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Details on the rotation of strategic crude oil stocks by SFF

It is important that that the context in which the Strategic Fuel Fund (SFF) took the decision to rotate crude oil stocks is properly clarified for the benefit of all stakeholders.

In October 2015, SFF decided that the model currently used for strategic stocks needed to be varied. The model that SFF currently have for storing emergency crude oil is an outdated model based on the experience of sanctions and is not currently best international practice for the holding of strategic crude oil stocks.

During the era of sanctions, the pre-1994 government stored a vast quantity of strategic crude oil stock and procured most of the commercial crude oil stock required by the domestic refineries. At that stage, security of supply was attained through the storage of crude oil for strategic stock for 5 years and supplying the commercial crude oil requirements to the domestic refineries as the country had surplus refining capacity and was therefore self-sufficient in terms of security of supply. This stockpile was last sold in in 1999 to Sasol and Total to fund the fiscus.

The pre-1994 business model meant that SFF had a huge amount of working capital tied up for very long periods of time (15 years) until the rotation of stock. This decreases rather than increases economic value due to the loss of value through long term storage.

If we consider then the current situation, it is not the first time that rotation of strategic stock has occurred in South Africa. As indicated the current government rotated strategic stocks in 1999 and only replaced them in Saldanha in 2001. During this period, the country did not have a single barrel of strategic crude oil stock and nor were the Saldanha tanks filled as is currently the case.

The grades stored by SFF for strategic crude oil stocks were based on producing a slate of products for Clean Fuels 1 and lubricant manufacture. The grades which need to be repurchased for strategic stock are different and will have to be Clean Fuel 2 grades. SFF will also have to diversify to refined petroleum product storage as part of strategic stock.

Rotation of strategic stock has therefore both technical and economic benefit for the country. Storage of crude oil for a long periods of time (in our case since 2001) results in

the deterioration of the quality of the crude oil and reduction in the volume. Moreover rotation in a low price crude oil market results in the preservation of the value intended and is an attempt to increase that value. There are at least four margins to be extracted from the rotation which enhances economic and financial value.

Moreover, for a company such as SFF which operates in a single part of the value chain there is no multiple profit centres and therefore the company cannot operate on a unit of sale basis. The company rather functions on a total contribution model and any further incremental value is generated through marginal economics from the same value source.

It is important to note that since 1994, the government has not granted SFF any funding for the holding of strategic stock, which is the current global practice when an agency holds strategic stock on behalf of Government.

What are Strategic Oil Reserves?

Strategic stocks of petroleum products are defined as both crude oil and refined products held by Governments to safeguard the country’s economy, and help maintain national security during an energy crisis caused by severe oil supply disruption or catastrophes.

Strategic stocks are only available under declared emergencies and are not to be used for operational supply disruptions. The role of government is to ensure that there is sufficient crude oil stock that can be accessed in case of an emergency.

The Strategic Fuel Fund (SFF)

SFF is the state owned entity, established by the South African government in 1967 to manage strategic crude oil stocks. During the UN led crude oil sanctions against the previous government, the SFF mandate was extended to include purchases of commercial crude oil supplies. Post 1994, SFF’s role changed to that of procuring and managing strategic crude oil reserves.

SFF derives its mandate from the White Paper on Energy (1998), Crude oil and Petroleum Strategic Stock Policy (2000), National Energy Act, Central Energy Act (1977), Ministerial Directives and the Agency Agreement.

SFF owns two storage facilities, Saldanha and Milnerton tank farms situated in the Western Cape. The Saldanha facility is the bigger of the two with 6 on the ground storage tanks with a capacity of 45 million barrels.

The Decision for Rotation

The Rotation of the Strategic Stock is financially and economically advantageous to government as SFF will generate more than US$ 15 million on the storage or a R180 million per annum over a period of five years. The alternative economic value proposition of the stock laying in tank is that it could lose about 1% of the stock per annum.

Moreover, this was dead stock which tied up SFF’s working capital. SFF has through the rotation reduced the burden on the working capital and ensured that SFF is able to ensure security of supply in new ways while simultaneously generating income. The alternative to the rotation of Strategic Crude Oil Stocks is that Government will have to fund SFF from the fiscus for some R7 to R10 billion depending on the price of crude oil and product stock which is a big ask from National Treasury considering the pressing Government infrastructural development priorities.

Globally the models for the holding of strategic stock have also changed. In many countries Government no longer completely funds the holding of strategic stock.

Stock rotation in December 2016

In December 2016, following a Ministerial Directive from the Department of Energy, 10 million barrels of crude oil stock was sold to the following companies: Vitol/Vesquin, Venus Trade/Glencore and Taleveras based on a transparent market related price formulae. The sold stock pile still remains in tank at the SFF Saldanha terminal with SFF having the first right to buy the crude oil and supply the market in the event of a crisis. Furthermore the department of Energy is engaging the National treasury on the treatment of the transaction.

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Statement issued by the Central Energy Fund on the SFF rotation of strategic stocks.
26 May 2016

The Board of the Central Energy Fund has noted the article in the Business Day of 26th May 2016, titled “Strategic Stock sold off secretly”. We wish to correct the impression created by the article that there are issues based on the misunderstanding of the management of strategic stock. The article makes particular incorrect assertions, which if not corrected may create uncertainty in an already volatile oil market.

We have to emphasise that Strategic Stocks are managed through Ministerial Directives and this case was no different. The notion that the country is put at risk through this rotation is factually incorrect.

We wish to re-iterate that no approval is required from the Minister of Finance (MOF) to sell or rotate strategic fuel stocks.

It should also be noted that when the SFF started the process of the rotation of strategic stocks, the country had 21 days reserves of strategic stocks. After the December 2015 rotation, the country now has access to 90 days reserves which is 30 days more than the required volumes. This allows for South Africa to be able to absorb any market variations and provides a buffer for 3 months in the case of any eventuality.

We wish to reiterate that the integrity of the Strategic Stocks is secured and that the Group will be able to respond to any challenge should it arise.

 

Enquiries:

Mr Tseliso Maqubela, Director, Central Energy Fund, 082 450 9224

Mr Vukani Khulu, Group Stakeholder Advisory Manager, 083 276 3283