Fuel Price: Minister of Energy briefing; with Deputy Minister

Energy

21 August 2018
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Portfolio Committee met with the Department of Energy (DoE) to discuss the country’s high fuel prices.

At the outset, the Minister was asked to explain why nobody from the DoE had attended the previous meeting. The Minister said this had been due to a miscommunication that the meeting had been postponed, but the Department had been put into disrepute by comments that it had boycotted the meeting because they were unable to account for the high fuel prices. The Minister’s explanation was accepted by the Committee.

The Minister acknowledged that concerns about the price were at an all-time high, as fuel was an input cost to economic activity. The South African petroleum industry accounted for an 8.1% contribution to the gross domestic product (GDP), was responsible for over 100 000 direct and indirect jobs, and accounted annually for R365 billion in turnover, R72 billion in duties and levies, and R9.6 billion in capital expenditure. 

Saudi Arabia, Nigeria and Angola accounted for more than 90% of South Africa’s crude oil imports last year. The main causes of the high fuel prices were the decisions of the Organisation of the Petroleum Exporting Countries (OPEC), geo-political instability and the recent global economic recovery. The petrol price was at a record high of R16 a litre. The fuel levy accounted for R3.37 of the price, and the Road Accident Fund (RAF) accounted for R1.93. The fuel levy contributed R62.8 billion annually to the national revenue fund (NRF).

The Department explained that the entire process of the petroleum supply (value) chain had an impact on the retail price of fuel. Freight and transportation was affected by insurance costs, ocean losses, cargo dues, coastal storage, stock financing and demurrage costs. It emphasised that there was exploration to find oil locally, and shale gas had been identified. Interventions included recognising that crude oil prices were cyclical, the implementation of energy (fuel) saving measures in the short term, and sustaining engagements with oil producing countries on the impact of oil prices on developing countries.

Members complained about the lack of information provided by the Department on how exactly they could lower the fuel price. What was wrong with the refineries in South Africa, and what could be done to improve them and increase their output? A major concern was why neighbouring countries’ fuel prices were lower than South Africa’s, despite them receiving fuel from South Africa. The mismanagement of the RAF was another important issue in relation to the effect on the fuel price. The DoE was asked about the potential for increasing imports from African countries, as well as deregulating the fuel industry, but were warned that fuel retailers would cut costs by introducing self-service pumps, which would put 50 000 pump attendants out of work.

Meeting report

Absence of DOE officials clarified

The Chairperson welcomed the Minister, Deputy Minister, Committee Members and the public. He said that before the presentations were made, they would need to address the issue which had taken place on Tuesday last week. He emphasised the disappointment of the Committee regarding the absence of the Department’s officials from the previous meeting, and that no presentations had been circulated for the previous meeting as well. The previous meeting had closed with a statement that the Minister would be invited to address the matter of non-attendance by the Department. The Minister would address the matter, followed by comments, and then the matter would be closed and the presentations would commence.

Mr Jeff Radebe, Minister of Energy, said that it was common knowledge that he was unable to attend last week’s meeting due to his attendance at a summit in Windhoek. He explained that the fact that nobody had been there was due to a miscommunication by a Department of Energy (DOE) official that the Committee meeting had been postponed. The Department had been put into disrepute by comments that the Department had boycotted the meeting as they were unable to account for the high fuel prices. The Minister objected to this claim and stated that South Africa was a democracy and they were accountable. However, the miscommunication had been the cause, and he apologised for that.

Ms Z Faku (ANC) said that on behalf of the ANC, the Minister’s apology was accepted, and it noted the miscommunication which had led to the unpleasant situation.

The Chairperson said that the Minister’s apology was accepted, and hoped it would not happen again in future. He emphasised that despite this incident, the Committee and the Department worked very well together, but such a bad miscommunication had never occurred before. He stressed that on the Committee’s part, communication methods would be strengthened to increase overall efficiency.

Fuel Price: DOE Presentation

Minister Radebe acknowledged that fuel prices were at an all-time high in South Africa. Concern had also escalated as fuel was, and continued to be, an input cost to economic activity. The high prices impacted negatively on government, labour, business, civil society and the population in general. The Department would provide clarity as to why the prices were the amount they were and what options there would be for interventions.

The South African Petroleum industry accounted for an 8.1% contribution to the national gross domestic product (GDP); over 100 000 jobs directly and indirectly; R365 billion per annum in turnover; R72 billion per annum in duties and levies; and R9.6 billion per annum in capital expenditure. 

The South African economy relied heavily on petroleum, and was dependent on imported crude oil and increasingly on imported petrol and diesel imports. There were no proven oil resources in the country, except for the shale gas potential. The private sector dominated the fuel industry; and petroleum import dependence was increasing.

