Gas Bill: Shell & Sasol submissions; SA Diamond Board: briefing

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Mineral Resources and Energy

06 June 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


6 June 2001

Chairperson: Mr DM Nkosi

Documents handed out:
Shell Submission on Gas Bill (see Appendix 1)
Sasol Submission on Gas Bill (see Appendix 2)
South African Diamond Board Powerpoint presentation

Shell and Sasol made submissions on the Gas Bill. The questions directed at Shell and Sasol related to transmission pipelines, competition and licencing.

The South African Diamond Board expressed its support for the draft Mineral Development Bill and updated the committee on developments within the Board and the different agreements they have reached, notably the Section 59 agreements and the settlement agreement with DVIC Valuations. The SADB contended that budget control and corporate governance were on track

Shell presentation
Dr S Paetke addressed the following issues in the Gas Bill that Shell thought are important for the Committee and the Department to consider:
- Framework for Historically Disadvantaged South Africans (HDSA) or Black Economic Empowerment (BEE) to participate in the industry.
- Conditions and terms of licence and non-discrimination
- Mozambique Gas pipeline agreement
- Private sector participation the state-controlled gas transmission pipelines
- Health, safety, environmental and labour standards
- Activities requiring a licence – Liquefied Natural Gas (LNG)
- Exemptions from the Bill
[For details please refer to attached submission]

Mr I Davidson (DP) asked about the terms and conditions of licences that are set out in clause 21 of the Gas Bill. Does Shell believe those conditions are specific and clear enough to be accepted in the industry? If not, what additional terms and conditions would Shell want in the Bill in order to ensure that the private sector is induced into this industry.

Dr Paetke said in the short-term there could be reluctance but perhaps in ten to twenty years time there would be a matured industry and initial investments would be recovered. Subsequent investments are not small, for instance, on the West Coast they are talking of investments of 2 to 3 billion US dollars. All those investments have to hang together by contractual, legislative and regulatory means.

Mr Davidson asked for clarity on point 3.3 of Shell’s submission

Dr Paetke replied that Shell is happy with the way the draft Bill has been rephrased in terms of discriminatory practices. However, there is a core issue: investors in pipelines, gas suppliers and consumers will need some understanding in matters of pricing. What is important is to open up a transparent market for the product. When they sell gas to consumers Shell look at gas prices against other sources of energy. He said they are asking for the market to be opened further for competition.

Prof. Mohamed (ANC) commented that the establishment of a State gas company in Clause 20(1) is not clear and the Department should provide more details in that clause.

Mr Davidson noted that from the submission, it seems as if Dr Paetke believes that there should be a single regulator governing gas, electricity and so on.

Dr Paetke replied that Shell’s original submission had suggested that there should be a combined electricity and gas regulator. They have not picked up on that point again because it was not included in the Bill. They thought that if there could be a single regulator that would be an advantage in terms of sharing of skills and expertise. It will mean that whoever regulates can price natural gas in accordance with all the alternatives.

In reply to a question by Prof. Mohamed about the competition between gas and electricity, Dr Paetke said they would like a situation where agreement is reached on pricing. Pricing will depend not only on the agreed terms of the contract, but also on the alternatives whatever they might be.

Mr Davidson asked if Dr Paetke wanted to encourage competition between industries with only a single regulator. If there is a single regulator responsible for regulating both electricity and gas industries, this means that there may be less price competition.

Dr Paetke said he understood Davidson’s logic that it does not necessarily need to be a single regulator as long as the legislation is clear about who is regulating which industry and that competition goes on smoothly.

The Chairperson commented that for the committee the most challenging issue is the availability of gas at affordable prices and creating more access to different energy sources. However profit versus affordable prices is not an easy discussion.

Dr Paetke said he agreed with the chairperson that they have to prove that gas could be supplied to all customers at affordable prices.

Mr Davidson pointed out that Clause 16 (2)(e) states that any application for a licence must include "a general description of the type of customers to be served and the tariff and gas price policies to be applied". It should not be the regulator who determines the return that the industry requires. This clause does not spell out what is actually being looked for, whether it is an investor or what. There is a need for greater clarity in the clause because that is an investment decision that the Department wants to take.

Dr Paetke said it depends on so many other elements such as affordable prices and volumes. It is an investment that they are looking for, on a case by case basis. Shell tends to take a very long-term yield on their returns and investments. This is one of the reasons why they are particularly strong in gas. Gas is a specific energy source and huge investments are required to bring gas to customers and the West Coast is an example of that.

