Infrastructure issues in the Petroleum Sector

Dr Rod Crompton

National EnergyRegulator of South Africa

2 November 2011

1

2

PERSONAL OPINIONS

Outline

• Background to economic regulation

• Introduction to NERSA

• Regulating market entry

• The construction boom & challenges• The construction boom & challenges

• Prices and tariffs

• Funding big energy infrastructure

• Storage tariffs

• Security of Supply & Strategic stocks

• Biofuels compulsory blending?3

Background to economic Background to economic regulation

4

Text book

• Rationale for regulation based on “natural monopolies” i.e. market failure, & avoiding unnecessary duplication

• Prevent monopolistic price gouging

5

Reality

• Multiple objectives in regulatory

laws, sometimes competing; e.g.

– promote competition.– promote competition.

– orderly development

– public interest

– security of supply (implies strategic element)

6

Introduction to NERSA

• Commenced November 2005

• Modelled on modern transparent economic regulatoreconomic regulator

• Public hearings

• Written decisions and reasons for decision

Regulated sectors

Electricity Petroleum Gas

Gen. Trm Distr Pipelines Storage Trm Distr

Dominant Eskom Eskom Munics Transnet Six oil SASOL SASOLDominant

market

share

Eskom Eskom Munics

/Eskom

Transnet Six oil

cos

SASOL SASOL

Regulation Full Full Full/co

ntested

Full/set Full/app

rove

Light

monitor

&

approve

Light

monitor

&

approve

3 Industries

• 3 different Acts

• Electricity and petroleum treated as established industries established industries

• Gas treated as an infant industry – less onerous regulation

What do economic regulators do?

• Make impartial, difficult, economic trade-off decisions in “the public

11

trade-off decisions in “the public interest” (not defined)

– licence “the players” (market entry)

– set conditions of licence and police them

– set and approve tariffs

Regulating Market EntryRegulating Market EntryHow should we admit new pipeline

capacity?

12

Market access

1. Petroleum Pipelines Act: Must have a licence

2. Objective of Act: Promote (introduce) competition

(without privatisation – unique?)

3. Act silent on competing applications

13

3. Act silent on competing applications

4. Process in order received

1. First mover advantage

2. Unsubstantial rejected

5. Weigh the merits

The construction boom &

challenges

14

Pipeline Construction approved

Petroleum Pipeline Construction Licenses Granted YEAR Approved

Area Rm

Petroline RSA (Pty) Ltd 2007 Maputo to Kendal 4,200

Transnet Ltd. 2007 Durban to inland 23 400

15

Transnet Ltd. 2007 Durban to inland 23 400

Sasol Oil (Pty) Ltd. 2011 Secunda to Natref <2,000

Engen Petroleum Ltd. 2010 Durban <1,000

SAPREF 2011 Durban <1,000

TOTAL <32,000

Storage Construction approved (1)

Petroleum Storage Construction

Licenses Granted

Year

Approved

Area Rm

Chevron (additional 3 tanks) 2006 Alrode 20 – 25

Chevron (additional 3 tanks) 2007 Waltloo 20 – 35

Chevron (additional fourth (one) tank) 2007 Alrode 2 – 5

Engen (additional 3 tanks) 2007 Cape Town 20 – 40

Engen (additional tank) 2007 Upington 2 – 7

ACSA (new 6 tanks) 2008 KSIA Durban 60 – 100

Engen (further additional 3 tanks) 2009 Cape Town 2 – 7

ACSA (additional 3 tanks) 2009

ORTIA

Johannesburg 80 – 140

Sasol Oil (additional 10 tanks) 2009 Alrode <1 500

Storage Construction approved (2)

Petroleum Storage Construction

Licenses Granted

Year Approved Area Rm

Engen (additional 5 tanks) 2010 Langlaagte (JHB) 40 - 80

VOPAK SA Developments (new 38

tanks) 2010

Jamesson Park

(Gauteng) <1 500

Shell (additional 4 tanks) 2010 Alrode <500

FFS Refinery (additional tank) 2010

Cape Town

Harbour 2 – 5

BPSA, Shell Engen & Total (new four

arms) 2010

Island View

Berths 6 80 - 120

Sunrise Energy (new 6 tanks LPG) 2011 Cape Town <1 000

17

Loading Construction approved

Petroleum Loading Facilities Licences Granted YEAR Approved

Area Rm

18

BPSA, Shell Engen & Total (new four arms) 2010

Island View Berths 6 50-150

Sunrise Energy (new 6 tanks LPG) 2011 Cape Town 350-750

TOTAL (Rm) 5,228 to 5,964

Construction applications under consideration

Applicant Area

Oil Tanking Grinrod Calulo (new 18

tanks & loading facilities) Coega IDZ

Total SA (additional tank) Waltloo

19

Total SA (additional tank) Waltloo

Total SA (additional tank) Polokwane

Total SA (additional tank) Ohrigstad

BPSA (additional tank) Waltloo

BPSA (new 4 tanks) Rand Airport

Storage Capex approved

1000

1200

1400

CAPEX Rm

Sunrise

VOPAK

Shell

0

200

400

600

800

2006 2007 2008 2009 2010 2011

CAPEX Rm Shell

FFS

Saosol Oil

ACSA

Engen

Chevron

20

Sasol

Challenges

• Delays

• Costs

For example

Licensed construction

• Petroline: 12” Maputo to Kendal – scheduled completion Q3 2009. – licence deadline March 2010– not built within allotted 3 years – EIA delays– 2010 – extended to 3 yrs after EIA ROD– Not started, market opportunity missed– Not started, market opportunity missed

• Transnet: 24” Durban to Gauteng + other– scheduled completion Q3 2010 – latest Q4 2012– cost escalations:

• 2007: R 11 bn• 2009: R 12.6 bn• 2010: R 15.4 bn• 2010 R 23.4 bn• next ???? 22

Statutory options for late delivery

Option1. Extend construction

period

Consequence1. Capacity constraints.

