presentation to the parliamentary portfolio committee on energy update on lpg issues

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8/25/11 PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES 23 August 2011 11

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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES 23 August 2011. 1 1. PRESENTATION OUTLINE. Post-Regulation of the maximum retail price of LPG supplied to residential customers; Update on the Pilot Projects; Transformation of the LPG Industry; and - PowerPoint PPT Presentation

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Page 1: PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES

8/25/11

PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

UPDATE ON LPG ISSUES23 August 2011

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Page 2: PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES

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PRESENTATION OUTLINE• Post-Regulation of the maximum retail price of LPG

supplied to residential customers;

• Update on the Pilot Projects;

• Transformation of the LPG Industry; and

• Way Forward

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RETAIL PRICE REGULATION• Inaugural regulation of the maximum retail price of LPG

supplied to residential customers on 14-Jul-10

o Some stakeholders alleged that they were being squeezed out of business while others applauded the regulation and the concomitant price reduction

• Stock-taking workshop with relevant stakeholders on 23-Nov-10

o Concerns raised and working group formed to address these concerns

o Stakeholders were requested to forward their inputs by 17-Dec-10 – not all stakeholders submitted

• Follow meeting of working group representatives held on 19-Jan-11

o Allocation of representatives to the various working groups

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COMPOSITION OF MAX LPG RETAIL PRICE (c/kg) W.E.F. 03-AUG-11

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Price element Coast (Zone 1A Gauteng (Zone 9C)

Maximum refinery gate price 742.760 742.760

Primary transport costs 37.120 175.960

Operating expenses 343.000 343.000

Working capital 26.000 26.000

Gross margin (Cylinder-filling plant) 161.000 161.000

Sub-total (1) 1435.880 1574.720

Retail margin: (15% of sub-total 1) 215.382 236.208

Sub-total (2) 1651.262 1810.928

Value Added Tax (14% of sub-total 2) 231.177 253.530

Maximum Retail Price (rounded to full cents)

1882.000 2064.000

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HISTORY OF MAX. LPG RETAIL PRICES (c/kg) SINCE IMPLEMENTATION OF REGULATION ON 14-JUL-10 (1)

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Date Coast Gauteng Increase / (Decrease)

14 July 2010 1,569.00 1,727.00

04 August 2010 1,619.00 1,801.00 74.00 correction in application of Rules and increase in product prices

01 September 2010 1,593.00 1,775.00 (26.00)Decrease in product prices

06 October 2010 1,586.00 1,768.00 (7.00)Decrease in product prices

03 November 2010 1,618.00 1,800.00 32.00Increase in product prices

01 December 2010 1,635.00 1,817.00 17.00Increase in product prices

05 January 2011 1,681.00 1,863.00 46.00 Increase in product prices

02 February 2011 1,722.00 1,904.00 41.00Increase in product prices

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HISTORY OF MAX. LPG RETAIL PRICES (c/kg) SINCE IMPLEMENTATION OF REGULATION ON 14-JUL-10 (2)

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Date Coast Gauteng Increase / (Decrease)

02 March 2011 1793.00 1975.00 71.00Increase in product prices

06 April 2011 1843.00 2025.00 50.00Increase in product prices

04 May 2011 1896.00 2078.00 53.00Increase in product prices

01 June 2011 1886.00 2068.00 (10.00)Decrease in product prices

06 July 2011 1844.00 2026..00 (42.00)Decrease in product prices

03 August 2011 1882.00 2064.00 38.00Increase in product prices

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STOCK TAKING WORSHOP ISSUES (1)• LPG Maximum Refinery Gate Price (MRGP) is based on 93 octane

movements within the Basic Fuels Price (BFP) mechanism whereas the import price of LPG is based on Saudi prices

o Included in the Dept’s 2011/12 deliverables. Deemed priority to address

• Non-regulation of the wholesale price

o Wholesalers can still charge higher prices which eat into the margins of retailers

o Most retailers have franchise agreements with wholesalers and consequently, do not have the option of sourcing LPG from other wholesalers with lower LPG prices

- Caution: Limiting role-flexibility and “over-regulation”

• Management and filling of LPG cylinders

o Cross-filling and hoarding of cylinders is still not adequately addressed

o Concern: who takes responsibility regarding safety issues when the filling of cylinders has been done by various parties

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STOCK-TAKING WORKSHOP ISSUES (2)• Playing field not yet leveled for participation of BEEs

o Admin fees charged by refineries

o Products ex-refineries committed to their wholesaling arm

• Safety Issues

o Adequate incorporation and administration of safety element in the LPG pricing structure

o LPG Association undertook to provide a thought-through proposal

• Review of the Magisterial District Zones (MDZ) pricing system

o Revision of the LPG MDZ system to removing any inconsistencies in the determination of LPG transport costs through the various zones

o Included in the Dept’s 2011/12 deliverables. Stakeholders will be invited to make submissions

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STOCK-TAKING WORKSHOP ISSUES (3)

• Zero rating for VAT of LPG was suggested by some stakeholderso Adequate incorporation and administration of safety element

in the LPG pricing structure

o Not accepted but will monitor developments and landscape changes

• Domestic / Residential vs. Commercial Prices

o Some stakeholders were concerned that LPG sold to residential customers could actually be used for commercial activities

o Earlier indications: commercial customers got quantity discounts & therefore matter a non-issue. Stakeholders need to prove the contrary

