Liquefied Petroleum Gas Option for Expansion: Briefing by Department of Energy

Energy

16 August 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy briefed the Committee on the advantages of the use of liquefied petroleum gas by domestic users. It could lessen the demand on the electricity grid and was a cleaner form of energy. However, there were several problems. Prices were high, production of the gas was at the whim of refinery owners, there were restrictions on the ability to import gas, the supply of cylinders was limited and the public still had a negative perception over the safety of gas as a fuel. The Department proposed that the use of a subsidy might encourage the public to convert to gas as an energy source.

Members felt that there was a lack of movement in the industry. They were informed that pilot projects in Gauteng were to be transferred to the control of PetroSA after problems with the service providers. The delays in producing a strategy document were questioned. The supply of gas had reduced since the electricity crisis. Members were not convinced that subsidies would necessarily benefit poorer households as there were a number of issues relating to the supply and transport of gas cylinders, while the cost was high. It was costly to import refined gas products, and it would be better if refineries would produce more gas from crude oil.

The Committee also took the Department to task on the issue of transformation. The briefing was not what they had expected. Answers were needed on the state of transformation in the sector, which was controlled by the major petrol companies. There should be adherence to the Liquid Fuels Charter. The Department had produced a road map but was not sharing the information with the Committee. Public hearings would be held at a later date, preferably coinciding with the release of the strategy document.

Meeting report

The Chairperson said that most of the recent meetings involving the Liquefied Petroleum Gas (LPG) sector had revolved around price. There was also a concern about stock levels. There had been a suggestion to hold public hearings on this sector. The pace of transformation was also a concern. It was already one year later. People were concerned over the safety aspects of working with gas. There were complexities in the supply chain. The current 5% of market share should be increased to 20%.

Mr Jabulani Ndlovu, Director: Petroleum Policy, Department of Energy (DoE), made some opening remarks. The DoE wished to see more access to LPG for South Africans, and was also concerned with transformation in the sector. The South African energy industry was characterised by various sources of energy. Low-income households did not have easy access to energy. Shortfalls prompted the use of LPG as an alternative source of power to electricity. The LPG industry could provide a quick and easy solution. LPG was also an introduction to the use of natural gas. If LPG could be supplied to all households it would facilitate the conversion at a later stage to natural gas.

Mr Ndlovu said that another objective was to move households from coal and paraffin to gas. This might obviate the need to build more power stations. The level and quality of energy sources should be enhanced. Not all residents had access to quality energy. Government wanted to improve the environment by reducing greenhouse gases. LPG was a cleaner fuel.

Mr Ndlovu said that the demand for LPG was growing. In 2004 supply had exceeded demand, but by 2007 the opposite was the case. The demand for LPG was boosted by problems with the electricity supply at that time. The demand for LPG was still increasing. While electricity satisfied 59% of energy needs at present, LPG was only approximately 1%. Pricing was an issue, but was not the only factor affecting availability. In terms of the usage of energy, 67% went to cooking while LPG provided only 2% of this.

Mr Ndlovu said pricing was still a major stumbling block. Certain elements had to be investigated. Prices remained high despite government interventions, making LPG unaffordable to many people. Interventions had to create some predictability in pricing. The supply of LPG was a crude oil by-product. Refiners might place more emphasis on products such as petrol at times depending on the requirement. The type of oil also affected the type of products which could be refined. Refineries were also equipped to produce certain types of product. The biggest import facility belonged to Afrox, and could handle 3 500 tons. There were also environmental requirements and refinery economics to be considered. The amount of LPG production was a business decision.

Mr Ndlovu said that constraints on the growth of the market included a lack of funding. People would need subsidies to replace coal or wood-burning appliances. Money would have to be found somewhere, but was not that easily available. The second issue was the vertical integration of the supply chain. The LPG industry was the same as the petrol industry. The manufacturers of LPG were also the wholesalers for petrol. Transport and storage were costly. There was also a negative perception. LPG itself was not any more dangerous than petrol although there had been occasional reports of explosions. This made people afraid to use it.

