Petroleum Pipelines Bill: deliberations & motion of desirability

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
12 August 2003
PETROLEUM PIPELINES BILL: DELIBERATIONS & MOTION OF DESIRABILITY

Chairperson: Mr M Goniwe (ANC)

Documents handed out:
Petroleum Pipelines Bill as amended by the Committee (final version)
Notes on Common Carrier
[PMG hopes to have this documents here by 21 August]

SUMMARY
The Committee formally accepted the Bill and passed a motion of desirability. Clause 20(1)(bb), on temporary changes in licence conditions in emergencies, was amended to include a requirement that the Authority consult the licence holder where possible. An objection to Clause 28(3), on tariffs, by Mr I Davidson (DA) was noted.

In discussion, the Committee raised concerns about public safety, discussed whether the Authority's expertise be understood individually or collectively, possible conflicts of interest for regulators, and the duties of Local Authorities regarding construction affecting pipelines. Mr Davidson's concern that Clause 28(3) might have adverse effects on the viability of Natref and SASOL was discussed at length.

MINUTES
Discussion on the revised Bill
Dr R Crompton (Deputy Director General: Hydrocarbons and Energy Planning, Department) distributed a note on the concept of common carriers. He stated that the note should not be regarded as definitive and was merely to assist understanding.

Mr E Lucas (IFP) asked how the object of promoting companies in the petroleum industry owned by historically disadvantaged persons (Clause 2(g)) would be achieved.

Dr Crompton replied that this would be achieved by means of licence conditions. Clause 33(1)(g), stating that the Minister must as appropriate make regulations regarding mechanisms to promote historically disadvantaged South Africans, also addressed the matter.

The Chair responded that a Black Economic Empowerment consortium had objected that the Bill would disadvantage their investment. Did this cater for their concern?

Dr Crompton replied that it was difficult to target a particular consortium in legislation - there is no reference to any particular company. Concerns expressed by the consortium owning Natref had been addressed to the extent that it is reasonable.

Mr G Oliphant (ANC) stated that the Bill clearly took care of the interests of companies but was only concerned about community interests in general terms. Pipelines pass through communities' land and could have health and safety consequences, yet there was no reference to this. This could have an impact on expropriation.

The Chair asked for an explanation of the conditions under which expropriation is possible under Clause 4(2)(a).

Dr Crompton noted that Clause 4(2)(a) had been deleted and replaced with Clause 1(h). This allows expropriation of land or any right in respect of land, necessary for the exercise of a licensee's rights. Pipelines are very expensive - costing approximately R2 million per kilometre to build. Using the shortest route possible is thus important. Where owners of private land refused to deal with the constructor, the Authority has the authority to expropriate, as with other major infrastructure. Dr Crompton drew the Committee's attention to Clause 32(1) of the Bill, requiring that expropriation occur under Section 25(3) of the Constitution.

The Chair responded that this was relevant to the concern raised by Mr Oliphant. He noted that Clause 4(1)(j), requiring that decisions by the Authority be in line with Government policy, was relevant here. Could there not be a Clause that ensures due consideration of the communities' interests?

Dr Crompton replied that Section 25(3) of the Constitution required that this be considered. The decision would inevitably be a trade off between the rights of the individual owner and the public interest.

Mr Oliphant responded that he saw more risk than benefit for communities where pipelines were laid. What benefits would accrue to communities?

Dr Crompton replied that there would not always be direct benefits to the affected community. He cited the example of a national freeway, which might not directly benefit the community through which it passes but which benefits the national economic interest as a whole. There had to be trade-offs. If a depot were set up in the affected community, this would be a direct benefit. He noted that Local Authorities could challenge the laying of a pipeline. Regarding safety, he drew the Committee's attention to Clause 20(1)(x), which requires emergency planning, and (z), which requires liaison with the Local Authority.

The Chair responded that this captured the concern well. He wondered if this could not be captured in the Clauses on the powers and duties of the Authority.

