Petroleum Licensing: Current Status, Challenges, Way Forward, Strategies for Renewable Energy & Energy Efficiency

MINERALS AND ENERGY PORTFOLIO COMMITTEE
14 March 2007
PETROLEUM LICENSING: CURRENT STATUS, CHALLENGES AND WAY FORWARD & STRATEGIES FOR RENEWABLE ENERGY AND ENERGY EFFICIENCY

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Department presentation on Petroleum Licensing
Presentation: Renewable Energy

Audio recording of the meeting

SUMMARY

The process of the licensing of petroleum retailers and wholesalers was under way. Many people had waited until the last minute to apply for licences with a resulting huge number of applications in progress. Many of these applications were defective. The Department of Minerals and Energy was able to regulate the market to a degree by controlling the location of new petrol stations and overseeing Black Economic Empowerment policies.

Members asked questions on the BEE issue as well as the advancement of women in the industry. They expressed concern over the state of the industry in certain areas. There were reservations about the Department’s capability to enforce regulations as there was only one inspector for each province, and co-operation with the police was not satisfactory.

In the Department's presentation on renewable energy, it was noted that South Africa was heavily reliant on fossil fuels for its electricity generation needs. Government had mandated the Department to increase the contribution of renewable energy sources. Various projects were being undertaken. Biodiesel fuels were also being developed. Several financial schemes had been created to assist suppliers.

Members felt that there was not enough financial and intellectual investment in the work on renewable energy, as South Africa had the potential to be a world leader. The country had to have a much bolder vision.

MINUTES
Petroleum Licensing: briefing by Department of Minerals and Energy (DME)

The Petroleum Licensing briefing looked at definitions, objectives, the retail licensing system, the meaning of Net Present Value (NPV), the application process, licensing conditions and targets, timelines and fines as well as the accompanying challenges of each of these.

Mr Victor Sibiya (DME Director: Petroleum Licensing) discussed the difference between retail and wholesale petrol supplies. The term ‘bulk’ required the retailer to hold a minimum 1 500 litres of petrol in stock. This was a key distinguishing factor between retail and wholesale traders. Oil companies were resellers of petrol. Small farmers had raised the issue as they were prevented from receiving smaller quantities.

Licensing requirements were for a retailer to have a designated site. There was a problem where sites were co-owned, especially at manufacturing facilities. Section 2A of the regulations prohibited certain activities without the possession of a valid licence. Some retailers were still trading without licences, but the oil companies were getting strict with such people. One of the challenges was that people would already be developing a site when they applied for a licence. They should apply for the licence first. DME officials were the target of bullying tactics as prospective retailers tried to work around the law. There were also cases of persons buying petrol stations and only leaving the licence to the last minute. There was no guarantee that a licence would be granted. There was no guarantee that a licence would be granted, and this had to challenge the viability of the station.

Mr Sibiya said the licence should be considered first. DME was often only approached for permission when the deal had already been done. He outlined the objectives of the licensing process. Generally, the objective was to make recommendations to the Controller. Applicants were often not aware of the licensing system. It was often difficult to evaluate applications. The overall challenge was to provide an efficient industry. This would be done at the discretion of the Controller.

Part of the licensing system was the calculation of the net present value (NPV) of a business. When the regulations had been drafted, there were various options to calculate the economic value of a business. The use of NPV would make it possible to calculate the value of a business accurately. Future cash flow projections gave the retailer money to buy stock and to generate future income. A discount rate was used to calculate the present value of a business. If this was negative, then the Controller knew that the business would not be viable. The calculation included income from forecourt stores which were not regulated by DME. Task 141, which dealt with accounts, would divide the business expenses between petroleum sales, shops and other forecourt enterprises.

Mr Sibiya said only the owner of the property could apply for a licence. The site licence holder had to either own the site, or have written permission if the land was publicly owned. Retail and wholesale licence applicants had to be the owner of the business entity concern. A challenge occurred were a facility was jointly owned. In terms of the new regulations, joint owners would each have to obtain a manufacturing licence. Work was in progress to solve this problem.

