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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES

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

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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES

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  1. PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY UPDATE ON LPG ISSUES 23 August 2011 11

  2. 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 22

  3. RETAIL PRICE REGULATION • Inaugural regulation of the maximum retail price of LPG supplied to residential customers on 14-Jul-10 • 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 • Concerns raised and working group formed to address these concerns • 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 • Allocation of representatives to the various working groups 33

  4. COMPOSITION OF MAX LPG RETAIL PRICE (c/kg) W.E.F. 03-AUG-11 44

  5. HISTORY OF MAX. LPG RETAIL PRICES (c/kg) SINCE IMPLEMENTATION OF REGULATION ON 14-JUL-10 (1) 55

  6. HISTORY OF MAX. LPG RETAIL PRICES (c/kg) SINCE IMPLEMENTATION OF REGULATION ON 14-JUL-10 (2) 66

  7. 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 • Included in the Dept’s 2011/12 deliverables. Deemed priority to address • Non-regulation of the wholesale price • Wholesalers can still charge higher prices which eat into the margins of retailers • 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 • Cross-filling and hoarding of cylinders is still not adequately addressed • Concern: who takes responsibility regarding safety issues when the filling of cylinders has been done by various parties 77

  8. STOCK-TAKING WORKSHOP ISSUES (2) • Playing field not yet leveled for participation of BEEs • Admin fees charged by refineries • Products ex-refineries committed to their wholesaling arm • Safety Issues • Adequate incorporation and administration of safety element in the LPG pricing structure • LPG Association undertook to provide a thought-through proposal • Review of the Magisterial District Zones (MDZ) pricing system • Revision of the LPG MDZ system to removing any inconsistencies in the determination of LPG transport costs through the various zones • Included in the Dept’s 2011/12 deliverables. Stakeholders will be invited to make submissions 88

  9. STOCK-TAKING WORKSHOP ISSUES (3) • Zero rating for VAT of LPG was suggested by some stakeholders • Adequate incorporation and administration of safety element in the LPG pricing structure • Not accepted but will monitor developments and landscape changes • Domestic / Residential vs. Commercial Prices • Some stakeholders were concerned that LPG sold to residential customers could actually be used for commercial activities • Earlier indications: commercial customers got quantity discounts & therefore matter a non-issue. Stakeholders need to prove the contrary 99

  10. STOCK-TAKING WORKSHOP ISSUES (4) • Incorporation of a regular Review Mechanism of Working Rules • Clear set timeframes or trigger mechanisms for the review / revision of working rules • Implementation of a framework for annual or periodic adjustments of particular price elements 1010

  11. 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 Plan • Provides firm basis to progressively look at the whole LPG value chain • Terms of reference formulated and research on international prices and pricing mechanisms underway • Consultations with LPG industry will commence once discussion paper on the review of the MRGP and the Working Rules have been finalised • Verification of allegations of losses in respect of importation (and local manufacturing) of LPG • Revised MRGP and Working Rules will be promulgated before the end of the 2011/12 fiscal year • Subscription to relevant information sources and continuous monitoring 1111

  12. PILOT PLANTS OVERVIEW (1) • To test the efficacy of the proposed approach • 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 • Per household subsidy: 1x 2plate stove, 2x 6kg cylinders & 1 x Sapphire heater • Bottle filling plants have been constructed in both municipalities 1212

  13. PILOT PLANTS OVERVIEW (2) • Gain policy insights, particularly related: • Energy security: security of supply and demand; logistical chain / access • Economics: capex and opex; LPG retail price for households / affordability • Holistic viewpoint - PESTEL • Impediments and challenges • Capture lessons, close pilot phase and roll-out • A service provider, SSER was appointed in February 2007 to run the pilot • Closure of pilot phase and further roll-out: (1) SOE (PetroSA); (2) Open bidding 1313

  14. PILOT PLANTS: UPDATE • PetroSA formally responded to the Department’s close-out option and undertook a due diligence • Due Diligence completed at the end of July 2011 • Formal report expected before the end of September 2011 • Engagements with involved municipalities underway 1414

  15. TRANSFORMATION OF THE LPG INDUSTRY • Two-fold but interrelated: • Structurally – the value chain • Participants – broad-based economic empowerment of Blacks / HDSAs (historically disadvantaged South Africans) in the sector 1515

  16. LIQUID FUELS CHARTER (LFC) • The parties to the Charter agreed that: • 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 • 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 • Hence some shortcomings are understood in the context of being the first Charter 1616

  17. 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 1717

  18. LFC: STRATEGIC FOCUS AREAS • Ownership • Financing • Sustainability • 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 1818

  19. OBSERVATION REGARDING TRANSFORMATION • Transformation in terms of the LFC has not happened • LPG 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 required • Reference 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

  20. WAY FORWARD • Improvement of data collection on LPG Industry transformation and monitor compliance • Follow-up on matters raised with the LPGSASA • Review of the empowerment dispensation next year • Conclusion of MRGP Review • Conclusion of the Development of the Strategy • Contextualize and fit the pieces of puzzle together • Working closely with the LPG Industry stakeholders to address supply challenges • Including Transnet SOC Ltd (TNPA in particular for infrastructure) • Roll-out pilot concept 2020

  21. Ke ya leboga Thank you Ke a leboha Ke a lebogNgiyabonga Ndiyabulela Ngiyathokoza Inkomu Ndi khou livhuwa Dankie 2121

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