Jet fuel shortages & challenges facing the petroleum industry: SA Petroleum Industry Association briefing

Meeting report

Jet fuel shortages and general challenges facing the petroleum industry: South African Petroleum Industry Association (SAPIA) briefing.
The Chairperson noted apologies from the Minister, and the Director General of the Department, of Economic Development, both of whom had been required to attend a strategic planning meeting that had been rescheduled because of the Minister and Director General having to accompany the President to Angola on the original date. They were aware that important issues would be discussed today, but could not attend.

He said that the current meeting would address the issue of the recent jet fuel shortages at OR Tambo airport. The Minister had required that the leaders of the oil industry and the South African Petroleum Industry Association (SAPIA) must brief the Select Committee on what had contributed to these fuel shortages, and also address some concerns about the industry’s preparedness for the 2010 FIFA World Soccer Cup.

Mr Avhapfani Tshifularo, Executive Director, SAPIA, noted that his briefing report would cover the task team recently appointed to manage the issues around the jet fuel shortages, and address some challenges currently facing the petroleum industry.

Mr Tshifularo outlined the interests and membership of SAPIA, which represented the common interests of the petroleum industry and played a key role in furthering those interests in a way that promoted the development and growth of the national economy. The role of the petroleum industry was acknowledged as vital in the growth and development of the economy. SAPIA’s membership comprised BP Southern Africa (Pty) Ltd, Chevron South Africa (Pty) Ltd, Engen Petroleum Ltd, PetroSA (Pty) Ltd, Sasol Ltd, Shell SA (Pty) Ltd, and Total South Africa (Pty) Ltd.

The broad objectives of SAPIA were to encourage co-operation amongst its members, as well as to ensure good ethics and governance within the industry. SAPIA aimed to be a source of information in respect of issues pertaining to the petroleum industry. It would provide a cooperative approach to find solutions to challenges facing the industry. SAPIA supported a liberalised market reflecting market processes that were orderly, fair and inclusive. Other cornerstones of SAPIA's ethos were the support of empowerment drives, rural development and sustainable development.

Mr Tshifularo then gave some background to the recent jet fuel shortages at OR Tambo Airport. He said that this airport received jet fuel via a dedicated feeder pipeline from the Transnet pipeline from Durban. It also received fuel via the Aviation Turbine Fuel (AVTUR) pipeline, the National Petroleum Refinery (NATREF) and in rail tank cars from the coastal refineries. OR Tambo had an existing fuel storage and distribution capacity of 46 500 cubic metres. NATREF and the fuel supplied by rail made up 22 500 of this, and the Transnet pipeline from Durban supplied the other 24000m³. Currently, Chevron South Africa (Pty) Ltd managed and operated these facilities on behalf of the consortium.

The jet fuel shortages experienced early in August 2009 resulted from a combination of a number of factors. The first was the low opening stock holding at the Oritia storage terminal, which had resulted from production problems at an inland refinery during June 2009, and some logistical problems experienced by Transnet during July 2009, both of which led to inadequate and irregular supply to this terminal, gradually depleting the stock down to low levels in July. It was suggested also that another factor could have been the fact that the industry had stopped doing joint supply planning, as the Competition Act prevented key industry stakeholders from communicating with each other regarding the stock holdings. 

In order to remedy the situation, a concentrated logistics programme had been put into action. Fuel was transported by air and by road to replenish the declining stock holdings. The holding stock at OR Tambo was now back to normal. In order to allow for better communication between key stakeholders in the industry, SAPIA was preparing an exemption application to the Competitions Commission, so that interaction between industry members in regard to supply issues, logistics planning, pipeline operations, shipping and other areas specifically impacting on the supply of fuel could take place. The Department of Trade and Industry (dti) had designated the petroleum industry under the relevant section of the Competition Act. The Department of Energy (DoE) had established a supply Task Team to investigate the jet fuel supply plans and shortages as this would also impact on the FIFA World Cup 2010.

Mr Tshifularo explained that in regard to the FIFA World Cup 2010 preparations, SAPIA aimed to ensure smooth fuel supply throughout the event, and to prevent fuel shortages. The importance of the event in 2010 was acknowledged. The exemption under the Competition Act would ensure that fuel supply would not be disrupted.

Mr Tshifularo then set out some of the challenges that SAPIA currently faced. The most significant was the global economic climate, which highlighted the need for sustainable development. There was an urgent need for industry members to work co-operatively to provide energy access and security. To this end, policy and financial drivers needed to be developed.

