Liquid Fuels Infrastructure Roadmap and Basic Fuel Price: briefing by Department of Energy

Energy

12 November 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy (DoE) said that the Liquid Fuels Infrastructure Roadmap would help to ensure that South Africa had access to sufficient and sustainable sources of energy to meet the country’s liquid fuels demand, creatiing an environment that would encourage investment into liquid fuels infrastructure and an integrated government-wide approach to dealing with liquid fuels.  Data collected during the project would assist in determining, in terms of capability and capacity, local refining, storage and handling facilities, logistics to transport liquid fuels, and security of supply concerns.  Challenges included the collection of industry data which was primarily dependent on stakeholders’ co-operation, the validation of data collected being a critical component.   There had been delays in responses by stakeholders, inadequate funding and expansion of the project to include a refinery audit.  As a result, revised target dates for completion of the project had been set.  A refineries’ audit report was to be completed by 15 December 2012 and a final report and 20-year roadmap models were to be completed by 15 February 2013.

The Committee asked questions on the revision of dates for the completion of targets, the construction of Mthombo refinery by PetroSA, the source of funding and how this would be recovered; and the sufficiency of the current infrastructure in light of the forthcoming 2013 Africa Cup of Nations.

The Committee was told that there were three basic forms of fuel pricing globally:
  Ad hoc pricing common in countries like Iran, Mexico, Bolivia with their own oil (highly subsidised), where prices were set irregularly with no transparency;
  Formula based/automatic pricing adjustments, as used in South Africa, where prices and formulas were published – some countries did not publish the formulas;
  Liberalised pricing systems, as in Australia, where the prices were set by the market. As a means of ensuring that there was no price collusion, the Australian Competition and Consumer Commission had been established to play the role of a watchdog.

The Basic Fuel Price (BFP) was based on the import parity principle – what it would cost a South African importer of petrol to buy petrol from an international refinery, transport the product from that refinery, insure the product against losses at sea and land the product on South African shores. The Central Energy Fund (Pty) Limited had been appointed by Cabinet in 1994 as an impartial body to determine the BFP as a way of preventing manipulation by any interested party.  Daily and average monthly BFPs for price-regulated fuels were calculated in terms of the working rules, and the monthly Fuel Price Media Statement was independently audited before publication every last Friday of the month.

Factors influencing the magnitude of the BFP were international crude oil prices, international product supply/demand balances, product inventory levels – for instance, reserves for Saudi Arabia going down would affect prices – geo-politics (alternative sources for companies that used to import oil from Iran), the Rand/US dollar exchange rate, international refining margins and weather patterns in the northern hemisphere.   The various levies applied to liquid fuels were described in detail.

Fuel prices were changing every month because the government had made a decision to regulate fuel prices on a monthly basis.  SASOL was not selling petrol at lower prices, considering that they were producing it from coal, because the price was regulated by the government.   In the absence of a dual pricing system, SASOL could not sell at a lower price because this would distort the market. The country was not ready for deregulation of fuel prices because the playing field was not level.  Deregulation would stifle competition, with only the big players benefiting from the trade since they had access to the infrastructure, such as that used to offload crude oil.

Members asked questions about the comparative advantages of importing oil in a crude or refined state, the level of levies, the role of Sasol, and the monitoring of paraffin prices. 

Meeting report

20-year Liquid Fuels Infrastructure Roadmap
Mr Jabulani Ndlovu, Director Petroleum Policy: Department of Energy (DoE), said that the objective of developing a 20-Year Liquid Fuels Infrastructure Roadmap was to enable the government and others to ensure that South Africa had access to reliable, affordable, clean, sufficient and sustainable sources of energy to meet the country’s demand for liquid fuels; an environment was created that encouraged investment into liquid fuels infrastructure; there was promotion of diversity in the supply of liquid fuels, enabling improved competitiveness of the economy; empowerment of all stakeholders in dealing with any liquid fuels supply disruptions that might occur; and an integrated government-wide approach to dealing with liquid fuels.

The models to be constructed from the data collected would assist in determining, in terms of capability and capacity, local refining, storage and handling facilities, logistics to transport liquid fuels, and security of supply concerns.

Remedial actions in dealing with shortcomings in all the areas of infrastructure were likely to trigger investments. For instance, a finding of insufficient refining capacity in the country would lead to building of a new refinery, which would result in employment opportunities in the refinery and in the area of procurement of materials. By improving logistics capacity, such as the transportation of liquid fuels, new players were likely to come in as had been the case during the downsizing of the old Durban-to-Johannesburg pipeline.