Mr Sibiya described the process to issue licences. This was contained in the Petroleum Products Amendment Act of 2003. It took 90 days to get a decision. Persons who qualified in terms of the Act had six months of 17 March 2006 to make an application. It took 250 days to evaluate an application. People who were operating before 17 March 2006 were deemed to have a licence provided they operated within the guidelines of relevant provincial and local legislation. The challenge faced by DME was that many people had waited until the last minute to lodge their applications. Many applications for conversion licences had been handed in at the last minute. They had to include site and retail applications. Many had not lodged applications in duplicate, as specified by regulations. The lack of information returns was also a problem with many of the applicants.

The major difficulty was that DME could not cope with all the applications. People were filing applications after the due date. One of the challenges was for businesses which had been established twenty to thirty years previously. At that stage there had no requirement for an Environmental Impact Assessment (EIA), which would be the case for new licences. Established businesses would have to apply for new licences but would not be able to comply in this respect.

Mr Sibiya said that transitional licences had to be lodged within six months. Some businesses were still trying to apply, as they had to have the documentation in order before they could receive stock of petroleum. People were now being forced to go to the DME. Provinces were not able to treat applications as conversion licences, as this capability had been removed from the system. Applicants were providing wrong documentation such as the application forms for closed corporations rather then the certificates. It was necessary to know the names of directors and members so that the demographic composition of the company could be determined. All relevant documentation was needed such as invoices and tax clearance certificates. These could prove the viability of the business. The challenge was that the law was not being complied with. DME was in discussion with the SA Revenue Service. The question would be if non-compliance in itself was a good enough reason to deny a licence application.

Mr Sibiya suggested that the system could be streamlined if applicants could declare that they complied with the regulations, and the licence could then be issued. If they were later found not to be compliant, then the licence could be revoked. DME was currently sitting with approximately twelve thousand applications. This figure excluded incomplete applications, where the applicants had been advised as to what they should do. He presented a breakdown. Some 415 conversion licences had been issued, including all existing concerns, and there were 128 new wholesalers. The monthly target for March 2007 was 425. Both site and retail licences had to be in order. The cost for a retail licence was R 500 and for a site licence R 1 000.

Mr Sibiya said that there was a challenge of the compromise of broad-based black economic empowerment (BBBEE) and small, medium and micro enterprise (SMME) policies by fronting. Sites on national roads were particularly guilty here, as the big companies used them as a front in many cases. The Memorandum of Understanding (MoU) and Articles of Association documents were needed. Agreements were needed, although the oil companies could have their share. It was unacceptable that licence holders could not hold retail interests. The oil companies had to use other arguments.

DME lacked legal advice and law enforcement. An applicant in KwaZulu-Natal (KZN) had not kept invoices or operational documents before the inception of the Act. He had gone to court, but the State Attorney had thought that DME had no case without any knowledge of the issue. The application had been received after the due date.

Mr Sibiya said that temporary licence applications were a problem. People sold business but the licence was not yet issued. They then requested temporary licences, which could circumvent the situation. These should only be used in emergency situations. DME had been accused of restraint of trade as a consequence. Once the temporary licence had expired, the holder would never be able to get a permanent one.

The DME also had problems with used incorrect information in their applications. This was often because of the use of agencies, who took for granted that the information was correct. It was assumed that approval would be automatic, but this was not the case. Some applicants knew nothing about their application, with the result that they applications were referred back to the applicants. It was not necessary for applications to be delivered in person, but it was a problem if the owner of the business did not have all the facts.

Mr Sibiya said that there were oil companies which were not paying licence fees. It would be necessary to reconcile the different accounts held by provinces, as there were different registration numbers. Many would prefer to have a once-off payment, but the problem here would be that there would be no link between the licence holder and payment. Oil companies had to pay licence fees when they were issued and not wait to make a batch payment. If letters requesting payment were ignored, DME would have to consider what would be done in reaction.

In the case of small wholesalers and farmers, the law would probably put them out of business. If they had to make provision to store more than the required amount of 1 500 litres, their input costs would be increased.