Mr Ndlovu said that DoE had done some international benchmarking. In Brazil, some 42 million households used LPG. There was a system of cross-subsidies. Vouchers had been made available to poor households. In India, 162 million households used LPG for cooking. The Indian government had left subsidies in place for gas while removing them from other forms of energy. In Indonesia there were 5.3 million users.

Mr Ndlovu proposed a number of interventions:
1) The development of the supply infrastructure. Not long ago there had been serious supply shortages, particularly in the Western Cape. Suppliers had been forced to import. Adequate infrastructure was needed, and the biggest facility was in Richards Bay. It was limited in capacity and was controlled by a single player, namely Afrox. The DoE was working with other stakeholders such as Transnet National Ports Authority (TNPA) to facilitate the development of infrastructure at Saldanha Bay.

2) The licensing regime would have to be used to regulate prices and the enforcement of safety. Users should use LPG safely.

3) Uncompetitive behaviour had to be combated. The supply of gas cylinders was hindered due to hoarding. This was done to take competitors out of the market by decreasing their ability to supply customers. Such practices should be reported to the Competition Commission or the DoE. It was a serious challenge.


4) The
local production of cylinders would make the industry more sustainable. All gas cylinders currently in circulation were imported. This would also create employment opportunities. There were some developments but there was still a long way to go.

5) Government should consider subsidising LPG appliances and cylinders rather than the gas itself. People would need some incentive to change to LPG. This form of incentive had been used before. He believed that 1.2 million households should be targeted across the economic spectrum. Although the price of LPG had been regulated, this was not enough.

6) More needed to be done to review the LPG Maximum Refinery Gate Price and the Working Rules. Some research had been done on a pilot project. Presently, the price of LPG was based on the average price of 93 octane petrol. This was based on the international market and not on the actual production costs. This study was part of a reconsideration of the fuel price as a whole. Some of the components of LPG, such as butane, were used in the production of 93 octane fuel. This was not a scientific approach to pricing. The asset base used to determine pricing should also be reconsidered. Some of the aspects might no longer be relevant.


Mr Ndlovu told Members that the cost of the proposed subsidy to 1.2 million households, in 2011 figures, involving the initial supply of a stove and the first cylinder, over a five year period, would be about R650 million. This money would have to be found somewhere, but he believed that it was a necessary expense. A holistic approach was needed to the other factors involved. Bulk importing would be cheaper, especially during the European summer. Local production of cylinders would also reduce the cost.

Mr Ndlovu said that a number of role players had been identified. The Department of Trade and Industry (DTI) should be involved in the manufacture of cylinders and appliances. The Department of Co-Operative Government and Traditional Affairs (COGTA) should encourage the various municipalities to encourage the roll-out. An environmental assessment would be needed, which could take anything up to two years. The Department of Environmental Affairs (DEA) would have to assist with this, as they were doing with the development at Saldanha Bay. DoE would need to work with National Treasury on the subsidy scheme as they held the purse strings. The National Energy Regulator of South Africa (NERSA) controlled the energy prices, although mainly for electricity. The large-scale introduction of LPG would lessen the burden on the electricity supply. Some of the savings should be used to subsidise the conversion to LPG. The DoE would have to work closely with the Industrial Development Corporation (IDC) to support programmes for the use of LPG as an energy carrier. Engagement was needed with Transnet National Ports Authority  (TNPA) to develop the infrastructure to process imports. It made more economic sense to use the largest vessels available.

Mr Ndlovu said that there were some new developments. One of these was the import facility at Saldanha Bay. There were some companies developing storage infrastructure. The DoE would do whatever it could to see these interventions come to reality. An internal strategy document had been developed. The next step would be to get inputs from other stakeholders. He felt guilty when he saw problems remaining unresolved. Whatever was happening, it was not because DoE was comfortable with the situation. Many issues had to be addressed.