Mr Ndlovu said that the DoE still faced challenges with the project, like the collection of industry data, which was primarily dependent on stakeholders’ co-operation, the validation of data collected being a critical component.   There were delays in responses by stakeholders, inadequate funding and expansion of the project to include a refinery audit.  As a result of the challenges, revised target dates for completion of the project had been set.  Out of the ten targets, two had been completed – the first refinery site visits and interviews; and the development of a common information architecture data warehouse – and the completion dates of the other eight had been revised.  A refineries’ audit report was to be completed by 15 December 2012 and a final report and 20-year roadmap models were to be completed by 15 February 2013.

Mr Muzi Mkhize, Chief Director Hydrocarbons, DoE, added that the road map was meant to lay the foundation to ensure security of supply of liquid fuels in the short, medium and long-term, and that it was still a work in progress.
 
Discussion
Mr S Radebe (ANC) expressing concern about the shifting of dates for the completion of targets asked if it was due to insufficient capacity or lack of skills?   What other strategies were in place to get reliable data?  How would new players be protected from big companies, which had a tendency of blocking them?

Mr Mkhize said the challenge had more to do with obtaining data, rather than a lack of skills. The DoE was currently engaging with the industry to have this improved.  Infrastructure was relevant for the achievement of capacity and so the road map sought to identify the inadequacies in the infrastructure in a bid to find solutions.  There was adequate legislation for provision of data through the office of the petroleum controller, but the challenge was more on the format of the data as required by the DoE, which was different from the way in which the providers were collecting it.  This was partly what was causing delays in the response time.

Mr L Greyling (ID), referring to a new refinery, asked if the plans to build the Mthombo plant were still on, as had been alluded to by PetroSA.  What would the impact be on the basic fuel price, where was the funding to come from and how would the money be recovered?

Mr Mkhize said that Mthombo was a PetroSA project and that a pre-feasibility study had been completed. Although they were in position to move on to the next stage, he could not make any further comments.

Mr G Selau (ANC) pointed out that the presentation had not indicated what activities were going to take place between the objectives and outcomes of the project. In terms of the challenges, he asked if there were any legal measures in place which would play a role. What measures were in place to deal with the inadequate funding?   Would the current infrastructure would be sufficient for purposes of the upcoming 2013 Africa Cup of Nations?

Mr Ndlovu said that the project was dependent on the models.  These would make it possible to assess import requirements and the development of relevant policies.

Mr Mkhize said that the work under the project was to be linked to the Integrated Energy Plan.  He referred to the Energy Security Plan of 2007, which had looked at the needs of the country to ensure that there was energy security by partly highlighting indigenous sources that would be relevant in the generation of energy.  South Africa’s refinery capacity was low but there was a need to gauge how much importation the country could take, bearing in mind that the importation of crude oil also had its challenges. In short, South Africa would have to develop its own capacity. He added that the Mthombo plant was not part of the audit process of the ongoing project.

The Chairperson hoped that the final report of the project would address some of the questions raised by the Committee Members. He asked if the DoE had engaged with the National Treasury to address the challenge of inadequate funding.

Fuel Price
Mr Robert Maake, Director Hydrocarbons Operations, DoE, said that there were three basic forms of fuel pricing globally:

  ad hoc pricing common in countries like Iran, Mexico, Bolivia with their own oil (highly subsidised), where prices were set irregularly with no transparency;
  formula based/automatic pricing adjustments, as used in South Africa, where prices and formulas were published – some countries did not publish the formulas;
 liberalised pricing systems, as in Australia, where the prices were set by the market. As a means of ensuring that there was no price collusion, the Australian Competition and Consumer Commission had been established to play the role of a watchdog.

The regulation of liquid fuel prices applied to petrol, diesel and illuminating paraffin, and liquefied petroleum gas for households had also been under regulation since 14 July 2010. South Africa was using the import parity principle (the price at which an importer paid to purchase a product in the world market and have it delivered for domestic sale) which applied deemed pricing (imaginary price mechanism), zonal pricing (magisterial district zones – based on distance from the supply source), transport modes (based on least cost mode, such as pipeline, rail and road) and cost recovery (pass through cost).

Some of the regulatory and policy instruments that empowered the DoE to regulate prices were the Energy White Paper on Energy Policy (November 1998), Petroleum Products Act, 1977 (Act No. 120 of 1977), Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) and National Energy Regulator Act, 2004 (Act No. 40 of 2004).