Mr Sibiya said that the way forward was to give applicants a due date to provide information. Letters had been sent out in August 2006 and some had still not been returned. At the moment traders could use their application numbers t trade although they should only do this once their licence had been granted. Task 141 provided for regulatory accounts and a price review methodology. The price was regulated at retail level, but there was pressure to determine retail margins. Shop expenses could not be carried over to the forecourt. New applications would be prioritised, and some agreements depended on the issue of licences. Therefore new licences would enjoy a priority over conversions.

Mr Sibiya continued that the annual submission of licence requests should be in not later than the end of February. The fee would be due on the anniversary of the granting of the licence. All relevant information should have been supplied by the end of February. The challenge here was non-compliance and DME’s ability to enforce penalties. The Act made provision for a fine of up to R1 million or a prison sentence of ten years if annual information was not supplied. The penalty would only be imposed as a last resort, but the Department had not been taken seriously in the past. There was still a last minute rush for licence applications.

Future regulations would focus on the conditions relating to the advancement of historically disadvantaged South Africans (HDSAs), the keeping of records, the continuity of supply chains, and specifications and standards. Benefits would be that people would call for information. There was no proper Integrated Technology system to gather information. Regulations required the Controller to publish information twice a year. The Controller would thus have his own data. There would be an indication of where the petrol stations were located, and this would help to manage the concentrations of these facilities. The co-ordinates of petrol stations would be supplied to manufacturers of global-positioning satellite navigation systems. The Minister would be given the authority to make regulations.

Discussion

Adv H Schmidt (DA) got the impression that the industry was generally not in compliance with the Act. There was a tendency to kick against the regulations. BEE issues were described in the general conditions of the Act. According to the schedule, it took five months to process a licence. He asked if this would be done on time. He asked how many inspectors were employed. Visible control and law enforcement was needed, but it seemed that this was not the case at present. There was a risk to business if licences were not awarded.

Mr C Molefe (ANC) said that licence applications were not being submitted timeously. He asked if DME was happy with their communications with the public. On the issue of non-compliance, he noted a challenge in the presentation given. DME was not specifying how it would deal with this issue. Generally he was happy with the regulations.

Mr C Kekana (ANC) asked how viable the industry was, and if the Act was working. Petrol retailers struggled in the black areas, with even the biggest battling to stay in business for more than two years. The reasons for this included tax issues, economic viability and the question of franchises. Owners were working for the oil companies rather than making money for themselves. There were so many problems which led to his question of viability. He asked how many licences had been issued, and how many were given to the same owners. There was a need to discuss the franchise issue in contrast to fronting. Consideration should be given to changing the supply chain philosophy to move away from the colonial companies. Consideration should be given to the establishment of South African owned refineries.

Prof I Mohamed (ANC) saw one big problem. He had sympathy with the traders who were burdened with a millstone of legislation.

Mr M Matlala (ANC) asked how the licensing process could be improved. New people were applying for licences, but he wondered how many of them young women in the rural areas were, for example. The industry was dominated by men. There was a massive programme underway to communicate the situation, but rural people did not see mainstream television and newspapers. Issues should be communicated at the community level

Mr T Mahlaba (ANC) addressed the issue of enforcement of regulations. He asked if there was any local involvement. Actions had to start at ground level. Retailers had to be encouraged, and information needed to be disseminated. There had to be a suitable demographic spread of applications. Environmental conditions had to be observed. There should be more exposure for applicants, and people like white women should be encouraged. Security and environmental impact issues had to be considered.

Mr E Lucas (IFP) was concerned with the definition of bulk petroleum supplies. Farmers could not hold onto quantities of more than 1 500 litres. He asked what came first, the licence or the site. The two should work hand-in-hand. Some middle way was needed. A serious look was needed at the question of window dressing. Big companies were prone to do this. He asked what had been done regarding the litigation in KZN. There had to be a relation between the refiners, wholesalers and retailers. It must be stated clearly if refineries could operate petrol stations. He appreciated the work of Task 141, as fuel was very expensive. He asked how the licensing process related to the advancement of HDSAs. People felt that they had been left out both in the past and in the present. New traders were unable to join the mainstream because of the stiff competition. In the rural areas there were vast open spaces, with huge distances between petrol stations.