Further challenges arose from the economic legislation and regulation of the industry. The oil industry was a vital component of the South African economy and it operated within a highly regulated environment. However, in order to be able to develop the access and security of oil supply, the industry needed predictable regulations. This, in conjunction with better margins and sustained investment returns, would encourage investment in the industry by existing and new investors. Previously, the industry was regulated through the Marketing of Petroleum Activities Return (MPAR) mechanism. SAPIA was currently working with the Department of Energy to develop a new mechanism for industry regulation. The industry also faced difficulties arising from the shortage of skills, and this must urgently be addressed. Finally, the capacity of government to process licenses and approvals was limited, which had a negative impact on industry development and which increased industry costs.

The challenge of infrastructure development was another factor. Petroleum product pipelines and tankage capacity needed to be developed in order to adequately service the inland market. The Energy Security Master Plan had made provision for building new pipelines and tankage facilities, with some provision for private sector investment in these projects. Beneficial conditions would attract better investment by the private sector. With regard to the challenges around access and security of supply of petroleum products, the exemption from some provisions of the Competition Act would allow for SAPIA members to co-operate in formulating a solution. Fuel shortages would have a significantly detrimental effect on the nation's economy and growth targets.

Still further challenges faced by the petroleum industry were environmental in nature. Use of cleaner fuels was vital to improvement of air quality by the reduction of carbon dioxide. Important developments in vehicle technology enabled cleaner and more efficient engine systems. SAPIA had been integrally involved with the development of the long term roadmap for developing clean fuels. It had taken lessons from the launch of lead-free fuel in South Africa in 2003, and had used the models provided by Australia and Europe to help it develop a long-term plan for the introduction of cleaner fuel in South Africa.

Future Fuels Roadmap briefing
Mr Michael Stead, Industry and Government Liaison Officer, Engen Petroleum Ltd, presented the section on the Future Fuels Roadmap. Although the roadmap drew on the lessons learned by practices in Australia and Europe, it was then tailored to South African conditions. It was also designed within a time frame that would allow vehicle manufacturers to keep up with the required changes in vehicle technology. The roadmap consisted of three key phases. The first, described as RSA Clean Fuels 1, would phase out the use of lead in fuel. The second phase, RSA Clean Fuels 2,  would require all new and existing vehicles to be compliant with the 2004 European guidelines, Euro 4/ EN 2004, for cleaner fuel and vehicle technology. In the third phase, RSA Clean Fuels 3, all new and existing vehicles must be compliant with 2009 European guidelines (Euro 5/ EN 2008) for cleaner fuel and vehicle technology. This process, whilst vital for addressing environmental concerns, was also costly. It would cost oil refiners in South Africa between R20 billion and R40 billion to implement the changes. Presently, the oil refineries in South Africa were not equipped to meet the requirements commensurate with these changes and developments in fuel and vehicle technology.

Discussion
Mr S Montshitsi (ANC - Gauteng) asked for more clarity on the processes of the three steps of the Future Fuels Roadmap. He also required clarity regarding the abbreviation 'EN' used in the presentation.

Mr Stead responded that the processes were complex, and he would find it difficult to explain them adequately in the time available now. However, a book had been written about the details. The most important current concern was that fuel be rendered lead free. Although the process of obtaining cleaner fuel was complex, the levels of sulphur in fuel were an important guideline. During the second phase, levels of sulphur must be reduced to 50 parts, and during the third phase down to 10 parts, which was considered to be clean. He explained that the abbreviation “EN” was used to refer to European fuel specifications. Most vehicle manufacturing specifications were adopted from Europe, although they had been tailored for South Africa conditions.

Ms E van Lingen (DA - Eastern Cape) queried the date referred to in the European specifications, asking whether the dates in the presentation were those on which the specifications in Europe had been officially changed, or referred to the date set for implementation of the specification changes.

Mr Stead responded that the European specifications dates reflected the actual date on which the European Parliament had approved the specifications and emission standards.

The Chairperson asked that the presentation continue, and that questions other than those seeking immediately clarity on a point should stand over until the end of the presentation.

Continuation of Briefing
Mr Tshifularo outlined the socio-economic challenges that the petroleum industry had been facing, noting that one of the most important was the continued escalation of crime. Crime impacted upon the petroleum industry at multiple levels, from service station crime like ATM robberies or attacks on service station forecourts, to cash-in-transit robberies, through to bulk fuel theft and commercial crime such as fraud and corruption. He noted that the industry had taken steps to prevent crime. SAPIA had established the Oil Industry Security Forum, whose main focus was to prevent crime, address security issues, and manage crime fighting projects. Within the industry, companies and service station owners were being educated and empowered through the use of strict cash-handling procedures. Innovations around cash handling mechanisms and procedures were also part of the crime management strategy. Service station designs were now geared to crime prevention and the addition of bullet-proof glass and closed circuit television cameras (CCTV) were further crime-prevention measures. Close liaison was being maintained with the South African Police Service (SAPS) to ensure full investigation of every crime and the incorporation of the findings into improved security measures. Empowering and training of staff members in crime prevention and survival techniques was also a priority.

