Liquid Fuels Sector: Department of Energy briefing

Energy

01 September 2014
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Department of Energy (DoE) met with the Committee to brief Members on the developments and challenges within the liquid fuels sector. The first part of the presentation dealt with petroleum and petroleum products, while the second part dealt with the fuel pricing mechanism.

South Africa’s economy relied heavily on petroleum. The country was dependent on imported oil and increasingly on petrol and diesel imports. There were currently no proven resources in the country, except for shale gas.  The liquid fuel sector employed about 110 000 people, 70 000 of whom were in retail.  The sector generated a R270 billion turnover per annum.  As at the end of 2013 the key sources of crude oil supply to South Africa were Saudi Arabia, which supplied 45%, Nigeria (23%), Angola (18%), and Ghana (4%). Other sources supplied the remaining 10%.

Key challenges within the sector included continuously improving the distribution infrastructure, liquid fuel emergencies and the DoE’s capacity to respond, the fact that the country had no significant crude of its own, and there was very little economic transformation within the petroleum sector. Other challenges included the fact that refineries were operating at an average of only 80% of capacity, South Africa was not attractive to traders, and refinery unreliability, which had an impact on liquefied petroleum gas (LPG) and bitumen.

Transformation within the petroleum sector was still a serious challenge.  State participation in the petroleum sector, however, needed to be limited so as to encourage new entrants into the sector.  One of the issues which the DoE would be looking at in the long term, was dieselisation of the South African vehicle pool.  This meant migrating motor users from petrol to diesel, starting with the government fleet.

The DoE announced that the price of petrol, diesel and LPG would drop on Wednesday (3 September), due to the significant drop in crude oil prices. The basic fuel price (BFP) was adjusted on the first Wednesday of each month. The BFP was based on the import parity pricing principle -- what it would cost a South African importer of petrol to buy the 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 BFP made provision for all grades of petrol, and all grades of diesel and paraffin.

The Central Energy Fund (CEF) was appointed by Cabinet in 1994 as an impartial body to determine the BFP and to prevent manipulation by any interested party. Some of the factors which influenced the magnitude of the BFP included international crude oil prices, international product supply and demand balances, product inventory levels, geo-politics, the Rand/US Dollar exchange rate, international refining margins and weather patterns in the Northern Hemisphere.

According to the DoE, petrol was cheaper in neighboring countries than in South Africa because the BFP was calculated to include various levies, such as the fuel levy, the customs and excise levy and the Road Accident Fund Levy.

Members asked whether petrol consumers would be expected to pay more levies for the Mthombo refinery.  Where would the refinery be sited?  Why were South Africa’s refineries only 80% operational? Why was there a need to have seven levies, when local motorists were cash strapped and could not afford to pay them?  What timeframes were there for building new refineries? What were the outcomes from key stakeholder public participation meetings, and which areas had the DoE visited? What was the envisaged salary increase for petrol attendants?  Was there a policy or plan to supply the poor/unemployed with free paraffin, seeing that these groups of people still could not even afford electricity?  What plans did the DoE have to ensure the sustainability of the PetroSA refinery in Mossel Bay?  Were foodstuffs being used for the production of biofuel?
 

Meeting report

Opening remarks
The Chairperson welcomed the Minister, the Deputy Minister and senior management from the Department of Energy (DoE) to the meeting.  Members of the Committee were also welcomed, together with the various stakeholders in attendance.

Ms Tina Joemat-Pettersson, Minister, DoE, informed Members that the vacant position of Director General had been advertised, and the closing date was 12 September 2014.  Nominations for suitable candidates to serve on the Boards of DoE entities had closed on 29 August, but if Members still wanted to put forward a candidate for nomination, they could still do so.  She said that the price of fuel would be lowered considerably due to the drop in crude oil prices.  In addition, the Position Paper on the South African Biofuels Regulatory Framework had been published, and an inter-Ministerial Committee had been set up for this purpose. Members’ comments were welcomed.

The Chairperson thanked the Minister, and welcomed the presentation from the DoE.

Presentation: Petroleum and Petroleum Products Regulation Branch
Mr Tseliso Maqubela, Deputy Director-General: Petroleum and Petroleum Products Regulation, DoE explained that South Africa’s economy relied heavily on petroleum. The country was dependent on imported oil and increasingly on petrol and diesel imports. There were currently no proven resources in the country, except for shale gas.   The liquid fuel sector employed about 110 000 people, 70 000 of whom were in retail.  In addition, the sector experienced a R270 billion turnover per annum. The sector was governed by the Petroleum Products Act.  Some of the key stakeholders in the sector included the South African Petroleum Industry Association (SAPIA), all Oil Companies, Retail Associations, the National Energy Regulator of South Africa (Nersa), and labour organizations.