Discussion
Ms N Mathibele (ANC) found the presentation somewhat confusing. The DoE was not moving forward. In 2010 there had been a project to identify three members in each of the nine provinces who were investigating LPG use. She mentioned the three projects in Gauteng. There had been no mention of these projects in the presentation. Funding was now offered as a challenge. It seemed that DoE was saying that people should stick to coal, wood and cow dung as energy sources as an alternative to expensive electricity. She asked what had happened to these projects.

Mr Ndlovu replied that there had been two pilot plants in Gauteng. A previous presentation had mentioned that the service provider had not really advanced the interests of the DoE. A lot of problems had been experienced. The DoE had asked PetroSA to look into taking them over. In July a meeting had been scheduled to finalise the take-over. The plants had served as the basis for setting a maximum LPG price. The industry had not been fully co-operative. The intention was to reduce the number of middlemen. The ultimate objective had not been achieved as those running the pilot schemes had failed.

Mr S Mayatula (ANC) asked what the status of the strategy document was. It had obviously not gone through all the stages at DoE. He asked why the supply had reduced over the years. He said that certain shops would not accept a cylinder from another distributor. The big comparison before had been between electricity and solar energy.

Mr Ndlovu replied that the strategy document was currently subject to internal approval. He thought that it had only still to go to the Director-General and the Minister. The peak of supply and demand had been at a time of problems with electricity supply. The manner in which refineries operated had a bearing on the amount of supply. Refinery audits had been conducted. It was important to look at local production. There would still be a requirement for imports as there would still be a shortfall. Sometimes the manufacturers looked at what was more urgent and profitable at the time. More efficiency in the refineries would help. The normal procedure with cylinders was that each company produced its own branded cylinders. The distributing companies would accept their competitor's cylinder, but might keep these in storage rather than return them to enable their rival to redistribute them.

Mr E Lucas (IFP) said that the situation was being re-analysed. There had been some progress when the price had been reduced. It seemed to him that a new start was needed. Transformation was urgently needed. Only having one import point, controlled by a single company, was concerning. It seemed that the concentration on the new facility at Saldanha Bay showed a dependence on imports. There might be a pricing concern moving gas from one side of the country to another. If more crude was imported, more gas could be refined locally. Subsides were an excellent idea, but the upper income groups would benefit again. There should be a mechanism to encourage lower income groups. On a monthly income of R430 per month, there was no money to buy gas. Imported cylinders had been found to be inferior. Local manufacture would not necessarily remedy the issue of standards and hoarding. He asked if reports that gas affected the health of disabled children were true.

Mr Ndlovu agreed that transformation was not up to standard. The same players were active as in the petrol sector. LPG was one of the facets of the whole liquid fuels sector. Some of the sellers were not manufacturers. This matter needed to be addressed. Those who could afford LPG would benefit more than those who could not, but the subsidy for higher income groups would be lower.  Some in the middle income group might benefit. The DoE would use the project to see how things would turn out. They were following an example that Eskom had used at the time of the electricity crisis. People would not change without some form of incentive. He assured Members that gas was less harmful than petrol. It produced relatively few fumes. There might be a problem if the gas itself was ingested.

Ms B Ferguson (COPE) asked if there had been any research on lower-income homes where gas was being used. LPG was used mainly in middle and upper income homes. She also asked why the supply was reducing, and asked if crude imports had any impact. Demand had also fallen since 2006. Afrox had the monopoly in South Africa, and could set the price, and they were setting a high price. She noted some of the projects. Businessmen were conducting these projects, and they would be positioning themselves to dominate supply once the move to use LPG was launched. There had been no mention of educating the public about gas. People were afraid. She would be interested to see what model would be used to set the LPG price if it was divorced from the petrol price. In Cape Town, a liquid-burning stove was introduced to households in Langa. It had not lasted despite being cheaper due to difficulty in buying supplies. This was why paraffin remained so popular as it was readily available. The plants would become white elephants if there was no demand. There was only 5% black ownership in the industry. She asked what was being done by the DoE on Broad Based Black Economic Empowerment (BBBEE).