Mr Sibiya replied that BEE objectives must be given effect. This was specified in Section 2 C of the Act, where there was a BEE charter. This served to promote the interests of HDSAs. All four pillars of the BEE model had to be satisfied. Companies had to have a HDSA component of more than 25% in the retail sector, and the requirement in the wholesale sector was a minimum of 50%. Companies would not be allowed to import petroleum products if they failed to comply with these figures.

Mr Sibiya said that there was a need to start communicating immediately. If applicants did not obtain their licences they would not be allowed to operate. The industry was good at self-monitoring, and rival traders often acted as informants. The oil companies were also ensuring that their client retailers were properly licensed. It was so difficult to receive information. There was a challenge in keeping the books up to date. DME had to deal with applicants, and it was a challenge to issue licences as quickly as possible. Many of the applications came in at the last minute. As many as 60% of the applications were filed during the two weeks before the closing date. DME would still be processing these applications by the end of September. Problems included applicants failing to provide two copies of their application.

Mr Sibiya said that there were nine inspectors who were assigned to the provinces. This was not enough, and he hoped to see an increase in their numbers. Law enforcement should be taken seriously. Samples of fuel were tested by the South African Bureau of Standards. However, the process of enforcement often occurred by accident. There were problems in determining which areas should be visited, and targets should be set.

DME needed to look at its communications strategy. Road shows were planned. A centre of information would be established to provide information related to energy. There was a challenge to accommodate these needs in the regions. In these areas, 60 to 80% of their work centred on processing licence applications before the end of the year.

Mr Sibiya said that the viability of petrol stations was part of the evaluation process. Applicants often invested their life savings in the business only to see it fail. New applicants had to show that they would be economically viable. It was hard to do this if they failed to provide the necessary information for DME’s consideration.

He said that Section 12 B of the Act allowed any person to register a dispute, involving either retailers or wholesalers. The matter could be sent for arbitration. The Controller would appoint an arbitrator, particularly in the event of allegations of unfair contractual agreements.

Mr Sibiya said that margins were always too low, but a study had shown that South Africa had one of the highest margins in the world. Task 141 was handy to address this. If the profit margins were increased, then the prices would also increase. All expenses not related to petroleum products were not considered in determining economic viability. All aspects of the value chain had to be considered. Most wholesalers also had their own manufacturing component. There had to be consideration to the issue of manufacturing licences. This was particularly complicated where manufacturing facilities were owned jointly.

He added that the status of HDSAs in the wholesale market was still a challenge. Retailers had no access to petroleum as it was offloaded at the harbour. Improved pipelines and storage facilities would make things easier for wholesalers.

Mr Sibiya said that DME wanted to work closer with the South African Police Services (SAPS) on the issue of the enforcement of the Act. However, co-operation was not good at present. The issue was not a priority for SAPS, but their help was needed. They would be a back-up for the inspectors.

He said that many local municipalities were not aware of the licensing process. The inspectors had to work with all municipalities, and to give and receive feedback where it was needed. There was some co-operation, an example being during the municipal election roll-out where inspectors had been given the chance to address the people.

Mr Sibiya said that the definition of bulk had seen many options being considered. Retail and wholesale sectors should have different zoning. It was not right that the wholesalers received twice the mark-up compared to the retailers. DME had met with farmers. The minimum tank size available was 1 000 litres. Transport providers faced the same problem. It did not make economic sense for the big transport companies to benefit from wholesale trading. Bad debts and higher margins were issues, and these companies could get higher prices. The process had to be open.

He said that there was a two-way service strategy. An applicant for a new station first had to find open space on which to build. The area had to be zoned correctly. The applicant then had to apply for a licence. An EIA had to be conducted. Alternately, a new applicant could buy an existing business. Many applicants disregarded the 90 day period. The application was often left too late, and the DME was threatened by the applicant if the licence was not approved quickly enough. The Controller had 90 days to consider an application.

Mr Sibiya said that DME was looking to catch operators guilty of window dressing. The court case in KZN had revolved around non-compliance. DME’s legal services were not happy with the person who had handled the case. The person was incompetent.

