The future of (liquid) fuel August 2019

About SAPIA The South African Petroleum Industry Association (SAPIA) represents the collective interests of the South African petroleum industry. The Association plays a strategic role in addressing a range of common issues relating to the refining, distribution and marketing of petroleum products, as well as promoting the industry’s environmental and socio-economic progress. SAPIA fulfils this role by contributing to the development of regulation in certain areas of South African policy; proactively engaging with key stakeholders; sharing research information; providing expert advice; and communicating the industry’s views to government, members of the public and the media.

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

The Societal Challenge Current Future 570 Exajoules 1000 Exajoules Energy Demand 6.2 billion people (1.2 billion no access) 10 billion people (all with access) Population CO2e 32 Gt CO 2e Net Zero CO 2e Emissions Increasing global temperatures Keep temperature to well below 2 C pre-industrial levels Source : IPIECA ; Shell Energy Transition Report

A long term reliance on fossil fuels South Africa (2040) Coal 47% Oil 21% Gas 5% Other 27% Demand 13 708 Mtoe Demand 17 715 Mtoe Change in Primary Energy Demand – 2017 - 2040 - NPS Source : IEA World Energy Outlook 2018

But with a shift in type of demand Scenarios for GHG emissions in 2040; Current emissions (2017) - ~32.5 Gt Current policies – ~42 Gt New Policies – ~ 36 Gt Sustainable Development – ~17.5 Gt New Policies – vehicle oil demand static Vehicle increase offset by efficiencies Impact of electric and biofuels - small Sustainable development the impact is expected to be large – but this scenario relies on CCUS Source : IEA World Energy Outlook 2018

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

EV role in these scenarios Current total world car population estimated 1.2 billion units South African vehicle population ~12 million (January 2017) 95% are passenger cars or light commercial vehicles Annual sales of passenger cars ~ 370 000, 99% of which are ICE Increasing concern about GHGs and local pollution suggests heightened interest in EVs SDS scenario suggests world wide fleet a little under a billion vehicles EVs South Africa expected uptake slow Worldwide 2017 new registrations (estimate): BEV – 1.9 million and PHEV – 1.2 million With total new registrations of BEV that amounts to 0.15% of the car parc and for PHEVs that is % For the global fleet in 2040, assuming a static car parc the EV penetration would be 25% and 80% for NPS and SDS respectively Source : IEA World Energy Outlook 2018; SAPIA; NAAMSA

But an altruistic demand ? EV demand presently not driven by cost but primarily environmental concerns – local pollution and GHG emissions Euro 0 and Euro I vehicles the main contributors to vehicular PM and NOx emissions In South Africa these vehicles comprise about 26% of the parc Older vehicles fitted with outdated and inefficient powertrain technologies has a negative impact on both emissions and consumption Fuel quality critical to achieve acceptable environmental performance of ICE Source : ICCT; SAPIA;

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

What does the future pool look like? The green transport strategy provides the following wrt liquid fuels; Reduce their use Promote biogas and use of CNG, LNG Primarily for use in captive fleets EVs from solar power From IEP ~10bl incremental liquid fuels needs ~ 5 GW electricity Produce cleaner fossil fuels (Clean Fuels 2 program) Paradoxically will produce more GHGs Facilitates introduction of advanced vehicle technology – Euro VI, hybrids etc. Future fuel pool will be mix of offerings As far as transport is concerned and given the reliance on fossil fuels, oil will be the dominant energy carrier with biofuels and gas. EVs probably less <20% World Energy Council – Scenarios of 2016 suggests a maximum of 32% EV penetration world wide in 2060 10 bl incremental liquid fuel required which equates to 72 PJ using 20% ICE efficiency and then 120 PJ at 60% for electricity

The Cleaner Fuels Program Clean Fuels 2 is the provision of 10 ppm sulphur petrol and diesel with other specification changes to provide an enabling fuel meeting at least Euro V emission specifications SAPIA supports the implementation of a cleaner fuels regime Can lead to the reduction in noxious tail pipe emissions and improve quality of life through reduction of non-communicable chronic diseases Implementation in the context of sustaining the industry which means providing a reasonable fiscal framework and timeline for investments at refinery level DEA draft strategy on cleaner fuels focuses on key interventions; fuel quality, emission standards, expanding public transport system and the use of CNG) in buses and taxis. Estimated benefit ~ R200 bn DEA Draft Integrated Strategy for the control of motor vehicle emissions 2013

