Avhapfani Tshifularo – Executive Director, South African Petroleum Industry Association (SAPIA)
Avhapfani (Fani) Tshifularo, executive director of the South African Petroleum Industry Association (SAPIA), shares his insights into the major developments of the South African downstream sector over the past decade, SAPIA’s focus on developing the local industry and promoting diversity within the sector, and his optimism about the abundant opportunities South Africa’s young and developing population will provide.
Fani, having been in your position as Executive Director for almost a decade, how have you seen the role of the South African Petroleum Industry Association (SAPIA) change during that time?
“Not only is our population growing, it is also becoming more affluent, better-educated and improving their standards of living. We may be at a plateau right now but there is a huge amount of potential to be realized in the future.”
SAPIA was founded during the advent of a democratic South Africa with a new government because we wanted to build the knowledge that we as industry also have a role to play in the country’s development. There used to be significant distrust between government and industry – and this has not fully gone away; even globally, we continue to see mistrust between government and business – but SAPIA has tried its best to bridge that divide. It has not always been easy; over the past ten-plus years of my time with SAPIA, we have dealt with about ten ministers responsible for Energy! As you know, not all of them stay for the full term. You can imagine how this impacts government-industry relationships. We are constantly having to rebuild these relationships.
SAPIA also used to be a closed organization representing only the oil majors that owned refineries in the country. Since 2013, however, we have opened up membership to licensed wholesalers that meet a set of defined stipulated criteria. The criteria have been defined because there are over 2,000 licensed wholesalers in South Africa, many of whom are still in the start-up phase. If we open ourselves to the entire sector, we will lose our core focus. Our mandate continues to be representing fully operational entities that are already generating significant value for the industry.
The petroleum industry as a whole was also very closed prior to 1994. Very little information was publicly available. Another one of our objectives was to make the industry more open and transparent and communicate more about our activities.
Prior to independence, the industry was also dominated by expatriates. with very little local involvement. Today, the numbers are reversed. The leadership teams of multinationals comprise mainly South Africans, with very few expatriates remaining in the industry, which is another very encouraging change. We have seen the international oil industry develop more of a local focus, which is starting to benefit local talent.
During that time, an associated issue also emerged: even as local representation increased, black representation did not keep pace, so SAPIA’s focus moved to increasing black representation in the industry. Today, however, we have realized that while black male representation has increased, we have somewhat left women behind, so the topic of workforce diversity has become a major area of focus for us. For instance, SAPIA has been running a program in partnership with local universities for almost ten years now, which, among other things, expose women in leadership positions to broader industry topics and trends.
Finally, we have also seen industry dynamics change. 20 years ago, South Africa had a production surplus. That changed around 2004 and 2005, when we became net importers, importing around 20 percent of domestic consumption.
Due to its coal resources, South Africa has primarily been powered by coal, with the consequence that energy is often seen as synonymous with electricity. How is SAPIA promoting better understanding of the petroleum and liquid fuels industry?
SAPIA works across a number of levels. Firstly, we collaborate extensively with the Department of Energy to share information on the petroleum and liquid fuels industry. As an association, we also produce reports and publications to summarize industry concepts, trends and topics at the highest levels. Our annual reports are really text-based, issues-driven, with the goal of explaining key critical issues to stakeholders.
Many of the people we interact with are entrepreneurs that would like to enter the industry. Something I would like to highlight is that a main stumbling block is actually not that the barriers of entry are high, but the lack of information available to industry outsiders. Very often, entrepreneurs will come to us and tell us that they have received their license, they now need to obtain product, but they do not know where to source that from! It does sometimes appear that not everyone does their due diligence before entering the industry. Our role then becomes to facilitate these entrepreneurs and point them in the right direction. For instance, we will usually ask them about their business plans and then link them to the appropriate contact persons to the right companies. Many entrepreneurs lack the necessary networks to get in touch with the right people in the bulk purchasing departments of oil companies. We are not business developers so it is not our job to build these businesses, but we do provide the basic resources and facilitate their entry into the market.
We also help international investors seeking to enter the local sector to better understand the local industry, key issues and dynamics. Nevertheless, we have identified that we would like to do more in terms of communicating our activities as SAPIA and also as an industry because there is still a lack of understanding within South Africa about the role we play.
As smaller players have joined the market as wholesalers, how has that changed market dynamics?
