with Gerard Derbesy, CEO, BP Southern Africa
While you officially started as CEO in September 2011, you already arrived 2 months earlier to ensure a smooth management of change process, together with the outgoing CEO Sipho Maseko. Can you highlight to our readers some of those key steps you had to take in those first days?
The first step was around the safety program that was in place. In 2009, we had started an extensive safety audit and upgrade of all our facilities across the country. This program still consumes 60 to 70% of our investment. It is not only about risk removal by consolidating operations in a few terminals, but also about upgrading the standards in each of the facilities we operate, which goes all the way to the retail side. Understanding the risk, the program and resourcing both people and money for the coming 2 years was the major part of the handover. Last November, we announced our investment commitment of USD 250 million across terminals and retail sites in the coming 2 years.
On another note, Sipho’s departure –together with 3 other members of the senior leadership team- occurred rather rapidly. As a result, 3 new South African senior leaders were brought in and had to be introduced to the different stakeholders. My role is to also continue the job that Sipho started, in creating a local leadership team.
When you arrived here you already had 15 years of market and refining experience and were already familiar with the BP family. However, each local context has its own particularities. How was this learning experience for you and what have been some of the differences observed?
In fact, I have observed many more similarities than differences. I had spent 5 years in refining in Europe mainly, 5 years in sales, marketing & retail in the US, 2 years in trading in London and 3 years at the head office working for the CEO. I understand the downstream business very well, and was previously the trusted the advisor to the CEO. When the problems occurred, I was sent here to stabilize the operations and recreate a team.
I found the business to be extremely similar to everywhere else, in terms of the integration between refining, supply & logistics, retail and trading. It did appear that the infrastructure was “tired”, which is why I continued the journey of investment. There is an enormous opportunity because this is a growing region with a lot of potential. This is perhaps a significant difference: while you are fighting for survival instead of growth in mature places such as Europe or the US, there is a huge growth opportunity in this part of the world. It is however challenging to cope with a lot of conflicting priorities in emerging countries. One of them is the use of talent, and a second is how to develop a sustainable economy. Therefore, you need to work with the government that is trying to achieve a broader goal in terms of job transformation and poverty, in which we have a role to play.
One quite significant step globally was the BP merger with Castrol, which has been said to have had quite some impact on the South African operations. How did it reshape the operations here?
We run our downstream operations according to 2 distinct business models. There is the fuels value chain business model, consisting of the production and retailing of liquid –mainly transportation- fuels. We see this as a commodity business which has a lot to do with location, scale and efficiency of operations. We try to integrate between refining, trading, supply and retail.
When it comes to lubricants, we have an entirely different business model. We do not manufacture any lubricants and we do not see this as a commodity business at all. Instead, this is a fast moving consumer goods (FMCG) business for us. We are heavily investing in the marketing and the power of premium branding. At present, this is working very well in South Africa.
Between the two businesses, there are economies of scale such as the sharing of the same head office, back office, etc. although these are limited overall. Additionally, we do have the opportunity to share a number of strategic customers to provide them with a value-added offer.
With Sapref, BP further owns half of the largest refinery in Southern Africa. When speaking to the Bonang Mohale of Shell, he told us that hosting such capacity gives the company a great sense of responsibility. What does Sapref mean to BP?
The same as for Mr. Mohale! Sapref is definitely a critical asset in our position. This is where most of our lubricants come from as well as the majority of the fuels. It is further critical because, as I mentioned, our business is integrated. South Africa is rather isolated from the rest of the world and imports are generally at least 3 weeks away. Having the ability to produce locally gives you a distinct competitive advantage. At the same time, it does increase your exposure in case any production problems occur.
Sapref is the largest refinery in Southern Africa and is a world-class refinery that can compete in terms of efficiency. Based in Durban, the refinery is also located in the best location in the country. In terms of crude, this is where the imports come in, which directly links to the main pipeline covering around 60% of demand. Having the largest refinery in the best location is an immense strategic advantage. On top of that, the refinery is well designed in terms of upgrading capabilities, for the production of lubricants, avgas, specialty products such as chemicals and wax.
We are still producing according to South African specifications, which results in a discounted price versus the global price level. This results in problems of profitability, which in turn limits the investment in people. The refinery will need to be able to produce cleaner fuel specifications in the future. Today, like the rest of the industry, the refinery runs on around 75% of utilization, while the rest of the world stands at around 85%. For the same cost and infrastructure, we thus receive around 10% less income. It is a big challenge to both supply the country and ensure a profitable business.
What will it take to reach levels of at least 85%?
In terms of Sapref, there has been a lot of investment to improve the refinery’s level of integrity over the past 2 to 3 years. To use the analogy of a car, we want the windscreen to show no cracks and to have the tires running. The car is functioning, but we now need to improve the driver’s capabilities. The reliability of the plant is not what it should be, and it is related to the capability of the staff. There is no real education program to produce such skills. With exploration & production (E&P) booms in places such as the Middle East, talent is in high demand.
Do you see room for additional initiatives to provide further training for these people?
At a Presidential and Ministerial level, we have started to recognize this challenge. The need for engineers has been identified through the Infrastructure Program. In the world of oil and gas, we need specialized engineers but we also must not underestimate the need for operators. There is a real shortage for such talent.
