PRESENTATION TO THE SELECT COMMITTEE ON ECONOMIC DEVELOPMENT UPDATE ON LPG ISSUES 02 November 2011

1. PRESENTATION TO THE SELECT COMMITTEE ON ECONOMIC DEVELOPMENT UPDATE ON LPG ISSUES 02 November 2011

2. PRESENTATION OUTLINE Supply / Demand Situation Retail Price Regulation; Update on the Pilot Projects; LPG Strategy; and Way Forward

3. DEMAND / SALES ISSUES Monthly demand varies Unplanned shutdowns Limited imports Demand sectors manufacturing hospitality industries (including restaurants) households Licensing Difficult to monitor and enforce compliance with safety standards because LPG retailers are not licensed

4. LPG SUPPLY Six Refineries Sapref in Durban Sasol’s synfuels (CTL) facility in Secunda PetroSA’s synfuels (GTL) facility Mossel Bay Natref in Sasolburg Enref in Durban Chevref in Cape Town Imports Durban Port Elizabeth Richards Bay

5. LPG IMPORTS Normal ship load: 2,500 tons Afrox may import via Richards Bay Facility leased by Afrox from Island View Storage Working capacity: 3,500 tons About 200 tons per day throughput – investigating rail option to increase throughput Easigas imports via Port Elizabeth Owned by Shell Maximum holding capacity: 1,600 tons (2 spheres of 800 tons each) Imports via Durban through Sapref facilities Owned by SAPREF Maximum holding capacity: 1,000 tons (2 spheres of 500 tons each; there are other spheres in the refinery but store gases)

6. LPG IMPORTS (contd.) East London facility now mothballed BP-owned Saldanha Bay: ship-to-road operation? Safety and operational concerns NERSA has already awarded a licence for an import facility in Saldanha Bay Alignment among players is key: particularly DoE, Transnet and NERSA NOTE Inadequate import facilities Throughput challenges with existing infrastructure Seasonality – Northern hemisphere winters versus southern hemisphere summers and vice versa RSA summer shortages coincide with high European winter demand - cargoes destined for Europe

7. LPG SUPPLY SHORTAGES Occur every winter due to high demand Planned (scheduled) and unplanned shutdowns Refinery shutdowns, currently: PetroSA - on an unplanned shutdown: back mid-Nov. ENREF - on a scheduled maintenance shutdown which was brought forward due to a fire accident on the plant. SAPREF - shutdown again (for 14 days) due to technical problems with the cracker unit: operating at~50% LPG production rate at best Frequent unplanned shutdowns – Infrastructure integrity (old RSA refineries and demand that has outstripped domestic supply). Need for investment in refining infrastructure and maintenance thereof Failure to bring units back on line as planned Accidents and equipment failures result in: Unplanned shutdowns depending on how critical to the process the involved equipment is Delayed start-ups or drawn forward shutdowns Unusual Spring / Summer shortages

8. LPG SUPPLY SHORTAGES Importation of LPG is the primary solution Possible demand growth will not be met by domestic supply Maximum Refinery Gate Price (MRGP Review) Investment in additional LPG import facilities

9. LPG SUPPLY MANAGEMENT Submission of shutdown schedules by the oil companies Per refinery and consolidated to get industry picture Updated on a monthly basis Contingency plans: challenge of executing according to plan Regular supply meetings Chaired by DoE mainly comprising SAPIA members and Transnet Conditional exemption of industry by Competition Commission Individual company submissions and consolidation thereof Joint meetings between Department and industry Focus on product type as per need – interconnectedness of product types Regular LPT Meetings feeding into top level meetings

10. CHALLENGES Lack of sanctions to those who fail to supply other than the normal financial losses due to lost sales and associated losses Probability of a non-supplying company negotiating hard with other for own optimal financial situation at the expense of the overall product supply to the market. Contingency plans: challenge of executing them as planned Exploring possibility of imposing sanctions through revision of licensing conditions Frequent unplanned shutdowns – Aggravates the situation when coinciding with other shutdown(s) Low refining margins? LPG not main product?

11. CHALLENGES (contd.) Demand / supply imbalance Unenviable position of Government: coaxing the oil companies to do what they are supposed to do Difficulty of managing imports: delays due to inclement weather; congestions / scheduling at the port – high demurrage costs and supply shortages; inadequate import facilities Investment in domestic refining capacity as well as additional port facilities

12. CURRENT LPG SUPPLY SITUATION Planned (scheduled) and unplanned refinery shutdowns PetroSA - on an unplanned shutdown: back mid-Nov. ENREF - on a scheduled maintenance shutdown. SAPREF - shutdown again (for 14 days) due to technical problems with the cracker unit: operating at ~50% LPG production rate at best LPG Imports AFROX: Imported 7 kt, of which 3.5kt arrived last Wednesday and the balance is due 20-30 November 2011 EASIGAS: Imported 5 kt, of which 2.5kt arrived last Friday and the balance is expected this week Challenge: European winter demand & lack of adequate import facilities Department-led coordinated response Individual oil company contingency plans Regular LPT meetings

13. MAXIMUM REFINERY GATE PRICE (MRGP) 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 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 done LPG stakeholder workshop organized for the 10-Nov-11 for gathering inputs from stakeholders: will lead to proposed review of the MRGP and the Working Rules 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 Encouraging new investments in the LPG sector Subscription to relevant information sources and continuous monitoring

14. 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

15. LPG STRATEGY OBJECTIVES: The LPG Expansion Strategy 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; Enhance the level and quality of energy services currently available to residential users throughout South Africa; and Contribute to the Government’s green economy programme aimed at reducing greenhouse gas emissions

16. 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 behaviour Hoarding of cylinders is uncompetitive. The Department would encourage all service providers to report such behaviour to the Competition Commission. Vertical integration of the LPG supply chain: Manufactures of LPG being wholesalers & retailers at the same time - total control of the supply value chain.

17. STRATEGIC INTERVENTIONS (contd.) 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.

18. WAY FORWARD Conclusion of MRGP Review Conclusion of the Development of the Strategy Contextualize and fit the pieces of puzzle together Policy cohesion Infrastructure development Working closely with the LPG Industry stakeholders to address supply challenges Including Transnet SOC Ltd (TNPA in particular for infrastructure) Explore possible interventions

19. Keyaleboga Thank youKe a lebohaKe a lebogNgiyabongaNdiyabulelaNgiyathokozaInkomuNdikhoulivhuwaDankie