petroleum licensing parliamentary portfolio committee briefing 23 august 2006
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Petroleum Licensing
Parliamentary Portfolio Committee Briefing
23 August 2006
DME Team
• Nhlanhla Gumede – Chief Director Hydrocarbons• Muzi Mkhize – Director Petroleum & Gas Ops• Victor Sibiya – Deputy Director Licensing• Nonhlanhla Ndebele – Deputy Director Promotions• Avishkar Nandkishore – Chief Energy Officer• Papali Bakane – Energy Officer
Licensing &
Monitoring
LFI Charter
Margins setting
Transport differenti
als
Import control
Regulatory
accounting
Supply Agreeme
nts
Import parity
pricing
BFP
Regulatory framework is a system
Not all petroleum products are regulated
Retail Commercial
Petrol
Diesel
Non-fuel products
Unregulated?
Regulated
Unregulated
Unregulated?
Unregulated
Unregulated?
Non-controlled products Unregulated Unregulated
Levers and effects
Balancing different interests
Licensing
Pricing
Import control
Investments
Consumer prices
Transformation
Security of supply
Impact
Policies underpinning our regulatory framework
• Import parity system
• Rural-urban subsidies
• Cash basis
• Historical basis – margin setting
• Promotion of local refining
• Minimal product imports
• Industry transformation
Current problem areas
• Refining– Capacity running out
• Wholesale– Diesel “cross subsidies”– Retail customers subsidizing commercial
customers
• Retail– Uneven treatment of DODO vs. CODO sites– Proliferation of service stations
• Distribution– Limited investment in logistical infrastructure
Ownership of New-to-industry (NTI) sites
0
10
20
30
40
50
60
70
2000 2001 2002 2003 2004
No. of NTIs
Company controlled Dealer controlledSource: Sapia
OMC’s dominate NTI development (70-80%) of NTIs are company controlled
Ownership of oil company branded retail network
0
500
1000
1500
2000
2500
3000
1993* 1999 2000 2001 2002 2003 2004
No. of Service Stations
Company controlled Dealer controlled
Source: 1993 – Lambrecht’s Report, 1993; 1999-2004 Sapia
Proportion of network controlled by the OMCs has risen from 41% in 1993 to 57% in 2004
Service station closures
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
2000 2001 2002 2003 2004
No. of Service Stations Closed
Company controlled Dealer controlled
Typically 70 - 80% of site closures have been dealer service stations
Retail Vicious Circle
Accommodate new
players in Retail
Retail Service
stations over proliferation
NewPlayers
Accommodation
Logistical constraints
Different solutions to the same problem
Problems
Deregulation
Industry Supply Agreements• Sasol upliftment terminated in 2003• PetroSA MOU coming to end in 2007
Regulated upliftment
Retail licensing framework• Vertical integration prohibition• Wholesale margin review
A solution, including availing of appropriately sized logistical infrastructure, needs to be found before the industry can be liberalised
Sasol & PetroSA, for historical reasons, do not have outlets for their product
New participants have limited access to the market
New players in refining cannot easily enter
Not enough logistical infrastructure for product distribution.