South Africa had sourced its crude oil imports during 2017 from the following countries:

  • Saudi Arabia: 49%
  • Nigeria: 24%
  • Angola: 20%
  • Togo: 2%
  • Equatorial Guinea: 1%
  • United States of America: 1%
  • Cameroon: 1%
  • Ghana: 1%

 

The Minister described three main causes of high fuel prices. These were attributed to:

The Organisation of the Petroleum Exporting Countries (OPEC)

In 2014, oil prices were at $115 a barrel, but by January 2016, the price had dropped to below $30 a barrel. In November 2016, OPEC and key non-OPEC producers -- especially the Russian Federation – had removed 2% of global oil production to support higher oil prices. This year, prices were around $80, which meant that oil prices had more than doubled in 24 months. To a large degree, OPEC and key non-OPEC producers had achieved their objective, to the detriment of petroleum consumers globally

Geo-Political Instability

The political turmoil in Venezuela had led to the near collapse of oil production in this key OPEC member country. Venezuela was also under US financial sanctions. There had been production challenges in Libya since the change in government in 2011, and production had been intermittent -- from 1.5 million barrels a day to at best 600 000 barrels a day on average. Then there was the recent US policy towards Iran, with its decision in May 2018 to withdraw from the Joint Comprehensive Programme of Action (JCPOA) signed with Iran, and the immediate imposition of US sanctions enforceable by November 2018. Iran was a major producer of oil, and sanctions include an embargo on its oil exports. The market had to factor this into the crude oil price.

Global Economic Recovery

The global economic recovery in 2017 had impacted on the demand for oil and resulted in an approximate increase in demand of 1.5 million barrels a day.

South Africa’s fuel price

Minister Radebe explained that the fuel price was at a record high of R16 a litre. The fuel levy accounted for R3.37 of that price, and contributed R62.8 billion annually to the National Revenue Fund. The Road Accident Fund levy accounted for R1.93 of the price.

Mr Tseliso Maqubela, Head: Petroleum Regulation, DOE, said that the entire process of the petroleum supply (value) chain had an impact on the retail price of fuel. He emphasised that there were explorations to find oil locally, and shale gas had been identified. All the crude oil used in South Africa was imported, and most of it came from Saudi Arabia, Nigeria and Angola, and was then offloaded in Kwa-Zulu Natal, put into storage and then sent to refineries. From the refineries, it was sent to tank farms and from the tank farms was sent to the various areas via pipeline, rail and road tankers. The preferred method of transportation of the fuel was through pipelines, as it was the most efficient method of transportation, but the refineries in South Africa’s were not able to meet the demand for that.

Legislative Framework

The Minister of Energy, under section 2(1)(c) of the Petroleum Products Act, 1977 (Act No. 120 of 1977), is empowered to regulate prices of petroleum products. Section 2A (1) of the same Act empowers the Minister to license wholesaling and retailing activities. The National Energy Regulator (NERSA) is a regulatory authority established as a juristic person in terms of section 3 of the National Energy Regulatory Act, 2004 (Act No. 40 of 2004). NERSA’s mandate is to regulate the petroleum pipelines industry in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).

Policy Position and Key Pricing Mechanism

1. Policy Position:

  • Apply import parity principle; refineries to be cost-efficient and compete on a pricing basis with international refineries
  • Apply a cost-recovery principle;
  • Regulate petrol prices at the retail level;
  • Regulate the retail prices of Liquefied Petroleum Gas (LPG);
  • Regulate a Single Maximum National Retail Price (SMNRP) for illuminating paraffin (IP);
  • Publish reference wholesale list prices for diesel and IP;
  • Apply the most cost-efficient mode of transport to determine the primary transport costs implemented into fuel price structures.

 

2. Key Pricing Mechanism

  • Apply the Basic Fuel Price (BFP) mechanism (import parity);
  • Apply the Regulatory Accounting System (RAS) to set retail, wholesale, secondary storage and secondary distribution margins applicable in retail prices of petrol;
  • Apply the most cost-efficient mode of transport to set transport costs in 54 fuel pricing zones;
  • Apply ring-fenced fuel levies as and when applicable

 

Pricing of Petroleum Products

How the retail margin is calculated:

  • Historically, a survey is conducted by the Small Business Advisory Bureau SBAB annually on the annual operating expenditure (OPEX) and the average annual petrol sales
  • Other costs were adjusted by the consumer price index (CPI);
  • The asset base was adjusted by the producer price index (PPI);
  • The total volumes from the oil companies were taken into account;
  • Electricity adjustments in July by the National Energy Regulator of South Africa (NERSA);
  • Salaries for forecourt workers from the Motor Industry Bargaining Council (MIBCO)

Fuel Levies

The petroleum products levy had been implemented to reimburse the pipeline users for the applicable NERSA tariff on transporting fuel through the pipeline. The levy was set by the Ministers of Energy and Finance in line with the expenditure budget of NERSA.