As at the end of 2013, the key sources of crude oil supply were Saudi Arabia, which supplied 45% of South Africa’s oil, with Nigeria supplying 23%, Angola supplying 18%, Ghana supplying 4%. Other sources supplied South Africa with the remaining 10% of its oil.   The key infrastructure for liquid fuels included the Single Buoy Mooring, which was based in Durban, and six refineries -- two in Durban, and one each in Cape Town, Sasolburg, Secunda and Mossel Bay.  Pipelines included the new multi-product pipeline, the Durban-Johannesburg pipeline and the crude oil pipeline.  Other infrastructure included ports, fuel depots and rail networks.

With regard to fuel security of supply and compliance monitoring, he said regular meetings were held with the industry to monitor whether everything was still running well.   These included supply managers’ meetings, which took place on a bi-monthly basis. With regard to compliance, the fuel specification test was performed on a “spot check” basis. However, the storage facility for liquefied petroleum gas (LPG) needed to be increased.

Some of the key national challenges within the sector included the continuously improving distribution infrastructure, liquid fuel emergencies and the DoE’s capacity to respond, the fact that the country had no significant crude oil of its own, and there was very little economic transformation within the petroleum sector. Other challenges included the fact that refineries were only operating at an average of 80% capacity, South Africa was not attractive to traders, and refinery unreliability, which had an impact on LPG and bitumen.

Some key regional challenges included:
• A massive shortage of infrastructure in the region;
• A lack of pipelines;
• A lack of refineries;
• Import facilities needing to be upgraded (Mozambique has already advanced);
• Demand far outstrips supply;
• The Southern African Development Community (SADC) had a 250 000 barrels per day deficit in 2012, and this was expected increase;
• The utilization of refineries in the region was among the lowest in the world

Mr Maqubela concluded that the empowerment of historically disadvantaged South Africans (HDSA) was happening at a very slow pace. This was a serious concern. He informed Members that higher wages would be introduced for petrol attendants. State participation in the petroleum sector, however, needed to be limited so as to encourage new entrants into the sector.  One of the issues which the DoE would be looking at in the long term, was dieselisation of the South African vehicle pool.  This meant migrating motor users from petrol to diesel, starting with the government fleet.

Presentation: Fuel Pricing Mechanisms Branch
Mr Robert Maake, Director: Fuel Pricing Mechanisms, DoE, began by announcing that the price of petrol, diesel and LPG would drop on 3 September.  This was due to the significant drop in crude oil prices. He outlined the structure of the presentation, which would include policy positions and key pricing mechanisms, the Basic Fuel Price (BFP) for liquid fuels, the Single Maximum National Retail Price of illuminating paraffin and the Maximum Refinery Gate Price for LPG.

He said there were three basic forms of fuel pricing globally -- ad hoc pricing, formula-based/automated adjustments and the liberalised pricing system.  South Africa used the formula-based pricing strategy which meant that prices were published. The following liquid fuel prices were regulated through policy: petrol, diesel, paraffin and LPG (since 14 July 2010).  Fuel pricing mechanisms were regulated by policy instruments such as the Energy White Paper on Energy Policy 1998, the Petroleum Products Act 1977, the Central Energy Fund Act 1977 and the National Energy Act 2008.

On the Basic Fuel Price (BFP), he said that the Central Energy Fund (CEF) had been appointed by Cabinet in 1994 as an impartial body to determine the BFP and to prevent manipulation by any interested party. The BFP was based on the import parity pricing principle -- what it would cost a South African importer of petrol to buy the 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 BFP made provision for all grades of petrol, and all grades of diesel and paraffin. The BFP was adjusted on the first Wednesday of each month. Some of the elements which were taken into consideration were the free-on-board-value, freight and average freight rate assessments, insurance, ocean loss, cargo dues, stock financial costs and coastal storage.

Factors which influenced the magnitude of the BFP included international crude oil prices, international product supply and demand balances, product inventory levels, geo-politics, the Rand/US Dollar exchange rate, international refining margins and weather patterns in the Northern Hemisphere. He explained that petrol was cheaper in neighboring countries than in South Africa, because the BFP was calculated to include various levies, such as the fuel levy, the customs and excise levy and the Road Accident Fund Levy (which compensated people who were involved in accidents).

