October 2009 1

FUEL PRICE EVALUATIONFUEL PRICE EVALUATION

Comparing different fuel costs is a Comparing different fuel costs is a complex issue requiring an in-depth complex issue requiring an in-depth knowledge of fuel properties and knowledge of fuel properties and characteristics, pricing mechanisms characteristics, pricing mechanisms and the inclusion and value of and the inclusion and value of intangible services.intangible services.

October 2009 2

FUEL PRICE EVALUATIONFUEL PRICE EVALUATION

This presentation attempts to clarify the This presentation attempts to clarify the factors that need to be considered and then factors that need to be considered and then presents a model for determining these presents a model for determining these values to allow a more rigorous comparison values to allow a more rigorous comparison to be made between alternatives.to be made between alternatives.

October 2009 3

INTRODUCTIONINTRODUCTION

Fuel prices, and thus values, are difficult to Fuel prices, and thus values, are difficult to compare as fuels differ in characteristics by compare as fuels differ in characteristics by having different:having different:

– Energy contents (gross & net)Energy contents (gross & net)– Densities (liquid fuels)Densities (liquid fuels)– Efficiencies (radiance)Efficiencies (radiance)– Operating costsOperating costs– Environmental costsEnvironmental costs– Other intangible benefits or liabilitiesOther intangible benefits or liabilities

October 2009 4

INTRODUCTIONINTRODUCTION

The problem is then compounded by fuel prices The problem is then compounded by fuel prices being quoted in different units, such as:being quoted in different units, such as:

–Rands per tonRands per ton

–Cents per litreCents per litre

–Dollars per tonDollars per ton

–Rands per GigaJouleRands per GigaJoule

–etcetc

October 2009 5

INTRODUCTIONINTRODUCTION

And then made more complicated by quoting And then made more complicated by quoting prices that are linked to other prices such prices that are linked to other prices such as:as:

– BFP (Basic Fuel Price)BFP (Basic Fuel Price)– Durban Bunker (Platts 180)Durban Bunker (Platts 180)– Company list pricesCompany list prices

October 20096

ENERGYENERGYBefore any meaningful value comparison can Before any meaningful value comparison can

be made between alternatives, all costs must be made between alternatives, all costs must be converted to an appropriate common be converted to an appropriate common standard unitstandard unit..

This unit is a This unit is a Cost per EnergyCost per Energy quantity quantity Where the cost is typically in Where the cost is typically in RandsRands Energy is measured in Energy is measured in JoulesJoules The The standard unitstandard unit for heating fuels is for for heating fuels is for

convenience given as: convenience given as: Rands per GigaJoule (R/GJ)Rands per GigaJoule (R/GJ)

October 2009 7

COST PER ENERGY UNITCOST PER ENERGY UNIT In order to calculate the In order to calculate the Rand/GigaJouleRand/GigaJoule

cost from any quoted price the following cost from any quoted price the following information is required:information is required:

The fuel oil gross and net calorific (energy) The fuel oil gross and net calorific (energy) value (value (CVCV) in ) in MJ/kgMJ/kg

The Fuel Oil density (The Fuel Oil density () in ) in kg/litre, kg/litre, if the if the price is quoted in price is quoted in cents per litrecents per litre

Once this is known, a cost in Once this is known, a cost in Rand / Rand / GigaJouleGigaJoule can be calculated. can be calculated.

October 2009 8

RANDS/TONRANDS/TON

If the price is quoted in Rands/ton then the If the price is quoted in Rands/ton then the calculation is as follows:calculation is as follows:

R/GJ = (R/t) / (MJ/kg)R/GJ = (R/t) / (MJ/kg)

October 2009 9

CENTS PER LITRECENTS PER LITRE

If the price is quoted in If the price is quoted in cents per litrecents per litre then then the calculation is as follows:the calculation is as follows:

R/GJ = (c/lt x 10) / (R/GJ = (c/lt x 10) / ( x CV) x CV)

October 2009 10

LINKED PRICESLINKED PRICES

Prices are often linked to moving list prices Prices are often linked to moving list prices and quoted on a given date.and quoted on a given date.

When comparing quotes all prices must be When comparing quotes all prices must be calculated using the same calculated using the same Base DateBase Date..

