PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE OF ENERGY: 17 AUGUST 2012

OPTION FOR LPG EXPANSION

OUTLINE OF PRESENTATION

Introduction & backgroundLPG expansion objectivesSA’s LPG market analysisConstraint in the development of LPG marketInternational benchmarkingStrategic InterventionsLatest developments Way forward

INTRODUCTION & BACKGROUND

South African energy supply is characterized by unequal access to modern energy such as electricity and Liquefied Petroleum Gas (LPG).

Low income households lack access to affordable, safe and cleaner energy sources for cooking and space heating.

Power shortfalls in recent years have triggered the emphasis of the need for the energy mix to reduce the heavy dependence on electricity.

Government has identified a need to promote LPG as an alternative energy carrier of choice in meeting the challenges of energy security.

LPG industry can provide a quick and effective solution to household energy requirements.

LPG should be seen as a precursor to the introduction of Liquefied natural gas (LNG) for household use.

LPG EXPANSION OBJECTIVES

The LPG Expansion option aims to provide access to safer, cleaner, efficient, portable, environmentally benign and affordable thermal fuel for all households nationally.

Switch low income households from the use of coal, paraffin and biomass to LPG as the thermal fuel;

Contribute to demand side management by minimizing the use of electricity on cooking and space heating; investing a fraction of the cost of a power plant in LPG switching cost could lead to a delay in the investment in new power plants;

LPG EXPANSION OBJECTIVES(CONT.)

Enhance the level and quality of energy services currently available to residential users throughout South Africa; and

Contribute to the green economy programme of government whose aim is to reduce greenhouse gas emissions;

SA’s LPG MARKET ANALYSISSouth Africa Supply/Demand

Demand for LPG is growing as more households diversify their energy mix in

response to rising electricity prices/tariffs.

Source: World Liquefied Petroleum Gas Association (WLPGA) 2009

In 2008, 337 000 tonnes of LPG were produced in South Africa with consumption at approximately 365 000 tonnes.

SA’S LPG MARKET ANALYSIS (CONT.)Sources of energy used for heating in South Africa:

The demand for LPG is influenced by increases in the price of electricity.

Source:Team Analysis, Stats SA community survey of 2007

LPG consumption is approximately 1% to 2% of the total amount of energy used for heating and cooking.

Low electricity tariffs, and high prices of LPG have resulted in low uptake of the latter.

SA’S LPG MARKET ANALYSIS (CONT.)

Sources of energy used for cooking in South Africa

Source: Team Analysis, Stats SA community survey of 2007

Higher prices of LPG than electricity have resulted in the majority of poorer households switching to fuels such as coal1%, paraffin(15%)and wood(15%)

SA’S LPG MARKET ANALYSIS (CONT.)

Government has since promulgated regulations on setting the maximum price at which LPG can be sold to residential consumers.

Such intervention provides some predictability on LPG prices.

Allows consumers to plan their future related energy purchases behaviour.

SA’S LPG MARKET ANALYSIS (CONT.)

Factors affecting supply of LPG: Crude type or feedstock diet;

Other fuels (petrol) specifications (which vary during the course of the year, having capacity to consume more or less as a result);

Complexity of the various refineries and their ability to process and upgrade LPG into other fuels;

Storage and infrastructure availability;

Environmental regulations; and very importantly;

Refinery economics.

CONSTRAINTS IN THE DEVELOPMENT OF LPG MARKET Lack of funding Switching people from using other sources of energy such as wood,

charcoal, electricity to LPG would require funding in terms of subsidies.

Vertical integration of the supply chain The supply chain of LPG is vertically integrated. The manufactures of

LPG are also wholesalers and retailers resulting in a total control of the supply value chain.

Transportation and storage costs in the supply chain results in higher price of LPG being sold to consumers.

Negative Perception of LPG Whilst LPG is no more dangerous than gasoline when contained in a fuel tank or

cylinder, there are still negative perceptions by the public about its safety due to occasional incidents of explosion.

INTERNATIONAL BENCHMARKING

Approximately 42 million household in Brazil use LPG in their residential sector.

They practiced a cross-subsidy scheme for several decades in order to make LPG affordable to households in all parts of the country.

Subsidy and voucher system was used in expanding and making LPG available only to lower income households respectively.

162 million households in India use LPG for cooking.

Indian government removed all subsidy on petroleum products except for LPG.

Indonesia achieved more than 5.3 million users of LPG in their programme.

Government distribution of packages comprising of 3kg cylinders, stoves and free gas (first fill) was a success factor for Indonesia.

STRATEGIC INTERVENTIONS

Development of supply infrastructure

The construction of the open access import infrastructure is of paramount importance. This would have to be supported by the construction of storage facilities.

Licensing Regime

This would have to be used to regulate prices and the enforcement of safety.

Combating uncompetitive behavior

Hoarding of cylinders is uncompetitive. The Department would encourage all service providers to report such behavior to the Competition Commission.

STRATEGIC INTERVENTIONS (CONT.)

Local production of cylinders

The expansion of the LPG market will in the medium to long term necessitate the investment in the local cylinder manufacturing plant(s); this will create sustainable jobs for South Africans.

Subsidies on Appliances

It is also recommended that Government considers subsidising LPG appliances and cylinders rather than the product itself.  

Targets 1.2 million households from all income groups over a period of five years.

Review of the LPG Maximum Refinery Gate Price and the Working Rules Currently the Maximum Refinery Gate Price of LPG is based on the average

monthly Basic Fuel Price (BFP) of 93 Octane Lead Replacement Petrol (LRP) which is a deemed price.

STRATEGIC INTERVENTIONS (CONT.) Indicative cost of implementing the strategy

o Note: Prices are based on the current US$ exchange rate.o 5Kg cylinder – R 100.00o 9Kg cylinder – R 100.00o Stove (Double plate) – R197.00o Middle and Upper income subsidy – R2000.00o R 13.00 Price of LPG

Households Cylinders Stoves Amount

Target 1.2 million x R100 600 000 x R 197 R 238,200,000.00

Low income

( electrified and non electric)

1 million x R 100 500 000 x R 197 R 198,500,000.00

Middle Income 100 000 x R 100 50 000 x R 2000 R 110,000,000.00

Upper Income 100 000 x R 100 50 000 x R 2000 R 110,000,000.00

First Fill

(subsidised)

Gas Price/Kg Quantity Amount

5Kg R 13.00 R 65.00 R 71,500,000.00

9Kg R 13.00 R 117.00 R 11,700,000.00

Total R 629,900,000.00

ENVISAGED ROLES OF OTHER PLAYERS DTI to facilitate the possibility that LPG cylinders and appliances be manufactured

locally.

COGTA will be requested by DOE to encourage different municipalities to support the rollout of the project throughout the country.

DEA prioritise assessment of Environmental Impact Assessments.

National Treasury would be consulted on any proposed subsidy scheme.

NERSA would be consulted on subsequent Multi Year Price Determination (MYPD).

Work closely with IDC to support programmes for the expanded use of LPG as an energy carrier in supporting green economy.

Engage Transnet National Ports Authority (TNPA) to facilitate the development of import infrastructure at the identified ports.

LATEST DEVELOPMENTS

There is a company that is developing an LPG import facility at the Port of Saldanha.

Also, as a positive development, there are also a number of other companies which are constructing storage infrastructure for LPG

WAY FORWARD

Get internal approval of the strategy.

Thank You