Renewable Energy

Mr Sandile Tyatya (Chief Director: Clean Energy, DME) introduced his delegation

Mr Silas Malaudzi (Renewable Energy Directorate, DME) said that 90% of South Africa’s energy needs were met by fossil fuel sources, mainly coal. Electricity demands were increasing in time. There was a danger that the country would run short of fossil fuels. In the rural areas firewood was used for cooking, which presented a threat to the environment. The vision of DME was for renewable energy sources to increase their share of the power supply. This would contribute to sustainable development.

He said that there were five goals for the renewable energy programme. These were job creation in a BEE environment, promotion of health, making energy available in the rural areas, reducing greenhouse gas emissions and promoting economic sustainability and energy security.

Mr Malaudzi outlined the history of policy and legislation. A White Paper on energy policy had been introduced as early as 1988. This, however, took little account of renewable sources. A new White Paper had been tabled in November 2003. This created the conditions for the development of renewable energy. There was a target of 10 000 GigaWatt/hours (GWh) to be reached by 2013. The target would be reviewed every five years. He realised that this was a challenging target, but felt that it was achievable.

He said that 843 GWh was currently being produced by renewable energy sources. Wind power comprised 34% although it was planned to boost this ultimately to 74%. Sugar bagasse contributed 59% and hydro-electric schemes the remaining 10%. The crux of the present situation was what was already being achieved. The situation was being monitored and evaluated. He presented figures which showed the continuing growth of the contribution of renewable energy sources. In 2005 an increase of 22 GWh had been reported, but the figures for 2006 were still not available.

Mr Malaudzi said that a Renewable Energy Finance and Subsidy Office (REFSO) administered by DME, had been established. This had disbursed R 14.2 million for capital costs of new projects since 2005. There were 25 projects registered, of which 16 involved bio diesel. The total subsidy for current projects was R 129.4 million, but R 137 million was needed. The capacity of REFSO was being built. Subsidy contracts had been approved by the Director General, and were conditional on the achievement of certain milestones. First payments would be due before the end of March 2007.

He said that workshops had been held in all nine provinces regarding the bio fuel industry. These had been concluded recently, and a report would be presented to Cabinet in May 2007. Two long term sustainable financial schemes were available. These were the Clean Development Mechanism (CDM) and the Tradable Renewable Energy Certification System (TRECS). The latter provided grants to renewable energy producers and the certificates could be traded world-wide. Further consultation would be held with stakeholders.

Mr Malaudzi then described developments in the South African Wind Energy Programme (SAWEP). The pilot project at Darling was currently in Phase One. This was a two-year programme and was designed to show the potential of wind energy. Project managers would be appointed, and an inception workshop would be held soon afterwards.

Mr Malaudzi said that various financial mechanisms were in place. There were some barriers to development. Large scale plants were favoured. DME backed community involvement, and was introducing projects at that level such as solar water heating. The needs of the community had to be considered. Another barrier was the lack of visibility of renewable energy projects.

He said that there were challenges. It took time to conduct an Environment Impact Assessment (EIA). Water permits could take up to 20 months to be issued. There was a lack of co-ordination between water and power suppliers. However, there were many opportunities. Apart from economic and business opportunities, the reduction of pollution would have a positive effect on the environment. Hybrid mini-grids were being created, which would see two or more sources providing reliable power into the grid.

Mr Malaudzi noted that there were ongoing negotiations with Treasury.

Discussion

Mr W Spies (FF+) said there were so many challenges. There was no doubt that there was work in progress, but South Africa was still behind the eight ball. DME had given an aim of 4% of electricity demand to be met by renewable energy sources by 2013. This target was far too small for a country like South Africa. More scenario planning should have occurred after the Kyoto Protocol. He asked if DME was thinking big enough. Coal was an easy resource to use, while renewable energy projects were initially expensive. It seemed that the grants given to start projects were fantastically small. Millions of Rand should be invested in renewable energy, but at present he felt these initiatives were not being given a chance. The CDM was an interesting opportunity, but aggressive marketing was needed. The banks needed to come to the party, and government should be prepared to underwrite risks.

