Petroleum Licensing

Parliamentary Portfolio Committee Briefing

23 August 2006

DME Team

• Nhlanhla Gumede – Chief Director Hydrocarbons• Muzi Mkhize – Director Petroleum & Gas Ops• Victor Sibiya – Deputy Director Licensing• Nonhlanhla Ndebele – Deputy Director Promotions• Avishkar Nandkishore – Chief Energy Officer• Papali Bakane – Energy Officer

Licensing &

Monitoring

LFI Charter

Margins setting

Transport differenti

als

Import control

Regulatory

accounting

Supply Agreeme

nts

Import parity

pricing

BFP

Regulatory framework is a system

Not all petroleum products are regulated

Retail Commercial

Petrol

Diesel

Non-fuel products

Unregulated?

Regulated

Unregulated

Unregulated?

Unregulated

Unregulated?

Non-controlled products Unregulated Unregulated

Levers and effects

Balancing different interests

Licensing

Pricing

Import control

Investments

Consumer prices

Transformation

Security of supply

Impact

Policies underpinning our regulatory framework

• Import parity system

• Rural-urban subsidies

• Cash basis

• Historical basis – margin setting

• Promotion of local refining

• Minimal product imports

• Industry transformation

Current problem areas

• Refining– Capacity running out

• Wholesale– Diesel “cross subsidies”– Retail customers subsidizing commercial

customers

• Retail– Uneven treatment of DODO vs. CODO sites– Proliferation of service stations

• Distribution– Limited investment in logistical infrastructure

Ownership of New-to-industry (NTI) sites

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004

No. of NTIs

Company controlled Dealer controlledSource: Sapia

OMC’s dominate NTI development (70-80%) of NTIs are company controlled

Ownership of oil company branded retail network

0

500

1000

1500

2000

2500

3000

1993* 1999 2000 2001 2002 2003 2004

No. of Service Stations

Company controlled Dealer controlled

Source: 1993 – Lambrecht’s Report, 1993; 1999-2004 Sapia

Proportion of network controlled by the OMCs has risen from 41% in 1993 to 57% in 2004

Service station closures

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

2000 2001 2002 2003 2004

No. of Service Stations Closed

Company controlled Dealer controlled

Typically 70 - 80% of site closures have been dealer service stations

Retail Vicious Circle

Accommodate new

players in Retail

Retail Service

stations over proliferation

NewPlayers

Accommodation

Logistical constraints

Different solutions to the same problem

Problems

Deregulation

Industry Supply Agreements• Sasol upliftment terminated in 2003• PetroSA MOU coming to end in 2007

Regulated upliftment

Retail licensing framework• Vertical integration prohibition• Wholesale margin review

A solution, including availing of appropriately sized logistical infrastructure, needs to be found before the industry can be liberalised

Sasol & PetroSA, for historical reasons, do not have outlets for their product

New participants have limited access to the market

New players in refining cannot easily enter

Not enough logistical infrastructure for product distribution.

Mergers & Acquisition

Accommodation of new players

RSA prices globally competitive

International Pretax Petrol price comparison

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Prices as at Nov 2004, sourced from gtz

RSA prices globally competitive International Petrol Price comparison

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160.00

180.00

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Prices as at Nov 2004, sourced from gtz

Economic regulatory Models observed

• Cost-plus– bottom up, costs and

margins regulated

• Benchmarking– prices set in relation

to those in other countries/regions

• Import parity– prices set in line with

import costs

“Gold plating” problems“Gold plating” problems

Efficiency lossesEfficiency losses

Security of supply concernsSecurity of supply concerns

Allusive comparisonAllusive comparison

Transparent but too simple,complex but less transparentTransparent but too simple,

complex but less transparent

Real costs subjectto manipulation

Real costs subjectto manipulation

Theoretical coststoo simplistic

Theoretical coststoo simplistic

Licensing

Definitions

• “ ‘bulk’ means a 1500 litres, per transaction, of petroleum product”

• “ ‘retail’ means the sale of petroleum products to an end-consumer at a site”

• “ ‘wholesale’ means the purchase and sale in bulk of petroleum products– by a licensed wholesaler to or from another licensed

wholesaler, or to or from a licensed manufacturer, or sale to a licensed retailer or to an end-consumer for own consumption”

