Gas Industry: briefing; NCOP Amendments to Petroleum Products Amendment Bill: voting

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Mineral Resources and Energy

19 November 2003
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

19 November 2003

Mr M Goniwe (ANC)

Documents handed out
Petroleum Products Amendment Bill (B25B-2003)
NCOP amendments to Bill
Petroleum Products Amendment Bill 2003: Suggested changes

The briefing by the Liquid Petroleum Gas Safety Association dealt with the following:
- the technical process of producing gas from crude oil/synfuel,
- the composition, mission and functions of the LPGSA,
- the supply chain from manufacturer to customer, and
- their concern that licences were proposed by the Bill.

The Department of Minerals and Energy pointed out that Liquid Petroleum gas was excluded from the proposed licencing requirements, but stressed that there was grave concern about the inability of the LP gas industry, through market means, to reach the poorer sector of the population and so assist in reducing pollution and improving safety. The excessively high cost of locally produced gas cylinders, especially when compared to imported ones, was highlighted. The fragmentation of the LP gas associations, in spite of efforts to unite, was deplored, and a serious indaba was proposed. Finally the over-long supply chain escalated costs.

The Petroleum Products Amendment Bill with the proposed amendments of the National Council of Provinces was passed. Parliament's Rules do not allow further changes to this Bill which the Department would like to introduce to achieve equilibrium and managed liberalization. Such amendments will have to be introduced as another amendment bill in the future.

The Chair expressed his regret and apology for the misunderstanding about the starting time of the Portfolio Committee meeting the previous week resulting in the meeting being cancelled.
- Agreement between RSA and Namibia: The State Law Advisor had given his assurance that the agreement which had been entered into between RSA and Namibia concerning gas trade was not in conflict with any domestic law.

Briefing on Liquid Petroleum Gas Industry
Mr Dick Townsend (Managing Director of the Liquid Petroleum Gas Safety Association) accepted the apology of the Chair and apologised for not having been on time for the previous week's meeting.

He prefaced his briefing on the Liquid Petroleum Gas Association with the comment that the Petroleum Products Amendment Bill, originally intended for the petroleum industry, more specifically filling stations, had later been extended to include gas, resulting in unintended consequences.

- The mission statement of the LPG Safety Association was to promote gas as a safe, modern, clean fuel to enrich lives. Their primary concern was safety, and they were also involved in training people, maintaining standards, promoting LP Gas for cooking (through radio stations),
monitoring that the seven-point check by dealers of customer equipment was done and liaising with the Department of Labour.
- The Association did not engage in commercial activities and was made up of voluntary membership of wholesalers, distributors, dealers and hardware shops as well as affiliate members. They were financed by the subscriptions of these, at present, 650 voluntary members and from levies on the wholesale companies.
- LP Gas had an excellent safety record, in 2003 there were only four deaths and all four involved self-inflicted action (suicide and murder).
- LP Gas was a product of the crude oil/synfuel industry and consisted of a mixture of propane and butane, compressed to 30 bar pressure and transported in high pressure vessels (cylinders). - The cylinders were expensive, approximately ten times the value of the contents (LP gas) and weighed about the same as the gas content. In practice three cylinders were required for each one cylinder in use.
- The LP Gas challenges were Availability, Affordability, Accessibility and Acceptability, especially in rural communities.

LP Gas Safety Association concerns about Petroleum Products Amendment Bill
Their concerns with the Petroleum Products Amendment Bill were:
- The envisaged licensing of distributors/wholesalers would increase the cost of servicing;
- Additional licencing was superfluous;
- Policing of licences of the 20 000 retailers would be impractical;
- The restrictions on the number of dealers, as proposed by the Bill, could lead to higher prices, because it was anti-competitive; and
- The preferential supply status for synfuel could result in higher cost and LPG was not a strategic fuel for South Africa.
He repeated their main concern was the effects that the Bill could impose on retailers.

Response by Department
Dr R Crompton (Deputy Director-General Hydro-carbons & Energy Planning, Department of Minerals and Energy) regretted that the Gas Industry had not consulted his Department before this presentation, because their objections were spurious and based on a lack of understanding of the Bill.