Dr Crompton replied that under Clause 33(1)(h), the regulations could provide more details on the duty to liase with the Local Authority under Clauses 20(1)(x) and (z).

Mr Oliphant expressed his concern that these matters were being relegated.

Dr Crompton replied that Clause 20(1)(x), (y) and (z) fell under conditions that the Authority could impose on licensees.

The Chair asked if there was any reason why, under Clause 5(4)(a), members held office for four years.

Dr Crompton replied that there was no particular reason. The Department wanted to give members of the Authority some security of tenure and four years seemed a reasonable period.

Mr A Blaas (ACDP) asked if positions on the Authority would be full time.

Dr Crompton replied that the intention was that they would be.

Mr Blaas stated that he thought periods of office on such Authorities were determined by norms.

Ms X Mdludlu (State Law Advisor) responded that periods of office depended on the Department's policy; they are not decided by law.

Mr I Davidson (DA) asked how the Department would merge all the Energy regulatory bodies into one Authority. Would people not lose jobs?

Dr Crompton replied that the short answer was 'with difficulty'. If the Bill and the Gas Act both came into effect on 1 April 2004, the same five people could be appointed to the Petroleum Pipeline and Gas authorities. The Electricity regulators are not in full-time positions. Their tenure ends on 1 May, and at that time the five regulators could be appointed as Electricity regulators. In this way the three bodies would be merged. Since the Electricity regulators were in part-time positions, they would have to change careers in order to join the new body. They would not be excluded from applying for or being nominated to the new Authority if they so wished. The secretariat would not be adversely affected - employment would likely expand.

Mr Davidson asked why the phrase allowing permanent residents, as well as citizens, to be appointed to the Authority had been deleted from Clause 6(1)(a).

Dr Crompton replied that he agreed that the phrase should ideally remain. However, the Clause had to be in line with the Gas Act to allow the unification of the regulatory bodies.

Mr Davidson asked if Clause 6(1)(c), forbidding persons 'in the employ of, or affiliated to, an organ of state in any sphere of government, or [having] a conflict of interest in this regard' from being appointed, applied to parastatals.

Dr Crompton replied that it did.

Mr Davidson asked why 'collectively' had been removed from Cluase 6(2)(a) requiring that persons appointed 'have adequate legal, technical, business, economic or other experience relevant to petroleum pipelines'. It would be difficult to find an individual with this range of experience, easier for the group collectively to have it.

Dr Crompton replied that this had been done for the sake of uniformity with the Gas Act. The Department hoped to introduce a short Bill to standardise the three Acts; it is possible that when the Acts take effect this provision will have been replaced.

Mr Davidson responded that he understood that latter Acts took precedence over former Acts. Conformity was making bad legislation.

Mr Oliphant responded that persons are not just lawyers - it would not be difficult to find someone with this range of experience. He stated that Mr Davidson appeared fixed on the idea that South Africans did not have the skills necessary for regulation.

The Chair responded that Mr Davidson's point was correct. If the Bill required collective expertise then one would not need to find a number of lawyers - one would do. This would allow the Authority to be broadly-based, with people with a range of skills.

Mr Oliphant responded that Clause 2 refers to 'persons' not to 'a person' having this expertise, so meant all the persons on the Authority.

Dr Crompton agreed that the Clause was ambiguous in referring to 'persons' and could be interpreted both ways. He added that the Department had funding for two months of training for the regulators. There was not a large group of people in South Africa with the relevant experience.

The Chair stated that if the Bills had to be synchronised, then the Committee would have to accept this or be faced with making several amendments.

Mr Davidson stated that he could live with the ambiguity, but was of the view that good legislation should have one clear interpretation.

Mr Oliphant asked if Clause 6(6) should refer to the Gas Regulator.

Dr Crompton replied that 'Gas Regulator' had been replaced with 'Authority'.

Mr Davidson asked why failure to perform a duty imposed by the Act had been removed from Clause 7(2) as a reason for dismissal of a member.

Dr Crompton replied that it had been relocated to Clause 9(a) to conform with the Gas Act.

