PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

1. PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY LPG PILOT PROJECT & PRICE REGULATION 16 FEBRUARY 2010 Hydrocarbons Chief Directorate Team Tel: 012 444 4015/6

2. Outline of Presentation • Introduction of the Hydrocarbons Team • General Overview • LPG Pilot Project • Regulations in Respect of the Maximum Retail Price of LPG for residential customers • Challenges • Next steps • Questions, comments, guidance, discussions

3. Why liquefied petroleum gas (LPG)?? • Advocacy of White Paper on Energy Policy of 1998 on energy mix • Diversification of household energy carriers to enhance energy security, • To promote a better life for all South Africans through eradication of energy poverty • facilitate universal access to basic energy services • Contribution to achievement of millennium development goals • Cleaner, modern form of energy (cf biomass) - environmental considerations • Efficiency of LPG for thermal use (cooking and space heating), particularly when compared to electricity – Energy Efficiency • Inelastic domestic energy demand (people have to cook their food, warm their homes when it is cold and use warm / hot water) • Implies that energy demand merely shifts from one available carrier to another, depending almost exclusively on economics • LPG use as an electricity Demand Side Management intervention • Business & employment opportunities for HDSAs – BBBEE

4. Energy use by households (residential sector) Acknowledged: different residential sectors have different needs Source: Energy outlook for South Africa - 2002

5. Thermal load handling We have to shift this load to an appropriate thermal energy source

6. The role of gas in global economies RSA per capita consumption is less than a kg/year compared to about 37kg/per capita in Brazil and 34kg/per capita in Morocco

7. Why the low usage? Prices High prices Very High Prices But where am I gonna get this LPG from???

8. Price related fact …Petrol even with all Government imposts is still much cheaper than LPG at retail level… Source: Based on March 2008 Petrol figures

9. Some facts related to LPG supply • Sources of LPG in RSA • natural gas to liquids (PetroSA) & coal to liquids (Sasol) facilities • 4 local crude oil refineires (Sapref, Enref, Chevref & Natref) • Importation • Richards Bay, Durban and Eastern Cape facilities inadequate • Various LP Gas import facilities in planning stage • Potential import sources • Angola, Nigeria, Algeria, Egypt, Saudi Arabia and Qatar

10. Indicative gross margin cpl Dealers Existing LPG supply chain Commercial (10kT) Manifolds 55 Distributors 65 35 45 90 • Refineries • Sapref • Sasol CTL • PetroSA GTL • Natref • Chevref Stockists Households (13kT) 90 Fore- courts Own filling 130- 50 Source: Wild Orchard, 2004

11. Exclusive Area 3 Exclusive Area 2 Primary Transportation Manufacturers & importers Consumers Consumers Consumers Exclusive Area 1 Distribution channels Distribution channels Distribution channels Cylinder Filling, management Centre Cylinder Filling, management Centre Cylinder Filling, management Centre RGP = Petrol BFP - R74/kg But is Platt’s quoted Promote imports Max Price set Zone differentials Tariffs based on actual transport costs to each zone Own & maintain cylinders in area Fills all cylinders in area Regulated monopoly BEE opportunity iGas participation? Require economies of scale Mixture of low & high income households Delivery & non delivery channels Retail Price on Cylinder Admin charge for marketing Allow distribution charge for delivery and collection of cylinders – cost recovery basis Proposed Business Model

12. Adopted approach Price regulation Ensuring Access by poor • Reduction of current industry wide high prices • Investigate sharing of logistic value chain • Investigate cylinder filling options “Free basic energy” provision • Availing cylinders and appliances to the LIH • Focus in LSM’s that can afford LPG • Exchange unsafe appliances • For those poor LIH’s who can’t afford to buy LPG, exchange 50kW free electricity for say 15 kg LPG per month

13. The road travelled thus far • LPG for Low Income Households (LIH) CBA in March 2003 • LPG Challenge workshop - April 2004 • LPG Association Annual Conference - November 2004 • May 2005 – LPGSASA pilot projects • Dec 2005 – Department/LPGSASA Agreement • Jan 2006 – Department’s LPG Pilot Project • LPGSASA Conference in Cape Town - Oct 2007 • Presentation to PPC – March 2008 • Publishing of Draft LPG Price Regs – March 2008 • Stakeholder engagement – 27 May 2009 • LPGSASA Conference in Johannesburg - Oct 2009 • Publishing of Draft LPG Price Regs & Working Rules – Nov 2009 • Stakeholderengagement – 02 Feb 2010