The Chairperson noted that the issues being discussed such as competition, returns, investment and trade were linked and had been raised in previous meetings. The committee needed to ensure that these issues are properly accommodated in the legislation. However he does not know which part of the Bill needs to be changed, to what extent and how.

Dr Paetke drew attention to point 3.5 of Shell’s submission that states that it is not clear who retains title and risks through the pipeline system. In some instances the legislation in other countries has been set up where the pipeline company retains the risk and title and they do not transfer this back to the traders. Shell proposed that a transmission company should be responsible for the safe and proper transmission of gas, but that title to the gas should remain with the producer until delivery to a distribution company or an end-user.

Ms Motobatse wanted to know what pipelines Shell is referring to in point 8.1.

Mr Kobedi from Shell replied that these pipelines are private assets that are owned by the refineries. They do not believe that such private assets should be subject to regulation by the Gas Regulator. The reason is that they believe there is no threat of a monopoly situation arising from the operation of those pipelines. Thus they are proposing that these pipelines should be excluded from regulation.

Sasol Presentation
Mr Lean Strauss, General Manager of SASOL Gas, said that they believe there is a need for a Gas Bill that would ensure the following:
- the orderly development of the natural gas industry in South Africa
- facilitating investment in the pipeline gas industry
- creation of sustainable trade and regional economic development
- facilitating the introduction of an investment friendly alternative energy carrier.
- setting safety, health and environmental standards for the pipeline gas industry.
- the regulator has unfettered powers in awarding licences.
[For details, refer to the submission]

The Chairperson noted that a committee delegation of fourteen members would soon be visiting the gas fields in Mozambique via Secunda and they would be interacting with Sasol. The discussion from this meeting will help them get a clear sense of issues relating to Shell’s involvement in Mozambique.

Mr Lucas (IFP) asked why SASOL believes the fifteen bar cut-off is not practical.

Mr Strauss replied that South Africa has no reticulation distribution systems compared to countries in Europe. In Europe very limited gas is sold to households. South Africa sells large volumes to big factories and what they have in the distribution network they supply to industries such as ISCOR. This results in the pressure of their distribution exceeding fifteen bar and going as far as eighteen bar.

Mr Nash asked why a closed ended pipeline and an open ended pipeline on the other side?

Mr Strauss said currently they are serving 42 million GJ in the local market. For the project to be viable a market of 120 million GJ must exist. They have calculated that there is still a another 40 million GJ for which they must find a market.

Mr Oliphant (ANC) asked what timeframe do they attach to the cycle of infancy to maturity that Sasol has identified.

Mr Strauss replied that he does not have a definite answer. The best they can do, is to look at international experiences and see how long it has taken to develop in those countries.

Mr Davidson wanted clarity from the Department on how they had reached a decision on the the issue of the fifteen bar.

Dr Crompton (Department) said they have received a number of submissions on this and some people wanted certain criteria and other did not. However, the Department had to make a choice and the fifteen bar is the international standard.

Mr Strauss concluded that Sasol believes that gas should be beneficial for all stakeholders.

South African Diamond Board
Mr Abe Chikane told the committee that the SADB is a regulatory body also involved in the promotion of the diamond industry. They have been involved in the past month in consultative processes with key stakeholders in the industry to see how the industry can be improved further. In all these consultations they have indicated that they endorse the Mineral Development Bill and the SADB is committed to transformation and the creation of jobs. His presentation focused on:
- Contribution into the Mineral Development Bill
- Status of the section 59 agreements
- Settlement agreement with DVIC
- Conflict diamonds in Kimberly

Mr L Mabombo, the acting Chief Executive Officer, recapped on the 2 August 2000 presentation made by SADB to the Committee. He also outlined the budget objectives of the SADB for the financial year 2001/2002.

[For details, refer to SADB document]

Ms Motabatse asked with regard to the opening of an office in the Northern Cape, what will happen to the diamonds that are lying in some areas in the Northern Province, is the ASDB going to open offices there as well? She said opening of offices to the Northern Province could bring about an emergence of new miners from the disadvantaged communities.

Mr Mabombo indicated that with the exception of KwaZulu-Natal the surface of South Africa is full of diamonds. Therefore it is unacceptable to have an office only in Gauteng. The Act that governs them recommends that they open up offices in the Northern Cape and other areas where diamonds are found. He said they would love to have offices in all the regions where diamonds are found in order to be able to service their clients with ease.

Mr Davidson asked why some of the recommendations from the Taljaard Report have not been implemented with regard to corporate governance. He said that corporate governance is still a major problem within the Board.

