Petroleum Pipelines Bill: hearings

Meeting report

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MINERALS AND ENERGY PORTFOLIO COMMITTEE
3 June 2003
PETROLEUM PIPELINES BILL: PUBLIC HEARINGS

Chairperson: Mr M Goniwe (ANC)

Documents handed out:
Petroleum Pipelines Bill (B22-203)
SAPIA: Presentation (PowerPoint)
Natref in Durban: Presentation (PowerPoint)
Sasol: Presentation (PowerPoint)

Document awaited:
Coastal Crude Refineries

SUMMARY
Although each representation endorsed the broad objectives of the Bill, the conflicting interests of coastal and inland refineries in respect of the 'Natref in Durban' principle became clear. Coastal refineries expressed concern that, if the 'Natref in Durban' principle was enshrined in the Bill, inland refineries would be placed at a competitive advantage. Inland refineries, on the other hand, claimed that, if the principle were to be excluded from the proposed new tariff-setting arrangements, this could have serious negative implications for the future of the inland refineries and their black economic empowerment (BEE) partners. The Bill needed to provide clarity on this important issue and, where possible, level the industry's playing fields in the best interests of creating a stable environment for ongoing investment in oil refining and petroleum product manufacture.

MINUTES
The Chair noted that the Bill had aroused a great deal of interest but that, due to time constraints, it had been necessary to limit the number of oral representations made. The hearings would continue the following day. Where appropriate, the Department would be given the opportunity to respond to key issues raised. The Committee would then engage with the Department on these issues during the clause-by-clause deliberations on the Bill later in the month.

South African Petroleum Industry Association (SAPIA)
Mr Colin McClelland (Director, SAPIA) began his oral submission by saying that, while SAPIA members supported the broad objectives of the Bill and acknowledged the need for the pipeline network to be regulated, the Bill would not achieve its objectives unless certain changes were made. In particular, SAPIA called for clarity on the scope of the Bill within the broader legislative framework affecting the industry's manufacturing, distribution and marketing processes.

Discussion
Mr J Nash (ANC) asked whether SAPIA had raised these concerns with the Department before.

The Chair commented that questions of clarity could easily be raised and addressed telephonically. He asked whether SAPIA's concern that the Bill might cause uncertainty among investors was a canvassed position or simply SAPIA's view.

Mr McClelland replied that SAPIA represented a large number of local and foreign investors in the industry and that this was their position. SAPIA had not canvassed the views of investors in other sectors. SAPIA had engaged regularly with the Department on the contents of the Bill during the Department's two-year consultation process. They had raised their concerns about the ambit of the Bill and had asked for clarity. Although some of their recommendations had been accommodated, several had not.

Mr Nash suggested that SAPIA ask the Department why not all of the concerns raised had been accommodated. Regarding the role of the Minister, he pointed out that the Bill clearly stipulated that the Minister would be required to consult the regulatory authority, invite public comment and consider these comments before promulgating regulations.

Mr McClelland explained that, in SAPIA's view, the Bill should spell out the framework within which the Minister would operate and guiding principles in terms of which the tariff structure would be set.

Mr Nash replied that with the Minister would be guided by the Department.

Mr McClelland reiterated that SAPIA welcomed the move away from gentlemen's agreements towards a more structured dispensation. The Bill should, however, reflect international best practice by spelling out key principles underpinning the tariff-setting process.

Mr A Quail (Engen/SAPIA) observed that the issues were complex. There were many different models of tariff structure and many different vested interests needing to be taken into account.

Mr E Lucas (IFP) asked for clarity on SAPIA's reference to pipelines utilised for the sole primary purpose of providing a service for profit as opposed to pipelines integral to the manufacturing process. Was SAPIA suggesting that manufacturing was not for profit?

Mr I Davidson (DA) asked how the proposed guiding principles would be arrived at and whether they would be enshrined in the Bill or in the regulations themselves.

Mr Quail explained that the distinction had been made between the two types of pipeline in order to distinguish between businesses that provided a service to other parties for profit and businesses that manufactured a petroleum product for profit. Regarding the proposed guiding principles, he said that these would be determined by the tariff-setting methodology used.

Mr Davidson again asked how these principles would be derived and where they should be enshrined. If they should be included in the Act, now was the time for suggestions about what these principles should be.

Mr Quail replied that the proposed guiding principles would need to be in the regulations. Industry members were concerned that they did not know what these regulations would be. It was Government's, not industry's, role to prescribe regulations and it was the Department's responsibility to provide clarity where required.

Mr McClelland said that Parliament drove the legislative process and it was therefore the Committee's responsibility to spell out the principles that would need to underpin tariff-setting. The technical details would be a matter of drafting.

The Chair thanked SAPIA for their presentation. The issues raised would be discussed with the Department and, if necessary, SAPIA would be given an opportunity to re-engage the Committee later in the legislative process. SAPIA's perspectives on the roles of the Legislature and the Executive had been noted. As had been the case with the Mineral and Petroleum Resources Development Act (MPRDA) the general principle of fairness would prevail. It was not the Department's intention to destroy the industry.