Mr L Greyling (ID) agreed with Mr Spies. Part of the problem was that there was always a burden. Government should have a broader vision, and the public should have an opportunity to see the value of energy plans. There was growth in the market. South Africa had an opportunity to position itself as a world leader. He praised the innovative financial measures, but felt that there was room for more bold thinking. A South African had developed a solar power system, but this had been bought out by Germany where a factory had been erected to produce the system. More money should be given to this sector if government wanted to assist. He asked if there were problems between the Darling project and the Cape Town municipality. The renewable energy sector could not afford to stay small for another ten years.

Mr Molefe said that there was a challenge in collaboration and co-operation. He asked about the communication strategy. The community should be involved. He had only heard about bio fuels at this kind of meeting and needed more information. DME was not communicating. He was aware of the European Union’s concern over the greenhouse effect, and wondered where South Africa stood on this issue. There was a financial challenge in fast tracking developments, but he wondered if the skills were available. Foreign direct investment was needed. He asked if the renewable energy programme would depend on the DME or if other countries would work with South Africa. He asked about the geographic spread of the programme. Offices should be at regional level. He asked how far the DME resources were spread.

Ms H Bhose (ANC) noted the concern about health benefits. The public needed to be educated about this.

Mr S Louw (ANC) felt that the subject of renewable energy was being treated as a side issue. The structures had to be promoted. The wind project at Darling had to be pursued thoroughly. Wind turbines should also be erected in other areas, such as Port Elizabeth. This would also aid with job creation.

Mr Kekana said that the economy was growing. Infrastructure development needed to be boosted. He asked if this would help the renewable energy programme. He also asked if the environment was hostile. More power stations were needed.

Mr Tyatya said that DME had to lead the process. They were attending to various issues, such as the Kyoto Protocol. Work was in progress regarding energy planning. He strongly believed in the future of the programme. There was a lack of renewable energy planning in the energy sector. He was not sure how efficient the funding was. The programmes were based on research, but he feared that renewable energy was becoming research fatigued.

He said that CDM was an excellent base, but was a new activity. DME expected active investment. There was as yet no methodology to say whether the bio fuel industry would comply with guidelines. This sector would attract numerous projects.

Mr Tyatya added that he was thankful for the Committee’s support. Activities were still small, but something was being done. At present the programme depended on the involvement of third parties. Electricity had to be sold into the existing grid. There was a challenge to stay within the legal and regulatory framework. He hoped to table legal issues before the end of the year. Government departments tended not to talk to each other, but the renewable energy programme was moving forward.

He said that DME was taking the issue seriously, and a Chief Director had been appointed to oversee the Renewable Energy section. There was a lot more government funding in South Africa than in some other countries. Germany was the world leader in solar energy, and South Africa should want to develop this aspect. Water and other permits were a problem as there were blockages in co-operation. Foreign investment was being received from Denmark and had been put towards the Darling wind project. They had supplied the wind turbines.

Another current programme was a mini hydro-electric project at Bethlehem. The government had gone out to attract projects. There were only a certain number that could be funded within the current timeframe. Renewable energy would ensure greater access to electricity. There had to be a move away from the perception that renewable energy sources were not good enough for use in urban areas but were foisted onto the rural areas.

Mr Tyatya said that a soil turning ceremony had been held in Darling recently. He predicted that the turbines would be operational by June 2007. There was potential for wind power in other areas as well. The infrastructure would be an opportunity for development. Opportunities were moving ahead. The DME had started with a project to use solar power to light their buildings. This would be extended to other government departments in time. However, many people still regarded renewable energy as “voodoo science”. He thanked the Members for their comments.

Mr Malaudzi said that a road show would be held. Nothing had been finalised yet, but planning was underway. This would inform the public of the possibilities of renewable energy.
The planning was underway for Phases 2 and 3 of the Darling scheme.

The Chairperson was encouraged that this sector was being promoted. However, it seemed that the programme was behind schedule. Research and development was good, but financial statements had to be produced. Bold action was needed to encourage renewable energy projects. It was fair for Members to compare investment to the result of programmes. Communication needed to be ongoing. Members and the communities had to be kept up to date on developments. Some world protocols needed to be followed, and tangible steps were expected. He wanted to see the results of the investments.

The meeting was adjourned.