He said that more information in the briefing on the structure of the LPG market would have been helpful. The Department had done a survey in Mamelodi and found a difference between the lowest and highest prices for LPG ranging as much as 76%, which was unconscionably huge.
Furthermore, in general terms, it was a sad fact that "LPG stops where the tar (road) stops".
The Department welcomed the World Summit on Sustainable Developments and the LPG Challenge. He felt that there was a lot to do in South Africa where the average per capita consumption of LPG was much lower than in most countries. The neglect of the considerable opportunities for LPG marketing and consequent paraffin market distortion was what led the Department towards introducing the Bill. Low-income households were the targets -- they are not well serviced, whereas the industrial and high-income markets had been serviced reasonably well.

The Bill made it clear that licencing was only for designated products, and that LPG was excluded
which was why he thought that the objections were spurious. If the Minister should decide on granting concessions for LPG in designated areas, such as was done for electricity, then obviously the price would have to be regulated, because a monopoly would then exist. Also the size of the container would be regulated. The challenge was to reduce the number of cylinders in use from three cylinders per cylinder actually in use, as quoted. It could be done, and would reduce prices and expand the market. It was unfortunate that the industry was resisting this opportunity instead of supporting it.

Mr J Nash (ANC) suggested that it would be possible to lower the cost of containers by two-thirds, like in other countries. People should be given the opportunity to distribute LPG by bicycle, transporting two cylinders at a time. He was concerned about the huge discrepancy between the wholesale and the retail prices of LPG which resulted in inflating it three times higher than it should cost. Dealers have set the price three times too high. It was necessary to police these firms to ensure that LPG became affordable.

Mr I Davidson (Democratic Alliance) commented on the 76% difference in prices in Mamelodi cited by Dr Crompton. which he thought could be attributed to many factors such as accessibility, lack of real competition, etc. If it was indeed the case that LPG was not a designated fuel in terms of the Act, then the comments from the industry were not appropriate. Electricity was indeed a monopoly because there was only one supplier, while in the LPG industry there was competition, so why regulate here? There were a lot of ifs and buts and one wondered how real the problem was.

Mr E Lucas (Inkatha Freedom Party) regretted that there was often no control where a caged area for cylinders was required, and that the availability of LPG stopped "where the tar ends". He agreed that the future market was in the rural areas. He suggested that the stakeholders meet and sort out the misunderstandings.

The Chair commented that cooking of food posed the most dangers and that women are predominantly engaged here. He enquired if there were other associations similar to LPGSA. He was encouraged by the recent amalgamation of business associations and felt that new wine could not be poured into old bags and suggested an inclusive indaba to pull together all the associations in this field. It was critically imperative to get the involvement of all those people.
Shack fires were a concern, and if affordability could be attained, the target market is there, and then the higher volumes could help to reduce prices. People who were formerly excluded had to be included to make a truly South African industry in character and content. If women had been part of the delegation it could have helped to reassure the Members. Manufacturing affordable containers had to be possible.

Mr Townsend referred to experience in India and China where a smaller 6 kg cylinder was used. A lot of experimentation was done in South Africa, and one of the problems was the cost of steel from Iscor, which based its prices on import parity. Furthermore Iscor was not really interested in producing such a small run of steel. Cylinder specifications were based on international standards (also SABS) for 30 bar pressure which could not be compromised. Sub-standard cylinders in China and India had killed thousands of people, and they are also moving towards adopting international standards. There had to be other innovative ways of cheaper handling and cheaper cylinders as was done when electricity was introduced into rural areas. A limited number of entry-level appliances should be made available, including the cylinder.

Mr Keith Bonynge (General Manager - Handigas: African Oxygen Limited) said that cylinders manufactured to the same quality standards could be imported at half the price of the locally produced product.

Mr Townsend described the supply train from the main depot which filled the cylinder through the distributor and dealer to the retailer, where values were added but percentages for profits were also added on.

Mr Davidson objected to the institutionalizing of this set-up and enquired whether there was no way of cutting this out.

Mr Townsend replied that the basic problem was that the supply chain was so long. If, at the end of the tar road, another dealer had to service the customers, he would then be sixth in line. The challenge was to reduce the chain, but it could not be easily done.

Mr Nash said that there had been a lot of talk but no action about the expensive cylinders. He asked why there was an import surcharge for importing cylinders, and how much money was lying in the deposits for cylinders. He suggested that a meeting with the suppliers be arranged to reduce the price of gas.

Ms N Mathibela (ANC) asked about three cylinders, whether one was a free gas cylinder.

Mr N Ngcobo (ANC) wondered why, seeing that imported cylinders cost half-price, the local cylinder could not be produced for that price. He suggested that a task team do research to find a way to reduce costs.

