Meeting with National Energy Regulator of SA (NERSA) on their reasons for their decision on the new Burgan Cape Town terminal

Meeting report

Chairperson opening remarks

The Chairperson indicated that the matter concerning the Burgan Cape Terminal licence had been one which had been talked about a lot in Parliament for some time. The Portfolio Committee on Trade and Industry had already held discussions on the matter. The Portfolio Committee on Energy had been invited to the meeting but it seemed sensible that the Portfolio Committee first hear a report from the National Energy Regulator of South Africa (Nersa) on the matter, because the entity reported to the Committee on Energy and to the Department of Energy (DoE). The Minister of Energy, Ms Tina Joemat-Pettersson was unable to attend the meeting, due to a cluster meeting she had to attend.

Briefing by National Energy Regulator of SA (Nersa)

Dr Rod Crompton, Regulator Member, Petroleum, Nersa, thanked the Committee for inviting the organisation to make a presentation.

Ms Pheladi Mongebodi, Compliance Officer, Nersa indicated that the presentation did not replace the 51-page document which was still available on Nersa’s website. The presentation was a summary for the Committee, and did not replace Nersa’s “Reason for Decision.” All Nersa’s licensing transactions were completely transparent, and were based on facts and evidence.

The National Ports Act and Transnet National Ports Authority (TNPA) bidding round process had started in September 2008. The TNPA wanted a fuel terminal in the Cape Town harbour and Burgan Cape Terminals had been the winning bidder. Nersa had issued a decision on 9 December 2014, which combined licences for the construction and operation of the following: a petroleum storage facility, a petroleum loading facility and a petroleum pipeline. The storage facility was enough for 12 tanks and the intake would be from the Chevron Refinery and from ships. The pipeline from the storage facility would be interconnected with the Chevron pipeline.

Burgan Infrastructure (Pty) Ltd was made of Vitol Tank Terminal International (VTTI), which owned 70% of the company, and Thebe Investment Corporation & Jicaro (Pty) Ltd, which owned the other 30%. With regard to public consultation, the application had been published in newspapers with only one objection from Chevron. She indicated that the public hearing in Cape Town had been postponed twice to accommodate Chevron. Objections and comments were on:

• Product supply and Demand (South Africa and the Western Cape);

• Petroleum infrastructure;

• Burgan storage facility capacity and location;

• Interconnection with the Chevron pipeline;

• Sustainable and orderly development;

• Impact on the Chevron Refinery;

• Cleaner fuels;

• Government policy;

• The Energy Regulator mandate.

Dr Crompton spoke about national supply and demand, and said that between 2008 and 2013, South Africa imported up to 22% of its needs for diesel and petrol. The Western Cape market made up 12.6% of the country’s demand. However, there was no merit in arguing that because a refinery was situated in a particular province where its production exceeded provincial demand, such a refinery should receive special protection from infrastructure that could import product into the province. For example, in Durban two crude oil refineries were in competition. Durban refineries produced in excess of the needs of KwaZulu-Natal and Durban had pipelines to inland, whereas Cape Town did not. There was therefore insufficient reason to treat Chevron as a special case.

South Africa had a shortage of storage facilities and investment was needed. Of the Nersa licensed facilities in the Cape Town area, only three provided storage for petrol and diesel, and only one allocated storage facility for third parties. Nationally only 1.7% of storage was available for third parties. Referring to the loading facilities in Cape Town, he said that the only marine loading facilities and pipeline licensed for petroleum products in Cape Town belonged to Chevron. The Western Cape was completely dependent on the Chevron refinery and its port infrastructure. This did not provide security of supply.

A study by the South African Petroleum Industry Association (SAPIA) showed that South African refineries were ageing and not very efficient. Chevron’s port infrastructure had operational constraints and limitations. With regard to sustainable and orderly development, Nersa had considered the impact the Burgan licence would have on other energy infrastructure. Nersa had a responsibility to promote competition in the petroleum pipeline industry. Chevron was exuding anti-competitive behaviour and abuse because the refinery was resisting competition from Burgan. There was no definite proof that the Burgan licence would shut down the Chevron refinery. Chevron wanted Nersa to deny Burgan a licence because it did not trust the government to implement its policy of import control.

Ms Teboho Motebele, Regulatory Specialist: Petroleum Pipelines Regulation (Legal Compliance) at NERSA, said that Nersa was required to make decisions that were “not at variance with published government policy.” Nersa’s powers were clearly outlined in Section 4 of the Petroleum Pipelines Act. Nersa regulated infrastructure which could be used for importing petroleum products, while the Department of Energy (DoE) and the International Trade Administration Commission (ITAC) regulated the importation of the product according to government policy.

 

Chevron wanted licence conditions which would double up physical import control and this was legally not possible. Government was committed to keeping the lights on, and currently Eskom was facing challenges in this regard and the power utility used diesel-powered stations. This increased demand for diesel in the Western Cape meant that there was an even higher necessity for storage. The entities which supported Burgan’s licence were the Strategic Fuel Fund (SFF), Gulfstream Energy and the Centre for Competition, Regulation and Economic Development at the University of Johannesburg.