Mr Chikane said he had requested Mr Davidson to send his questions in advance because he knew that this question would come from him. He said it is important to note that the board complies with corporate governance because they wanted a board that functions smoothly and professionally. Specifically when it came to the settlement agreement, the matter was very controversial. They had to resolve it within and outside the board and they had to involve all the parties concerned and ended up with a possible settlement. They presented this settlement to all board members and finally they had a vote. Out of that, the settlement was ratified

Mr Davidson questioned the issuing of licences. He alleged that some licences are being issued to some friends of the members of the Board.

Mr Mabombo said they did find some irregularities in terms of issuing of licences. They have started a forensic audit and a report to that effect will be tabled with the board in a week’s time. He said that they had invited Mr Davidson to come but he had never pitched up. He added if members were interested in the outcome of that forensic audit, it would be available on Friday June 15, 2001.

The Chairperson urged Mr Davidson to go to the Board when he is invited.

Prof Mohamed said it is not only Mr Davidson who should go to the Diamond Board, all committee members would like to be briefed about the situation on the Board.

The Chairperson said that the point made by the Board - and he supported it - was that there is an open invitation for any committee member. He added that because of the questions that Mr Davidson had raised with the Minister, the Board had decided to invite him.

Mr Davidson said he needed explanation from the Board as they came to the meeting to present a budget whereas he believed they have no budget to present to the committee. He said he knows very well that if one looks at the history of the Board in terms of what the original budget and financial levels were, there is a massive difference. He wanted to know what the financial status of the Board is now.

On the question of budget, Mr Mabombo said it is important to understand the context in which they operate. Mr Davidson is making reference to the budget of the Board seven years ago when it was R11 million and the Board was issuing 30 licences per annum. Now the Board is issuing about 60 licences per session four times a year. That is where one could see that the cost structure of the Board has changed significantly.

He said the Board is currently running at a budget of R13 million and this is the budget that they account for. The Auditor-General would be presenting its highly gleaned audit report to the Standing Committee on Public Accounts on the Board’s financial year ended March 2001.

Mr Davidson also wanted to know the position of Dr Sibiya?

Mr Chikane replied that Dr Sibiya has been a CEO of the Board for four years and recently he has been appointed as a senior adviser to the Minister. He did not resign nor was he fired from the Board, as other sources would believe.

Mr Mongwaketse argued that the question of empowerment in the diamond industry is not going well. He said perhaps the problem might lie with the licencing. He urged the Board to strategize on how they could empower the disadvantaged communities in the industry.

Mr Mongwaketse again wanted to know the status of the Section 59 agreement - what are these agreements?

Mr Temane (SABD) replied that Section 59 agreements are supply agreements that the Board enters into in order to facilitate a consistent supply of diamonds to manufacturers.

Mr Oliphant asked when the Kimberly office would be opened. Regarding SADB’s view that an independent evaluator is needed, is this because the other one did not work? Who is doing evaluation for the Diamond Board?

Mr Mabombo replied that they think that the office will be operating by the end of July 2001. They decided to open offices in that area because they want to know the markets and be as close as possible to them.

He said there is a need for an independent evaluator because the Board is of the opinion that there is a very limited resource of such expertise within government. It is important that there is a technical expert who will assist government with evaluation and also ensure that there is empowerment within the diamond industry. The current evaluator has a four-year contract signed in 1999 which will expire towards the end of 2002.

Mr Mongwaketse asked the Board whether they are monitoring the situation in the markets. Also what is the Board’s relationship with the police diamond squad? Thirdly, is there a moratorium on all people who were prosecuted for stealing diamonds before 1994?

Mr Mabombo replied that there are members of the South African Police Services (SAPS) who sit on the Board. There is also a project linking Customs, the South African Secret Service and SAPS ensuring that the Board has centralised statistics relating to the diamond trade.

The Chairperson noted that there would be a departmental workshop on Liquid Petroleum Gas (LPG) on 14 June 2001 in Pretoria.

The meeting was adjourned

Appendix 1:


6 JUNE 2001

Regulatory Certainty and Independence
1.1 Regulatory certainty and independence are two key requirements for investor and consumer confidence in any industry, particularly a pioneering one such as the emerging gas industry in South Africa. The level of regulatory certainty and scope for intervention by the Minister of Minerals and Energy ("the Minister") should therefore be subject to the legislative procedures currently entrenched in South Africa’s Parliamentary process. This process ensures that the constitutional objectives of openness and transparency are upheld and ensures extensive parliamentary participation in any changes to legislation and in the appointment of candidates to the regulatory authority.