The petroleum industry's transformation goals were encapsulated in the Liquid Fuels Charter (LFC), which was signed by the industry in 2000. This Charter aimed to ensure 25% ownership and control of the entire value chain by 2010. SAPIA was the first industry in South Africa to voluntarily commit to advancing black economic empowerment (BEE). The board of directors and senior management levels reflected 36% black membership and 11% were black women. Black representation was 32.4% at top management level, 37.1%, at senior management lever, 55.6% at specialists and mid-management levels, and 70.9% amongst skilled technical staff. All black staff collectively accounted for 70.9%. The industry's BEE procurement was currently at 42% of the total budget for goods and services. This excluded the BEE spend on crude oil and petroleum products. Historically disadvantaged South Africans (HDIs) operated 38% of the industry retail network. The Corporate Social Investment (CSI) of the industry was currently over R175 million.

In terms of skills development, SAPIA had implemented the Leadership in Oil and Energy Programme in 2006. Since its inception, 147 industry employees had graduated from the programme. The Artisan Skills Training Project currently had 1 400 learners in the system and was structured to produce in excess of 500 NQF level 4 certificated learners from 2009 onwards.

There remained some challenges to transformation imperatives, including the need to increase credible BEE suppliers and the availability of accredited petroleum industry learning programmes. A further challenge lay in increasing the  numbers of employees with disabilities. Despite this, the petroleum industry was on track to achieve the aspirations and goals of the Liquid Fuels Charter.

Mr Tshifularo concluded that the oil industry was vital for the economic survival of the country. Its business thus had to be run efficiently and smoothly in order to ensure the continued growth of the economy. The petroleum industry saw itself as a partner to the government, envisioning a working partnership where petrol industry and the government together could move the country forward. It also looked forward to continued cooperation from the Department of Energy.

Discussion
Mr B Mnguni (ANC – Free State) asked about the exemption from the Competition Act, asking if this was a total or partial exemption, and requesting further details. The Competition Act sought to protect consumers, and he was not sure whether it was correct to tamper with legislation that was primarily aimed at protecting the poor against price fixing.

Ms S Chen (DA - Gauteng) concurred with Mr Mnguni, and requested clarification on the specific regulation with which SAPIA required the Committee's assistance.

Mr Tshifularo responded that the issue of industry regulation had evolved over time. The industry had worked closely with the Department. The petroleum industry needed predictability about its regulation, so that the members of the industry could effectively plan and operate within the bounds of regulation. The stakeholder collaboration would also be important in allowing for collective awareness of challenges or potential difficulties with supply of product, so that all parties should be allowed to communicate about the subject of supply. In regard to fears around the potential for price fixing, he pointed out that prices of fuel in South Africa were regulated and there was no scope for manipulating prices. The main focus of a collaborative co-ordination was not to discuss prices at all, but rather to discuss issues impacting on supply. This process was crucial to ensure that the inland market did not run dry.

Mr A Nyambi (ANC - Limpopo) required more clarity around what was meant in the presentation by “all privately owned members have concluded equity ownership deals”.

Mr Nyambi asked what was the current representation of historically disadvantaged South African in relation to the Liquid Fuel Charter’s target of the goal of 25%.

Mr M Maine (ANC – North West) asked for the specifics of the industry's realisation of the transformation goals, and asked for an explanation of how the goals of 25% ownership of the whole industry’s value chain by previously disadvantaged South Africans would be made up in real terms.

Mr Tshifularo responded that in regard to transformation goals, at the time when the Liquid Fuels Charter was finalised it contained a goal of having 25% of previously disadvantaged South Africans across the total value-chain. This, in effect, provided historically disadvantaged South Africans with the opportunity to own 25% of the total oil industry value chain. Currently, the focus was moving away from this ownership percentage that was held by the “big names”, and moving to a more broad-based ownership model.

Mr Ivan Collair, General Manager of Government Relations, Shell SA, added that the industry members had met the 25% target. He explained that each company had individual agreements with participating shareholders. The Liquid Fuel Charter facilitated capacity building, economic empowerment and skills development, but it made no provision for specific quantifications. The broad-based legislation developed by Government for addressing the economic empowerment of previously disadvantaged South Africans provided this quantifiable framework. The oil industry operated within this legislation.

