• Market Watch

Shell's SA exit 'no surprise', experts say

• 1 Week Ago - 2024-05-08 00:00:00

Lisa Steyn - News that Shell plans to divest from its South African fuels business may be a shock to consumers, but it comes as little surprise to experts who say the industry is in flux globally, and also faces a tough local environment.
Shell, a global oil and gas major, confirmed reports that it was planning to exit its South African downstream business on Monday after more than 120 years of operation in the country.
Independent consultant, Niall Kramer, told News24 the reality was that the global multinationals would all have global strategies that span multiple years.
"They realistically have to consider which markets globally to stay in or to sell, how they're performing, what their future prospects are, and how well they're positioned," said Kramer.
This is not something exclusive to Shell, he added.
"There is backroom talk around all of the big oil companies as they'll typically assess things like local government policies, regulation, attitude, how easy they are to deal with, what kind of bureaucracy they've got in place, what the tax regime is, what the labour markets or unions are like - and naturally they're going to go for markets where they get the highest return with the least hassle."
Peter Morgan, CEO of the Liquified Fuels Wholesalers Association (LFWA), said the news was not surprising, but it was worrying.
"The environment in South Africa is quite toxic, because the message the government gives to everyone is that we're all making too much money," Morgan said.

Industry in 'flux'
But the reality is the industry is in flux.
The liquid fuel industry in the world is changing, with oil companies seeking to distance themselves from dirty fossil fuels and rebranding as energy companies. "Added to that is the clean fuels agenda, and of course the whole need for a BEE initiative," Morgan said.
The local environment in which companies trade was also important for encouraging investment, and the government's role was to create an attractive environment, Morgan said.
But oil companies are no longer investing in the country as evidenced by the number of refineries that have been shuttered instead of upgraded.

Deadline
Shell's Sapref refinery – a joint venture with BP – was closed indefinitely in 2022. While the Central Energy Fund was a possible buyer, subsequent flood damage to the refinery appeared to kill any potential deal.
For the three (out of six) South African refineries that are still operational, the deadline to produce cleaner, Euro-grade fuels is just a few years away; yet, none have made public announcements about plans to invest in the required upgrades, Kramer noted.
The discussion with government on a claw back mechanism was never finalised, said Morgan.
"So, the oil companies haven't spent the money on upgrading their refineries because they've got no understanding of how they're going to get that investment back".
For those that continue to market fuel in South Africa, they can continue to import the required fuel by sea rather than investing it in local refining capacity, Kramer said. "It tells you that the capital goes where the returns are." – Fin24