Mr Ndlovu responded that the refineries could not report fully on their production figures. LPG and other products still needed to be imported. If there was an adequate infrastructure, the northern hemisphere summer could be exploited in that prices in the north were cheaper. Domestic capacity should be made a priority. The DoE had held discussions with the LPG Safety Association. Some cylinders had been found to be of poor quality. The DoE would prefer to see local production as it would improve supply and create an opportunity for a local industry. The same applied to some of the imported appliances. There had been some research on the popularity of LPG in lower-income groups, but this had been some time previously. Door-to-door research would be needed as the supply chain was quite complicated. The pilot projects had been an ideal vehicle to monitor consumption within the areas served.

Mr Ndlovu said that LPG and 93 octane came from the same barrel of crude. Some work had been done on pricing. The cost of importing refined LPG from major production centres such as Saudi Arabia should be compared to 93 octane. All factors should be considered. It was costly. The price of crude included all cost factors, including transportation. Different containers and vessels were needed, impacting on the price. It was a complex issue.

Mr Ndlovu knew that some people would take a taxi to buy LPG in the town. Not everyone could afford this. This is why the pilot projects had been located in the townships. A service provider was used to deliver door to door where there was no nearby supplier. It was easier to transport paraffin. Lighter cylinders were being manufactured, some of them supplied with a cooking plate. Inputs would be invited at some stage in the future, and he hoped that this would lead to solutions.

Mr Ndlovu said that there had been some assessment on BBBEE in the liquid fuels industry. There was a Liquid Fuels Charter (LFC). He was informed that results had been published. This would address transformation in the industry.

The Chairperson was not satisfied with the answers to date. Two days previously, the National Development Plan had been presented to Parliament. This had been praised. Stronger oversight instruments were being put into place, especially concerning energy. He had invited DoE in order to brief the Committee on transformation within the LPG sector. In August 2011 the Committee had looked at the state of transformation. All aspects of the sector should be considered. Since 2009, the DoE and the Committee had looked at specific issues. Regular updates were needed. Pilot projects should become programmes. Members were growing impatient. The strategy document was still subject to internal approval. This was taking a long time. In February 2010, the then Chairperson had wanted to know when the programmes would be rolled out to the rest of the country. Mr Mkhize of the DoE had referred to a three year programme implemented in Indonesia. Their circumstances might be different, but it showed that such programmes could be executed. He asked if PetroSA should now be held to account for the implementation. In August 2011, empowerment legislation would have been reviewed. He asked why the document was not yet approved, and what was causing the delay. Penetration of the market by the LPG sector would bring relief to pressures on electricity supply. The issue of non-competitive behaviour should become history, but in the meantime the Competition Commission should be a stakeholder. In some parts of Johannesburg there was still a municipal gas infrastructure. The South African Local Government Association (SALGA) and Public Works Department (PWD) should also be consulted. The South African Petroleum Industry Association (SAPIA) should also work hand-in-glove with all parties, and the LPG Safety Association. Any campaign to enhance the safety education should be encouraged. Proudly South African should be involved to encourage manufacture.

Mr Ndlovu apologised if there had been a misunderstanding over the Committee's requirements. The DoE had felt that all the points under transformation had been raised as part of the discussion of the LFC.

The Chairperson said that this could be discussed at a later date.

Mr Mayatula was concerned that the strategy document had not gone to the Director General at least.

Mr Ndlovu said that while the document had not yet been approved, the DG had sanctioned the contents of the presentation.

The Chairperson said that elements such as skills development should be addressed. Issues should be dealt with as comprehensively as possible.

Mr Ndlovu said that a number of things had happened in terms of the pilot projects. When PetroSA had gone to look for certain records on site, they had experienced problems as the original operator was no longer there. A different person was running the plant and could not produce records. The plant was also short of supply. The DoE had written records, but they needed to be verified. This had taken some time. There was uncertainty over who owned the land. PetroSA had asked for a meeting, but it had not been held yet due to office movement. An agreement was needed. Some legalities still had to be observed before the hand-over could take place. These investigations had been concluded. It had been a good project, but the service provider had not lived up to expectations. He hoped that the meeting with PetroSA would happen within a month. The asset register had been provided. He could not comment on whether the Committee should oversee PetroSA. The DoE should report to the Committee on whether PetroSA was doing what was expected of them.