Mr B Mnguni (ANC - Free State) asked for clarity whether there was a single main cause that could be isolated to account for the airline fuel shortages.

Mr Montshitsi asked for more detail regarding Transnet's transport problems of fuel to OR Tambo. He too expressed concerns around relaxing the Competition legislation. He also pointed out that although the global economic crisis had a negative impact upon the oil industry negatively, it also impacted significantly on the consumers. This Select Committee had an important role in giving voice to the public interests.

Mr Maine queried whether there had been no collaboration by members of the oil industry prior to the jet fuel shortages.
 
Mr Collair reiterated that the most important aspect contributing to the jet fuel shortages was the low opening stock holding, and this in turn resulted from a combination of factors that led to the depletion of stocks. No single incident could be described as having contributed more significantly to the jet fuel shortage than another. He repeated that part of the problem had been the production problems at the inland refinery in July, which in turn was exacerbated by problems by Transnet in transporting that product to OR Tambo.

Mr Collier expanded upon the Competition Act matter. He noted that industry members had to obtain exemption from some areas covered by the Competition Act. Currently, because industry members had no collaborative understanding of issues impacting on supply of petroleum products, they could not collaborate to find appropriate solutions. The problem of supply to OR Tambo could have been more effectively dealt with had there been some provision in the legislation that allowed a collaborative effort to address supply issues by all industry members.

He stressed that the exemption sought would allow only for industry communication around supply of petroleum product, to assure the access and security of supply. This collaboration would also involve Transnet and other stakeholder agencies. He repeated that currently, prices in the oil industry were regulated by Government. Because 75% of the oil industry' income was regulated by Government, it was important that the oil industry worked closely with the latter to ensure that areas of mutual interest were handled efficiently. The key to this lay in certainty of regulation, and in ensuring that the regulations were clear to all parties, that there were no grey areas, and that all parties know and understand the scope within which they were expected to practise. Government could play an important role in optimising the oil industry by providing a legislative environment that allowed oil industry members to respond to opportunities faster than its foreign competitors, mainly Brazil and India.

Mr Mnguni queried how the supply of fuel to the OR Tambo airport was managed, asking if it was supplied by individual members of the industry, or through a consortium. He also asked what provision existed in the contracts between industry supplying the fuel and the Airports Company of South Africa (ACSA) in the event that stocks were low. He also sought clarity whether SAPIA was saying that the experience learned from the low stocks of fuel at OR Tambo was the rationale for the petroleum industry seeking exemption from the provisions of the Competition Act. He went further to ask if fuel access and security for the 2010 World Cup would be jeopardized if the exemption was not granted. He asked what SAPIA and the industry had put in place themselves to ensure the access and security of fuel supply, especially for the FIFA World Cup in 2010.

Mr Collair responded that challenges cited in the presentation by SAPIA were long-term problems, but the industry had also addressed the short-term issues relating to the 2010 FIFA World Cup and had solutions in mind.

Mr Tshifularo expanded upon this, noting that a task team had been established to address some of the short-term challenges presented by the 2010 event.

Mr Stead explained that the system that supplied OR Tambo was severely restricted, and although ACSA was building additional storage facilities, there was little that could be done to improve the main transport arteries into this airport. For this reason, a collaborative effort by industry members to monitor the fuel supply would be crucial to prevent a recurrence of the recent fuel shortages. He was concerned that should this not be allowed, then the problems experienced at the end of the Confederations Cup would be multiplied in 2010 at the FIFA World Cup.

Mr L Mabula, representative of PetroSA, added that it was difficult to guarantee that there would not be any disruption of fuel supply in 2010, during the FIFA World Cup. The more pertinent question would be how the industry could deal with the issue of supply. This was why the petroleum industry requires the co-operation of the Competition Commission, as it would enable collaboration by industry members in order to address this concern.

The Chair commented that a task team had been appointed by the Minister to investigate the petroleum industry's preparedness for the 2010 FIFA World Cup. The task team met regularly in Pretoria and had been briefed to alert the petroleum industry to any threat to access and supply of fuel. The Committee would need to contact the task team in order for them to brief the Committee.

Ms Van Lingen agreed that the Committee should meet with the Ministers of Trade and Industry and Energy, and that both these Departments should brief the Committee on the pertinent issues surrounding the petroleum industry's request for exemption from the Competition Commission.

Ms van Lingen commented that the Committee seemed to be struggling to obtain pertinent information from SAPIA and the industry members. The question remained what would really happen in 2010. The key issue was whether the industry had the ability to supply fuel to meet the needs of the 2010 FIFA World Cup. An understanding of the issue as an integral whole had not been presented.