• “ ‘manufacture’ means the manufacture of petroleum products for commercial purposes, and includes the blending and re-refining of petroleum products”

Petroleum products definitions

• Manufacturing– “any petroleum fuel and any lubricant, whether

used or unused, and includes any other substance which may be used for a purpose for which petroleum fuel or any lubricant may be used”

• Wholesaling– “aviation gasoline, biofuels, diesel, jet fuel,

liquefied petroleum gas, paraffin and petrol”

• Retailing– “liquefied petroleum gas used for the

propulsion of vehicles, petrol and diesel”

Section 2A Prohibition Of Certain Activities

• 2A. ( 1 ) A person may not-(a) manufacture petroleum products without a manufacturing licence;(b) wholesale prescribed petroleum products without an applicable licence;(c) hold or develop a site without there being a site licence for that site;(d) retail prescribed petroleum products without an applicable retail wholesale licence;

issued by the Controller of Petroleum Products

Objectives of licensing

• Give effect to the Charter• Promote an efficient manufacturing, wholesaling

and retailing petroleum industry• Facilitate an environment conducive to efficient

and commercially justifiable investment• Create employment opportunities and the

develop small businesses in the petroleum sector

• Ensure countrywide availability of petroleum products at competitive prices

• Promote access to affordable petroleum products by low-income consumers for household use

Licensing fundamentals

• Refining– Promotion of coastal refining and

petrochemicals hub vs.– Diversification of primary supply

• Wholesaling– Promote competition– Unregulated commercial business

• Retailing– System of controlling number– Improved profitability

• Site– Environmental rehabilitation

Licensing fundamentals - Retail

• Retailing licensing “system” – 2E– Finite (10 year period)– Intention: an optimum number of efficient sites

& achieve equilibrium amongst all participants– Must

• transform the retail sector - optimum number• achieve an equilibrium amongst all participants in• based on licensing objectives and 2C• promote efficient investment

– May• link the issuing of a new site licence to termination

or transfer• limit number of service stations• link the number to total volume traded

The “System” Basis

• Predictable Margin –(RPI – X) basis

• Predictable cost structure

–Linked to indices

• Based on Cashflows

Licensing System

• Retail licence satisfies a number of conditions

–Viable business–Compliance to all

relevant laws

Prudent Investment Level

• Prudent value of business

–determines prudent investment levels

–Determines the appropriate type of infrastructure

Prudent Value

• Use NPV methodology

–Gives a realistic value of the business

–Determines appropriate “key moneys”

Retail licensing ‘system’

Who should apply?

• Based on definition of petroleum products in the Act

• Refining– Any manufacturer of petroleum products

• Wholesaling– Wholesaler of “prescribed” petroleum products

• Retailing site– Owner of site

• Retailing– Retailer of “prescribed” petroleum products

Applicant lodge an application

Process of applying for a license

Application accepted?

Evaluation stage

DecisionAccept Decision

License issued

Appeal

Return application

LicenseDecline

NO

YES

Licensing under the PPA

90 days

By PostWalk in

1) Before accepting a site license application, the Controller must be satisfied that –

a corresponding valid retail licence application has been lodged for that site;

the applicant is the owner of the site or in the case of a publicly owned land, has the written permission of the owner

the application form has been completed in full; and

all documents specified in regulation 3(b) have been submitted with the application form

Licensing under the PPA

Accepting the application

2) In accepting a retail license application the Controller must be satisfied that –

a corresponding site license application has been lodged for that site or a valid site license exists;

the applicant is the owner of the business

the application form has been completed in full; and

all documents specified in regulation 15(1)(b) have been submitted with the application form

Licensing under the PPA

Accepting the application

3) In accepting a wholesale license application, the Controller must be satisfied that –

the applicant is the owner of the business

the application form has been completed in full; and

all documents specified in regulation 15(1) have been submitted with the application form

Licensing under the PPA

Accepting the application

4) Before accepting a manufacturing license application, the Controller must be satisfied that –

the applicant is the owner of the property or has the written permission of the owner of the property on which the manufacturing facility is or will be located;

the application form has been completed in full; and

all documents specified in regulation 16 have been submitted with the application form.