Mr Maake said that the Basic Fuel Price (BFP) was based on the import parity principle – what it would cost a South African importer of petrol to buy petrol from an international refinery, transport the product from that refinery, insure the product against losses at sea and land the product on South African shores. The Central Energy Fund (Pty) Limited had been appointed by Cabinet in 1994 as an impartial body to determine the BFP as a way of preventing manipulation by any interested party.  Daily and average monthly BFPs for price-regulated fuels were calculated in terms of the working rules, and the monthly Fuel Price Media Statement was independently audited before publication every last Friday of the month.

The BFP Working Rules were used for explaining how the fuel prices would be determined in South Africa, giving timelines and indicating how over/under recoveries incurred in a fuel price review period would be dealt with.  April (transport tariffs, fuel levy and RAF adjustments), September (forecourts attendants wage adjustments) and October (wholesale and retail margins adjustments) were important months in the fuel pricing calendar. Octane differential adjustments were made on a quarterly basis. 

Mr Maake said the elements of BFP were free-on-board value, which required a seller to deliver goods on board a vessel designated by the buyer, with the obligation to deliver to the seller being fulfilled when the goods had passed over the ship's rail, freight and average freight rate assessment, insurance, ocean loss, demurrage, cargo dues, coastal storage and stock financing costs.   In terms of free-on-board, South Africa was getting values from Platts, an agency which provided benchmark price assessments for commodity markets.  When pricing petrol, 50 per cent came from MED [Mediterranean] (USD/ton) plus 50 per cent from Singapore (USD/bbl [Oil Barrels]); diesel 50 per cent MED plus 50 per cent from AG [Arab Gulf] (USD/bbl); and illuminating paraffin 50 per cent MED (USD/ton) plus 50 per cent from Singapore (USD/bbl).   In terms of freight, South Africa received quotations from the London Tanker Brokers’ Panel, and a subscription was required to get this information. There was a 15% premium to supply to South Africa, the rationale for which was being questioned by the DoE.  A review would be carried out the DoE to see if the continued payment of this premium was justified.   In terms of cargo dues, South Africa was using 0.15% of the free-on-board value plus freight.   The tariff was set by the National Ports Authority, but a review of this tariff was underway.  

Demurrage – the time spent in a harbour to load and discharge cargo – was a big problem. The pricing system covered demurrage for three days, and the transporter of the cargo would incur demurrage from the fourth day onwards.  Coastal storage was adjusted annually in line with the movement in the Producer Price Index, and 25 days were currently allowed for storage.

Mr Maake said that the factors influencing the magnitude of the BFP were international crude oil prices, international product supply/demand balances, product inventory levels – for instance, reserves for Saudi Arabia going down would affect prices – geo-politics (alternative sources for companies that used to import oil from Iran), the Rand/US dollar exchange rate, international refining margins and weather patterns in the northern hemisphere.

In terms of fuel levies in place, there was an Incremental Inland Transport Recovery levy to finance inland transport costs, due to the 100% utilisation of the Durban-Johannesburg petroleum products pipeline (currently 3 cents per litre).  This levy was to be eliminated due to the multi-product pipeline. There was also the petroleum products levy, which was used to reimburse the pipeline users for the applicable NERSA tariff on transporting fuel through the pipeline.  This levy was set by the Ministers of Energy and Finance, in line with the expenditure budget of NERSA.  The illuminating paraffin (IP) tracer dye levy was used to reimburse the oil industry for buying tracer dye.  The dye was used to curtail the mixing of IP and diesel, as people were mixing IP, which is zero rated (not taxed), with petroleum to avoid paying tax.  There was also a slate levy, which was meant to finance the cumulative under-recovery of the industry. This was applicable only when the cumulative State balance exceeded R250 million. The levy was currently 13.5 cents per litre.

The fuel levy was taxed by the government, while customs and excise levy was collected by the Customs Union Agreement. The Demand Side Management levy, which currently stood at 10 cents per litre, was introduced in 2006 to curtail the use of ULP 95 in the inland market, since ULP 95 did not make a difference to a car’s performance.

Mr Maake said that there were countries like Madagascar, Vietnam and India that had a stabilisation fund to try to smooth the price in case of a global increase, and cushion the impact on motorists. It required transparency in terms of collection and usage, otherwise it would be a challenge.  South Africa did not have this fund available, and no discussion had come up within the DoE.