Mr E Lucas (IFP) asked why Clause 9(e) dealt with recusal in the case of conflict of interest when Clause 6(1)(c) forbade the appointment of persons with a conflict of interest to the Authority.

Dr Crompton replied that regulators' interests might change during their period of appointment.

Mr Davidson responded that this raised the broader issue of whether regulators should have interests in the regulated industries. It would be safer to disallow this completely, especially since it affected only five people.

Dr Crompton replied that the case could be compared with that of judges. They may invest money that results in a conflict of interests in some cases. However, judges are not restricted from investing. Clause 6(4)(a) and (b) required full disclosure of interests.

Mr Davidson replied that this was not a good analogy. Judges could have a range of interests. This case concerned a specific area of possible investment. He asked what would stop a director of Eskom becoming a director. Eskom's profitability led to millions of rands in bonuses to the directors and that profitability depended on the Regulator.

Mr Oliphant retorted that it was a standard Clause. Should regulators have to resign if their children married into families with energy interests?

The Chair stated that people would take up business opportunities - there had to be a Clause to deal with this.

Dr Crompton pointed out that the regulator positions would be full-time, so directors would have to resign their positions in any event.

Mr Davidson replied that this would not be true of non-executive directors.

Dr Crompton conceded that it was conceivable that a non-executive director of a private company could be appointed to the Authority, though this was unlikely. If this happened, such a person would be required to make a full declaration of interests.

Mr Davidson stated that he did not wish to press the point further.

Mr Oliphant asked why 10(1)(b) required that the Authority's decisions be 'in the public interest' when this requirement had been stated elsewhere.

Dr Crompton replied that public interest was difficult to define. The Clause gave the Authority broad direction. It might be more clearly understood if contrasted with a phrase like 'in the interest of oil companies'.

Mr Davidson asked if the reference to 'review' by the High Court rather than appeal, in Clause 10(3), meant that appeals could only be based on procedure.

Dr Crompton replied that it did.

Mr Davidson asked if this meant that as long as a decision was procedurally correct, its result could not be appealed.

Dr Crompton replied that it did. This was consistent with the Gas Act. One had to consider the danger of legal disputes that last years.

Mr Davidson responded that he was not happy with the explanation. He thought that he Gas Act provided an appeal mechanism.

Dr Crompton replied that Section 10(1)(3) of the Gas Act also allowed only review by the High Court.

Mr Davidson responded that he thought a later Section in the Act dealt with appeals.

Dr Crompton replied that this was not correct.

Mr Oliphant asked if the deletion of Clause 12(d), which allowed approved donations or contributions to the Authority, meant that such donations and contributions could not be received. Was this done out of conformity with the Gas Act or on a substantive point?

Dr Crompton replied that it was for the sake of conformity and because submissions suggested that allowing such donations would be unwise.

Dr Crompton stated that the State Law Advisors had requested that 'deem' in Clause 14(1)(f) be replaced with 'consider'.

Ms Mdludlu explained that this change was to make the legislation more 'user friendly' by avoiding legalese where possible.

Mr B Bell (DA) asked if transport had been handled.

Dr Crompton replied that he did not understand the question. If it was a reference to the National Ports Authority, then he could see no difficulty.

Mr Lucas asked why information on the 'commercial arrangements regarding the participation of historically disadvantaged South Africans in the licensee's activities' had to be provided (Clause 20(1)(d)).

Dr Crompton replied that the information was needed to measure the extent of empowerment.

The Chair asked if this had any impact on the granting of the licence.

Dr Crompton replied that Clause 20(1)(d) had no effect in this regard, but other parts of the Bill did.

Clause 20(1)(f) a petroleum pipeline may be licensed for either crude oil or petroleum, provided that sufficient pipeline capacity is reserved for crude oil to enable the uninterrupted operation of the crude oil refinery located at Sasolburg, to operate at its normal operating capacity at the commencement of this Act, for so long as that refinery continues as a going concern

Dr Crompton noted that they had been advised that 'or both' should be added after 'a petroleum pipeline may be licensed for either crude oil or petroleum products' in Clause 20(1)(f).

