Petroleum Pipelines Bill: briefing

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
20 May 2003
PETROLEUM PIPELINES BILL: BRIEFING
Chairperson: Mr M Goniwe (ANC)

Documents handed out:
Petroleum Pipelines Bill: Department of Minerals and Energy
International Pipelines, Legislation and Regulation: A Dykes, Consultant
Petroleum Pipelines Bill: A Dykes, Consultant
Petroleum Pipelines in South Africa: Charl Moller (zip file)(download the zipped PowerPoint presentation and all the following files.) File 1, File 2, File 3, File 4, File 5, File 6, File 7

SUMMARY
The briefings emphasised the importance of an independent, efficient regulatory framework for liquid fuel pipelines that would stimulate competition, thereby attracting investment and the exploration of oil and gas resources. Once again, concern was expressed by some ANC members about the cost of establishing separate regulators for electricity, gas and liquid fuel pipelines when the intention was to consolidate these into a single regulator for the energy sector, possibly as early as 2004. The issue of restructuring state assets was also raised in the context of the ownership of existing and proposed new commercial pipelines.

MINUTES
Department of Minerals and Energy: Briefing
Mr S Pearce, Deputy Director General, Petroleum Policy, appraised members of the background to the Petroleum Pipelines Bill and the rational underpinning its provisions. These included the composition and role of the regulator, whose functions would eventually fall under the single regulatory authority envisaged for the entire energy sector.

The Bill's principal objectives were to lower intermediate energy input costs and reduce tariffs by fostering competition between and within energy carriers. This would facilitate investment and economic development, especially in South Africa's industrial heartland.

Discussion
Mr J Nash (ANC) asked about the relative profitability of road, rail and pipeline transport for petroleum products. He also asked how long it would take to phase in a single regulator, emphasising the importance of minimising expenditure on establishing separate regulators as an interim measure.

Mr S Louw (ANC) asked why the South Africa's pipelines were being privatised, especially in view of their strategic importance.

Mr G Oliphant (ANC) requested more information on legislation being drafted in respect of levies that would be used to fund the pipeline regulator. He also asked for clarity on the process of amalgamating the separate energy regulators into a single entity. How the ownership of existing and new pipelines would be determined also required clarification.

Professor I Mohamed (ANC) asked at what point in the supply and distribution process market rules would be applied to pipelines. He also questioned the rationale behind incorporating the nuclear energy regulator into the proposed new single regulatory authority for the energy sector, noting the highly specialised and sensitive nature of the industry concerned.

Mr Pearce advised members that nuclear energy would not fall under the single energy regulator precisely because of these sensitivities. The legislative framework for the energy sector as a whole would inform the process of arriving at a single regulatory authority. In this regard, the relevant section of the Bill might need to be amended to allow for flexibility in order to facilitate consolidation, which could take place as early as 2004. Because of the potential for synergy among systems for administering regulations in the separate interim regulators, harmonising these systems under a single entity should not present too many difficulties.

The ownership of existing state-owned pipelines would be determined by policies underpinning the process of restructuring state assets. The issue of private ownership would affect the construction of new pipelines, and the Bill made provision for this. Access to the entire commercial pipeline network and measures to curtail opportunities for exploiting natural monopolies were key issues in this regard. With this in mind, the Department would keep tariff-setting functions for pipelines in-house.

Legislation being drafted in respect of levies for funding the pipelines regulator was a National Treasury responsibility.

The relative profitability and efficiency of road, rail and pipeline transport for petroleum products was a complex issue. Inefficiencies did exist, particularly in respect of road transport being used instead of rail networks for long distance haulage. This affected consumer prices. However, the onus was on the Department of Transport to remedy these problems as well as those relating to transparency in transport pricing.

Mr Nash expressed extreme dismay about the cost implications of establishing separate regulators only to consolidate them shortly afterwards.

The Chair undertook to ensure that this matter was raised with the Minister in the context of the overall policy framework.