Mr Bonynge explained that the customer paid a deposit on one cylinder, which amounted to one-third of its value, currently R 75,00, for life-long use while it was being maintained by the principal. If the customer exited the market, the deposit was returned. The deposit had to be higher than its scrap value to retain it for the industry. With reference to the differences in charges for gas (76% in Mamelodi) it had to be born in mind that much depended on where one shopped. Buying milk at a supermarket as compared to a filling station likewise produced very different prices.

The Chair commented out that removing VAT from paraffin would only enrich the rich and not the poor for whom it would be intended.

Mr Bonynge stressed that addressing the supply train to the rural community to bring down the cost of LP gas was crucial. Gas had to be able to compete with paraffin in terms of price and not only in terms of being cleaner, healthier and safer.

Mr Nash enquired about the time frame for addressing unifying the industry.

Mr Townsend explained that for two years the LPGSA had been endeavouring to incorporate the African Minerals and Energy Foundation (AMEF) without success. They had changed their structure, allowing for two directorships for AMEF but it had not been taken up. Their invitation to the LPGSA conference was not taken up. LPGSA needed "the new thinking" and had a lot of infrastructure to offer but their membership was voluntary and nobody could be forced to join them. They noted that they had had a meeting the previous day.

The Chair suggested that what was needed was a serious indaba leading to a new formation with new thinking. They were talking across each other.

Ms B Tinto (ANC) was concerned about the fact that no women seemed to be featuring at all.

The Chair wanted to know what kind of science other countries had that brought about that prevented South Africa from competing.

Mr Townsend replied that it was simply steel and labour and referred to India which had cheap steel and labour. It was up to members to delegate women as their representatives on the LPGSA committee. They were not requiring any organization to disband before joining them.

Dr Crompton replied to Mr Davidson's question that the reason for the possible regulation was to arrive at cleaner fuels by encouraging the use of gas in lieu of wood and coal, and if the market could not achieve that, it might then be necessary to regulate to bring the industry into those areas and achieve economies of scale. Contracting the supply chain would be important, and a conference with stakeholders was envisaged for early in 2004.

He continued that the issue was more an urban issue than a rural one. In urban areas paraffin and coal, which polluted the environment, could be replaced by LP gas, whereas in rural areas wood was obtained at no cost. It had to be noted that regulation was just another option for use if the market did not deliver the desired outcome. In South Africa the LP gas industry seemed to be distorted in that the retail sector was not fully developed like the service stations, and the association consisted mainly of manufacturers and wholesalers.

The Chair said that the planned indaba would be very important and that the Portfolio Committee should be deeply involved. He ruled that the Afrox briefing on Black Economic Empowerment in the gas industry be deferred until next year and the Health Portfolio Committee would be invited as their recent BEE deal involved medical care.

NCOP proposed amendments to Petroleum Products Amendment Bill
Dr Crompton explained the amendments introduced in the National Council of Provinces (see document) which were mainly to accommodate the fact that some companies were involved in both manufacturing and wholesale activities.

The State Law Advisor stated that the amendments were legally sound.

Further amendments to achieve equilibrium and managed liberalisation
Dr Crompton noted that these suggested changes (see document) had been referred to the State Law Advisors to determine whether the Committee, under parliamentary rules, had the power to address these provisions. Their ruling was that they were, provided that it was strictly relevant to the amendments proposed by the NCOP. As some words were not strictly relevant, the Committee had not the power, or at least the argument would leave a grey area. The State Law Advisors recommended the preferential route was the Committee report the current Bill to Parliament. A second amendment bill would have to be tabled after an interval.

The imperatives for moving forward were based on eight principles which were briefly introduced, of which equilibrium was emphasized. Among the problems was the overabundance of retail service stations. It was desirable to increase the volume throughput. Capping the number might have unintended consequences such as the Minister having to regulate more rather than less, but market forces were preferable. Allowing more service stations would improve competition, perhaps with minimal volumes. The principle is to let the market regulate itself, but retain the ability for the Minister to regulate. For example, when the inland market can run dry because rural demand is scattered with low volumes and special provisions might be required.

The justification for establishing new service stations was outlined. For example, policy principles such as each service station had to be economically justified; a minimum volume of 400 000 liters per month; the wholesale margin; incentive regulation, as building blocks towards a successful managed liberalisation strategy.

The Committee was taken through these proposed amendments. It was stressed that the document was not the final draft.

Voting on NCOP proposed amendments to Petroleum Products Amendment Bill
The Bill, with the NCOP amendments, was passed with no objections.

Meeting adjourned.


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