PMR - Professional Management Review

A research project, under supervision of the University of Stellenbosch Business School, conducted an economic evaluation of a Bio-fuels Industry for South Africa. The major focus of this project was directed at the production of fuel-ethanol from maize and sugar cane. Bio-diesel production was excluded from the project, due to constraints on time and length of the report. The findings and recommendations of the report proved to have been accurate, considering the current trends and circumstances that developed since this report was written.

This research project extensively dealt with the availability of fossil fuels for South Africa, and the future outlook for energy requirements for South Africa. Although South Africa has the largest coal reserves in Africa (which are sufficient to sustain South Africa’s demand for approximately 200 years at current consumption rates), the environmental impact of continued burning of coal to generate electricity has a detrimental effect on the environment and contributes to global warming. South Africa’s participation in the Kyoto Protocol puts additional pressure on its energy strategies to reduce CO2 emissions. This will certainly compel the Country to burn less coal in order to comply with the reduced CO2 emission goals of the Country.

South Africa’s limited oil reserves also add significant pressure to investigate alternative fuel sources to supply the Country’s demand for transport fuel. In 2004, South Africa was importing more than 90% of the Country’s oil demand. This phenomenon put pressure on the Country’s trade balance, especially considering that world oil prices have shown a strong increase and showing no signs of cooling down to pre-2006 levels in the foreseeable future. This increase results from, amongst others, the fact that the world energy industries realise that oil is not a renewable energy source, and that the existing reserves will reach their peak in the foreseeable future. The debate on when peak oil production will be reached continues, and expectations are that oil supplies will only last for another 40 years approximately.

local and international developments

In view of these projections, the need for renewable energy sources, the development of improved technology to exploit these renewable sources and the commercialisation of these sources are becoming increasingly important. In view of these contingencies, countries such as Brazil and the United States have positioned themselves as market leaders in the field of fuelethanol production from sugar cane (Brazil) and maize (United States). These countries have already adopted extensive programmes to utilise fuel-ethanol as additives to their fuel supply, and played a significant role (especially in the case of the USA) in contributing in the current threats of world food shortage.

Although South Africa published a National Bio-fuels Strategy in December 2007, this strategy is still not finalised, and certainty on how this country will approach a bio-fuels industry has not yet been reached. At the time of writing this series of articles (July 2008), finalisation of talks between agriculture and the Task Force on bio-fuels had not been finalised, while international investors look to other countries in the SADC region to finance bio-fuels projects, irrespective of international concerns around food security.

The need to adopt this strategy has been recognised by most of the stakeholders in the South African energy industry, since it is commonly acknowledged that oil imports have a detrimental effect on the Country’s current account. This is evident from the drastic increase of the trade deficit that was experienced since 2005 – a direct result of the increase in international oil prices.

The large scale importation of oil is probably the largest contributor to the increase in inflation in the South African economy. The South African National Biofuels Strategy acknowledges that the petroleum industry will have to be involved in the uptake of bio-fuels into the fuel-blend. This uptake still has to be negotiated to maximise efficiencies, reduce costs and ensure that the fuel is fit for the intended purpose. The writer has also experienced resistance to bio-fuels through the interviews he conducted with some of the roleplayers in the petroleum industry, some of which certainly do have merit.

The development of a fuel-ethanol industry in South Africa will have a definitive impact on the Country’s economy, but this benefit is certainly a qualified one. This qualification lies therein that the adoption of an E10 blend into the petrol stock will have significant impact on the transport industry in South Africa. It is a point of contention that the capital investment arising from such a policy will be significant.

The South African Petroleum Association is concerned about the capital cost implications of implementing the E10 policy. This is mainly due to the fact that significant process changes will have to be adopted at the refineries to allow for splash blending at depot levels. Ethanol cannot merely be added to conventional petrol, since the volatility and chemical behaviour of petrol and ethanol will affect the compliance with fuel specifications in South Africa. Furthermore, significant expenditure will have to be embarked upon to provide for separate storage facilities of the ethanol at depots, and the special transportation requirements of fuel-ethanol.

There are also real concerns around the reliability of feedstock for the E10 blend. South Africa has had to import refined petrol from time to time, as a result of unforeseen disruptions in supply. If such circumstances arise when the E10 requirements are implemented, it will not be possible to merely import standard petrol, as is the case at present.

Industry specialists explain that a special substance, Blend stock for Oxygenate Blending (in short, BOB) will have to be produced by the refineries from where the petrol is imported. This BOB will have to be of such specifications, which, when blended with fuel-ethanol, will meet South African specifications. The BOB will be difficult to be supplied on short notice, since it will have to be specially manufactured to specifications. This cannot be done at short notice by the foreign suppliers, as would have been the case if conventional petrol is used.

A point of concern that has arisen from this research project is the fact that the motor manufacturing industry, which will probably be most affected by the implementation of the E10 policy, has not been properly consulted and/or involved in the formulation of the strategy.

The implementation of the E10 blend in petrol will have significant impact on the performance of motor vehicles, unless certain adaptations to motor vehicle engines are made. If E10 petrol is used in motor cars, and the necessary alterations to the engines have not been made, the probability of increased emissions from these vehicles is very high. This, together with the fact that a large portion of the South African motor fleet consist of older models, will not only contribute to higher pollution levels, but also increased expenses on vehicle maintenance. Not only may it have mechanical implications, but higher volumes of petrol will also be required, due to the fact that the energy efficiency of vehicles is compromised by the addition of ethanol to petrol.

It appears from what has thus far been reported, that the bio-fuels strategy is a much more complex issue than merely stipulating that ethanol should be added to the fuel blend. Although it is abundantly clear that alternative energy sources, specifically renewable fuels, should be explored and developed, a haphazard approach cannot be adopted. The Task Force on Biofuels need to adopt a systems approach to this strategy and involve all stakeholders, think progressively and make bold, but manageable decisions to develop and implement this strategy. The articles that follow in this series, will hopefully pave the way for all stakeholders to create a holistic view of the industry and empower them to make bold and progressive decisions to finalise and implement the strategy.

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