Mergers & Acquisition
Accommodation of new players
RSA prices globally competitive
International Pretax Petrol price comparison
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RSA prices globally competitive International Petrol Price comparison
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Prices as at Nov 2004, sourced from gtz
Economic regulatory Models observed
• Cost-plus– bottom up, costs and
margins regulated
• Benchmarking– prices set in relation
to those in other countries/regions
• Import parity– prices set in line with
import costs
“Gold plating” problems“Gold plating” problems
Efficiency lossesEfficiency losses
Security of supply concernsSecurity of supply concerns
Allusive comparisonAllusive comparison
Transparent but too simple,complex but less transparentTransparent but too simple,
complex but less transparent
Real costs subjectto manipulation
Real costs subjectto manipulation
Theoretical coststoo simplistic
Theoretical coststoo simplistic
Licensing
Definitions
• “ ‘bulk’ means a 1500 litres, per transaction, of petroleum product”
• “ ‘retail’ means the sale of petroleum products to an end-consumer at a site”
• “ ‘wholesale’ means the purchase and sale in bulk of petroleum products– by a licensed wholesaler to or from another licensed
wholesaler, or to or from a licensed manufacturer, or sale to a licensed retailer or to an end-consumer for own consumption”
• “ ‘manufacture’ means the manufacture of petroleum products for commercial purposes, and includes the blending and re-refining of petroleum products”
Petroleum products definitions
• Manufacturing– “any petroleum fuel and any lubricant, whether
used or unused, and includes any other substance which may be used for a purpose for which petroleum fuel or any lubricant may be used”
• Wholesaling– “aviation gasoline, biofuels, diesel, jet fuel,
liquefied petroleum gas, paraffin and petrol”
• Retailing– “liquefied petroleum gas used for the
propulsion of vehicles, petrol and diesel”
Section 2A Prohibition Of Certain Activities
• 2A. ( 1 ) A person may not-(a) manufacture petroleum products without a manufacturing licence;(b) wholesale prescribed petroleum products without an applicable licence;(c) hold or develop a site without there being a site licence for that site;(d) retail prescribed petroleum products without an applicable retail wholesale licence;
issued by the Controller of Petroleum Products
Objectives of licensing
• Give effect to the Charter• Promote an efficient manufacturing, wholesaling
and retailing petroleum industry• Facilitate an environment conducive to efficient
and commercially justifiable investment• Create employment opportunities and the
develop small businesses in the petroleum sector
• Ensure countrywide availability of petroleum products at competitive prices
• Promote access to affordable petroleum products by low-income consumers for household use
Licensing fundamentals
• Refining– Promotion of coastal refining and
petrochemicals hub vs.– Diversification of primary supply
• Wholesaling– Promote competition– Unregulated commercial business
• Retailing– System of controlling number– Improved profitability
• Site– Environmental rehabilitation
Licensing fundamentals - Retail
• Retailing licensing “system” – 2E– Finite (10 year period)– Intention: an optimum number of efficient sites
& achieve equilibrium amongst all participants– Must
• transform the retail sector - optimum number• achieve an equilibrium amongst all participants in• based on licensing objectives and 2C• promote efficient investment
– May• link the issuing of a new site licence to termination
or transfer• limit number of service stations• link the number to total volume traded
The “System” Basis
• Predictable Margin –(RPI – X) basis
• Predictable cost structure
–Linked to indices
• Based on Cashflows
Licensing System
• Retail licence satisfies a number of conditions
–Viable business–Compliance to all
relevant laws
Prudent Investment Level
• Prudent value of business
–determines prudent investment levels
–Determines the appropriate type of infrastructure
Prudent Value
• Use NPV methodology
–Gives a realistic value of the business
–Determines appropriate “key moneys”
Retail licensing ‘system’
Who should apply?
• Based on definition of petroleum products in the Act
• Refining– Any manufacturer of petroleum products
• Wholesaling– Wholesaler of “prescribed” petroleum products
• Retailing site– Owner of site
• Retailing– Retailer of “prescribed” petroleum products
Applicant lodge an application
Process of applying for a license
Application accepted?
Evaluation stage
DecisionAccept Decision
License issued
Appeal
Return application
LicenseDecline
NO
YES
Licensing under the PPA
90 days
By PostWalk in
1) Before accepting a site license application, the Controller must be satisfied that –
a corresponding valid retail licence application has been lodged for that site;
the applicant is the owner of the site or in the case of a publicly owned land, has the written permission of the owner
the application form has been completed in full; and
all documents specified in regulation 3(b) have been submitted with the application form
Licensing under the PPA
Accepting the application
2) In accepting a retail license application the Controller must be satisfied that –
a corresponding site license application has been lodged for that site or a valid site license exists;
the applicant is the owner of the business
the application form has been completed in full; and
all documents specified in regulation 15(1)(b) have been submitted with the application form
Licensing under the PPA
Accepting the application
3) In accepting a wholesale license application, the Controller must be satisfied that –
the applicant is the owner of the business
the application form has been completed in full; and
all documents specified in regulation 15(1) have been submitted with the application form
Licensing under the PPA
Accepting the application
4) Before accepting a manufacturing license application, the Controller must be satisfied that –
the applicant is the owner of the property or has the written permission of the owner of the property on which the manufacturing facility is or will be located;
the application form has been completed in full; and
all documents specified in regulation 16 have been submitted with the application form.