1.2 In particular, it is proposed that:
1.2.1 further to clauses 5, 6 and 7 of the Bill, any appointments or decisions that influence the constitution of the Gas Regulator, should be made by the Minister from a list of candidates selected by the Portfolio Committee after calls for public comment;

1.2.2 further to the provision in clause 20 (1), the Minister should consult with the Gas Regulator before directing that a licence be issued to a State-controlled entity responsible for the establishment and operation of a specified gas transmission pipeline, and that the Minister should also consult with the Portfolio Committee after the latter’s consultation with stakeholders of the proposed transmission pipeline;

1.2.2 the consultation required by the Minister pursuant to clause 34 (2) prior to promulgating any regulations contemplated in clause 34 (1) should be expanded to include consultation with the Portfolio Committee after the latter’s consultation with the Gas Regulator and stakeholders likely to be affected by the proposed regulation or regulations.

1.3 Acceptance of the recommendations in paragraphs 1.2.1 to 1.2.3 above will enhance the desired independence of the Gas Regulator and enhance both regulatory certainty and confidence in the legislative process because of greater consultation with the Portfolio Committee and stakeholders.

2. Framework for the Implementation of BEE or HDSA
2.1 Despite the object contemplated in clause 2 (d) regarding the "promotion (of) companies in the gas industry that are owned or controlled by historically disadvantaged South Africans by means of licence conditions so as to enable them to become competitive", there is no further reference to this object other than 34 (1) (u), which stipulates that the Minister may make regulations regarding "mechanisms to promote historically disadvantaged South Africans".

2.2 Shell fully subscribes to HDSA or BEE involvement in the South African gas industry. However, there are no clear provisions in the Bill regarding the criteria, terms and conditions relating to the issue of licenses to HDSA. We assume that these details will be contained in the detailed regulations, to be established by consultation with the Gas Regulator.

2.3 It is proposed that the Bill should include some provisions that spell out the principles for HDSA or BEE participation in the gas industry, as a condition of licence in clause 21 (1). These principles will then form a predictable basis for any commercial agreements. Shell would welcome further consultation in this regard.

3. Conditions & Term of Licence and Non-discrimination
3.1 The provisions contained in clauses 21, 22 and 23 are essential to ensure that investment in gas infrastructure takes place. These provisions should be precise, predictable, fair and stable to ensure the confidence of all stakeholders across the gas value chain, including customers, investors and financiers.

3.2 It is Shell’s belief that the provisions that are meant to regulate conditions concerning third party access to gas infrastructure are not clearly defined and in some instances contradictory. For example:

3.2.1 It is not evident what the "prescribed manner" referred to in clauses 21 (b) and (g) is. It is assumed that this will be formulated in detailed regulation. Greater clarity is required in the Act.

3.2.2 Clauses 21 (e) and (i) relating to the bearing of additional costs for access to infrastructure appear to be contradictory. In Shell’s submission to the Department, it was stated that additional costs for access to infrastructure must be borne by the third party access-applicant. Third party access requests before development starts should incur a pro-rata split of total investment and not just the incremental capital cost.

3.2.3 No provision is made for safety, commercial and operational considerations. Specifically: There is no recognition of contractual commitments to supply gas to customers of a specific specification. There is no compensation to suppliers of gas for changes to the energy value of gas in the co-mingled stream after third party access to shared infrastructure.

3.3 The Draft Bill defined "non-discriminatory" in the definitions clause whereas the Bill now defines discriminatory practices in more detail in clause 22, specifying objectively identifiable and justifiable criteria based on efficiency factors as was suggested by Shell in its submission to the Department. This is commendable from a competition law perspective. However, it should be added that competition practices should not be limited to differences within an energy type such as gas, but also between gas and other energy types such as electricity, coal, liquid fuels, etc. because of the substitutability thereof with gas. The need to allow price competition between different energy types is therefore also essential to ensure the growth of the piped gas industry and the penetration of existing energy markets, whether for primary consumption (e.g. fuel for power generation or feedstock for gas-to-liquids manufacture) or for final consumption by end-users of energy.

3.4 Clarity is required on the interpretation of the provisions for "Term of licence" in clause 23. This is essential for investors and financiers alike to determine whether the provisions contemplated will provide an equal basis for various licensees to earn a fair return on investment. In particular, it is not clear what the basis will be by which the Gas Regulator determines the period of licence and what criteria will be used to establish whether investors have recovered their investments.