Mr Davidson stated that he knew that Clause 20(1)(f) was intended to ensure there was a sufficient crude oil supply for the refinery at Sasolburg. He wanted to ensure that there was sufficient supply at all times. He asked that the Clause be flagged for later discussion when he was clearer on the problem.

Mr Lucas stated that he was also concerned. Did the Clause allow for up and down movement in the supply to the refinery?

Dr Crompton replied that members should consider the information on the common carrier note. If one looked elsewhere in the Bill, one would see that booking space in a pipeline required a fee - there was thus a business imperative that one utilised booked space properly. It was conceivable that one could pay for space and not use it, though the Regulator would not allow this is it would affect supply. One could not hold the country to ransom by booking space one did not intend to use. If the refinery at Sasolburg wished to increase capacity, that would be an ordinary market decision and so was not addressed by the Bill.

Mr Davidson suggested a scenario where oil companies decided not to take SASOL fuel, but to use their own fuel from coastal refineries. SASOL would then have to reduce the crude supply to the refinery because there would be no outlet for its fuel and there was limited storage space. One could end up with Natref starved completely.

Dr Crompton replied that Mr Davidson was describing the operation of market forces. The Department's view was that they should leave room for the market. The Bill's approach was thus minimalist - space was only reserved for the refinery to continue normal operation. This gave it the capability to compete. The rest was up to the market.

The Chair stated that they wanted to avoid Natref starving. Even if guaranteed supply in law, differences in the cost of transporting crude and refined products would have an impact.

Dr Crompton replied that the costs would not be known until the Authority set the tariffs.

Mr Davidson responded that the Bill set guidelines. For example, if an oil company bought its own refined product to sell inland at a favourable tariff, it would be cheaper than buying the SASOL product. To correct this the supply should be guaranteed at all times, which would determine how much refined product could be transported inland.

Mr S Louw (ANC) suggested that the wording in the Clause be changed from 'provided that sufficient pipeline is reserved' to 'provided that sufficient pipeline is available' so that there would be no charge for unused portions of the reserved supply.

Mr J Nash (ANC) stated that he could not see the problem. There was sufficient crude going to Natref. If a problem arose, an alternative pipeline, currently used for gas, could be recommissioned to transport crude. Natref would not be starved.

Mr Oliphant stated that members were starting to fight the battles of oil companies. The responsibility was to ensure supply. If it was cheaper for a company to buy its own refined product, it would do so. The Clause ensures that Natref has enough crude to do what it does.

Mr Lucas stated that he was concerned that the Act was meant to help historically disadvantaged individuals but if they invested in Natref and it died, then the Bill will not have protected them.

The Chair stated that legislation had to be considered in terms of its practical implications. This must be done in an objective, non-biased way to create a level playing field. The Committee thus needed come understanding of competing forces so that they did not end up with legislation that could be said to favour one side or the other. However, they should not go too deep into the dynamics of market competition. It is legitimate to consider practical implications, so the Committee must look at the circumstances that coastal and inland refineries faced.

Mr Davidson stated that Clause 20(1)(f) could not be looked at in isolation from Clause 28(3)(a), which requires that '[t]he tariffs set or approved by the Authority must enable the licensee to recover the investment'. There are two pipelines - one carrying refined products, the other crude. The crude line is new, the refined products line has already its value written-off, thus the tariff would be lower for refined product. This meant that the cost of carrying refined product would be cheaper and so SASOL would be disadvantaged by the higher cost of carrying crude. It would thus be cheaper for companies to take up refined product from their coastal refineries and ignore Natref. So, coastal refineries would do well in the interior because they would be bringing product up at lower prices. This would starve Natref since there would be no demand for its product.

Mr Louw stated that that the past was catching up with the industry. The Committee had to apply their minds economically.