Every 5 years, a refinery needs to go through a complete overhaul, which means a shutdown for 50 days, after which it is supposed to run smoothly again for another 5 years. We are in a cycle of a turnaround every 2 years, because there are not enough contractors or capabilities in the country.
There is an immense opportunity in terms of upgrading the country’s capabilities in this regard. A 10% improvement in production is a huge change, both for the security of supply of the country but also for the profitability of the business. This challenge should be tackled in partnership with the government and infrastructure in terms of universities and education.
The Sapref refinery makes you dependent on good infrastructure in Durban too. Surely, the R 70 million project in ship-loading infrastructure at Berth 6 in 2010 was a welcome investment. How satisfied are you with the overall infrastructure in Durban, beyond the refinery itself?
The main bottleneck, in my opinion, has been removed, with a pipeline connecting Durban to the inland market. I am very satisfied with this development. The logistics around Durban are improving in terms of berthing facilities. The entire system is adequate, provided that the refineries work well. In a steady-state scenario, there is plenty of capacity.
However, under a crisis scenario where a refinery such as Sapref, Engen or Natref has an unplanned shutdown, the infrastructure will become very constrained to take on all the additional cargo. When it comes to crude import, the key asset is the single buoy mooring (SBM). As we experienced during the last Christmas period, if this asset fails there is no other way to import crude.
Minister of Energy Dipuo Peters has named inland energy supply as a key ongoing challenge for South Africa. Just a year ago, BP celebrated the completion of a R140 million expansion of its Pretoria-based fuel storage facility. How does this help to tackle this challenge?
Significantly! The inland region takes up the largest part of energy demand in the country, yet remains the toughest area to supply. The first issue was the pipeline from the coast to inland that was too small. This bottleneck has fortunately been removed.
As BP, we believe that the terminal infrastructure around Johannesburg is adequate for now but not fit for the future. We are therefore consolidating into fewer but bigger and more sophisticated facilities. The upgrade gave us three things: an increase in size, higher standards and better capabilities. Building the right capabilities and creating a stronger team is essential in view of the new scale and technology deployed. We are trying to become an industry solution and have managed to do this quite well with Sasol.
Another development has been the Fuels Technology Centre since 2010. How important was this for BP in Southern Africa, as well as at a global level?
The centre has an important role for several reasons. A first is to preserve our brand, which is the best asset in a commodity business. Our brand is built on the quality of our product. The primary task of the centre is to have state-of-the-art quality, having control and capability.
The second reason is that we are positioning ourselves as differentiated fuels. At a global level, we had done this with BP Ultimate. We want to continue on this journey and produce a wide range of products, from premium gasoline to diesel, as well as some new fuels and lubricants that will better fit the trucks for the mines for example.
Finally, we also have a very important partnership to build with the dealerships. This relationship is funded on what we share in common, which is the brand and the product. The Fuels Technology Centre is a great facility to bring in the customers and test the benefits of these differentiated fuels. In this way, we create win-win partnerships.
Why was South Africa chosen as a location for the Fuels Technology Centre?
Globally, we run BP according to different geographic markets. While we have centers in locations in the US, Germany and the UK for example, we identified gaps in the way we could relate to the South African customers. While it would not make sense to fly these customers to Europe for every roadshow, they would also not relate to those markets. The products tend to be different, whereas we have Aral in Europe for example. For this reason, we have also created a lab in China, which is another growth market where we want to build on the foundation of quality control, differentiation and customer engagement.
If we take a 5 year term, what do you envision for BP Southern Africa and how significant will its operations be for the Group worldwide?
Today, and in 5 years or even more, Southern Africa is very important for BP. It is a quality business that is growing. We have a world class downstream business with a proven track record, but the majority of our exposure exists in the more mature markets, meaning Europe and the US in particular. We are rationalizing the Group in order to redeploy capital into growing markets. China and India are not really open yet, as prices are still highly regulated. Southern Africa presents a fantastic opportunity to be a quality business in terms of attractive financials, very strong investment opportunities and economies that are growing.
We are looking at business opportunities across the region. Mozambique, and the east coast as a whole, will be a very important asset in terms of importing and enabling growth. We are positioning ourselves to have very strong coastal infrastructure from Nacala –in Northern Mozambique- all the way down to Cape Town, and have world scale capabilities in terms of imports upon which we can leverage our trading capabilities in Singapore. In this way, we will bring the necessary fuel to support the mining growth as well as the economic growth.
Here, I particularly point to Southern Africa as a region consisting of multiple growing economies. These countries will not be building refineries overnight, which means that most products will either come through South Africa or via the coast. As a global trader, a refiner in the region and an established player, we have a big role to play in fueling this profitable growth. We are still small compared to the scale of BP globally, but we are growing.
Do you have a final message to the readers?
Southern Africa is a very exciting place to do business and there are many investment opportunities. We need to start with strengthening the safety and reliability of our operations, and then invest to capture the growth. The order in which we do this is very important. We need to have the right foundations from a safety point of view, as well as the security of supply in order to satisfy our customers.