3.5 The Bill is not explicit on where the transfer of risk and title of gas takes place between the various activities requiring a licence, notwithstanding the definition of "trading". In Shell’s submission to the Department this comment was omitted and represents an oversight not previously considered. It is assumed that transmission companies, whether private or public sector entities, or a combination of both, will only enter into third party contracts for the transportation of gas with producers and/or distribution companies. It is proposed that a transmission company should be responsible for the safe and proper transmission of gas, but that title to the gas should remain with the producer until delivery to a distribution company or an end-user. A new clause should be inserted in this regard. Shell is willing to expand on this proposal should it be requested.

4. Mozambique Gas Pipeline Agreement
4.1 Shell recognises that certain exceptional provisions may be necessary to promote investment in pioneering energy projects and to preserve existing - freely negotiated - commercial agreements, provided that the provisions in no way compromise the evolution to mature and competitive energy markets due to advantages entrenched in legislation. The merits of obliging the Gas Regulator to issue licenses to entities contemplated in the Mozambique Agreement as proposed in clause 36 of the Bill, and of providing that the agreement binds the Gas Regulator for 10 years after first gas is received from Mozambique, cannot be evaluated without the opportunity to review the contents of the Mozambique Agreement.

4.2 In order to ensure that the objects of the Act, including those set out in clause 2 (b) and (f), are achieved, it is essential that conditions imposed in respect of the Mozambique Agreement in clause 36 should be consistent with the Act, especially the provisions contained in clauses 20, 21, 22 and 23.

5. Private Sector Participation in State-controlled Transmission Pipelines
5.1 Clause 20 (1) (a), (b) and (c) describe the conditions under which "the Minister may direct … that a licence be issued to a State-controlled entity for the establishment and operation of a specified gas transmission pipeline". This could be problematic in that it allows disparate treatment of public versus private sector entities. Shell believes that the possibility exists for public-private partnerships in owning, building and operating transmission pipelines, including HDSA or BEE. Provisions should be made for this in accordance with clearly stated principles and conditions.

5.2 It is proposed that provision be made in the Bill for the consideration by the Gas Regulator of private sector participation in transmission pipelines as a condition of licence for the State-controlled entity before issuing a licence in terms of 20 (1). The outcome of this consideration, with reasons, should be passed on to stakeholders of such a transmission line for discussion before making a final decision regarding the desirability of including a private sector entity in the State-controlled transmission pipeline.

6. Establishing minimum Labour, Health, Safety and Environmental Standards
6.1 Clause 16 (2) (f) of the Bill stipulates that any licence application must include "the plans and ability of the applicant to comply with all applicable labour, health, safety and environmental legislation". Furthermore, according to clause 18 (b) of the Bill, the Gas Regulator "may direct the applicant to alter the plans … in order to comply with applicable labour, health, safety and environmental legislation".

6.2 It is proposed that the Bill should be more explicit in referencing the applicable legislation. Internationally recognised technical and operating codes should be defined and applied to ensure consistency of standards during market and infrastructure development. Amongst others, this referenced legislation should include:

6.2.1 with regard to applicable labour legislation: the Occupational Health and Safety Act, 1993; the Compensation for Occupational Injuries and Diseases Act, 1993; the Labour Relations Act, 1995; and the Basic Conditions of Employment Act, 1997;

6.2.2 with regard to health: the Atmospheric Pollution and Prevention Act, 1965; the Hazardous Substances Act, 1973; and the Health Act, 1977;

6.2.3 with regard to safety: the Mine Health and Safety Act, 1996; and

6.2.4 with regard to the environment: the Environmental Conservation Act, 1989; the National Water Act, 1998 and the National Environmental Management Act, 1998.

7. Activities requiring a licence – Liquefied Natural Gas
7.1 Liquefied natural gas and re-gasified liquefied natural gas are included in the definition of "gas". However, the definition of "production" makes no reference to the manufacture of LNG or re-gasification of LNG, nor any of the associated facilities such as bulk loading or unloading terminals. Furthermore, in the activities requiring a licence described in 15 (1) (a), (b) and (c), no mention is made of the export or import of LNG and associated liquefaction and re-gasification activities.

7.2 It is proposed that the Bill should expand the activities requiring a licence to include those activities associated with the export and import on LNG. Failure to do so would require that LNG and re-gasified LNG should be deleted from the definition of "gas".