The Chair then commended Mr McClelland on his use of Xhosa during the presentation. However, he noted with regret that SAPIA's delegation was not representative of all sectors of South African society. Women, in particular, were conspicuously absent from all the delegations due to make representations that morning. Including women in processes such as this one was an important first step towards empowering them to play a more active role in the industry. He wondered whether Parliament should continue to accept delegations that were not fully representative, especially when women were not included.

Coastal Crude Refineries
Mr C Germeshuys, Legal Manager, BP, spoke on behalf of the Coastal Crude Refineries delegation, which included representatives from British Petroleum (BP), Engen and Shell. As members of SAPIA, the coastal refineries endorsed the overall view expressed in the SAPIA submission. However the coastal refineries had specific concerns about the Bill and, in particular, its potential for placing inland refineries at an unfair competitive advantage.

Discussion
Mr N Ngcobo (ANC), in his capacity as Acting Chair, noted the different interests motivating each submission nevertheless welcoming the fact that there was general consensus among SAPIA members regarding the broad objectives of the Bill.

Mr Davidson asked for clarity on the issue of unfair competitive advantage for inland refineries. As he understood it, the location of the inland refinery gave Sasol an advantage and Section 20(1)(f) of the Bill would reinforce this. Was this analysis correct? He also asked whom the contracts referred in Clause 20(1)(f)(ii) were between.

Mr Germeshuys replied that they were not sure what was intended by that clause and would need full disclosure on issues related to it in order to properly understand its implications.

Mr Quail said that the link between crude oil and petroleum product did tend to place inland refineries at an unfair competitive advantage in terms of accessing lucrative inland markets for their products. This had not been the Bill's intention and should be addressed. There should be complete equity of access to the pipeline network. Inland refineries should not be allowed to use pipeline capacity constraints in respect of crude oil as an excuse for monopolising access to the pipeline network by coastal refineries needing to transport petroleum product to the industrial heartland.

The Chair asked how long it took to convert a pipeline from crude to product or visa verse, and what were the implications of doing so.

Mr Quail replied that this took about one week. Product interface in the pipeline was the issue. However, multiple product pipeline usage was common practice internationally and the technology was available for this to be managed flexibly and efficiently.

Mr Nash asked whether multiple product access to the Empangeni pipeline would help to address capacity problems. Mr Quail replied that it would, although long-term capacity remained a challenge.

Mr Germeshuys commented that Petronet was best placed to provide clarity on these issues.

Mrs F Mathibela (ANC) asked for clarity on a comment in the presentation asserting that the Bill would effectively prohibit Petronet from optimising assets and maximising revenue which, in turn, could reduce pipeline tariffs.

Mr Germeshuys replied that, if promulgated in its present form, the Bill would impact negatively on Petronet's ability to make optimal use of its pipeline network. He again suggested that Petronet would be in a better position to provide clarity on this matter.

Total South Africa
Mr Kevin Baart, Manager, Business Support and Strategy, Total South Africa, advised members that the Total representation would give a different perspective to the issue of inland and coastal refineries. Total's Natref refinery had been built inland largely because of political imperatives at the time. The special 'Natref in Durban' arrangement based on transport economics had sought to ensure that the refinery's distance from the coast did not place Total at a competitive disadvantage in respect of pipeline tariffs. He emphasised that, as a member of SAPIA, Total supported the broad thrust of the SAPIA submission but nevertheless wished to ensure that the Bill provided sufficient security for Natref and the vast number of people employed there.

Discussion
Mr Ngcobo asked if Total's concerns had been put to the Department.

Mr Baart replied that Total had participated fully in the two-year consultation process and had raised the issues concerned several times.

Mr Nash asked for clarity on Total's proposals.

Mr Baart replied that the essence of the submission was an appeal for no discrimination between coastal and inland refineries in respect of pipeline access and tariffs.

Mr Nash expressed dismay at the extent of the differences between two SAPIA members, wondering how the Committee could be expected to find a way forward if, after a two-year consultations process, such an important issue had not been resolved.

The Chair commented that the purpose of the consultation process had been to arrive at a piece of legislation, not necessarily consensus on every issue. Stakeholders had the right to make representations to the Committee on matters of concern and to lobby for changes to the Bill.

Mr Davidson said that, as he understood the situation, coastal refineries were at a competitive disadvantage in respect of transporting product up the pipeline. On the other hand, inland refineries were at a competitive disadvantage in transporting blends to the coast for shipment elsewhere. The formula for calculating tariffs needed to take these issues into account. He asked for clarity on the presentation's reference to 'affected parties' and who these might be.

Mr Lucas asked for clarity on the assertion that the Bill was discriminatory. He also observed that, as he understood it, arrangements were in place between some inland and coastal refiners to overcome the problems concerned.

Mr Ngcobo commented that profit was the issue in each of the representations heard thus far. He wondered where the transformation of the industry fitted in and what was being done about access for historically disadvantaged communities.

Mr Baart replied that the key issue was Natref's self-sufficiency in producing for the South African market. It could not dispose of product blends as cost-efficiently it would if it was situated at the coast. This placed Total at a competitive disadvantage, which had serious implications for Total's ability to generate wealth and create jobs. Its black economic empowerment (BEE) consortium would also be adversely affected.