The entire industry has been squeezed so companies are really pushing efficiency gains to drive profits. The majors are rationalizing their operations, focusing on areas where they can push bigger volumes. This means leaving outlying, more rural areas to newcomers. A small volume can still be a great opportunity for a smaller company, who may not have the capabilities to move large volumes anyway. It is therefore quite complementary for all actors and builds a good ecosystem. Oil companies acting to find more efficiencies is creating more opportunities for smaller players to grow and service more expensive, marginal areas.
As an indication, in 1994, SAPIA members were probably responsible for almost 98 percent of total market sales. Today, that number is under 90 percent. I fully expect this sector to continue to grow. For instance, some of the majors have actually sold their businesses in chunks. This generates more opportunities for local entrepreneurs and frees up their own resources on their core activities.
The downstream sector in South Africa is facing a number of cost pressures from the need to upgrade their fuel specifications to the proposal for a new refinery that has been debated for the past few years. How are these challenges affecting your members?
One of the issues that people need to understand is that capital moves very quickly. The downstream industry is very global one dominated by majors, who have global investment committees undertaking their investment decisions. They look at not only returns on investment but also the growth potential and policy environment within countries. South Africa needs to compete with other countries for such investments.
The downstream sector here does face a number of issues from environmental concerns to government policy uncertainty, such as the one requiring our move to Clean Fuels II (CF2), which corresponds to the Euro 5 emission standard. All these represent increased costs for our members so unless there is a corresponding financial support mechanism, the attractiveness of their assets fall.
In terms of the CF2 upgrade, for instance, our members have reflected that, as they operate in a highly regulated environment, they will not be able to receive any returns on such compliance investments. We were supposed to upgrade our refineries to produce 10ppm fuel by July this year! This has obviously not been done. No entrepreneur will invest money in a business proposition like that. At the same time, there is a tension because the fuel we import have better specifications than locally produced fuel. Furthermore, the new cars being sold here recommend the use of fuels better than locally produced fuels, which puts pressure on the country to import more. The more you increase imports, the more you increase competition to local refineries. That is our dilemma. The current situation is not sustainable.
We have already reached out to the government to communicate those concerns and the need for them, as the regulator, to make the decisions that would make such investments more financially viable. The new Minister of Energy has been in position for about three months and we have presented these issues to him. Ultimately, we all share the goal to grow our industries and economy without neglecting environmental concerns, while ensuring prices are affordable for consumers and investors are recouping their investments.
On the proposal to build a new refinery, we have seen that there are calls for BRICS countries to invest in such projects. With South Africa’s existing refinery capacity being the second-largest on the continent, does South Africa have the potential to be a refining and petrochemical hub for the region?
Looking at proposals for the new refinery, it does not seem like the idea is to build a new petrochemical plant but just a traditional refinery. While we may have the potential to become a downstream hub due to our existing capacity, it does not seem to be the focus of current policy, and neither are we seeing private investor interest.
To be honest, I think we must consider ourselves very lucky to have our existing refining capacity because of our geographical disadvantage. The distance and the lack of oil make it almost prohibitive for investors to look at us as an attractive downstream investment destination. If an investor is interested in building a new refinery in Africa, between countries like Angola and Nigeria, and South Africa, we will definitely not be the first choice! As a result, if South Africa wants to attract such investments, we need to make it extremely attractive for investors. After all, capital knows no region or color. Money is money. As long as you are in business, you expect a return. As a private company, shareholders want to see dividends and returns. As a government, the citizens of that country are shareholders. There has to be returns to justify that investment.
What opportunities within the downstream sector would you like to highlight to international investors?
We are a young nation with a developing economy. Our economy may be struggling right now but it is a cyclical affair and when it recovers, it will recover very quickly. Furthermore, as a developing country, even assuming that we bring in energy efficient solutions and other innovations, the expectation is that our consumption and demand for energy will only continue to grow. Not only is our population growing, it is also becoming more affluent, better-educated and improving their standards of living. We may be at a plateau right now but there is a huge amount of potential to be realized in the future.
This is why we have already seen some interest from international investors to invest in the local industry, for instance through the acquisition of a significant local player. This provides them with a very strong base with which to expand into the rest of the continent.
From that perspective, whether you are looking at the sector as an investor or a service provider, there are plenty of opportunities. One way or another, whether South Africa will be increasing capacity and building a new refinery or only upgrading its existing facilities, a growing economy generates massive potential!