The Chair stated that there had been a request from Mr Davidson to flag the Clause. The Department should be given an opportunity to reply and the Committee could return to it later.

Mr Nash stated that he agreed to the flagging. He did not think that Natref was disadvantaged and would take the time later to explain why this was.

Mr Oliphant asked what was being flagged and why. There were two proposals before the Committee - the Department's inclusion of 'or both' and Mr Louw's suggestion of replacing 'reserved' with available'.

The Chair replied that the department's proposal had been accepted. The Clause was flagged for concern.

Mr Davidson stated that it needed to be considered along with a rewording of Clause 28(3). He proposed that the words 'at all times' be inserted after 'reserved'. Clause 28(3) had to be addressed to level the playing field. Natref was a huge investment and should not just be destroyed.

The Chair asked what exactly Mr Davidson wanted flagged.

Mr Davidson replied that there were two critical Clauses - 20(1)(f) and 28(3).

The Chair agreed that Mr Davidson had established a link. He asked what Mr Davidson wanted flagged in Clause 20(1)(f).

Mr Davidson stated that he wanted the Committee to take a macro view and ensure a level playing field. One mechanism was needed to ensure sufficient crude at all times: 'at all times' should be inserted for this. On the other side, they had to ensure that the tariff structure was addressed so that coastal refineries were not favoured.

Mr Oliphant suggested that 'both', 'available' and 'at all times' be flagged.

Ms Mdludlu stated that 'provided' should be changed to 'as long as' since the former connoted that it was a proviso.

Dr Crompton gave the Department's reply. He stated that the Bill did not seek to address historical problems. It sought to provide a reasonable path forward. Some assumptions made in the contributions were incorrect. Market issues should not be addressed in law. If oil companies could buy refined product more cheaply or at the same price from SASOL for inland distribution, then he could not see why they would ship it themselves. They would only do this if they were involved in a market power play, but this was not regulated. The Bill provided Natref with sufficient supply to continue normal production as at the time it went into operation. Inserting 'at all times' would be unwise - this would require that pipeline space be reserved even during maintenance shutdowns. The proposed works does not specify which pipeline should be used for which product. Various pipelines could be used in various configurations, with regard to common carrier principles. Further, some Natref shareholders had access to the retail market. Finally, tariffs were for the Authority to define.

Mr B Bell (DA) stated that Clause 20(1)(z) seemed very one sided. Local Authorities should have some responsibility to report on excavations that might cross servitudes.

The Chair replied that there was provision for the Minister to expand on the responsibilities of Local Authorities in regulations.

Mr Bell responded that there should be something in the Bill stating that the Local Authorities have responsibilities.

Dr Crompton responded that regulations are law - the Bill did not need to state that regulations apply to Local Authorities. Bringing in the responsibilities of Local Authorities would require a long consultative process to make the amendment. This process would be followed for the regulations.

Mr Davidson stated that it had been evident on the study tour that Local Authorities allowed people to transgress servitudes and this was difficult to deal with. There should be an onus on Local Authorities to ensure that the law was not transgressed in this regard.

Dr Crompton replied that the Department were aware of these issues. He suggested that they be dealt with in the regulations because of the complex procedure involved.

Mr Bell stated that Clause 20(1)(bb), stating that licence conditions could be temporarily changed by the Authority in an emergency, was very broad. What constitutes an emergency? He suggested that the phrase 'in consultation with the licence holder' be added to the Clause.

Dr Crompton replied that there was a common sense understanding of 'emergency' but it could not be precisely defined - the Authority would have to apply their minds. There could be major implications to a disruption in supply.

The Chair asked if the consultation phrase could be added.

Dr Crompton replied that it was taken for granted that there could be consultation, though there might not always be time for consultation in an emergency. They could look at wording to incorporate this.

Mr Blaas asked if there was any rationale behind the fine figure of R2 million per day in Clause 25(2).

