Briefing of Portfolio Committee on Gas Pricing

PPC Presentations

12 March 2007NH Gumede – Deputy Director General

S12A, Ground Floor, NCOP Wing

2

Team members

• The team comprises of– Nhlanhla Gumede – Deputy Director

General (Hydrocarbons & Energy Planning

– Muzi Mkhize – Chief Director (Hydrocarbons)

– Elizabeth Marabwa – Director (Hydrocarbons Policy)

3

61 59

53

51 49

41 41 40 40 38 37 36 35 35 34 33 33 32 30

26 25 25 25

0

10

20

30

40

50

60

70

Bra

zil

Sou

th A

frica

Mex

ico

Nig

eria

Mal

aysi

a

Tha

iland

US

A

Chi

na

Moz

ambi

que

Indi

a

UK

Irela

nd

Alg

eria

Aus

tralia

Ban

glad

esh

Sw

itzer

land

Net

herla

nds

Pol

and

Ger

man

y

Nor

way

Cze

ch R

ep

Japa

n

Den

mar

k

Source: World Development Report 2003

RSA realities - Inequality - Gini Index

4

The People of South Africa - 2001Employment status of people aged 15-65 by Race (note: Figures used from Labour Force Survey 2001, and not Census 2001)

13.9 11.74.1

33.9 52.1

47.136.2 31

16.5 19

39.8 49.8 64.9

36.243.9

Total SA Black African Coloured Indian / Asian White

Unemployed Employed Non-Econ Active

Source: Stats SA - Census 2001

5

Households of South Africa - 2001Type of Dwelling Unit by Race Group

86.493.4 95.9

20.4

18.7

4.8 5.2 3.7 4.6 3

63.856.6

16.4

7.414.8

Total SA Black African Coloured Indian / Asian White

Formal Informal Traditional Backyard

Source: Stats SA - Census 2001

6

Energy use in RSA

Energy use in RSA, 2001

Non-specified (Other)

1%

Residential17%

Commerce and Public Services

8%

Agriculture3%

Transport Sector27%

Industry Sector44%

7

Distribution of Energy types use in the residential sector

Household Energy supply

Paraff in9%

Vegetable w aste2%

Wood30%

Solar0%

Coal20%

Electricity37%

LPG2%

Source: Energy outlook for South Africa - 2002

8

Energy use by the residential sector

Residential energy useSpace heating12%

Lighting5%

Cooking41%

Other (Friges, radio and TV)

10%

Water heating32%

Yes, different residential sectors have different needs

Source: Energy outlook for South Africa - 2002

9

Households of South Africa - 2001Main Energy Source for Cooking / Heating /

Lighting

6.82.8

6.6

20.524.6

1.4 4

0.8

22.7

51.4 49

69.7

2.51.1

14.6

21.4

Cooking Heating Lighting

Electricity Gas Paraffin Coal Wood Other Candles

Source: Stats SA - Census 2001

10

Households of South Africa - 2001Main Energy Source for Cooking by

Region, Race

48.3

29.8

82.3

39.3

82.3

97.1 96.6

34.1

27.1

6

0.7

40.1

10.6

27 38.6

3

25.8

7.5

73.2

38.5

55.3

17.9

14.7

21.331.6

21.4

Gauteng Nw/Lmp/Mpum

Ofs.NC KZN E.Cape W.Cape African C'red Indian /Asian

White

Electricity Paraffin Wood

Source: Stats SA - Census 2001

11

Households of South Africa - 2001Main Energy Source for Heating by

Region, Race

50.2

24.8

76.8

37.2

78.6

97.2 93.2

22.0

18.6

3.5

2.4

42.2

18.5 34.3 44.5

7.5

30.4

13.111.3 9.0 12.9

3.7 0.9 0.3

5.9

73.6

37.746.5

11.7

15.4

11.029.8

12.7

Gauteng Nw/Lmp/Mpum

Ofs.NC KZN E.Cape W.Cape African C'red Indian /Asian

White

Electricity Paraffin Wood Coal

Source: Stats SA - Census 2001

12

10

15

20

25

30

35

40Price

Residential sector - demand curves

Quantity

High income households

Low income households

No income households

Middle income

households

13

Domestic energy demand is inelastic

• Domestic energy demand is inelastic in general– When people have to cook, they have

to cook– When people have to heat their homes,

they have to heat– When people need warm water, they

need warm waterEnergy demand merely shifts from one form to the another, depending almost exclusively on economics

14

10

15

20

25

30

35

40Price

LIH – application demand curves

Quantity

Mobility

Thermal - electricity

Thermal - biomass

Lighting

Thermal – Liquid Fuel

Thermal - Coal

15

The role of gas in the energy mix

Gas to total non oil energy Ratio

0%

20%

40%

60%

80%

100%

120%U

SA

Mex

ico

Bra

zil

Col

ombi

a

Per

u

Oth

er S

. & C

ent.