Discussion
Mr L Greyling (DA) asked whether the DoE had any plans for building a new refinery in the country. He said margins on refining were very small -- would petrol consumers be expected to pay more levies for the Mthombo refinery? Where would the refinery be sited? He asked about the progress made on refining the country’s fuel standards.  Which sectors were investors primarily interested in?   The City of Cape Town was experiencing significant shortages of bitumen -- how would these shortages be confronted? Was there a plan in place for the importation of the product?

He referred to the PetroSA and Engen deal, which had been described as scandalous.  What progress had been made with this deal?  He argued that South Africa needed to get away from vertical integration. On the licensing of retail service stations, he asked why the process took such a long time.  How did the DoE make its licensing decisions, especially when there was an existing station already in that particular area?

Mr J Esterhuizen (IFP) asked why the refineries were only 80% operational.   Was this because of a lack of planning, or was it due to maintenance issues?   LPG was desperately needed in the country, given our energy crisis and rising electricity costs.  He raised concern that the problems currently being experienced at the Saldanha terminal were due to squabbles within the national ports authority, and these were slowing down processes.  On the BFP, he asked why paraffin was not regulated. Why was there a need to have seven levies, when local motorists were cash strapped and could not afford to pay for them? 

Ms N Louw (EFF) thanked the Minister for dealing with the “acting” senior management positions. She also raised a concern around refineries, asking what timeframes there were for dealing with the challenges and for the building of new refineries.  What were the outcomes from the key stakeholder public participation meetings, and which areas did the DoE visit? She asked the DoE to provide the Committee with a list of all key crude oil sources. What was the envisaged salary increase for petrol attendants? Was there a policy or plan to supply the poor/unemployed with free paraffin, seeing that these groups of people still could not even afford electricity? 

Mr M Matlala (ANC) asked whether the Petroleum Products Act of 1977 and Central Energy Fund Act of 1977 had ever been amended and updated. He asked about the 220 000 barrel deficit.   What was the country’s deficit currently?  

Ms T Mahambehlala (ANC) also raised a concern about refineries.   How far was PetroSA on Mthombo? What were the timeframes for the acquisition of Engen?  What plans did the Department of Energy have to ensure the sustainability of the PetroSA refinery in Mossel Bay? There were rumours that the refinery would be closing down. According to the presentation, the DoE argued that the state needed to have limited participation within the liquid fuels sector.  What was the role of the state currently?  She spoke about the current debate around biofuel versus food security, and asked if the DoE could provide more clarity on the matter.  Were foodstuffs being used for the production of biofuel?

Mr R Mavunda (ANC) asked that the DoE provide Members with the details of who the new players in the petroleum sector were, and the role they would be playing. He asked whether the DoE’s recommendation that motorists migrate from petrol to diesel would not monopolize the market.

Ms Z Faku (ANC) asked whether the DoE had a turnaround strategy to move away from the dependence on imports, and to move towards localisation and job creation.

A Member said some petrol attendants were exploited by garage owners.  How would the DoE monitor and ensure that owners implemented the appropriate wage increases and did not move away from the regulations?

The Minister responded to Ms Louw, and said the list requested in the previous meeting, containing those municipalities which owed money to Eskom, should be requested from the Department of Public Enterprises.  Eskom did not report to the DoE.

Mr Maqubela thanked Members for their engagement with the presentation.  Some of the issues would require the DoE to send through written responses, as the issues required more detail. On the questions on refineries, he said the DoE was guided by the National Development Plan (NDP) and a decision on refineries would be taken by 2017. It was important to note, however, that a lot of reinvestment into the sector was needed because much of the infrastructure was ageing.

He said the state should participate less in the liquid fuels sector to accommodate new entrants.  However, this was a conversation which the country still needed to have, because the state still needed to participate, even in limited terms. On Saldanha, he said the situation there was very unfortunate, because a number of the parties did not see eye to eye.   The DoE could not elaborate further on the matter because it was still in court, but it was important to note that the DoE was not a catalyst in those developments.

He argued that importation was not necessarily a bad thing, and what became problematic was the level to which a country depended on imports. The DoE had to evaluate the costs of importing versus the costs of building refineries, and the building and running refineries was a very expensive undertaking. On Mthombo, he said the matter would be part of the decisions for 2017.  The CEF would respond to the questions asked on PetroSA projects to the Committee in writing, or through a separate presentation.  The DoE was fully committed to keeping the refinery at Mossel Bay fully operational.   The 1977 Act had been amended a number of times.

On the question about the migration of motorists from petrol to diesel, he said the question would be responded to in more detail in writing. However, the simplest explanation would be that diesel was more efficient than petrol, even though the costs of purchasing a diesel car were higher. In the long run, the benefits were substantial. The levies were imposed to discourage high octane levels.  On the turnaround, he said the Department of Mineral Resources needed to be encouraged to proceed with facilitating more exploration of hydrocarbons on our shores. This would mean that the country focused more on building its own capacity, thereby creating jobs in the process.