Dr Crompton replied that the Regulator had to consider the severity of the contravention and noted that large volumes of petroleum product could be involved. If the fine were set too low, it would pay to commit crime. There was nothing precise about the figure, but it seemed a reasonable one in light of the volumes that could be shipped. The figure was consistent with the Gas Act.

The Chair stated that Mr Oliphant's concerns were further addressed in Clause 27.

Dr Crompton noted that the State Law Advisors had requested that 'objective i.e.' be deleted from Clause 28(2)(a)(i) for clarity.

Mr Davidson stated that his earlier argument illustrated the problems with Clause 28(3). He suggested that (a) and (b) be removed from the sub-Clause. The Bill should avoid being definitive on how to calculate profit.

Dr Crompton responded that the subsection was drafted in response to criticisms of the original Clause 28(2)(a). Submissions had requested more clarity, hence Clause 28(3)(a)-(c). These were standard statements found all over. There was nothing sacrosanct about them, though new investors should be confident that they would recover their investments.

Mr Davidson responded that new pipelines required a large return to recoup the investment - this would make shipping products along them very expensive compared with written-off pipelines. He suggested adding 'and/or' between (a), (b) and (c).

The Chair asked what the impact would be if the replacement value of the pipeline were used instead of its book value.

Mr Davidson responded that this would increase the cost of oil. He did not necessarily want to do this.

Mr Nash pointed out that written-off pipelines had operation and maintenance costs, which had to be taken into account. The Clause should be kept as it stood.

The Chair stated that there should be an assumption that the Authority would present their methodology to Parliament. At that point, Mr Davidson could raise these sorts of issues. The Bill was broad legislation.

Mr Davidson responded that the Authority did not have to come to Parliament.

Dr Crompton stated that pipelines would be covered by the common carrier principle. Since everyone would want to use the cheaper pipeline, anything it could no carry would be shipped, pro-rata, along the more expensive pipeline, so everyone will end up receiving equal treatment. Inserting 'and/or' between (a), (b) and (c) would cause problems of interpretation.

Mr Davidson responded that he accepted that the common carrier principle would alleviate the potential problem, but that there was customary use of the pipelines, with one used for crude and the other for refined product. This is the reality with which the Bill must deal.

Dr Crompton asked if it is a good principle to seek to iron out such differentials. Depreciation advantages are normal business advantages. The Authority would have to decide how to deal with capital aspects of the market. The Department was reluctant to step in as a matter of law.

Mr Davidson stated that he preferred to give the Authority greater flexibility and so moved that (a) and (b) be deleted from Clause 28(3).

The Chair asked whether the Committee supported Mr Nash's suggestion that the Clause be maintained as it appeared or that it be altered as Mr Davidson suggested.

The Committee supported Mr Nash's suggestion.

Mr Oliphant asked if Clause 35(1), requiring that persons apply for licences within six months of the commencement of the Act, meant that current licences would be valid for those six months.

Dr Crompton replied that there were no current licences. After commencement, owners would have six months to apply for licences. This time was necessary for them to familiarise themselves with the arrangements.

Mr Oliphant asked if this meant that they would operate without licences for the six months.

Dr Crompton replied that they would, as before.

Formal Consideration and Motion of Desirability
The Chair stated that the Committee should consider the Bill formally and then consider the motion of desirability.

Mr Blaas moved that the Committee formally accept all Clauses as discussed and amended.

Mr Davidson stated that he thought the Committee had to consider the Bill Clause by Clause.

The Chair stated that he was not sure if the Committee could take the shorter route proposed by Mr Blaas. He did not wish the Bill to be undermined by taking this route.

The Committee formally considered and accepted the Clauses as discussed and amended. Clause 20(bb) was amended, with the words 'and in consultation with the licensee where possible' added. Clause 28 was accepted with Mr Davidson's objection to Clause 28(3) noted. The Committee accepted the whole Bill.

The Committee passed the motion of desirability.

Since the report on the Bill was not ready, the Committee agreed to consider it at the following meeting. Dr Crompton assured the Committee that a clean version of the Bill would be available by the following day.

The meeting was adjourned.