Mr Montshitsi responded that perhaps the Committee should, for the moment, accept what SAPIA had stated, but pursue the issue with the Competition Board and investigate it further. Another meeting with SAPIA and industry members could be scheduled at a later date to finalise issues pertaining to the FIFA World Cup 2010.

The Chairperson agreed in principle but said that Members must be satisfied that their questions had been adequately addressed.

Mr K Sinclair (COPE - Northern Cape) noted that one factor which may account for the fuel shortage was the increased influx of tourists during the Confederations Cup. He also noted his doubts about the impact of the exemption for the petroleum industry from the provisions of the Competitions Act on fuel access and security.

Mr Mnguni noted that SAPIA had cited the shortage of skills as a challenge, making this sound that the Government had made no provision at all for skills development.

The Chairperson added that one of the valuable lessons the Committee had learned from its study tour to Australia was the importance of regulation of the petroleum industry by Government for the protection of the public, especially the poor. Regulation would keep the playing field fair. De-regulation ultimately impacted most significantly on the poor whose budgets could not cope with the fluctuations of a deregulated market.

Mr Tshifularo reiterated that the exemptions the petroleum industry was seeking from the provisions of the Competition Act did not relate at all to regulation of the price of fuel. The exemptions related to allowing communication and co-operation between industry members on issues pertaining to the access and security of fuel supply. He reiterated that the petroleum industry players did not seek to operate beyond the scope of the law prohibiting ant-trust activities. He acknowledged that there were advantages and disadvantages of both a regulated and deregulated market environment for the petroleum industry. There were no material issues with the regulated market environment. The issue now being raised was more reflective of the industry's need for predictable regulation, about which all parties could be adequately and timeously informed

Mr Mnguni queried which provisions of the Competition Act prevented industry players from communicating and collaborating in regard to the supply of fuel. He also noted that all regulations and legislation were formed according to a Parliamentary process, which allowed for stakeholders and members of the public to comment upon and interrogate the proposed legislation.

Ms Pansy Mekwa, General Manager: Strategy, Total South Africa, responded that the current legislative provisions in the Competition Act prevented the industry members from communicating with each other regarding volumes and volume capacity. The industry accepted that it was reasonable for legislation to block an industry member from having a global view of the other industry members' operations. However, if the various stakeholders were able to communicate with each other regarding the local volumes and local capacity, this would facilitate a co-operative endeavour to manage local supply issues.

The Chairperson clarified that the collaboration around local stock holdings would allow a collaborative effort to meet crucial supply needs when stocks were running low.

Ms Mekwa concurred and acknowledged that there would obviously need to be restrictions on what information could be shared, and what information was not to be made available during the collaborative discussions.

The Chairperson raised the issue of re-vamping of filling stations currently being embarked upon by the  petroleum industry. In order for this to happen, an application must be submitted, and the industry would then decide who would be considered for the upgrade. This was problematic, as some filling stations seemed to be overlooked for no discernible good reason. Furthermore, such upgrading often involved agreements with convenience store retailers such as Pick 'n’ Pay or Woolworths. In historically disadvantaged areas, this put the dealer at a disadvantage, as he was forced to supply his convenience store from these retailers, and this limited his flexibility to manage his margins.

Mr Graeme Yager, Manager of Corporate Affairs and Planning, Chevron South Africa, agreed that in some communities, this was the case. However, in some areas, the agreements did make provision that the dealer could decide what he wished to stock and this would allow the dealer to meet the needs of the market and sell what would allow him or her to remain profitable.

The Chairperson noted that the issue of government capacity was one that would be remedied with the budget discussions after 1 October, as Government departments would be able to fill vacant posts. He asked that this question be held over until after the briefing by the department.

Committee business
The Chairperson advised the Committee that the oversight visit to the Northern Cape would now not be possible. He offered the option of taking the oversight trip during the constituency period, and suggested that he and the Committee Secretary should review some possible alternative dates for the oversight trip. This visit remained of importance. Although De Beers had given R463 million to the Kleinsee community, some issues still needed to be tackled, and the implementation of the social and labour plan agreed to by De Beers needed to be overseen. He would revert with possible dates.

Mr Sinclair tabled and circulated copies of a newspaper article from a local newspaper in Kimberley, noting that the article raised important issues around the mines’ adherence to their agreed social and labour plan.

The Chairperson agreed, pointing out that communities suffered when mining concerns did not have social and labour plans. The Committee would need to widen its oversight visits to small-scale mining concerns, particularly in Limpopo, where these mining concerns had such plans but were not adhering to them.
 
The meeting was adjourned.