He argued that the DoE was working towards replacing paraffin with LPG, with LPG being made more affordable in the long term. There were huge difficulties currently with managing paraffin sales, especially at the “spaza level”. The DoE was therefore not looking to encourage the use of more paraffin.  He responded to the question on food security and assured Members that food security issues had been catered for and that the use of certain foods, such as maize, in the production of biofuels was strictly prohibited.

Mr Maake responded to the question on DoE’s awareness campaign on fuel prices, and said that all nine provinces were covered through the DoE’s road shows. What had been identified during these campaigns, however, was that it was very hard for people to understand how fuel pricing was calculated. On the wage increase for petrol attendants, he said that because the DoE was moving from a very low base, the increase would still result in a R 35 000 annual wage, which was still below minimum wage. This was a concern, and the DoE was working to improve this over time.

Mr Maqubela responded to the question on bitumen, and said the issue was broader than just the import facilities.  It was also about the specifications for bitumen within the country, which needed to be looked at. The specifications were not set by the DoE.  It was therefore important that the country’s policies attracted investors to the sector, and in addition that state organs which operated in the sector, such as Nersa and the Ports Authority were aligned.

Dr Wolsey Barnard, Deputy Director General, DoE, replied to the concerns around the economics of importing, and explained that refineries were very expensive. He reiterated the point that security of supply needed to be evaluated against the costs of imports.  On paraffin, he added that the DoE Integrated Energy Centres (IECs) were established, among other things, to set up outlets in rural areas where normal petrol companies were not willing to supply petroleum products. Ten IECs had been established to date.

Ms Louw argued that it was very disappointing that the DoE had no plan to supply free basic paraffin to communities which still could not afford electricity. She asked that the DoE provide the Committee with a list of the ten IECs.

Ms Mahambehlala said it was unacceptable that the DoE could not provide the Committee with details on projects of the CEF, such as the Mthombo refinery. When asked about the CEF projects, the DoE was supposed to be able to respond.  She asked that the question be responded to in writing.

Mr Greyling asked what the long term implications of the DoE recommendation that motorists migrate from petrol to diesel use would be.  He also raised concerns about the poor quality of diesel, referring to its high sulphur content. Were there any DoE standards in place for the quality of fuel being sold to motorists?

Mr Mavunda raised concern that the migration from petrol to diesel motor vehicles would be expensive, especially because diesel cars were expensive.

Dr Barnard apologized to Ms Louw that the lists she had previously requested had not been forwarded to the Committee.   However, the information the Member was looking for was on the DoE’s website. The list of the ten IECs would be forwarded to the Committee.  He argued that the DoE could not stimulate the use of paraffin, but customers were being encouraged to move away from its use. The DoE’s drive was therefore around energy switching from paraffin to LPG, and non-grid connections.

Mr Maqubela responded to the question on PetroSA and the CEF.  He said there were certain decisions which could still not be made public. Currently, the DoE was not mandated to respond on the Mthombo project, but the question would be responded to in writing.   Regarding the migration from petrol to diesel, the DoE was looking at having a calculator which would calculate how much diesel motorists would actually save in comparison to petrol motorists.  Policy interventions would also be introduced, to assist the migration. On the quality of diesel, he said the DoE had a programme where fuel quality was monitored on a regular basis, both through spot checks at garages and by the DoE’s compliance staff. National Treasury had already provided more funding for this programme.

The liquid fuel sector presented wide opportunities for radical transformation.  Change within the sector needed to be sustained by bringing in more HDSAs.  In addition, more South Africans needed to participate in the sector. With regard to paraffin, he said safety was a serious concern -- the level of deaths caused by paraffin fires was unacceptable. This was the main reason why the DoE was adamant about moving consumers from paraffin use to LPG.

Mr Maake responded to the question on petrol wage increases, and said the implementation of the wage increases would be monitored.  Unions would also be informed that the attendants would get salary increases. The DoE would also do spot checks at various service stations throughout the country to make sure the increases were implemented and that the attendants were treated fairly.

The Chairperson said the Committee welcomed the fuel price decreases. He thanked the Minister for addressing the issue of staffing stability at the senior level within the DoE, and said the Committee was pleased that the “acting” positions were being resolved.  Both presentations were welcomed, and the attendance of both the Minister and the Deputy Minister was highly appreciated. There was, however, the need for an integrated long-term vision for the energy sector.  The different energy sectors needed to be aligned.

The meeting was adjourned.
 

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