The IP tracer dye levy was implemented to reimburse the oil industry for buying IP tracer dye, and to inject it into IP to curtail the mixing of IP and diesel, which was a loss to the fiscus.

The slate levy was to finance the cumulative under-recovery of the industry, and was applicable only when the cumulative slate balance exceeded R250 million (under recovery).

The fuel levy was a tax levied by the Government  through the Minister of Finance.

The Customs and Excise levy was a duty collected in terms of the Customs Union Agreement.

The Road Accident Fund (RAF) levy was to compensate for people involved in vehicle accidents.

The Demand Side Management Levy (DSML) was introduced in 2006 to curtail the use of unleaded petrol (ULP) 95 in the inland market. 

Basic Fuel Price (BFP)

South Africa is a net oil importer and imports significant amounts of refined diesel as well as petrol. Prices were based on international benchmark prices at key refining centres. Prices were affected by geopolitical events and international demand, as well as natural disasters. Currency fluctuationa also play a major role, as oil prices are quoted in US dollars per barrel or ton.

BFP Structure

1. Free-on-Board (FOB) value

The daily spot prices of Petroleum products reported by Platts (an international fuel price reporting agency) were used. For petrol it was 50% Mediterranean (Italy) and 50% Singapore, while for diesel and IP, it was 50% Mediterranean (Italy) and 50% Arab Gulf. Platts was the cheapest fuel pricing reporting agency, paid by the Central Energy Fund.

2. Freight

Freight rates published by the Worldscale Freight Rate Association as of 1 January each year are applied. Single port charges are applied to Durban and Cape Town. Two port charges are applicable to Port Elizabeth, East London and Mossel Bay, with one average rate applied based on volume weightings. In 2002, freight charged to ship products to South Africa carried a premium of 15%, which was included in freight rates applied in the BFP. Freight rates were adjusted in line with the monthly average freight rate assessments compiled by the Worldscale Freight Rate Association. Freight rate assessments were based on the supply and demand of vessels and risks to vessel owners.

3. Insurance

Products are insured by the buyer. Insurance costs are equal to 0.15% of the sum of the FOB value and freight costs. The international tariff applied is 0.15%.

4. Ocean Loss

Provision  is made for product loss whilst being transported, which is an international practice. The current ocean loss is 0.3% of the sum of the following values: FOB + Freight+ Insurance.

5. Cargo Dues

The level of cargo dues is set by the National Ports Authority of South Africa. Cargo dues have to be paid by vessel owners for utilising harbour infrastructure.

6. Coastal Storage

This is to cover the cost of providing storage and handling of fuels at coastal terminals. The cost of storage was initially assessed in 2002 at 2.5 SA cents per litre per month, or US $3 per ton per month. The BFP makes provision for 25 days of storage (25 days negotiated). The cost escalated annually in line with PPI increases, and was effective in July each year, as negotiated.

7. Stock Financing

This cost is calculated as a SA cents/litre amount of each product on monthly landed cost values.

The basis for the calculation is:

  • 25 days’ stock (as negotiated);
  • The ruling SA prime interest rate minus two percentage points, as negotiated.
  • The formula for determining the stock financing cost is: landed cost value of product x prime interest rate - 2% x 25/365.

8. Demurrage Cost

This is applicable for delayed time spent by vessels to be loaded with products, and time spent for discharging products. Examples were port congestion, awaiting berths, ullage constraints, slow pump/discharge, bad weather and the vessel being pulled off a berth to enter the port later. Demurrage rates are published annually by the London Tanker Brokers Panel in US$/ton. Demurrage rates are applicable to vessels falling in the rage of 35 000 to 39 999 DWT class tankers, which is the size of vessels which can enter SA ports. Only three demurrage days are allowed (negotiated). Demurrage rates are currently negotiated separately for each spot voyage charter as part of the overall negotiated freight tariff.

 

Maximum Refinery Gate Price (MRGP) for LPGas

The MRGP was set at the BFP of 93 ULP, less R74/ton. The MRGP mechanism was currently under review by the Department of Energy policy unit.

Interventions

  • Recognition that crude oil prices are cyclical;
  • Implementation of energy (fuel) saving measures in the short term;
  • Sustaining engagements with oil producing countries regarding the impact of oil prices on developing countries;
  • Extracting more efficiencies from existing key infrastructure owners/operators;
  • Continuously reviewing the relevance of some of the pricing elements in the BFP;
  • Finalising the framework for the exploration of oil and gas in South Africa; and
  • The Mineral and Petroleum Resources Development Amendment (MPRDA) Bill needed to be finalised as it would encourage potential investors to explore within the waters of South Africa.

