Henry Nhlanhla Gumede Chief Director – Hydrocarbons 012 317 9694 nhlanhla@mepta.pwv.za

1. Petroleum Products Amendment Bill & Petroleum Pipelines Bill Presentation to the National Council of Provinces22th September 2003 Henry Nhlanhla Gumede Chief Director – Hydrocarbons 012 317 9694 nhlanhla@mepta.pwv.gov.za

2. Introduction • Liquid fuels sectormajor policy thrust • Managed liberalisation with minimal dislocation • Maintain regulatory system - with improvements - until removed • Re/deregulation after milestones have been met • Managed liberalisation • Protect small business and jobs • Elevate historically disadvantaged • Lower intermediate input costs (energy) to create low-cost platform for economic development – esp. in industrial heartland • Reduce monopoly rents in natural monopolies Energy Policy White Paper – Dec 1998

3. Introduction • Government’s Approach • Competition between and within energy carriers • Protect country’s strategic interests • Appropriate ‘rules of the game’ for investors • Facilitate investment projects • Regulation only where and to extent necessary

4. Introduction • Liquid fuels sectormanaged liberalisation - phases and milestones • Phase One:Achieve Milestones, Maintain regulation • Phase Two: Re/Deregulation • Phase Three: Phase Three - Monitoring and corrective action

5. The Petroleum Pipelines Bill

6. Introduction • The Bill seeks to untangle what has come to be known as the “Gordian Knot” “Natref Neutrality” “Location advantage” Gas agreement with Sasol Gordian Knot On-railing agreements with Spoornet Sasol Upliftment agreement Zone and Service differentials Fungibility and delivery of specific molecule Liquid Fuels Price control mechanism

7. Introduction • Government considerations • Pipeline network strategic importance – e.g. Natref fire • Most pipelines currently state-owned • Additional capacity & investment needed - +/- 2007 • Concerns been raised about derivation of pipeline and storage tariffs • Need for transparency in tariff formulation

8. Consultation • A number of stakeholders were consulted during the formulation of the Bill. Written submissions from 8 parties were received • Cosatu • Engen (Coastal refiners) • Groundwork (Environmental NGO network) • Petronet • Sasol • SA Institute of Civil Engineers • Totalfinaelf • Umhaba Estates

9. Scope and scale of the Bill • Purpose of the Bill • Establish a national regulatory framework • Establish a Regulator as custodian & enforcer of regulatory framework • Provide for issuing of licenses • Scope of Bill • Crude oil • Petroleum products • Pipelines, storage facilities, off-loading facilities • Excludes production facilities

10. Objects of the Bill • Promote competition in the construction and operation of petroleum pipelines,loading facilities and storage facilities • Promote the efficient, effective, sustainable and orderly development, operation and use of petroleum pipelines, loading facilities and storage facilities • Ensure the safe, efficient, economic and environmentally responsible transport, loading and storage of petroleum • Promote equitable access to petroleum pipelines, loading facilities and storage facilities • Facilitate investment in the petroleum pipeline industry • Provide for the security of petroleum pipelines and related infrastructure • Promote companies in the petroleum pipeline industry that are owned or controlled by HDSAs, by licence conditions that enable their competitiveness • Promote the development of competitive markets for petroleum products • Promote access to affordable petroleum products • Ensure an appropriate supply of petroleum to meet market requirements

11. The Regulator • The Bill sets up an independent regulator (legal person). The functions of the regulator are to • Issue licences for • the construction and conversion of petroleum pipelines, loading facilities and storage facilities • the operation of petroleum pipelines, loading facilities and storage facilities • Gather and store information on construction, conversion and operation • Undertake investigations and enquiries into the activities of licensees • Act as mediator or arbitrator • Set or approve tariffs and charges in the manner prescribed by regulation • Monitor and take appropriate action, to ensure access in a non-discriminatory, fair and transparent manner • Expropriate land or any right on behalf of licensees • Promote competition in the petroleum pipeline industry • Take decisions that are not at variance with published Government policy

