Biofuels Industry Strategy: input from the Oil Industry

Meeting report

South African Petroleum Industry Association (SAPIA) on Biofuels Industry Strategy
Mr Connel Ngcukana, Executive Director of SAPIA, stated that SAPIA believes that it is in the best long-term interests of South Africa that a world class, economically viable, environmentally sustainable Biofuels Industry be established for South Africa. SAPIA supported biofuels as part of the future road for the fuel industry. He added that an integrated approach was required that considered both renewable sources of energy, energy efficiency and energy security.

Mr Ngcukana said that SAPIA agreed with the recently finalised strategy for Biofuels as it set out to address job creation, rural development, feed stock selection, cleaner fuels and the need to progress towards 2^nd and 3^rd generation processes. He said that the strategy also considered the link between the 1^st and 2^nd economy.

Mr Ngcukana noted that SAPIA endorsed the changes made to the strategy as they would be beneficial in the long run. These changes include the introduction of pilot projects, the voluntary nature of the uptake of biofuels, continued Biofuels Task Team (BTT) involvement in the implementation process and the proposed support to be offered to growers and producers of biofuels.

However he acknowledged that the strategy failed to address certain key issues of the practical and economic implications of integrating biofuels into the fuels supply chain.

Mr Ngcukana explained that although there were advantages with the uptake of bio-diesels such as the fact that it can be readily used in industrial applications and that it can be blended without issue, there were some quality assurance problems that needed to be addressed. He stated that the quality of bio-diesel was hard to maintain and was aggravated when many small producers were involved.

Mr Ngcukana also highlighted that although the use of E100 and E85 ethanol would increase RSA fuel volumes; the use of lower blends such as the E10 and E2 would not lead to any volume increases. He added that ethanol as refinery ETBE ( ethyl tertiary butyl ether) involves high capital cost, provides limited ethanol uptake and reduces LPG uptake.

Mr Ngcukana explained that some practical considerations needed to be taken into account for the uptake of ethanol in petrol. One such consideration was that the objectives of the Vehicle Emissions Strategy and the aims of the Air Quality Act needed to be met. In addition he said that biofuels implementation in South Africa should be tailor-made to local conditions taking into account fiscal, environmental, social, climatic and technical requirements which may vary from other countries.

Mr Ngcukana listed the practical production specifications that need to be considered when adding ethanol to petrol which raises its volatility. He also said that refineries would need to remove light components to accommodate ethanol and this would have capital investment, foreign exchange and loss of volume implications. Motor Octane Number specifications would need to be reviewed.

Mr Ngcukana went on to list practical considerations for the distribution of ethanol. He explained that since ethanol was soluble in water there would be a need to modify the tanks and pipelines that were currently being used. Infrastructure would have to be upgraded to ensure the operation of a dry system of distribution for petrol that had more than 2% ethanol in it.

Additional practical considerations for taking up ethanol in petrol looked at the case of blended ethanol and petrol where security of supply might be compromised because the shortage of one product would halt production. In addition he said that it was not advisable to import ethanol as it would likely contain water. Ethanol had lower energy value than petrol which meant vehicle consumption would also increase. One would also need to denature ethanol to make it unpalatable, develop quality assurance and testing institutions and new fire-fighting equipment.

Mr Ngcukana also explained the economic considerations that need to be taken into account. Capital investment would need to take place to ensure constant volatility of petrol ethanol blends and in the primary distribution systems. He explained that some of the costs would include changes that need to be made to equipment to ensure that it was compatible with ethanol. Additional storage and receiving facilities, fitted tank domes and filters at retail sites would be required.

Mr Ngcukana concluded that the estimated cost implications would be a rise of 10 to 15 cents per litre. He noted that biofuels introduction in the rest of the world has been dependent on large government subsidies.

Finally Mr Ngcukana said that SAPIA strongly recommended that Expert Working Groups be set up to address key issues. He also said that the involvement of all relevant stakeholders, including the oil industry, was critical. He added that these groups should identify possible alternatives and decide on ways to address all the complex issues SAPIA had outlined. Finally he emphasised that the successful implementation of the biofuels strategy was dependant on engagement with the oil industry in the manner suggested.

Discussion
Mr E Lucas (IFP) said that the Committee fully supported the initiative. However the presentation had raised many issues about the viability of ethanol as an alternative fuel. He said that in the past the State had introduced an ethanol blend option. This had worked but he feared that the proposed use of pure ethanol would have too many cost implications because the fuel industry would have to be significantly modified to accommodate ethanol production.