 

Dr Crompton indicated that Burgan planned to commence with construction in 2015, but the project still remained in the pre-construction phase because the licence conditions required proof of final environmental authorization, and the outcome was currently pending. Burgan had recently applied to amend its facility details and this application was still being processed.

Discussion

Mr P van Dalen (DA) said the licence had already been granted to Burgan. The interactions between the Committee and Nersa could therefore not change anything, so the discussions were meaningless. There were far better and more important matters which the Committee should have been discussing, such as the national energy crisis. He asked why Chevron’s tanks were empty. According to Nersa, Burgan was 100% black empowered -- was Chevron not black empowered, was it a white company? Was there a safety net to ensure that Chevron did not close down? Was Nersa committed to ensuring that the workers who currently worked at Chevron would not be negatively affected by the Burgan deal? Did Nersa have a safety net for these workers should Chevron close down?

Mr G Mackay (DA) indicated that Nersa had been invited to brief the Committee on a number of important issues such as tariff increases, but they had not been able to come. It was therefore surprising that Nersa was available to brief the Committee on a decision which had been taken in November 2014. He agreed with Mr Van Delan that there was not much with which the Committee could engage on the presentation. It was far more useful for Nersa to come and speak to the Committee on competition within the broad energy sector. Competition was critical to bring down prices, and should be actively applied within the electricity sector. He asked whether Nersa had conducted a study during the process to assess whether Burgan would contribute towards the lowering of imported diesel costs, which would lower the cost of the diesel Eskom used to run its diesel plants to keep the lights on. It was surprising that the presentation had made no mention of PetroSA, and whether they supported the application or not. With regard to Clean Fuels 2, he said this was not financially viable from a business perspective, so the comments that Chevron was holding the government to ransom had been overly stated. The refineries were very old and were in urgent need of new investment, which would come from business. There needed to be a more frank conversation on how competition could be promoted and how Clean Fuels 2 could be speeded up.

Ms T Mahambehlala (ANC) agreed with the previous speakers that Nersa had already taken a decision on the Burgan licence. The Committee should therefore not be put in a position of playing “referee” because Chevron was afraid of competition. It was clear that Chevron was expecting the Committee to support anti-competitive behavior when a decision had already been taken. She argued that Nersa should be allowed to do its work. Burgan had been awarded the licence because there was a need to increase security of supply. The country’s strategic fuel stock was currently standing at 21 days and this needed to be increased to 40 days. On the other hand, Chevron’s tanks were empty. The most important priority was to improve the country’s capacity.

Mr J Esterhuizen (IFP) said according to Nersa, Chevron had already invested R 400 million into the refinery. The growing demand for gas in the Western Cape for Eskom’s gas turbines could not be the primary reason for a new storage facility. Eskom’s increased demand for gas was a temporary situation, and these demands could be met by imports, which would work out cheaper. Burgan was 70% owned by VTTI, which was the biggest world fuel trader, and in the past these big fuel traders had been known for fuel dumping, such as an incident which happened in Australia. How could one be sure that the same thing would not happen in South Africa? Imports of fuel would put more pressure on an already weak Rand, which would negatively influence the country’s economic growth. How would the general fuel prices to the public be affected? The pipeline from the refinery in Durban had been approved by Nersa and its initial costs had been estimated to be R12 billion, but it had ended up at R23 billion, which was still not cost efficient.

Mr M Dlamini (EFF) asked what expectations Nersa had of the Committee by briefing it on a deal which had already been concluded. How many jobs would Burgan create and how many jobs would be lost by the possibility of closing down the Chevron refinery? According to the presentation, only 21 jobs would be created by Burgan.

The Chairperson the Committee would deal with the issue around job creation, because that was an important matter.

Mr R Mavunda (ANC) said the presentation had been an eye-opener regarding issues relating to Chevron. He said a democratic process had been followed and stakeholders had participated, made inputs and objected. How many stakeholders had participated in the process and how many had objected, and what were the reasons for their objections? He reiterated the sentiments that Nersa should be allowed to do its job.

Mr M Matlala (ANC) said the country would not be held ransom by one imperialist institution. The African National Congress was committed to bettering the lives of all South Africans. Nersa had been given a mandate by the ruling party and it should be allowed to do its work. It was unacceptable that two public hearings in Cape Town had been postponed because Chevron did not want to participate. Nersa had a responsibility to promote competition within the petroleum pipeline industry.

The Chairperson indicated that the Portfolio Committee on Trade and Industry had held a meeting on the matter, and the Portfolio Committee on Energy had been invited to attend. Similar concerns had been raised around the possibility of job losses. Was this a matter to be concerned about? That was one of the reasons why Nersa had been invited to the Committee meeting.

Mr Mackay said the issue was not just about jobs and the refinery, but about the county’s strategic fuel structure. Nigeria was currently facing a fuel crisis because it had no refineries of its own, and the country was forced to import stock. South Africa therefore had to be concerned about its fuel stock and supply. If Chevron were to close its refinery, how would this impact the country’s fuel supply? What gave Nersa the confidence to make the assertion that the closure of Chevron was highly unlikely? Nersa needed to defend its decision because the consequences should Chevron close down were high -- bigger than those around job losses.