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STOCK-TAKING WORKSHOP ISSUES (4)• Incorporation of a regular Review Mechanism of

Working Rules o Clear set timeframes or trigger mechanisms for the

review / revision of working rules

o Implementation of a framework for annual or periodic adjustments of particular price elements

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MAXIMUM REFINERY GATE PRICE (MRGP)

•A review of the MRGP and the Working Rules governing the retail price of LPG in the DoE’s 2011/12 Strategic PlanoProvides firm basis to progressively look at the whole LPG value chainoTerms of reference formulated and research on international prices and pricing mechanisms underwayoConsultations with LPG industry will commence once discussion paper on the review of the MRGP and the Working Rules have been finalisedoVerification of allegations of losses in respect of importation (and local manufacturing) of LPGoRevised MRGP and Working Rules will be promulgated before the end of the 2011/12 fiscal yearoSubscription to relevant information sources and continuous monitoring

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PILOT PLANTS OVERVIEW (1)

• To test the efficacy of the proposed approacho Pilots undertaken in Atteridgeville, Tshwane Metro, Gauteng

[20,000 households] and Tweefontein South and North, Thembisile Hani Municipality, Mpumalanga [10,000 households]

• Switch users from electricity to LPG for thermal applications

o Per household subsidy: 1x 2plate stove, 2x 6kg cylinders & 1 x Sapphire heater

o Bottle filling plants have been constructed in both municipalities

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PILOT PLANTS OVERVIEW (2)• Gain policy insights, particularly related:o Energy security: security of supply and demand; logistical

chain / access

o Economics: capex and opex; LPG retail price for households / affordability

o Holistic viewpoint - PESTEL

o Impediments and challenges

• Capture lessons, close pilot phase and roll-out

o A service provider, SSER was appointed in February 2007 to run the pilot

o Closure of pilot phase and further roll-out: (1) SOE (PetroSA); (2) Open bidding

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PILOT PLANTS: UPDATE

• PetroSA formally responded to the Department’s close-out option and undertook a due diligenceo Due Diligence completed at the end of July 2011

o Formal report expected before the end of September 2011

o Engagements with involved municipalities underway

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TRANSFORMATION OF THE LPG INDUSTRY

• Two-fold but interrelated:o Structurally – the value chain

o Participants – broad-based economic empowerment of Blacks / HDSAs (historically disadvantaged South Africans) in the sector

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LIQUID FUELS CHARTER (LFC)• The parties to the Charter agreed that:

o 25% ownership and control of all facets of the industry that the parties to this Charter are seeking to bring about over a ten year period means HDSAs owning in total, by the end of that period, not less than 25% of the aggregate value of the equity of the various entities that hold the operating assets of the South African oil industry

o The parties to the Charter agree that the measurement of the extent of the achievement of this target of 25% of the aggregate value of the equity will be based on the asset values per the audited accounts of the entities concerned

• The LFC is a pioneer of all Charters, signed on 02-Nov-00 at the Liquid Fuels and Petroleum Industry Empowerment Summit

o Hence some shortcomings are understood in the context of being the first Charter

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LFC: SCOPE• Applies to the privately owned parts of the industry

• Exploration and production of petroleum

• Liquid fuels pipelines; Single Buoy Moorings; depots and storage tanks

• Oil refining and synthetic fuel manufacturing plants, including lubricants

• Transport, including road haulage and coastal shipping

• Trading, including imports and exports

• Wholesale and retail assets / infrastructure

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LFC: STRATEGIC FOCUS AREAS• Ownershipo Financing

o Sustainability

o Access to Ownership of Joint Facilities

• Control

• Supportive Culture

• Capacity Building/ Skills Development

• Employment Equity

• Preferential Procurement

• Corporate Social Development

• Preferential Payment Terms

New empowerment with strong compliance monitoring and enforcement is required and imminent

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OBSERVATION REGARDING TRANSFORMATION

•Transformation in terms of the LFC has not happenedoLPG Industry players sometimes considering themselves to be outside of the scope of the LFC

•Scientific and independently audited reports on transformation in the LPG sector in similar fashion to the liquid fuels sector are requiredoReference to reports that can stand legal scrutiny and challenge

•The LPG Industry is highly concentrated with a handful of industry players dominating the industry•Structural arrangements between refiners and marketers impeding introduction of new entrants•Latest deals

A properly resourced compliance monitoring and enforcement function is a key success factor 1919

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WAY FORWARD

• Improvement of data collection on LPG Industry transformation and monitor complianceo Follow-up on matters raised with the LPGSASA

o Review of the empowerment dispensation next year

• Conclusion of MRGP Review

• Conclusion of the Development of the Strategy

o Contextualize and fit the pieces of puzzle together

• Working closely with the LPG Industry stakeholders to address supply challenges

o Including Transnet SOC Ltd (TNPA in particular for infrastructure)

• Roll-out pilot concept

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Page 21: PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES

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Ke ya leboga Thank you

Ke a leboha

Ke a lebogNgiyabonga

NdiyabulelaNgiyathokoza

Inkomu

Ndi khou livhuwaDankie

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