Mr Anton Moldan, Environmental Advisor SAPIA, acknowledged that there were several issues regarding the viability of ethanol. However he said that there would be meetings in the future to address these issues in the light of how other countries have managed to resolve these issues. He said that they interpreted these solutions with regards to what was good for the country.

Mr Lucas appreciated that with the rising fear that crude oil was running out, there was a need to supplement the SA fuel supply. His only concern was that the introduction of ethanol would cause a rise in petrol prices by 10 to 15 cents per litre (cpl). He asked whether this would be feasible considering the economic implications this would cause. He asked if the price of ethanol based fuel would be founded on the dollar rate or the SA currency.

Mr Moldan explained that although there would be price increments, these could not be quantified at this stage. Government would need to assist the producers of these biofuels to sell their produce. In addition they need to address costs that pertain to uptake. They would need to find a balance between cost and uptake. The introduction of ethanol would require a lot of capital investment. However introduction of biodiesel would not be as costly.

Mr Lucas commented that SA had the natural resources required to sustain ethanol production but he wondered whether the country was ready for the initiative. He asked the Department to clarify whether they had done comparative analysis to see how other countries had handled ethanol production, supply and use.

Mr Moldan explained that other countries that produce biofuels were trying to align ethanol production with environmental regulations. One of the benefits of biofuels was that they produce less carbon dioxide. According to him, there was still a lot of work to be done with regard to the sustainability of ethanol production in Europe and the US. At the moment the US takes up more biofuels than they can produce.

Mr J Blanche asked what kind of products they intend to use for the production of biofuels. He asked whether they would use only sugarcane for ethanol.

Mr Moldan explained that it was not up to SAPIA to decide what products would be used. He had heard that SA was reluctant to use maize because of the food security issues in the country. He explained that there was a suggestion that waste materials be used and SAPIA would look into this as they were in support of finding alternative fuel sources.

Mr Moldan added that although SAPIA would not be involved in the decision of what products were to be used, they had researched what products were being used in other countries. Some European countries were using feedstock (seed oil and cotton seed) for biodiesel. However South Africa needed to find a product that was suitable for the climatic conditions of the country as the way diesel behaved in very low temperatures was different. 

Mr Blanche noted that last year the Committee had visited Brazil to learn more about ethanol and biofuels. He backed the statement made by SAPIA that government subsidies were necessary to support the production of biofuels. He explained that this was the case in Brazil. He went on to say that, as a big financial investment, it was also necessary for the big fuel companies such as BP and SASOL to buy into the idea. He asked if SAPIA had engaged in any discussions with vehicle manufacturers in anticipation of the implementation of the strategy.

Mr Blanche also questioned why SAPIA was concerned about the viability of importation and exportation of ethanol considering that many international countries had successfully done so. He gave the example of the USA that imports ethanol from Brazil. He asked what would defeat SA from doing the same. 

Mr Blanche suggested that ethanol production should be concentrated far away from the coast and further inland. The Department should also make use of the new pipeline that was being built between Durban and Gauteng.

Mr Stead, Government Liaison Manager, Engen Oil, said that it would not be feasible to build new pipelines for biofuel production. Hopefully the BOB (blend stock for oxygenate blending) could go in the current pipelines. He also said that if there were any ethanol sources in Gauteng then the new pipeline would be used.

Ms N Mathibela (ANC) asked what the current status was with biofuels production. She asked what use there was for the ethanol that was currently produced.

Mr Moldan noted that the production of biofuels was still at preparation stage and that at the moment there was no biofuel production taking place.

Ms Mathibela asked what had been done to promote the production of biofuels. She did not think that the program for biofuels should come from this strategy. It would better come from professional support.

Mr Moldan replied that SAPIA supported the Government’s strategy but noted that at the moment there was still a lot of ground work to be done. Right now the most important thing was to engage with government.

Ms Mathibela asked SAPIA to advise the Committee on the results of the pilot projects.

Mr Moldan explained that there had not been much headway with regard to the pilot projects. No projects had been started yet but there were plans to set up soya farming plants in the Eastern Cape. He explained that most projects were still in the pipeline. At the moment there were some farmers who produced their own diesel for use in their tractors but this came with many risks.

Ms Mathibela went on to ask who would be responsible for the monitoring of the modifications required for ethanol production and supply, such as the modification of fire-fighting equipment. Who would be responsible for quality assessment?

Mr Moldan noted that there were modifications that need to be done to facilitate biofuel production and supply. In the case of modification of fire fighting equipment it was necessary for one to apply to the local fire department for permission to store such fuels and then obviously the fire fighting regulations had to be met. Tests would be done and inspections undertaken to ensure these modifications took place and that the quality of ethanol produced was maintained.