8. Exemptions from the Bill
8.1 Certain existing gas pipelines are owned by private sector companies and are not used to deliver gas to end-users directly. These pipelines include those within refineries or as extensions of refineries, and/or those specifically used for loading or discharging gas to or from a depot and/or harbour.

8.2 It is proposed that those pipelines contemplated in paragraph 8.1 should explicitly be exempted from the Bill.

Appendix 2:

Sasol Gas Ltd
06 June 2001

In dealing with the Gas Bill Sasol has identified that it will be difficult to reconcile some of its objectives with those of Government, unless certain peculiarities pertaining to the nature of investment decisions in the South African energy market are taken into account first.

In our view the Gas Bill, as it stands, would lead to limitations on the abilities of investors to recoup large capital investments made in much needed natural gas infrastructure. It will also hamper investors’ abilities to service the long-term debts and commitments incurred in developing this infrastructure.

Although the Bill contains a number of positive aspects, we believe these are outweighed by the negative impacts, which are such that the objectives of the Bill will not be met. Broadly speaking the negative impacts are a failure to recognise the different phases of development within this industry and a number of onerous provisions within the following broad categories:
- The definition of distribution.
- The definition and treatment of pricing provisions and their relationship with the Competition Act.
- The definition and operation of eligible customers.
- The uncertainty as to the duration of the link between trading and distribution.
- Uncertainty arising from the minister and the regulator’s discretion and powers over various issues e.g. the term of license issued.

Sasol believes that in line with energy policy objectives, the Mozambique-South Africa natural gas project could potentially enable the achievement of:
- Regional economic development and trade.
- Increased energy diversity and improved security of energy supply.
- Improved access to an environmentally friendly energy source.
- The advancement of competitive black empowerment initiatives in the gas industry.
as a minimum, if the above-mentioned shortcomings are rectified.

In drafting these comments, Sasol has persistently tried to adopt an approach that is aimed at finding harmony, to the extent possible, between its own objectives and those of the Governments of Mozambique and South Africa.

As a major user and supplier of energy in Southern Africa, and the primary producer and distributor of pipeline gas within South Africa, Sasol aims to produce natural gas from several gas fields in Mozambique and economically transport it to markets within Mozambique and South Africa.

Sasol aims to assemble a financially viable project that will:
- Fulfil shareholders’ requirements,
- Be competitive with Sasol’s vast array of competing international projects,
- Supply gas to customers at prices that are cost competitive in relation to their current energy alternatives,
- Balance the requirements of all other stakeholders in both countries and,
- Serve customers’ needs.

In trying to achieve these aims, the following needs to be taken into account as well:
- The pipeline gas industry in South Africa currently supplies less than 2% of the South African net energy consumption compared to approximately 20% in international energy markets.

- Sasol is ideally positioned to enhance the role of gas in the Southern African energy sector and achieve greater energy diversity in both countries by creating the critical mass of consumers that will underpin the project by:
· substantially augmenting its existing gas supply to its customers
· and by supplementing its coal feedstocks to its chemical plants with natural gas.

(c) - At this stage Sasol is potentially the only party that is able to sign the necessary take-or-pay agreement with the gas field/s and the ship-or-pay agreement with the pipeline, and thus provide the required base-load.

Natural Gas would not only broaden the energy mix but could also provide a cost efficient and environmentally friendly source of energy for industry in South Africa. However, the investment that is required from Sasol to bring such a project to fruition is extensive and so are the financial and business risks attached to developing a viable and sustainable gas project:

2.3.1 This project requires a massive investment of more than R10 billion.

2.3.2 Sasol will be assuming considerable risk by underwriting the project as only 80mGJ/a (including the portion to be utilised by its factories) of the 120mGJ/a required for the project is currently available in the market.

2.3.3 Sasol and financiers are particularly concerned about the applicable regulatory regime during the debt service period.

While Sasol has been able to secure a 10-year regulatory dispensation, under which it may be exempted from some of the most stringent provisions of the Gas Bill. Sasol’s obligations within the project (to financiers, gas fields, the pipeline and customers) extend to far longer periods.

- If Sasol were to proceed with the project under the current restrictive provisions of the Bill, it would still place its obligations to the gas fields and pipeline at the mercy of gas marketers/traders who neither would have made any capital investment, nor provided any guarantees or commitments to underwrite investments.

- These marketers/traders will take advantage of the infrastructure established by Sasol and others and offer marginally lower prices to attract the most lucrative customers.

- This would mean that even a small loss of volume or an erosion of gas prices will have a large impact on the ability of initial investors’ to service the pipeline loans or to meet their take-or-pay and ship-or-pay commitments.