Upsets orderly development of capacity?

2. Don’t extend construction period

3. Impose fine for breach of licence condition

2. Construction halts? Liquidation? Shortages?

3. Construction halts? Liquidation? Shortages?

23

Statutory remedies for cost over runs

Option

1. “Prudent” - allow over run into tariffs

Consequence1. Higher tariffs

2. “Imprudent” -disallow over run from tariffs

2. Lower tariffs. Liquidation? Shortages?

Options for risk allocation

Options• Licensing (current legal

requirement)

• Deregulate market

access & let the market

Risk bearer1. Consumers

2. Investors & consumers

for late delivery & cost over runs

access & let the market

decide?

• Competitive bidding

rounds for additional

capacity. (locked in

tariff. Locked in

premium. Construction

Co. collusion?)

3. Fairer to all?

Prices and tariffs

26

April 2011Petrol ULP 93 (c/l)

Basic Fuels Price 546

Incremental Inland Transport Recovery Cost 3

Wholesale Margin 54

Petroleum Products Levy 0

%

International component + refining margin 56

Petrol price structure

Petroleum Products Levy 0

Transport Cost 23

Delivery Cost 11

Retail Margin 81

Demand side management levy 0

RAF 80

Customs &excise 4

Fuel tax 178

Retail price 980

Taxes & Levies 27

Administered prices 18

100

27

Cost drivers:

•Accident rate

•Admin costs

Small business

Job creation 26c/l

120

140

160

180

200

cen

ts/l

itre

Taxes & administered components of petrol price

28

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

cen

ts/l

itre

Fuel Tax RAF Transport

Wholesale margin Retail Margin Delivery Cost (road)

Administered components of petrol price

60

70

80

90

29

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

cen

ts/l

itre

Transport Wholesale margin Retail Margin Delivery Cost (road)

Issues

1. SA needs new pipelines

2. How to finance?

3. Transnet Pipelines: >quadruple asset base without equity injectionbase without equity injection

4. Only remaining financing option is tariffs

5. Debt service cover ratio

6. Security of supply levy: 7.5c/l for 3 years = R4.5 bn

30

83%

128%

83%

60%60%

80%

100%

120%

140%

Licence application

?

Transnet: funding by Tariffs

31

15%

51%

7.7%

-11%

12%

60%

-20%

0%

20%

40%

60%

08/09 09/10 10/11 11/12 12/13

Licence application

Tariff applications*

NERSA decisions*

* Allowable Revenue

Pipeline tariff impact on Gauteng petrol price

40

50

60

ce

nts

pe

r li

tre

24” Trunklineinto

Forecasts →

32

-

10

20

30

20

07

/08

20

08

/09

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

20

16

/17

ce

nts

pe

r li

tre

into operation

Full NMPP

Project

completed

Storage tariffsStorage tariffs

33

150

200

250Tariffs (c/litre) 65 Engen Storage facilities

0

50

100

150

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000Total Capacity of facility (m3)

140 000

160 000

180 000

200 000

200 Refined Products Storage facility sizes (m3)

0

20 000

40 000

60 000

80 000

100 000

120 000

35

Security of Supply &Security of Supply &Strategic Stocks

36

Government Policy & strategic issues

• Government required a bigger than commercial pipeline for security of supply reasons

• Security of supply insurance policies have to be paid for (in the tariffs) for (in the tariffs)

• but if only some tariffs (SOEs) are burdened with this obligation how have fair competition?

• Government security of supply injection: R4.5 bn via a 7.5c/l national levy on fuel for 3 years

• Compare costs with cost of interruption in supply 37

Nersa Estimates

12 000

14 000

16 000

18 000

20 000

millio

n l

ite

r /

an

nu

m

NMPP pipeline capacity

DJP pipeline capacity

Inland Jet Fuel supply

Road and rail requirement is indicated by the area between the demand lines and the bars

NMPP commences operation 1 January 2012. The whole project wil l be completed by 1 April 2014 i.e. NMPP reaches full

capacity at 1 Apri l 2014. This is as per Transnet's presentation to NERSA on 7 December 2010.

0

2 000

4 000

6 000

8 000

10 000

12 000

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

millio

n l

ite

r /

an

nu

m

Inland Jet Fuel supply

Inland IP supply

Inland Diesel supply

Inland Petrol supply

Inland Fuel demand

Inland Fuel demand incl. exports

38Note: Data availability an issue

No. of road tankers from

Durban to Gauteng

2009 2010 2011

Estimated impact of pipeline constraints on roads

Gauteng

Per annum 16 931 24 497 42 351

Per day 47 68 117

Per hour 2 3 5

Minutes between trucks

31 21 12

39

Strategic Stocks

• Currently held as crude at Saldanha Bay

• Draft regulations 23 September 2010

– switch to refined products

– almost equivalent to doubling refined products – almost equivalent to doubling refined products

storage capacity (capex?)

– key vulnerability (supply of inland market) will

require additional measures

• Regulations still coming?

40

Biofuels compulsory blending?Biofuels compulsory blending?

41

• Blending currently voluntary

• Draft regulations 16 September 2011:

– Compulsory blending bioethanol in petrol and

biodiesel in dieselbiodiesel in diesel

• Biofuels require subsidies – fuel levy?

• Affect pipeline operations? Increase tariffs?

• Impact on storage costs?

42

Thank you

43www.nersa.org.za