Ms Mathibela commented that it was not advisable to advertise the fact that ethanol was consumable. Considering the deteriorating morals of society, it would not be surprising to find people drinking ethanol to get drunk.

Mr Moldan explained that they could add something to the ethanol to make it unpalatable. He said that an example would be to mix it with a bit of petrol.

Ms D Seamodimo (ANC) asked what the job creation implications would be if the State embarked on this initiative. Would there be any rural development plans included in the strategy?

Mr Moldan replied that there was potential growth in the production of sugarcane. It would be up to the State to ensure that biofuel producers obtain their products from rural farmers. However he stressed that environmental regulations would have to be monitored in such initiatives.

Ms Seamodimo asked SAPIA to enlighten the Committee as to what they had learnt during the research into the viability of biofuels.

The Chairperson complained that this project did not sound cost effective. It was time that the State shied away from projects that would result in an increase in taxes and petrol prices as this negatively affected the community. He also commented that the public had been concerned that ethanol production may cut into food supply at a time when SA was faced with a food security problem.

The Chairperson asked why SAPIA did not concentrate on alternative fuel sources that had been tried and tested, such as the gas-to-liquids that was developed by SASOL. It was not a good idea to embark on new technological exploits when the country did not have the expertise to manage them. The State might not be able to finance such a high cost initiative. The problem with such projects was that they create fancy job positions for a few yet they do not benefit the masses.

Mr Stead explained that this was a policy issue and that SAPIA was not in a position to provide answers on alternative fuel technology.

The Chairperson noted that there was no need to embark on such complex and expensive initiatives were there were easier alternatives. He gave the example that although the USA had modern and extravagant nuclear machinery, when the Soviet Union was dissolved, they were found to have superior nuclear devices because they had stuck to what they knew and had not focused on experimentation.

The Chairperson made it clear that the role of the Committee was to align policy with the economic and financial status of the country. It was the duty of the Committee to redirect and call policymakers to explain why there were so many explorative ideas when there was a need for easy, feasible and cost effective solutions to resolve the energy crisis.

The Chairperson concluded by asking SAPIA to explain what the attitude of refinery stakeholders (BP, ENGEN, SASOL etc) and the Department of Minerals and Energy was on this strategy.

Mr Stead agreed that there was a need to be cautious and not rush into major projects. He said that they would set up expert groups to do research and they would conduct the pilot projects to educate people on biofuels.

The Chairperson highlighted that when they were doing their environmental considerations, SAPIA should keep in mind that there needed to be some sort of balance between what was necessary to alleviate poverty and what was necessary to protect the environment. South Africa was in a difficult position as a developmental state. There needed to be a focus on projects that would give SA an above average baseline supply of energy. There was a need to find a solution that was cost-effective and that could be implanted over a 15 year program.

The Chairperson went on to suggest that a solution to the volatility of ethanol could be found in the newly founded Indian technology whereby ethanol was made subject to kyro-temperature (below zero temperature) in order to store it without defect.

Mr Moldan suggested that perhaps ethanol could be stored in ice boxes.

Mr Naran (ANC) said that he felt that the initiative was very ambitious and would be costly to the tax payer. The Committee wanted to see State funds used reasonably. Due to the competitive nature of commerce, the result was that companies maximise their profit at the expense of the public. As global economies were intertwined, it was inevitable that charging would be based on the dollar.

Mr Naran went on to say that there should be no middle road; stakeholders should align with their directives. However he also acknowledged that state intervention would be inevitable. He concluded by asking why SAPIA was in favour of voluntary uptake if they fully supported the biofuels initiative. He also asked why there had not yet been any work done with regard to pilot projects.

Mr Moldan explained that it was just a matter of timing and that there was still a lot to be done before implementation. He said that the mandatory use of biofuels could only be determined after they had decided which blend option to use between the 2% and the 85% blend.

Mr Stead explained that although the first document they had drawn up had suggested mandatory use, it was decided that voluntary uptake allowed for more options. If they did not force the uptake of biofuels, then not all refineries would have to modify themselves to conform to the standards that would be imposed. This would create a good balance.

The Chairperson asked SAPIA to explain the nature of their relationship with ENGEN.

Mr Ngcukana explained that SAPIA consists of a group of companies working together and that ENGEN was one of these companies.

Mr Moldan stated that SAPIA would produce a report for the Committee on the progress reached with regard to the introduction of biofuels.

Mr Ngcukana explained that some of the questions raised by the Committee could only be answered by the DME (Department of Minerals and Energy). He said that SAPIA would make an attempt to join the meeting between the DME and the Committee.

The meeting was adjourned.