 

Frequently asked questions included: Why are fuel prices changing every month? What is over (under) recovery? Why is petrol cheaper in neighbouring countries and yet they purchase it from South Africa? Why is SASOL not selling petrol at lower prices because they produce it from coal and they are located in Gauteng? Why is the government not deregulating fuel prices? Why is ULP95 more expensive than ULP93 in Gauteng, but they cost the same in coastal areas? Why is the government not buying oil from African countries at lower prices?

Discussion

Ms G Nobanda (ANC) sought clarity on the petroleum supply (value) chain. She wanted to know what was wrong with refineries and why more finished products were bought because of this. What could be done to improve the refineries, and if they were improved, would they be used more? She also wanted to know why fuel prices in neighbouring countries were cheaper than in South Africa.

Ms Faku wanted to know if it wasn’t possible to import more from African countries such as Nigeria and Angola. By doing that, it would strengthen the regional areas of integration. She wanted to know if South Africa could not influence the domestic aspects of the fuel prices, as South Africa paid more than neighbouring countries due to levies, and therefore wanted to know if adjustments could not be done in that regard.

Mr M Matlala (ANC) said it had been a well-researched presentation and well handled on the technical side. He wished to be educated regarding the issue of the petrol price hike, as the Monetary Policy Committee would be meeting next month, and there was a chance that the rand would weaken to R15 to the dollar, which would cause the fuel price to increase. He emphasised that the fuel increase could only have negative impacts on South Africa and a further blow to their pockets, from the unemployed to the employed. He pleaded that the Minister should find a way to resolve the issue.

Mr G Davis (DA) said welcomed the presence of the Department at the meeting, but said it was also disappointing, as no real plan was given as to how exactly the fuel price would be reduced. He wanted to know if government had done an assessment of liberalising the fuel price, as this could potentially decrease the fuel price due to competition -- but could also potentially increase it. He said that the fuel levies were a concern and it was the main reason why neighbouring countries’ fuel prices were cheaper. He wanted to know if National Treasury had been consulted as to where else these levies could come from, and the time frame for it. He proposed that next year, when a new budget was introduced, the levies should not increase above inflation,and suggested that the Minister of Energy consulted the Minister of Finance regarding that. He said that the RAF was a major problem, as they reported deficits constantly, but money was still being given to them. He wanted to know why money for the RAF could be increased when it was so mismanaged, and what was being done to change that. Did the Minister acknowledge that local factors played a role in the weakening and strengthening of the Rand? He pointed out that the land expropriation announcement last week had depreciated the Rand by 30 cents.

Mr J Esterhuizen (IFP) said that the world economy had not recovered yet, and South African consumers were suffering. Fuel prices changed every month, South Africans were fortunate that there were regulations, but he did not understand why other countries’ fuel prices were lower. Blaming it on the RAF was not acceptable, as the RAF was not even working or manageable and it kept asking for bail outs, although it had been given R60 billion from the fuel levies alone. Most other countries paid around R10 to R11 for their fuel which came from South Africa. He said the fuel price had a blanket effect on the rest of South Africa, and the poor paid most of their money for transport and fuel.

The Chairperson said that ordinary people believed the government could lower the fuel price next week. If there was enough will, the government could lower the price and it could be done soon.

DoE’s response

Mr Maqubela responded that he agreed that the Road Accident Fund levy and the fuel levy were the reasons why the petrol was more expensive in South Africa than in neighbouring countries. He said that deregulation of the fuel price would probably lead to job losses, the reason being that retailers would opt for self-service at the pumps, which would reduce the price. He explained that the costs of petrol attendants were built into the retail margin, which formed part of the price determination. He emphasised that over 50 000 jobs could be lost if retailers opted for self-service pumps to save money.

He said that they were looking for quick wins, but adjustments to the fuel levy could take place only in the next financial year. They had not to the level of discussing the fuel levy, as Parliament had voted on it for the current financial year. He emphasised that the DoE strongly advised against allowing a tax holiday, as experience elsewhere in the world had not been positive. The Demand Side Management Levy could possibly be scrapped for reduction’s sake.

The Chairperson said he wanted to clarify that he had not meant to imply that the Minister and officials were not capable of managing the fuel industry.

Ms Thembi Majola, Deputy Minister of Energy, referred to the issue of oil exportation by Angola and Nigeria, and said the amounts given were much higher than previous years, and that exports between African countries were increasing in comparison to previous years.

The Minister said that contrary to what the Democratic Alliance had stated, he thought the session had proved that there were strategies and interventions in place to address the high fuel prices.

The Minister further elaborated that the Reserve Bank was also concerned about the high fuel prices and therefore it was a priority to deal with the issue as soon as possible. By the end of September 2018, the Department would report back on how the Government planned to mitigate the high cost of fuel prices.

The Chairperson thanked the Minister and Deputy Minister, Committee Members, government officials and the public for attending, and said that the Minister would report back after he had gone to Cabinet.

The meeting was adjourned.

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