Cleaner Fuels Program - hurdles Refining industry will find it difficult to respond to cleaner fuels challenge without assistance from government (estimated investment ~$3.9bn (2018) with no return) Nevertheless we are working actively with the DMRE to sort out obstacles to CF 2 implementation But the story is not only about cleaner fuels but also manufacturing, job sustainability, foreign exchange exposure, the provision of speciality products ….. The liquid fuels industry contributes 8.5% to GDP with the refining sector contributing 65% of this impact Provides around 490 000 jobs - direct/indirect/induced Is an anchor tenant for the specialised engineering & construction industry and supports further downstream manufacturing chemicals, plastics, bitumen

Compliance is important The objective of improved urban air quality and reduced GHG emissions from road transport is dependent on three aspects; The correct cleaner fuels must be available The appropriate technology must be used in vehicles All vehicles need to be maintained in an as designed condition All are interrelated and the failure of one leg does not support the ultimate objective Compliant Fuels Inspection Vehicle Technology Urban Air Quality Components of the three legged stool

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

Main Fuels demand - overview Mature market - flat to declining sales Net importer ~ 5 bn l/a Actual imports ~ 8.3 bn l/a (140 kbpd) Product quality; Diesel > 80% sales 50 ppm S Petrol > 80 % 95 RON Local refineries competitive within its regional peer group (Africa & Europe) on EBITDA basis Market shifting to cleaner fuels driven by technology requirements 2025 est ~50% of cars Euro V+ vehicles Significant investments required to upgrade refineries to meet Clean Fuels 2 specifications Sources: Department of Energy (sales and import data); SAPIA; Wood Mackenzie

Where we sit now Gasoline market Petrol consumption flat – net imports generally < 5% of market Traditionally a two tier market – low octane inland (93) / high octane (95) at the coast High octane (95) demand ~ risen from 35% of total gasoline market to now over ~ 75% LRP penetration now <3% Diesel market Diesel demand linked to GDP growth – growth continuing with imports ~40% of market demand 50 ppm diesel consumption - 2018 average ~ 70% Refiners have responded to 50ppm market by switching to manufacture this product 10 ppm production may present a severe challenge

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

Marpol Annex VI All shipping subject to IMO Regulations Sulphur limit requirement in emission control areas Limit enforced by 2020 worldwide 2016 decision to apply a sulphur cap on bunker fuels of 0.5% effective 1 January 2020 Cap aimed at shipping to meet their environmental obligations Likely see a rise in bunker costs worldwide (some estimates $50bn) Many refiners could be stressed to meet the residual fuel sulphur limit and the disposal of this product likely to compete with coal Probably see a switch to distillate fuels to meet the cap - wider implications for the diesel market.

Implications of the cap Refiners will generally respond by increasing distillate production Crude slate (diet) changes Increased conversion unit utilization Will not (at present) invest for HFO desulphurization Means distillate products meeting the cap will be sold as bunkers Shippers hoping for a refining response but some are installing scrubbers – but < 30% of world’s fleet Irrespective major disruptions are anticipated Rise in distillate prices above present ( some say >20 - 30%) Jump in shipping rates which may lead to changing trade flows Refinery margins for less complex refineries squeezed Platts call it a $1 trillion cost to the global economy over 5 years

Implications of the cap Major implications for importers / exporters Importers – increase in landed cost of product Anticipated rise in the price of fuel – pushed by increased FOB prices and increased freight component of the BFP Exporters – competition with other third-party suppliers in target markets Potential implications for local marginal miners Outstanding work in the process of concluding Agreement in FONAR reporting Port state control over non-compliant supply Remaining questions over fuel compatibility / safety

Presentation outline Some Background Role of EVs Future Fuel Pool Where are we now? Headwinds Summary

Summary Future fuels commence ‘now’ going into the future For the immediate term the implementation of the IMO 2020 sulphur cap on bunker fuel Limited to no ability of shippers to switch to cheaper fuels / biofuels or gas Set to have major ramifications world wide In the not too distant future the cleaner fuels program Pre-requisite for the introduction of better vehicle technology Industry requires support for investment In the future Oil still forms the key energy carrier for transport Will be a mix of other carriers – bioproducts and gas EVs are not expected to make it big up to 2050 - dependent on government action

End Thank you Dankie Ngiyathokoza Ke a leboha Ke a leboga Siyabonga Inkomu Ndo livhuwa Enkosi Ngiyabonga