Henry Nhlanhla Gumede Chief Director – Hydrocarbons 012 317 9694 [email protected]

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Henry Nhlanhla GumedeChief Director – Hydrocarbons012 317 9694

[email protected]

Petroleum Products Amendment Bill & Petroleum Pipelines Bill

Presentation to the National Council of Provinces

22th September 2003

Hydrocarbons Chief Directorate2

Department of Minerals and Energy

Minerals and Energy for Prosperity and Development

Introduction

Liquid fuels sector major 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




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




Introduction

Liquid fuels sector managed liberalisation - phases and milestones

Phase One: Achieve Milestones, Maintain regulation

Phase Two: Re/Deregulation

Phase Three: Phase Three - Monitoring and corrective action

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The Petroleum Pipelines Bill




Introduction

The Bill seeks to untangle what has come to be known as the “Gordian Knot”

Sasol Upliftment agreement

Gordian Knot

Liquid Fuels Price control mechanism

Gas agreement with Sasol

Fungibility and delivery of

specific molecule

On-railing agreements with

Spoornet

“Natref Neutrality”

“Location advantage”

Zone and Service differentials




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




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




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




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




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




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




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




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




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




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




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




Licensing

Authority may impose licence conditions within the following framework (1)

• A licensee must carry out the construction or operations activities for which the licence is granted

• Promote historically disadvantaged South Africans

• Provide for an appropriate supply of products to meet market requirements

• Licensees must provide the prescribed information to the Authority on the commercial arrangements regarding the participation of HDSAs

• Loading, pipeline and storage activities of vertically integrated companies may be required to be managed separately, with no cross-subsidisation

• A pipeline may be licensed for either crude oil or petroleum products, or both

• Sufficient pipeline capacity availed for crude oil to enable uninterrupted operation of Natref, at its current normal operating capacity

• Shippers must have access to petroleum pipelines in proportion to their needs and within the commercially reasonable constraints




Licensing


• Parties allowed to negotiate changes with pipeline licensees in the routing, size and capacity of proposed petroleum pipelines

Licensees not obliged to incur any additional expenditure to provide the changes and the total cost must be shared equitably between parties

• Licensees must allow interconnections with the facilities of other licensees

The interconnection is technically feasible Costs are borne by person requesting the interconnection

• 3rd parties must have access to loading facilities with the capacity in proportion to their needs, subject to an appropriate payment

• 3rd parties must have access on commercially reasonable terms to uncommitted capacity in storage facilities

On provision that an applicant may elect to give users access in proportion to their needs

• Parties may negotiate with storage licensees for changes in the capacity of storage facilities




Licensing


• 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




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




Other provisions

Other provisions

• Entry, inspection & information gathering by Regulator

• Voluntary resolution of disputes

• Compulsory resolution of disputes

• Expropriation – rights of way




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




General

Prohibition on agreements contrary to Act

Short Title – Petroleum Pipelines Act

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Petroleum Products Amendment Bill




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




The Challenges in the Petroleum sectorThe Bill has been configured in a manner that addresses these challenges

Challenge Response•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

•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




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




Section 2 amendments, extension of regulatory powersThe 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




Section 2A Prohibition Of Certain ActivitiesThe Bill prohibits a number of activities

• No person may without a appropriate licence hold or develop a site,manufacture petroleum products or 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)

o Except for trainingo Excludes LPG & paraffin

The sale of petroleum products using a system of self-service by consumers




Section 2B Licensing Objectives

The Controller of Petroleum Products must issue licences. In considering the issuing of any licences, the Controller shall give effect to the provisions of section 2C and the following objectives

• Promoting an efficient manufacturing, wholesaling and retailing petroleum industry

• Facilitating an environment conducive to efficient and commercially justifiable investment

• The creation of employment opportunities and the development of small businesses in the petroleum sector

• Ensuring countrywide availability of petroleum products at competitive prices

• Promoting access to affordable petroleum products by low-income consumers for household use.




Section 2C Licensing Objectives

Transformation of South African petroleum and liquid fuels industry

• In considering licence applications in terms of this Act, the Controller of Petroleum Products shall

Promote the advancement of historically disadvantaged South Africans

Give effect to the Charter

• The Controller of Petroleum Products may require any category of licence holder to furnish information, as prescribed, in respect of the implementation of the Charter




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 Petroleum Products 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 of six months apply for an appropriate licence

• The licence shall lapse if the person fails to apply for a licence within the stipulated period

• The applicant shall, on application,be entitled to a licence if the applicant is in compliance with all national, provincial and local government legal requirements, that are in force immediately prior to the commencement of this Act

• Such applicant subject to the general conditions of a licence but not financial security requirement prescribed by regulation




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




Section 2E - “System” for allocation & supply of site licensesThe 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




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




Section 2F - System for allocation of licences for LPG and ParaffinMinister 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




Section 4 - Controller of Petroleum Products The Minister

• Shall appoint any person in the public service as Controller of Petroleum Products

• May appoint persons in the public service as regional controllers of petroleum products or as inspectors for the Republic

• May, in consultation with the Minister of Finance determine, appoint or authorise any other person or person belonging to any other category of persons to act as regional controller of petroleum products or as inspector




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 Imprisonment for a period not exceeding ten

years Both such fine and such imprisonment

• Compliance may result in a directive to absolve from criminal liability




Section 12A - Appeal

Any person directly affected by a decision of the Controller of Petroleum Products may, appeal to the Minister against such decision

• An appeal shall be lodged within 60 days after such decision has been made known to the affected person

• The appeal shall be accompanied by

A written explanation setting out the nature of the appeal

Any documentary evidence upon which the appeal is based

• The Minister shall consider the appeal, and shall give his or her decision thereon, together with written reasons therefor




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




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

• The records and information to be kept by the Controller of Petroleum Products

• The continuity 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

• The prohibition of the blending or mixing of different petroleum products

• The rehabilitation of land used in connection with a licensed activity




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

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Thank you

Documents

Henry Nhlanhla Gumede Chief Director – Hydrocarbons 012 317 9694 [email protected]