Mr Esterhuizen said it was impossible that only 21 jobs would be created. He asked that this statement be corrected.

The Chairperson said Nersa should be given an opportunity to respond to the questions. Not all of the statements which had been made in the media were correct.

Dr Crompton responded to the question around the purpose of Nersa’s presentation. Nersa had been invited by the Committee and the presentation was in response to the Committee’s invitation. The request was that Nersa provide reasons for the Burgan licence decision. On why Chevron’s tanks were empty, he said that maybe was a day on which the tanks were empty and were filled the next day. However, Nersa did not monitor these on a daily basis. In the proximity of the refinery there were tanks owned by other refineries which had been empty for a while because they were undergoing repairs. The best people to speak to were the people at Chevron. On the questions around Black Economic Empowerment, he said that at the beginning of the presentation Nersa had pointed out that the presentation was a summary of the 51-page Reason for Decision. Chevron’s black economic empowerment was a matter of public record. What was not known about was Burgan Cape Terminals, because they were a new entrant.

Nersa had considered the possible closure of Chevron refinery and the safety net for employees. As the presentation had pointed out, it was not a foregone conclusion that Chevron would close down. A number of questions raised by Members had assumed that Chevron would automatically close the day the tanks were built. This was not the case, and Chevron had not substantiated such a case. There were a lot of variables at play, and Nersa had pointed these out in the Reason for Decision document.

The government, through the DoE and ITAC, was controlling import fuels physically, litre by litre. Chevron therefore had first option in selling its fuel to the South African market, and only if it decided not to sell could there be problems. The problem Chevron had was that it could not produce enough of the cleaner fuels, which was a small share of the market. New cars were entering the market everyday and these cars required certain levels of fuels, especially those with European specifications. The Burgan decision had been a government policy decision, and not a Nersa decision. Nersa was licensing the infrastructure which would move fuels. Government had made a decision that it wanted cleaner fuels by 2017. Nersa was unauthorized to make decisions on fuel specifications.

Also, all investors take risks, and because they take risks they get rewarded with profits higher than they would if they invested their money at an institution like a bank. This was the rationale for a return on investments. No regulator could manage all the risks faced by investors all the time.

On whether Nersa had conducted a study on the decision’s impact on diesel prices, he said it had not done so specifically because what Nersa was dealing with was a licence application, not a question about diesel prices. In any event, Nersa did not regulate the price of diesel -- market forces set the price for diesel in the country. Whether Burgan was likely to lower diesel prices -- the market would still determine what the price of diesel would be. The new infrastructure might make a difference, but this was not guaranteed.

On Cleaner Fuels 2 and how competition was supported, he said this was a policy matter which government had already pronounced on. It was not for Nersa to pronounce on government policy. Nersa was only an administrator of the Petroleum Pipelines Act. His personal view was that cleaner fuels could be speeded up when government made a decision for a subsidy. This issue needed to come to a conclusion so that manufacturers and refineries knew where they stood.

He said the number of jobs which would be lost was not really the main issue. Chevron would not automatically be closing. The number of jobs created by a storage facility was very small compared to the number created by a refinery. However, in the case of Burgan and Chevron, it would not be one for the other. Burgan would create 21 000 jobs.

Ms Mongebodi said eight stakeholders had participated in the process and of these, five had been in support of Burgan and three were opposed.

Dr Crompton said the names of these stakeholders were listed in Nersa’s Reason for Decision which had been submitted to the Committee two weeks ago. With regard to security of supply, he said in any country where demand was growing, imports would take place up to a certain level. South Africa was already importing 22% of its fuel needs, and there was insufficient justification for the existing refineries to expand their capacity. It was hard to build refineries on the southern tip of Africa because the oil came from very far. Unfortunately, these were some of the challenges which countries with small economies had to deal with.

The Chairperson said there would be further discussions with Nersa.

Mr Dlamini said the Economic Freedom Fighters were very obsessed with job creation, and Nersa’s responses to the questions around job creation had been based on assumptions.

The Chairperson said such questions should not be posed to Nersa.

Mr Van Dalen said Chevron had a right to take Nersa to court.

Mr Matlala said Mr Van Dalen should not make assumptions about Chevron taking Nersa to court. He asked that the meeting be closed on matters relating to the presentation.

Mr Van Dalen said it was not right for Members of the Committee to prevent other Members from raising questions and speaking their minds. All Members had a right to speak in Committee meetings.

Ms Mahambehlala reiterated the point that five out of eight stakeholders had voted in support of the Burgan licence, and the majority ruled. If the Economic Freedom Fighters were obsessed with job creation, the party should start by supporting the budget votes which were taking place in Parliament.

The Chairperson thanked Nersa for the presentation.

Adoption of Committee Minutes:

The minutes of 21 April 2015 were considered for adoption.

Mr Mavunda moved the adoption. Mr Matlala seconded. The minutes were adopted without any amendments.

The meeting was adjourned.