2.3.4 South African coal is among the cheapest in the world, and this would make the task of making natural gas attractive to large sections of industry impossible.

2.3.5 Gas will have to earn its place within the energy sector where there is already intense inter-fuel competition.

2.3.6 Unlike in most developed gas industries, due to climatic considerations and the low cost of electricity, the household market will not provide a sufficiently viable supplementary base-load for gas.

2.3.7 Large scale power generation, which often forms the main base-load for natural gas is generally not an option in this case.

2.3.8 The development of pipeline infrastructure to both transmit the gas from the gas fields in Mozambique and to distribute it to points of ultimate consumption requires large investments.

Clearly Sasol will only consider such investments if it were satisfied that it would not prematurely put its investments at risk by undertaking this project. Our view is that the Gas Bill adds to these risks rather than helps to mitigate them.

The main elements that influence investor’s views on investing in gas infrastructure can be summarised as follows:
- The existence of an investment-friendly, stable and predictable regulatory framework.

- Certainty over market-determined, investment-inducing price levels over the long-term.

- Market stability and the ability of investors to aggregate as well as maintain markets over the long-term.

- Linked to this is the ability of investors to develop credible base-loads and their ability to abide by take-or-pay and ship-or-pay contracts.

The bill mainly suffers from a failure to provide potential investors with certainty about their ability to benefit over the long-term from any investment that they might consider making in the gas industry. Sasol has limited its focus to the following broad areas of shortcomings:

3.1 Distribution (defined in section 1 of the bill)
The pressure restriction of between 2 bar and 15 bar gives rise to the following problems.

3.1.1 The economic viability of gas distribution relies heavily on the ability to aggregate customers. In South Africa this customer base is predominantly industrial and therefore such a market would typically depend on the aggregation of both small and large industrial customers. Because large investments are required to establish viable distribution networks, any risk of losing customers renders the whole distribution area uneconomical.

3.1.2 While the introduction of a lower pressure limit of 2 bar is understandable in the context of the need to distinguish between distribution and reticulation, an upper limit will not be necessary since distribution can be adequately defined by function.

3.1.3 In the interest of providing security of supply for its customers and increasing the distribution system’s "survival time", Sasol operates its distribution networks at a pipeline pressure of 30 bar. This means that at any one time Sasol’s distribution networks can have distribution pressures ranging between 2 bar and 30 bar.
This is done because:

it is the most optimal way of operating these pipelines given the vast distances between the source of supply and customers,

and to improve security of supply to customers by creating a buffer against unexpected interruptions of gas supply.

3.1.4 This pressure cut-off means that in future the design of distribution systems will not be based on what private investors optimally determine to be the most efficient distribution system under the given circumstances, but on what is arbitrarily determined by the act. This will lead to sub-optimal system design.

Government’s motivation for introducing a maximum pressure limit (15 bar) is unclear, but this provision will clearly interfere with Sasol’s ability to aggregate customers within viable distribution areas and increase the risks of prematurely losing large-volume customers to third parties. It will also penalise Sasol for having chosen to operate its current pipeline system at 30 bar.

We would recommend it is sufficient to define pipelines in terms of the functions that they perform rather than their pressure characteristics. Distribution should therefore be defined as the "transportation of gas through local or regional pipeline networks to points of ultimate consumption and/or to reticulation systems…"

3.2 Pricing regulation and the Competition Act
Sections 4(g) and (h) list the regulation of tariffs in terms of section 21(1)(n) and the monitoring, approving and regulating of tariffs as some of the functions of the Regulator. Section 21(1)(n) links this function to the existence of "inadequate competition".

3.2.1 Sasol Gas’ pricing mechanism to its customers is based on the principle of market value, which takes into account the costs of the alternative energy carrier. This in itself bears testimony to the existence of sufficient inter-fuel competition to ensure that gas remains competitive.

3.2.2 A customer wishing to purchase gas has a choice between a number of competing energy sources in making its selection. It therefore seems unreasonable that the tariff which is obviously acceptable to the customer as evidenced by his choice of purchasing the gas, then needs to be set by the gas Regulator. After all gas would have to offer good value for money in order to attract those customers in the first place.

3.2.3 Chapter 2 of the Competition Act should adequately prevent any abuse of dominant positions by gas suppliers. Our view is that the Competition authorities are in a position to adequately deal with issues relating to the adequacy or otherwise of competition.