12. The Regulator • Composition of the regulator • 5 members – full time • Appointed by Minister for 4 year term, renewable • Limitations • RSA citizens; solvent; no convictions • Conflict of interest – disclosure • To be phased into a Single Energy Regulator • Qualifications • Relevant experience • Impartial & objective • Balance between continuity & capacity building

13. The Regulator • Meetings of the regulator • Procedures prescribed by regulator • Open to public unless confidential, proprietary or commercially sensitive information discussed • Decisions to be reduced to writing • Record of proceedings • The Regulator - Duties • Act in justifiable & transparent manner • Not act in own interests • Act independently of undue influence or instruction • Act in a manner required & expected from holder of public office

14. The Regulator • Decisions of the regulator are bound by a number of principles • Procedurally fair • Based on facts & evidence • Legally consistent • In public interest • Written • Explained • Appeals to court having jurisdiction

15. The Regulator • The regulator will be supported by a competent staff • CEO & professional/administrative support staff • CEO may be person employed by another energy sector regulatory authority • Support to be common to eventual single regulatory authority

16. The Regulator • The regulator will be funded from a number of sources • Appropriation from national revenue • Levies by separate legislation (has been drafted) • Fees earned – e.g. dispute resolution • Accounts to be audited by Auditor General

17. Licensing • Issuing of Licenses • Applications advertised • Objections within 30 days • Decision period 60 days after replies to objections • Separate licenses for each activity • Existing activities must apply and get licenses

18. Licensing • Authority may impose licence conditions within the following framework (1) • A licensee must carry out the construction or operations activities for whichthe licence is granted • Promote historically disadvantaged South Africans • Provide for an appropriate supply of products to meet marketrequirements • Licensees must provide the prescribed information to the Authority on thecommercial arrangements regarding the participation of HDSAs • Loading, pipeline and storage activities of vertically integratedcompanies may be required to be managed separately, with no cross-subsidisation • Apipeline may be licensed for either crude oil or petroleumproducts, or both • Sufficient pipeline capacity availed for crudeoil to enable uninterrupted operation of Natref, at its current normal operating capacity • Shippersmust have access to petroleum pipelines in proportion to their needs and within the commercially reasonableconstraints

19. Licensing • Authority may impose licence conditions within the following framework (2) • Partiesallowed to negotiate changes with pipeline licenseesin the routing, size and capacity of proposed petroleum pipelines • Licenseesnot obliged to incur any additional expenditure toprovide the changes and the total cost must be shared equitably between parties • Licenseesmust allow interconnections with the facilities of other licensees • Theinterconnection is technically feasible • Costs are borne by person requestingthe interconnection • 3rdparties must have access to loading facilities with the capacity in proportion to their needs, subject to an appropriate payment • 3rdparties must have access oncommercially reasonable terms to uncommitted capacity in storage facilities • On provision that an applicant may elect to give users access in proportion to their needs • Partiesmay negotiate with storage licensees for changes in thecapacity of storage facilities

20. Licensing • Authority may impose licence conditions within the following framework (3) • Tariffs for petroleum pipelines set by the Authority • Tariffs for loading facilities and storage facilities approved by Authority • Licensed loading facilities, petroleum pipelines or storage facilities in a fully operational condition • The time period within which pipelines & facilities must become operational fixed • Licensees to provide information necessary for the Authority to perform its functions • Standards of construction and operation approved by the Authority include HSE standards required by the Authority, • Licensees must • Submit to the Authority annually an emergency plan for implementation • Train the appropriate operating and maintenance employees • Establish liaison with the appropriate emergency response officials • Pipeline licensees to have a plan for reviewing changes in conditions affecting the integrity and safety of their pipelines, including periodic patrolling • Licensees to establish and maintain liaison with local authorities that issue permissions for excavations

21. Licensing • Other issues that will be considered • Non-discrimination; term; amendment, revocation • Regulator can amend licenses • Regulator arbitration on request • Contraventions • Suspend or revoke • Fines up to R2 mill / day • Appeals to high Court