Licensing under the PPA

Accepting the application

4)In evaluating an application for any license, the Controller must give effect to Section 2C of the Act

Licensing under the PPA

Evaluation Process – All licenses

1) In evaluating an application for any site license, the Controller must verify that –

the information and the documents submitted with the application form are true and correct;

there is a need for a site;

the site will promote the licensing objectives stipulated in sections 2B(2) of the Act; and

where required, a notice contemplated in regulation 4(1) was published

Licensing under the PPA

Evaluation Process - Site

2) In evaluating an application for any retail license, the Controller must verify that –

the information and the documents submitted with the application form are true and correct;

the retailing business is economically viable;

the retailing business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and

where required, a notice contemplated in regulation 16(1) was published

In determining the economic viability, the Controller must be

satisfied that the net present value has been correctly

calculated and is positive.

Licensing under the PPA

Evaluation Process - Retail

3) In evaluating an application for a wholesale license, the Controller must verify that –

the information and the documents submitted with the application form are true and correct;

The wholesaling business will be economically viable;

the wholesaling business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and

where required, a notice contemplated in regulation 4(1) was published

Licensing under the PPA

Evaluation Process - Wholesaling

4) In evaluating an application for a manufacturing license, the Controller must verify that –

the information and the documents submitted with the application form are true and correct;

where applicable except in the case of an application for a facility manufacturing biofuels, that there is a need for additional capacity;

the manufacturing business will promote the licensing objectives stipulated in comply with sections 2B(2) of the Act; and

where required, a notice contemplated in regulation 4(1) was published

Licensing under the PPA

Evaluation Process - Manufacturing

Conditions of licensing

• Manufacturing– activity must remain a going concern– manufacturer may only manufacture

petroleum products• within the maximum design capacity stated on its

licence

– maintain minimum working stock levels in compliance with applicable regulations

– comply with Charter– comply with the provisions of the fuel

specifications

Conditions of licensing

• Wholesale– activity must remain a going concern– Wholesaler must

• Purchase or sell petroleum products only in bulk• Not make use of a business practice, method of

trading, agreement, arrangement, scheme or understanding which would result in a licensed wholesaler holding a retail licence except for training purpose

• comply with the Charter• keep minimum working stock levels in compliance

with applicable regulations

Conditions of licensing

• Site– Licence and corresponding retail

licence displayed at place of business– A licensee must at all times-

• comply with the Act and these Regulations• carry out legitimate instructions from the

Controller

Conditions of licensing

• Retail– retailing activity remain a going concern– retailer must only-

• Only retail from the site specified on the retail licence

• Only purchase petroleum products from a licensed wholesaler or a licensed manufacturer

• comply with the Charter• submit prescribed information • comply with the Act and these Regulations• not allow self-service

Timelines

• Act operationalised – 17th March 2006

• End of transitional period -15th September 2006

• Evaluation period – 1st year – 250 days – 2nd year and after - 90 days

Licensing under the PPA

Section 2D - Transitional licensing provisions

• The Petroleum Products Amendment Act, 2003 – commenced on the 17 March 2006

• Any persons who qualify according to Section 2D must apply within six months from 17 March 2006 to be deemed a holder of a licence

Licensing under the PPA

License Type Conversion New Evaluated Issued

Site 1 300 3 50 2

Retail 1 300 3 50 2

Wholesale 35 20 20 1

Manufacturing 1 0

Number of License applications accepted, evaluated & issued

Current focus is acceptance

Envisaged number of applications > 12 000

Future regulations

• Conditions relating to the advancement of HDSAs

• Obligation to hold, keep, furnish records and frequency

• Continuity of supply of petroleum products

• Specifications and standards of petroleum products

Fines

• As a last resort• 12. (1) Any person who contravenes a

provision of this Act, shall be 15 guilty of an offence and be liable on conviction to a fine not exceeding R1 000 000,00, or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment: Provided that if a directive issued in terms of section 2A(2)(c) or (3) is complied with within the period specified therein, the person concerned shall be absolved from criminal liability.

Additional benefits of licensing

• Data provision & publication

• Improved security of supply

• Planning

• Secrecy avoidance

• Tourist information/Navigation