Licensing under the PPA
Accepting the application
4)In evaluating an application for any license, the Controller must give effect to Section 2C of the Act
Licensing under the PPA
Evaluation Process – All licenses
1) In evaluating an application for any site license, the Controller must verify that –
the information and the documents submitted with the application form are true and correct;
there is a need for a site;
the site will promote the licensing objectives stipulated in sections 2B(2) of the Act; and
where required, a notice contemplated in regulation 4(1) was published
Licensing under the PPA
Evaluation Process - Site
2) In evaluating an application for any retail license, the Controller must verify that –
the information and the documents submitted with the application form are true and correct;
the retailing business is economically viable;
the retailing business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and
where required, a notice contemplated in regulation 16(1) was published
In determining the economic viability, the Controller must be
satisfied that the net present value has been correctly
calculated and is positive.
Licensing under the PPA
Evaluation Process - Retail
3) In evaluating an application for a wholesale license, the Controller must verify that –
the information and the documents submitted with the application form are true and correct;
The wholesaling business will be economically viable;
the wholesaling business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and
where required, a notice contemplated in regulation 4(1) was published
Licensing under the PPA
Evaluation Process - Wholesaling
4) In evaluating an application for a manufacturing license, the Controller must verify that –
the information and the documents submitted with the application form are true and correct;
where applicable except in the case of an application for a facility manufacturing biofuels, that there is a need for additional capacity;
the manufacturing business will promote the licensing objectives stipulated in comply with sections 2B(2) of the Act; and
where required, a notice contemplated in regulation 4(1) was published
Licensing under the PPA
Evaluation Process - Manufacturing
Conditions of licensing
• Manufacturing– activity must remain a going concern– manufacturer may only manufacture
petroleum products• within the maximum design capacity stated on its
licence
– maintain minimum working stock levels in compliance with applicable regulations
– comply with Charter– comply with the provisions of the fuel
specifications
Conditions of licensing
• Wholesale– activity must remain a going concern– Wholesaler must
• Purchase or sell petroleum products only in bulk• Not make use of a business practice, method of
trading, agreement, arrangement, scheme or understanding which would result in a licensed wholesaler holding a retail licence except for training purpose
• comply with the Charter• keep minimum working stock levels in compliance
with applicable regulations
Conditions of licensing
• Site– Licence and corresponding retail
licence displayed at place of business– A licensee must at all times-
• comply with the Act and these Regulations• carry out legitimate instructions from the
Controller
Conditions of licensing
• Retail– retailing activity remain a going concern– retailer must only-
• Only retail from the site specified on the retail licence
• Only purchase petroleum products from a licensed wholesaler or a licensed manufacturer
• comply with the Charter• submit prescribed information • comply with the Act and these Regulations• not allow self-service
Timelines
• Act operationalised – 17th March 2006
• End of transitional period -15th September 2006
• Evaluation period – 1st year – 250 days – 2nd year and after - 90 days
Licensing under the PPA
Section 2D - Transitional licensing provisions
• The Petroleum Products Amendment Act, 2003 – commenced on the 17 March 2006
• Any persons who qualify according to Section 2D must apply within six months from 17 March 2006 to be deemed a holder of a licence
Licensing under the PPA
License Type Conversion New Evaluated Issued
Site 1 300 3 50 2
Retail 1 300 3 50 2
Wholesale 35 20 20 1
Manufacturing 1 0
Number of License applications accepted, evaluated & issued
Current focus is acceptance
Envisaged number of applications > 12 000
Future regulations
• Conditions relating to the advancement of HDSAs
• Obligation to hold, keep, furnish records and frequency
• Continuity of supply of petroleum products
• Specifications and standards of petroleum products
Fines
• As a last resort• 12. (1) Any person who contravenes a
provision of this Act, shall be 15 guilty of an offence and be liable on conviction to a fine not exceeding R1 000 000,00, or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment: Provided that if a directive issued in terms of section 2A(2)(c) or (3) is complied with within the period specified therein, the person concerned shall be absolved from criminal liability.
Additional benefits of licensing
• Data provision & publication
• Improved security of supply
• Planning
• Secrecy avoidance
• Tourist information/Navigation
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