Am

eric

a

Aze

rbai

jan

Bel

gium

& L

uxem

bour

g

Cze

ch R

epub

lic

Fin

land

Ger

man

y

Hun

gary

Rep

ublic

of I

rela

nd

Kaz

akhs

tan

Net

herla

nds

Pol

and

Rom

ania

Slo

vaki

a

Sw

eden

Tur

key

Ukr

aine

Uzb

ekis

tan

Iran

Qat

ar

Uni

ted

Ara

b E

mira

tes

Alg

eria

Sou

th A

fric

a

Aus

tral

ia

Chi

na

Indi

a

Japa

n

New

Zea

land

Phi

lippi

nes

Sou

th K

orea

Tha

iland

16

-10

-8

-6

-4

-2

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007

Trade balance excluding oil imports

Total Trade Balance

R b

illio

n, 3

mon

th m

ovin

g av

eImpact of high oil prices on the trade balance

Taking due cognisance of impact of imported oil on the economy

17

Bringing LPG to the poor….

Ensuring Access by poor

“Free basic energy” provision

Price regulation

•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

•Reduction of

current industry

wide high prices

•Investigate

sharing of

logistic value

chain

•Investigate

cylinder filling

options

18

Reality is…

…Petrol even with all Government imposts is still much cheaper than LPG at retail level…

Rand / kg

BFPRetail Price

ImpostsMark up,

BT (R/kg)

% Mark up

Petrol 7.22 11.26 2.39 1.65 22.88

LPG 6.90 22.20 3.11 12.21 176.97

Source: Based on March 2008 Petrol figures

Distributors

Own fillingFore-courts

90

65

55

35 45 90

110

Hou

seho

lds

(13k

T)

cplIndicative gross margin

130-50

Commercial (10kT)Manifolds

DealersStockists

Refineries•Sapref•Sasol•Mossgas•Calref

IBLC 250

Gasco

110

Dist 70

Dealer

90

Stock

180

Price 700

Source: Wild Orchard, 2004

20

Proposed Business Model

Manufacturers & importers

Primary Transportation

Cylinder Filling,

management Centre

ConsumersDistribution channels

Exclusive Area 3

Cylinder Filling,

management Centre

ConsumersDistribution channels

Exclusive Area 2

Cylinder Filling,

management Centre

ConsumersDistribution channels

Exclusive Area 1

Own & maintain cylinders in areaFills all cylinders in areaRegulated monopolyBEE opportunityiGas participation?60 c/kg

Zone differentialsTariffs based on actual transport costs to each zoneExpected to be between 3 & 50 c/kg

Admin charge = 20 c/kg for marketingAllow distribution charge for delivery and collection of cylinders – cost recovery basis – 50 c/kg

Require economies of scaleMixture of low & high income householdsDelivery & non delivery channelsRetail Price on Cylinder

RGP = Petrol BFP - R74/kg= R3.29/kgBut is Platt’s quotedPromote importsMax Price set

21

LPG pilot program

• To test the efficacy of the proposed approach, pilots have been undertaken in Pretoria and Secunda– Set out to connect 30 000 households– Objective: switch users from electricity to LPG

for thermal application– After several delays, communities excited– In Attridgeville uptake highest in older part of

township but now taking up in all parts – Load shedding has resulted in higher uptake

in Tembisile

22

LPG pilot program – Consultant report

MILESTONE PROGRESS COMMENT

Procurement of hardware

10200 heaters received last week, delivering them to the (owed clients). A balance of 2000 is currently on sea and is expected early March. All stoves and cylinders received.

All cylinders and stoves received; outstanding are the resend faulty heaters. They are being repaired.

Atteridgeville: Number of households registered is: 17 998

Number of households that received the LP Gas Combos is : 16 998

LP Gas combo delivery backlog is : 3 002

There is an agreement in principle with the DME to rollout to non-registered beneficiaries and complete rollout by March 2008. Non- registered beneficiaries would sign an acknowledgement of debt for the R100.00. Target to finish by end of March

Thembisile: Number of households registered is 9 890

Number of households that received the LP Gas Combos is: 7 033

LP Gas combo delivery backlog is: 2 968

Project Roll Out

We should conclude rollout to this area by the end of this month.