A number of things had been done in terms of the Single Maximum National Retail Price (SMNRP) for paraffin. The composition of the SMNRP included the basic fuel price, wholesale margin, service differential, router differential, transport costs and the retail margin (currently at 33,3%). The maximum retail price at which ‘loose’ illuminating paraffin may be sold at any place in South Africa was 971.0 per litre, in ‘own container’ for  filling.  There was a move to zero rate paraffin in South Africa, but the targeted group had turned out not to be the beneficiaries.  SMNRP was a price cap beyond which no retailer could sell paraffin. The challenge was with the retail margin, which changed on a monthly basis. The DoE had done a study to fix the retail margin, and consultations were currently on-going.

In terms of the maximum retail price for LPGAS, there were concerns that since 2010, no review had been carried out.  This formed part of the BFP review, and a comprehensive report would be presented to the Committee with preliminary findings and recommendations from the DoE.

Mr Maake said that fuel prices were changing every month because the government had made a decision to regulate fuel prices every month.  SASOL was not selling petrol at lower prices, considering that they were producing it from coal, because the price was regulated by the government.   In the absence of a dual pricing system, SASOL could not sell at a lower price because this would distort the market.

In his view, the country was not ready for deregulation of fuel prices because the playing field was not level.  Deregulation would stifle competition, with only the big players benefiting from the trade since they had access to the infrastructure, such as that used to offload crude oil.

Responding to why the government was not buying oil from African countries at lower prices, Mr Maake said that the government did not procure crude oil, as this was the responsibility of the oil companies. Some of the oil companies were importing oil from Nigeria and Angola. The price of crude oil was fixed internationally.

Discussion
Mr A Moloto (ANC) asked, in terms of deregulation, if there had been a comparative analysis of policies used in South Africa in relation to taxes and levies, to see where the differences were. What were the advantages of importing crude oil against importing a finished product?  Why was there a 50/50 split in Mediterranean and Singapore?  He also asked for more clarity on stock financing costs.

Mr Mkhize said that although some would want the fuel sector deregulated in order to have the levies on fuel removed, he said that the levies were effective.  The explanation for the low prices in some African countries like Namibia and Botswana was explained by a lack of levies in place, due to subsidisation. There was a move towards reforming subsidies, because they did not benefit the intended people.  The 50/50 split was based partly on the efficiency of refineries in those countries of import. There were currently import-export guidelines which allowed people other than refineries to import crude oil since the local capacity had been exceeded by demand.

Mr S Mayatula (ANC) asked for more clarity on the advantages of either ULP 95 or UPL 93, and the 15% premium.   What was the DoE doing?

Mr Mkhize said the difference between ULP 95 and UPL 93 was in the ease of burning when starting the car and running the engine. The DoE was currently reviewing the 15% premium to see if there was any justification for South Africa to pay it.

Mr L Greyling (ID) said that given the current price of oil, South Africa had to find an alternative to importing crude oil in the long run.  How was the price of bitumen set?

Mr Mkhize said that the long term solution for petroleum would be in bio-fuels and shale gas.   The price of bitumen was not regulated by the DoE.

Ms N Mathibela (ANC) asked if there were enough inspectors to check the price charged for paraffin.  Why was paraffin going up in price, and yet it was used by the poor people?  SASOL was meant to develop the economy in terms of low prices, but this has not been achieved.

Mr Mkhize said that price inspection in remote areas was a challenge in terms of monitoring, inspection and compliance, and over-regulation was not the solution. Self-regulation would play a role in terms of price inspection in such areas. Paraffin prices were going up because the composition of paraffin was related to diesel.

In response to the point on SASOL, he said that price regulation was necessary because its absence would distort the market, especially when there was insufficient local capacity to meet the demand.

Mr Selau wanted clarity on who was responsible for regulation, the reason for the monthly adjustment under the BFP working rules; and the guiding principle for the important months in the fuel pricing calendar.

Mr Mkhize said that NERSA was responsible for regulating petroleum pipelines while the DoE was responsible for pricing the petroleum. The DoE was working towards transferring the pricing to NERSA, leaving it to handle policy formulation.
 
The adjustment in prices was done through consultation.  Adjustments were also caused by the formula used (15% premium) and realities on the ground, annual charges (world freight organisation), and changes in the salaries of petrol attendants.

The Chairperson asked the Department of Energy to submit a written response for the unanswered questions.

The meeting was adjourned.

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