3.2.4 Although used repeatedly in the body of the bill "Price" and "Pricing" is not defined.

We do not agree that there is a need for the Regulator to approve or regulate any prices. Rather pricing should therefore be set on the prevailing market value basis. Such prices are negotiated between buyer and seller on a purely commercial basis. The Competition act will then be called upon to ensure and promote competition.

Alternatively, rather than being subject to obligatory approval by the regulator, provisions similar to those in the Competition Act could be included whereby tariffs should only be subject to regulation, after a complaint has been lodged and an investigation conducted.

3.3 Eligible customers
The failure to define these customers up-front contributes to the atmosphere of uncertainty that is created by the bill. The threat that would be perceived by investors is that:

There is insufficient knowledge to evaluate long-term prospects.

Too much power is vested in the hands of the Minister and the Regulator in this regard.

This issue could be affected by the subjective views of powerful individuals and may be subject to change as the incumbent Minister/Regulator changes. It is not certain whether the thresholds will change over time.

The European Union (EU) gas directive {Article 18 (2)} defines eligible customers on the basis of their particular gas application (gas-fired power generation) and by means of their specific gas consumption (>1 million GJ pa). It however couples this - as a precondition - to the need of individual gas operators to meet their take-or-pay commitments (in Article 25), and to the state of development of the gas market (in Article 26).

3.4 The uncertain duration of the link between Trading and Distribution.
The combination of trading and distribution is welcomed (Section 21(1)(k)). We are however concerned at this being limited to an unknown period of time: "…for a period determine by the Gas Regulator".

In our view this lack of clarity as to the duration of this link, leads to uncertainty in the minds of potential investors over the long-term scenario and may thus inhibit investment.

It has always been understood that distributors would be able to sell gas to points of ultimate consumption within the geographic area of their distribution networks. At least during the infancy and stabilisation phases of the development of the industry, distributors will only construct distribution networks if they were able to aggregate a sufficient number of customers to whom they will not only transport, but also sell the gas. Without such an assurance, distribution networks will not be built, and projects such as the Mozambique to South Africa natural gas project will not be enabled.

This approach is also in line with international practice where distributors also undertake the selling of gas during these phases.

3.5 Uncertainty arising from the regulator’s unfettered discretion and excessive power.

3.5.1 Term of license issued. (Sections 21 and 23)
Uncertainty with regard to the period for which licenses will be granted is an area of great concern. We believe that licenses should be granted for an indefinite period, with rights of termination under certain specified circumstances. Alternatively, as a minimum, a period for which licenses are to be granted should be stated in the Act with further provision that these licenses will be renewed on application by the licensee, provided it has adhered to the conditions of that license within the previous period.

3.5.2 Section 34 of the Bill lists numerous regulations that are to be set by the Minister. We find the following in particular to contribute to investor uncertainty:
(h) Eligible customers (discussed in 3.3)

(s) Determination of price regulation procedures and principles.
Investors’ inability to establish their own pricing strategies presents a problem. It is also impractical to expect investors to make important decisions without knowing the applicable price regulation procedures up-front.

3.5.3 "Tariff" is defined as "a written statement of rates and terms and condition under which gas and or gas services are sold…" Because the Bill empowers the Regulator to set tariffs {21(1)(n)}, the Bill therefore empowers the regulator to also determine the terms and conditions at which gas is sold. This provision gives undue and unnecessary power to the Regulator over investors’ day to day business operation.

3.5.4 Section 21 (2) gives the right to parties that have been aggrieved by conditions set by the Regulator to appeal to the very same Regulator.

3.5.5 Determining Fines and levies
Fines and levies are determined unilaterally at the discretion of the Regulator and this is used as a means of financing the Regulator’s operations.

This is dangerous because without any preset safeguards this could lead to a conflict of interest, and be done to the detriment of licensees.

Developing gas markets throughout the world have benefited from favourable regulation for periods in excess of 30 years. In many cases these countries were still granted further derogations to allow for recoupment of investments and to ensure that long-term contractual obligations are met.

Without a secure, predictable regulatory regime that is conducive to investment, investors would neither be acting responsibly, nor in their shareholders interests if they undertook a natural gas project whose risk/reward profile was not clearly defined, and that was out of line with what investors around the world would normally expect from a project of this nature and magnitude.

In the short to medium-term (20 to 25 years), there needs to be an appreciation of the realities that are at work within the South African energy industry, as well as the considerations of investors in a relatively new energy sector that requires sizeable investments in infrastructure.

We believe that it may not be possible to fully achieve Government’s energy policy objectives without taking these concerns into account first.


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