Special arrangements between some inland and coastal refineries aimed at overcoming the problem were based on a system of exchange that took transport economics into account. Nevertheless, petroleum product prices inland would never be the same as those at the coast because of transport costs that would automatically be passed onto the consumer.

He assured members that Total remained committed to transformation, citing the recent launch of Total's BEE initiative, Tosaco, as one example. Total was also a signatory to the industry's Charter.

Mr Nash asked whether coastal refineries had limited access to the pipeline network because of the unique position of certain inland refineries in relation to inland markets.

Mr Baart replied that all petroleum manufacturers were obliged to purchase a proportion of their crude oil requirements from Sasol. This was determined by market share and did impact upon the capacity of the pipeline network to handle coastal product. This situation needed to be addressed.

The Chair asked if the positioning of Natref had been influenced by economic sanctions imposed against the previous regime.

Mr Baart replied that he was not sure.

The Chair then asked if the purpose of the Total submission was to seek protection for Natref and to entrench the status quo.

Mr Baart replied that they were not asking for protection per se, but rather pointing out that Total's investment in Natref had been against its ideal interests in terms of location. The government of the day had insisted that the refinery be located inland. The 'Natref in Durban' tariff arrangement had been negotiated to compensate for this and should remain in place.

Mr Ngcobo asked for more detail on the issue of BEE, particularly regarding ownership and control.

Mr Baart replied that Old Mutual had disinvested in Total South Africa, while Rembrandt and Total France had adjusted their shareholdings. This had resulted in twenty-five per cent BEE ownership of Total South Africa through Tosaco. The partnership included skills transfer with broad-based empowerment and upliftment in mind.

The Chair thanked the presenters for helping the Committee to understand the Natref issue better. In the interests of fairness, careful consideration would need to be given to all the submissions concerned in order to avoid unintended consequences when the Bill was promulgated.

Sasol
Mr André de Ruyter expressed Sasol's support for the broad objectives of the Bill and endorsed the Total submission, which represented the common interests of both inland refiners. Nevertheless, certain issues unique to Sasol needed to be raised. While it was important that the pipeline network should be licensed to transport crude oil and petroleum products, it was vitally important that there were no disruptions in the supply of crude oil to the Sasol refinery. Further, the entire spectrum of Sasol's petrochemical products fell within the ambit of the Bill, which Sasol believed should be narrowed down to focus on petroleum products.

The Chair asked who had been party to the decision to locate Natref inland. Had all stakeholders been involved in these negotiations, or just a select few?

Mr De Ruyter replied that, as he understood it, the negotiations had involved Total, Sasol, National Uranium and the then South African Railways and Harbours.

The Chair commented that this implied that the process had not been fully inclusive. He asked how the new government could be expected to respect any agreement made on the basis of exclusivity.

Mr De Ruyter respectfully replied that, in his view, this was not relevant to the current situation. Natref was a national strategic asset and, as such, was working well under the 'Natref in Durban' arrangement. If this arrangement was not enshrined in the Bill, negative signals would be sent to the investment community.

Discussion
Mr Davidson commented that the central issue appeared to be the strategic impact of negotiations around the main supply agreement. He asked for real numbers in respect of the relative advantages and disadvantages cost-wise of levelling the playing fields. Surely returns on the Natref investment had covered the costs concerned?

Ms Mathibela noted a reference in the Sasol presentation to the cancellation of agreements and the fact that some of the parties concerned wanted there to be no notice period. She asked what notice period Sasol would have liked.

Mr De Ruyter replied that, regarding the main supply agreement, the commercial dynamics of the industry were such that its impact would vary depending on how players positioned themselves in the market. Since the agreement allowed Sasol to enter the retail market and therefore promoted competition, it suited Sasol well.

Mr Davidson said that he understood this. However, what would happen to parties affected by the five-year notice period in respect of Section (20)(1)(f) agreements.

Mr De Ruyter replied that the five year notice period was a little on the short side but was nevertheless acceptable. He could not speak for parties wanting no notice period for the cancellation of existing contracts other than to say that termination on promulgation of the Bill could lead to instability since these contracts entailed certain commercial assumptions.

Regarding relative competitive advantage and disadvantage, the issues were complex and the intertwined interests concerned difficult to unravel. Like Total, Sasol would like the 'Natref in Durban' principle to remain in force.

Mr Lucas said that it would be important to have all the facts around what would happen if the agreement was terminated. What would be the benefits of the agreement remaining in place, particularly in respect of employment opportunities? The Natref agreement had been politically motivated. It would be difficult to justify enshrining it in a Bill that sought to address historical imbalances as part of the broader legislative framework. On the other hand, through its presence in the townships, Total had moved towards BEE much earlier than most other oil companies.

Mr De Ruyter commented that Natref would not shut down if the Bill was enacted in its present form. However, the Bill's negative implications for Natref could spill over into other aspects of the oil industry.

The Chair thanked him for the presentation, which would assist members in their clause-by-clause deliberations on the Bill. The Committee would revert to Sasol for any further clarity required.

The meeting was adjourned.