14. Identified successes of the Pilot Project • 2 Bottle filling plants were constructed, commissioned and are operational • Department facilitated an LPG upliftment contract for service provider with a refiner - SASOL • ± 90% households were connected to LPG • LPG usage accepted by communities where project is located • Local people were employed throughout the phases of the pilot • The DSM aspect of the pilot positively proven and independently verified (1377 mwh shift in Tshwane & 2607.27 mwh shift in T Hani) • Safe usage of LPG as a result of training has been achieved and no reported accident in pilot areas • Both municipalities have expressed an interest in expansion of pilot to cover broader areas within their respective jurisdictions • Draft LPG pricing regulations are but one outcome of the pilot

15. Identified weaknesses of the Pilot Project • Management of the project by service provider has not been satisfactory – cash flow problems; management capabilities • Contractual breaches by service provider – erratic supply of LPG, non-delivery to households, unavailability of a paid-for Information Management System • Poor marketing of the project – lesser LPG consumption • Appliance distribution to households poorly managed • Poor quality of appliances – heaters • Scope for project management up-skilling by all involved

16. Lessons learnt from the Pilot Project • Key lesson learnt - the adopted distribution model (bringing the plant closer to the market) is possible and could result in significant price reduction

17. Rationale underpinning the price regulation • Response to the public outcry about exorbitant LPG prices • Realisation of policy objectives of energy diversification, etc. • Determination of an appropriate pricing model for LPG in RSA • Forming a base on which to expand and develop an LPG market • Improvement of affordability & accessibility of LPG

18. Principles underpinning the pricing regime • Pricing structure similar to that of petrol • Import parity pricing • Zonal prices • Intended to promote importation of gas • Starts with existing refinery gate price approach • Basis is cost reflectivity • There will be licensing of LPG market players • Determination of an appropriate pricing model taking into account investment costs • Rate of return on investment commensurate with risk • Average cylinder filling plant considered is 35,000 kilogram (medium sized plant) • Return on asset LPG Wholesale margin of 15% • An LPG retail margin of 15% was used • Shortest possible value chain • Minimal “steel” transportation • Reduce number of “middlemen” in the LPG value chain

19. Stakeholder consultation process • Draft Regulations published in the Government Gazette for public comment on 28 March 2008 • Comments were received from the industry and other affected stakeholders such as: Afrox, Total Gas, Sapia, PRAF, LPGSASA • Stakeholders Workshop was held on the 27 May 2008. • Key concerns included: exclusion of LPG cylinders in the cost price structure of LPG Regulations; Working Rules not discussed • Draft LPG Regulations and the Working Rules published in the Government Gazette public comment on 12 November 2009 • Comments received mainly from stakeholders such as Afrox, Chevron, Gas and Equipment, Eddlegas and Others were duly considered and a takeholder Workshop followed on the 02 February 2010 • Comments from the Stakeholders include: • Margins, costs and recovery of such costs, • Inappropriateness of Maximum Refinery Gate Price of LPG • Cylinder management in the country - hoarding of cylinders & cross filling • The LPG Regulations and Working Rules have been sent to the State Law Advisor (SLA) to solicit legal opinion

20. Summary of price structure in Rands

21. Operating Expenses

22. Working Capital

23. Gross Margin (Cylinder filling plant – wholesale margin)

24. Potential impact of price regulation • Reduced price will in the short-, medium- to long-term: • Increase demand • Induce industry growth • facilitate investment in infrastructure • Create opportunities for HDSA participation in the sector • Reduce electricity consumption - DSM • Create jobs • Promote cleaner, safer, efficient and affordable household energy carriers • Provide choice for households especially those who use carriers that cause indoor pollution.

25. Challenges • Inadequate LPG infrastructure • Maintenance and safety • Hoarding of cylinders by competitors • Control of distribution channels by existing LPG refiners • Perception / reputation of LPG – the “bomb scare”

26. Next Steps • Promulgation of Regulations in respect of the Maximum Retail Price of LPG for Residential Customers – Mar 2010 • Obtain & incorporate comments from State Law Advisor • Translation of Regulations into a second language • Review of the LPG Licensing Regime • other aspects of the regulatory framework, particularly HDSA empowerment • Review of the Maximum Refinery Gate Price • Improve security of supply of LPG • Import facilities, storage and distribution logistics • Include LPG in the Free Basic Alternative Energy (FBAE) Policy • Ongoing monitoring and enforcement • Cooperation with stakeholders (DoL, LPGSASA, etc) i.r.o. cylinder management and safety issue of cylinders

27. WE THANK YOU