Petronet: Briefing
Mr C Möller, Chief Executive Officer, Petronet, appraised members of key characteristics and operational issues in respect of petroleum pipelines and related infrastructure, describing the entire system as one of several modes of transport in South Africa carrying energy in a wide range of liquid forms from crude oil to refined and semi-refined products. He then commented on the advantages and disadvantages of using pipelines to transport liquid fuels, advising members that, while pipelines elsewhere in the world tended to be privately owned, pipelines in South Africa were owned by State through Petronet, a division of Transnet.

While pipeline tariffs were cheaper than those for rail and road bulk transport, the door-to-door delivery often involved various modes of transport which tended to raise the overall price of transporting petroleum products by pipeline. Each mode of transport therefore needed to play its role in delivering liquid fuels to consumers at competitive prices.

Mr M Khoza, Operations and Projects, then appraised members of certain more technical aspects of pipeline operation and maintenance, advising them that South Africa's pipelines had not deteriorated as quickly as had been anticipated and would last at least twelve more years. Nevertheless, provision would have to be made for financing replacement pipelines when setting tariffs.

Referring to the provisions of the Bill, Mr Möller observed that Petronet was already subject to substantial regulation in respect of international norms and standards. However, this regulation did not extend to commercial activities, which he suggested should be the emphasis of the Bill.

Discussion
Mr B Bell (DA) asked if any physical barrier could be used to separate the different liquid fuel products in a pipeline at any one time, preventing contamination from intermixture at the point of contact.

Mr Nash enquired whether all Petronet pipelines operated at a profit, and if maintenance and replacement costs were factored into the tariff structure.

Mr Oliphant enquired what other types of pipeline exist other than those used commercially and, if so, how these would be regulated.

Mr Möller replied that the issue of separating different products in the pipelines was a subject of ongoing research. He confirmed that Petronet had already begun planning for replacement pipelines advising that, over time, current tariffs would make provision for future costs in order to avoid sudden price hikes.

In keeping with international norms only commercial pipelines would be regulated by the Bill, which would indicate which non-commercial pipelines would be excluded.

Mr Nash asked why, if Petronet profited from managing the pipelines, it did not make provision to pay for future pipeline replacements from accumulated profit rather than by way of increased tariffs.

Mr J Mongwaketse (ANC) enquired whether any calamities had ever occurred in the pipeline system.

Mr Möller replied that, while Petronet was operating at a profit, tariffs could not simply be reduced. Negative perceptions in respect of monopoly tariffs needed to be seen in the context of Petronet's strategic long-term plans. Regulating the State's commercial pipelines should therefore be handled sensitively.

He advised members that Petronet pipelines had occasionally fractured and leaked, usually as a result of third party activities. Only three serious problems had occurred during his twelve-year tenure.

International Pipelines Legislation and Regulation: Briefing by Mr A Dykes
Mr Dykes appraised members of key elements of international regulatory frameworks and their application, noting trends in Europe and the United States in respect of regulations governing economic, technical, security, health, safety and environmental issues.

Petroleum Pipelines Bill and Regulation: Briefing by Mr A Dykes
Mr Dykes appraised members of the background to the Bill, its generic provisions, non-generic definitions, provisions relating to the proposed regulatory authority and licensing conditions. He then highlighted issues needing attention, making recommendations for addressing these. In this regard, he stated that due cognisance would need to be taken of the purpose of the Bill, which was to facilitate access to infrastructure and markets, improve competitiveness and stimulate the exploration of oil and gas resources.

Discussion
Very little discussion ensued.

Mr Oliphant asked about the Bill's implications for pipelines elsewhere on the African continent as well as for the New Partnership for Africa's Development (NEPAD). He also commented that the issue of privatisation would need to faced and dealt with.

In response, Mr Dykes commented that a competitive, efficient, independent regulatory system in South Africa could lead the way in attracting investment elsewhere on the continent.

The meeting was adjourned.