22. Other provisions • Other provisions • Entry, inspection & information gathering by Regulator • Voluntary resolution of disputes • Compulsory resolution of disputes • Expropriation – rights of way

23. Regulations • Made by Minister after consulting Regulator & inviting public comment • Procedures • Record keeping • Forms • Publishing of information • Methodology to be used by Regulator • Land rehabilitation

24. General • Prohibition on agreements contrary to Act • Short Title – Petroleum Pipelines Act

25. Petroleum Products Amendment Bill

26. Introduction • Although there were a number of conflicting interests, the formulation of the Bill benefited from an extensive interaction with key stakeholders • Most submissions very helpful • Background and context are very important • An amendment Bill • Competition issues: public interest prevails for the transitional phase • Ministerial discretion: dynamic and complex industry • The drafting complicated by current negotiations on main supply agreement

27. The Challenges in the Petroleum sector • The Bill has been configured in a manner that addresses these challenges Challenge Response • Liberalization and competition • Internationally competitive • Synfuels industry • Supply of quality products • Efficient network • Safety and environment • Investments - Petrochemicals • HDSA participation & preserve jobs • Energy Efficiency • SMME • Transitional licence conditions • Regulate key economic inputs • Regulated “system” • Regulated standards/specs • Licensing & Petroleum Pipelines • Fuel standards regulation • HUB – Manufacturing licensing • Licensing/Full service • Regulate for efficiency (Feebate) • Vertical integration/Licensing

28. Objects of the Bill • The primary aim for amending this Act was to modernise it • The Petroleum Products Act, 1977 is outdated • It is no longer in line with the socio-political and economic dynamics pertaining to the liquid fuels sector • The PPAB will ensure that governance of the liquid fuels sector is in line with Government’s policy objectives • It gives effect to policy issues identified the Energy White Paper • It provides for a licensing dispensation that includes refiners, wholesalers and retailers petroleum • “Give effect” to the Charter through licensing • Allow for provision information

29. Section 2 amendments, extension of regulatory powers • The Minister may • Prescribe conditions under which the selling or buying of petroleum products other than in accordance with the prescribed, maximum or minimum price may take place and oblige any person to publish the prices at which petroleum products are “available for sale” • Make regulations for the purposes of ensuring a saving in, and the efficient and safe use of, petroleum products • Prescribe the quantities of crude oil or petroleum products to be maintained by any person

30. Section 2A Prohibition Of Certain Activities • The Bill prohibits a number of activities • No person may without a appropriatelicence hold or develop a site,manufacture petroleum productsor conduct the business of wholesaler or retailer • No person may make use of a business practice, method of trading, agreement, arrangement, scheme or understanding that is aimed at or would result in • Whereby a wholesale oil company may own and operate a service station(maintenance of small businesses) • Except for training • Excludes LPG & paraffin • The sale of petroleum products using a system of self-service by consumers

31. Section 2B Licensing Objectives • The Controller of Petroleum Products must issue licences. In considering the issuing of any licences, theController shall give effect to the provisions ofsection 2C and the following objectives • Promoting an efficient manufacturing, wholesaling and retailingpetroleum industry • Facilitating an environment conducive to efficient and commerciallyjustifiable investment • The creation of employment opportunities and the development ofsmall businesses in the petroleum sector • Ensuring countrywide availability of petroleum products at competitive prices • Promoting access to affordable petroleum products by low-incomeconsumers for household use.

32. Section 2C Licensing Objectives • Transformation of South African petroleum and liquid fuels industry • In considering licence applications in terms of this Act, theController of Petroleum Products shall • Promote the advancement of historically disadvantaged SouthAfricans • Give effect to the Charter • The Controller of Petroleum Products may require any category oflicence holder to furnish information, as prescribed, in respect of theimplementation of the Charter