Definition of Acronyms: BFP – Bottle Filling Plant; WIC – Walk-in-Centre

23

Pilot programme – Consultant report

Atteridgeville: Comments

The BFP was commissioned on the 10th Oct 2007 and is operational. Flooding experienced recently due to site previously a dump site, not all sections refilled with top soil. Our engineers advising on remedies.

The site is functioning well, however there’s requirement for back up generator

Thembisile:

BFP Establishment

First fill of the BFP will be this Friday. Arranging visit for the DME mid next week of the Thembisile area. Currently servicing the area from Atteridgeville site and using the BFP as registration, storage and exchanging full for empty cylinders whilst finalising re filling.

A need exist for a back-up generator due to ongoing load-shedding.

Atteridgeville & Thembisile A further 5 Data loggers have been installed at 5 the different mini- substations in February. (1 X sample mini substation was nominated per distribution sub as a basis for a sample) The rational for the installation at mini sub station was to refine our measurement of consumption in excluding non domestic installations e.g stadiums, businesses schools etc. The first download was done last Thursday and is currently doing analysis a detailed report will be presented to the DME by Tuesday of next week. Thembisile Municipality experiencing challenges in accessing downloads from the Municipality.

Baseline Gathering and Analysis

Data loggers at secondary sub station level will be retained till August 2008 as planned.

Definition of Acronyms: BFP – Bottle Filling Plant; WIC – Walk-in-Centre

24

Pilot Programme - Consultant report

Service Centre Establishment

The service centres are operation on both sites. The total number been increased to (15) who are placed at strategic positions within the community.

Communities waiting until two cylinders are empty and only then contact us for refill. Need to get product close and accessible as we possibly can to consumers.

Pricing Model The pricing structure was developed and presented to DME. Current retail price is 9.09 excl compared to 17.25 c/kg in some sections of Thembisile

Management Information System

The 1st phase of development of the management information system is complete. Further enhancements, as requested by the DME’s Electricity Department early January 2008, have been signed-off with the Developer and expected to be completed end March 2008..

Customer Education and Awareness campaign

Communication, incorporating the DME’s logo as a government initiative to conserve electricity, have been placed at strategic locations throughout the pilot sites encouraging communities to register and use LP Gas Campaign to promote LP Gas as well as to inform beneficiaries on locations of the merchants continues through flyers, loud-hailing, Ward Meetings and the community radio station. City of Tshwane developing street-pole ads and arranging radio slots. Campaign to kick-off in early March 2008.

Ongoing

Definition of Acronyms: BFP – Bottle Filling Plant; WIC – Walk-in-Centre

25

Some facts about LPG in Africa

Production by Country in Africa

Others19%

South Africa3%

Nigeria10%

Morocco1%

Eqypt12%

Algeria55%

Consumption by country in AfricaOthers22%

South Africa4%

Nigeria1%

Morocco17%

Eqypt37%

Algeria19%

9.7 Million tons16 Million tons

Source: Total Gas

26

Some facts about LPG in Africa

Source: Total Gas

LPG consumption by sector in Africa

2000 Consumption

Industry7%

Transport3%

Domestic90%

2006 consumption

Industry7%

Transport4%

Domestic89%

7.5 Million tons 9.7 Million tons

27

Propellants3%

Industrial to NG

30%

Industrial10%

Com Bulk6%

Lo Income17%

Hi income7%

Com Cyl27%

LPG Market by Sector

Market about 330kt will reduce by 100kt

Household Thermal use

Source: Wild Orchard, 2004

28

Some facts about LPG

• Sources of LPG in RSA– From coal and natural gas (PetroSA & Sasol)– Local 4 other local oil refineries

• Importation– No real terminal at this stage– Various LP Gas import facilities in planning

stage

• Potential import sources– Angola, Nigeria, Algeria, Egypt, Saudi Arabia

and Qatar

29

Proposed Pricing approach

• As an outcome of the pilot project, a new pricing system is proposed– Very similar to the petrol pricing

structure– Intended to promote importation of gas– Starts with existing refinery gate price

approach– Basis is cost reflectivity– Import parity basis– Reduce number of “middlemen” in the

LPG value chain

30

Proposed pricing structure

• The structure is simply+“Refinery gate price” ( R6.90)+Primary transport (R0.70)+Wholesale margin (R0.50)+Retail margin (R0.80)+Distribution margin (R0.50)+VAT (R1.32)=Retail price: R10.72

I Thank You