Mr Ndlovu said that all the consultations and internal inputs had been put in place towards compiling the strategy document. The principals had made some comment on the draft. The document had to have integrity before it could become official. He would convey the Committee's concern to his principals.

The Chairperson asked about the substance of the document. The content should also have integrity. There needed to be a balance. At macro level, Members needed to have an idea of what would be in the document. The DoE had a road map towards a transformed LPG sector, but this had never been shared with Members.

Mr Ndlovu replied that it was important for the Committee to know where the DoE was in the process. The DTI had made an intervention on the price of steel to be used in the local manufacture of cylinders. The question of investment was critical. The DoE was seeing the investment in the import facilities. The Saldanha Bay facility would be expensive to construct, and the willingness to undertake this project showed the confidence in the industry. Investors believed in what the Department was doing.

The Chairperson wanted to see total confidence in the sector, not partial confidence.

Mr Ndlovu replied that DoE was pleased with the attitude of the industry. Some practicability of where the Department was going was needed. A regulatory framework was needed. Some stakeholders had been overlooked. It was unfortunate that the whole document had not been presented. The Competition Commission was part of the plan, as well as international bodies and SALGA. COGTA had been mentioned.

The Chairperson said that COGTA made policy on local government but SALGA was responsible for implementation. Sometimes there was conflict between the bodies.

Mr Ndlovu said that the LPG Safety Association had had a number of engagements with DoE in preparing the document. Safety awareness programmes had been put forward. There were concerns over administration. Safety concerns would be addressed in collaboration with the Department of Labour. LPG installations had been discussed. Proudly South African was a body that had not been considered, but would be consulted. DoE was constantly in discussion with members of SAPIA. Whatever was said about the industry, it had to consider transformation. This should be in line with government's expectations. Sometimes business interests were put ahead of national interests. There were deeper issues to be dealt with.

The Chairperson said that Minister Trevor Manuel had referred to the need for more cohesion between business and government.

Mr Ndlovu introduced the other members of the delegation.

The Chairperson said there was still a long journey. He had felt the impact of LPG prices. In 2010 it cost almost R200 to refill a 9kg cylinder. The price had dropped close to R120, but had increased again with the onset of the winter of 2012. At some stage public hearings should be held, but it should be timed to coincide with the release of the strategy programme. Parliament would do its homework on the issue. He suggested that if Members were visiting the Johannesburg area, they should try to visit the pilot projects. He was quite curious as to the usage of gas in industry.

The Chairperson said that Members were not satisfied with the pace of transformation. The whole industry needed to be overhauled and even a brief outline would be handy.

Mr Lucas said that South Africans were not benefiting from the country's products. The local price for South African steel was based on the international market. Russian gas was much cheaper. The big companies enjoyed the benefits of economies of scale, while the smaller players could not command the same discounts. The small suppliers were given the blame for high prices.

Ms Ferguson asked that the document requested by the Chairperson should include something on proposals for skills development.

The Chairperson said that what was needed was a summary of the status quo across the sector. The Committee wanted to ensure that the timing of public hearings should be reasonable. The release of the full document should coincide with these hearings.

Ms Mathibela said that the DoE had been educating the public on LPG. She asked how this initiative was proceeding.

The Chairperson said that a surge of demand should be avoided. Economic activity could be triggered in certain areas by cylinder manufacturing plants. Even the transport of the cylinders would create employment, even though there would be safety issues. There was now a better understanding with DoE. The Department should consider the recommendations made by the Committee. While not dictating time-frames, he would expect that DoE would maintain progress. The industry had potential, and would have a ripple effect for other industries.

The Chairperson briefed Members on the meeting with Eskom the following week.

The meeting was adjourned.

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