33. Section 2D Transitional licensing provisions • The Act makes provisions for existing businesses • The provides deems any person to a holder of a licence who, at the time of commencement of the PetroleumProducts Amendment Act, 2003 • Holds and is in the process of developing a site • manufactures or wholesales petroleum products, or retails • The person shall, within a period ofsix months apply for an appropriate licence • The licence shall lapse if the person fails to apply for alicence within the stipulated period • The applicant shall, on application,be entitled to a licenceif the applicant is in compliance with all national, provincial andlocal government legal requirements, that are in force immediately prior tothe commencement of this Act • Such applicant subject to the general conditions of a licence but not financial security requirement prescribedby regulation

34. Section 2E - “System” for allocation & supply of site licenses • Framework for allocation of site licences • Intend: an optimum number of efficient sites • Intend equilibrium – all participants • Promote efficient and productive retail facilities by • Cap on number of sites • Link total sites to total consumption • Wholesalers can trade obligations to retailers • Supplies (on spec.) – give preference to products made from • Coal, natural gas, vegetable matter • Other raw materials • Link new licenses to terminators or transfers

35. Section 2E - “System” for allocation & supply of site licenses • The system for allocation and supply of site licences is not intended for certain products • For “prescribed” products • Minister to review efficacy of the system • Against objectives from time to time • Revise system if necessary

36. Licensing in general • For the purposes of accountability, the applicant must be linked to the activity for which the licence is intended • Any person who apply for a licence must • Manufacturing – be property owner or with their permission • Site – property owner • Wholesale & retail – be business owner

37. Section 2F - System for allocation of licences for LPG and Paraffin • Minister may prescribe licensing systems for the wholesaling and retailing of liquefied petroleum gas or paraffin • Additional objective “promote access to affordable petroleum products by low income consumers for household use” • New section: Minister may regulate”system” for LPG/Paraffin licensing “targeted at poverty alleviation for low income households” • In designated areas may restrict to one or more retailers

38. Section 4 - Controller of Petroleum Products • The Minister • Shallappoint anyperson in the public service as Controller of Petroleum Products • Mayappoint persons in the public service as regional controllers of petroleumproducts or as inspectors for the Republic • May, inconsultation with the Minister of Finance determine, appoint or authoriseany other person or person belonging to any other category of persons toact as regional controller of petroleum products or as inspector

39. Section 12 - Offences and Penalties • Any person who contravenes a provision of the Act, shall be guilty of an offence • Be liable on conviction to a fine • not exceeding R1 000 000 • Imprisonmentfor a period not exceeding ten years • Both such fine and such imprisonment • Compliance may result in a directive to absolve from criminal liability

40. Section 12A - Appeal • Any person directly affected by a decision of the Controller ofPetroleum Products may, appeal to the Minister against such decision • An appeal shall be lodged within 60 daysafter such decision has been made known to the affected person • The appeal shall beaccompanied by • Awritten explanation setting out the nature of the appeal • Anydocumentary evidence upon which the appeal is based • The Minister shall consider the appeal, and shall give his or herdecision thereon, together with written reasons therefor

41. Section 12B Arbitration • The Controller of Petroleum Products may, on request by a retailer or by a wholesaler, alleging an unfair contractual practice, require that the parties submit the matter to arbitration • Arbitrator to make awards to correct unfair and unreasonable contractual practices • Determine if allegations “frivolous or capricious” – compensatory awards • Orders, including costs, final and binding

42. Section 12C - Regulations • The Minister may make regulations regarding • Conditions or restrictions in respect of licences • Conditions relating to the advancement of HDSAs • The obligation of a licence holder to keep records and to furnish particular information • The form and manner of an application for a license • Prohibiting a business practice which conflicts with any licensing objective • Therecords and information to be kept by the Controller of Petroleum Products • Thecontinuity of supply of petroleum products by licensees under normal operating conditions, and in cases of potential or actual emergency • The specifications and standards of petroleum products • Theprohibition of the blending or mixing of different petroleum products • Therehabilitation of land used in connection with a licensed activity

43. Fuel Specifications and Standards • In the case of fuel specifications, the Minister shall, prior to promulgating any regulation contemplated in subsection (1)(e)— • Invite public comment thereon by publishing it in the Gazette • Allow a period of not less than two months for the submission of public comment • duly consider such comments

44. Thank you