Using the same exchange rate if applicableUsing the same exchange rate if applicable

October 2009 11

BEYOND BEYOND THE BASIC PRICETHE BASIC PRICE

When comparing different fuel oil quotes When comparing different fuel oil quotes there are many more issues to consider there are many more issues to consider beyond the basic fuel price, such as:beyond the basic fuel price, such as:– The efficiency of the fuel in the applicationThe efficiency of the fuel in the application

– The quality cost of the fuel offered both in terms of The quality cost of the fuel offered both in terms of energy loss from the presence of contaminants and energy loss from the presence of contaminants and the cost of wear and tear and down timethe cost of wear and tear and down time

– Operating cost, environmental cost and other Operating cost, environmental cost and other intangible costsintangible costs

October 2009 12

BEYOND BEYOND THE BASIC PRICETHE BASIC PRICE

Additional value offered by suppliers Additional value offered by suppliers should be factored in, including:should be factored in, including:– Reticulation equipment suppliedReticulation equipment supplied– MaintenanceMaintenance– Spares provisionSpares provision– Waste removalWaste removal– Inspection reportingInspection reporting– Consignment stockConsignment stock

October 2009 13

BEYOND BEYOND THE BASIC PRICETHE BASIC PRICE

If the contract period is for more than a year then If the contract period is for more than a year then the basic price needs to be corrected for any price the basic price needs to be corrected for any price escalations quoted.escalations quoted.

A discounted cash flow calculation can be used to A discounted cash flow calculation can be used to make the values comparable as follows:make the values comparable as follows:

PPee = P = Pbb((1-((1+((1-((1+ee/12)^/12)^nn)*(1+)*(1+ii/12)^-/12)^-nn)/()/(ii/12-/12-ee/12))/12))

Where PWhere Pee = the escalated price, P = the escalated price, Pbb = the basic price, e = annual price = the basic price, e = annual price

escalation percentage, n = contract period in months, I = interest rate escalation percentage, n = contract period in months, I = interest rate percentage (prime, cost of capital, investment rate)percentage (prime, cost of capital, investment rate)

October 2009 14

BEYOND BEYOND THE BASIC PRICETHE BASIC PRICE

Intangible CostsIntangible Costs need to be quantified to allow for need to be quantified to allow for an objective comparison of suppliers. This may an objective comparison of suppliers. This may include:include:– Capacity (financial, people, facilities)Capacity (financial, people, facilities)

– Reliability (storage, logistics, track record)Reliability (storage, logistics, track record)

– Technical support (knowledge, personnel)Technical support (knowledge, personnel)

– Stock controlStock control

– Reactive (response to queries/requests)Reactive (response to queries/requests)

– Quality management systemsQuality management systems

– Environmental management systems Environmental management systems

October 2009 15

SPECIALIST ACTIVITYSPECIALIST ACTIVITY

All this adds up to a specialist activity All this adds up to a specialist activity requiring:requiring:

– Knowledge of the applicationKnowledge of the application– Knowledge of fuel characteristicsKnowledge of fuel characteristics– An in-depth knowledge of fuel purchasingAn in-depth knowledge of fuel purchasing

October 2009 16

COMPARISON MODELCOMPARISON MODEL

FFS has developed a fuel comparison FFS has developed a fuel comparison model to perform these calculationsmodel to perform these calculations

FFS offers this service to industry to FFS offers this service to industry to facilitate better decision-makingfacilitate better decision-making

And to provide users with a true cost of And to provide users with a true cost of their energy purchasetheir energy purchase

October 2009 17

MODELMODEL

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R 20.00

R 40.00

R 60.00

R 80.00

R 100.00

R 120.00

R 140.00

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FFS REFINERS -HFO

FFS REFINERS -LO10

FFS REFINERS -ECODYN

OIL COMPANY -PARAFFIN

PIPELINE GAS - GAS OIL COMPANY -DIESEL

SUPPLIERS

BASIC FUEL PRICE COMPARISON

October 2009 18

MODELMODEL

October 2009 19

THE ENDTHE END

FFSFFS

““YOUR PREFERRED SUPPLIER”YOUR PREFERRED SUPPLIER”