Infrastructure issues in the     Petroleum Sector       Dr Rod Crompton        National Energy    Regulator of South Afric...
PERSONAL OPINIONS                    2
Outline• Background to economic regulation• Introduction to NERSA• Regulating market entry• The construction boom & challe...
Background to economic      regulation                         4
Text book• Rationale for regulation based on “natural  monopolies” i.e. market failure, & avoiding  unnecessary duplicatio...
Reality• Multiple objectives in regulatory laws, sometimes competing; e.g.  – promote competition.  – orderly development ...
Introduction to NERSA
• Commenced November 2005• Modelled on modern transparent  economic regulator• Public hearings• Written decisions and reas...
Regulated sectors                  Electricity          Petroleum                 Gas            Gen.      Trm     Distr  ...
3 Industries• 3 different Acts• Electricity and petroleum treated as  established industries• Gas treated as an infant ind...
What do economic regulators do?• Make impartial, difficult, economic  trade-off decisions in “the public  interest” (not d...
Regulating Market EntryHow should we admit new pipeline          capacity?                                   12
Market access1.   Petroleum Pipelines Act: Must have a licence2.   Objective of Act: Promote (introduce) competition     (...
The construction boom &      challenges                          14
Pipeline Construction approved Petroleum Pipeline Construction Licenses                         Area               Rm     ...
Storage Construction approved (1)   Petroleum Storage Construction          Year        Area        Rm          Licenses G...
Storage Construction approved (2)   Petroleum Storage Construction     Year Approved        Area           Rm          Lic...
Loading Construction approved   Petroleum Loading Facilities                          Area           Rm          Licences ...
Construction applications under                                   consideration             Applicant                  Are...
Storage Capex approved           1400           1200           1000                                                Sunrise...
Challenges  • Delays  • Costs  For example
Licensed construction• Petroline: 12” Maputo to Kendal  –   scheduled completion Q3 2009.  –   licence deadline March 2010...
Statutory options for late delivery         Option                  Consequence1. Extend construction      1. Capacity con...
Statutory remedies for cost over                             runs        Option                 Consequence1. “Prudent” - ...
Options for risk allocationfor late delivery & cost over runs               Options                    Risk bearer  • Lice...
Prices and tariffs                     26
Petrol ULP                                       Petrol price structureApril 2011                 93 (c/l)Basic Fuels Pric...
Taxes & administered components of petrol price              200              180              160              140cents/l...
Administered components of petrol price              90              80              70              60cents/litre        ...
Issues1. SA needs new pipelines2. How to finance?3. Transnet Pipelines: >quadruple asset   base without equity injection4....
Transnet: funding by Tariffs 140%                                             128% 120% 100%  80%                      83%...
Pipeline tariff impact on Gauteng petrol price                  60                                                        ...
Storage tariffs                  33
Tariffs (c/litre) 65 Engen Storage facilities250200150100 50  0      0   5 000   10 000   15 000   20 000   25 000   30 00...
200 Refined Products Storage facility sizes (m3)200 000180 000160 000140 000120 000100 000 80 000 60 000 40 000 20 000    ...
Security of Supply &  Strategic Stocks                       36
Government Policy &                       strategic issues• Government required a bigger than commercial  pipeline for sec...
Nersa Estimates                                      Road and rail requirement is indicated by the area between the demand...
Estimated impact of pipeline constraints on roads  No. of road          2009          2010          2011 tankers from   Du...
Strategic Stocks• Currently held as crude at Saldanha Bay• Draft regulations 23 September 2010  – switch to refined produc...
Biofuels compulsory blending?                                41
• Blending currently voluntary• Draft regulations 16 September 2011:  – Compulsory blending bioethanol in petrol and    bi...
Thank youwww.nersa.org.za       43
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Dr Rod Crompton, Regulator, Nersa

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Future Fuel Distribution Strategies for Southern Africa, 2 & 3 November 2011, Southern Sun O. R. Tambo International, Gauteng

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Dr Rod Crompton, Regulator, Nersa

  1. 1. Infrastructure issues in the Petroleum Sector Dr Rod Crompton National Energy Regulator of South Africa 2 November 2011 1
  2. 2. PERSONAL OPINIONS 2
  3. 3. Outline• Background to economic regulation• Introduction to NERSA• Regulating market entry• The construction boom & challenges• Prices and tariffs• Funding big energy infrastructure• Storage tariffs• Security of Supply & Strategic stocks 3• Biofuels compulsory blending?
  4. 4. Background to economic regulation 4
  5. 5. Text book• Rationale for regulation based on “natural monopolies” i.e. market failure, & avoiding unnecessary duplication• Prevent monopolistic price gouging 5
  6. 6. Reality• Multiple objectives in regulatory laws, sometimes competing; e.g. – promote competition. – orderly development – public interest – security of supply (implies strategic element) 6
  7. 7. Introduction to NERSA
  8. 8. • Commenced November 2005• Modelled on modern transparent economic regulator• Public hearings• Written decisions and reasons for decision
  9. 9. Regulated sectors Electricity Petroleum Gas Gen. Trm Distr Pipelines Storage Trm DistrDominant Eskom Eskom Munics Transnet Six oil SASOL SASOLmarket /Eskom cosshareRegulation Full Full Full/co Full/set Full/app Light Light ntested rove monitor monitor & & approve approve
  10. 10. 3 Industries• 3 different Acts• Electricity and petroleum treated as established industries• Gas treated as an infant industry – less onerous regulation
  11. 11. What do economic regulators do?• Make impartial, difficult, economic 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 11
  12. 12. Regulating Market EntryHow should we admit new pipeline capacity? 12
  13. 13. Market access1. Petroleum Pipelines Act: Must have a licence2. Objective of Act: Promote (introduce) competition (without privatisation – unique?)3. Act silent on competing applications4. Process in order received 1. First mover advantage 2. Unsubstantial rejected5. Weigh the merits 13
  14. 14. The construction boom & challenges 14
  15. 15. Pipeline Construction approved Petroleum Pipeline Construction Licenses Area Rm Granted YEAR ApprovedPetroline RSA (Pty) Ltd 2007 Maputo to Kendal 4,200Transnet Ltd. 2007 Durban to inland 23 400Sasol Oil (Pty) Ltd. 2011 Secunda to Natref <2,000Engen Petroleum Ltd. 2010 Durban <1,000SAPREF 2011 Durban <1,000TOTAL <32,000 15
  16. 16. Storage Construction approved (1) Petroleum Storage Construction Year Area Rm Licenses Granted ApprovedChevron (additional 3 tanks) 2006 Alrode 20 – 25Chevron (additional 3 tanks) 2007 Waltloo 20 – 35Chevron (additional fourth (one) tank) 2007 Alrode 2–5Engen (additional 3 tanks) 2007 Cape Town 20 – 40Engen (additional tank) 2007 Upington 2–7ACSA (new 6 tanks) 2008 KSIA Durban 60 – 100Engen (further additional 3 tanks) 2009 Cape Town 2–7 ORTIAACSA (additional 3 tanks) 2009 Johannesburg 80 – 140Sasol Oil (additional 10 tanks) 2009 Alrode <1 500
  17. 17. Storage Construction approved (2) Petroleum Storage Construction Year Approved Area Rm Licenses GrantedEngen (additional 5 tanks) 2010 Langlaagte (JHB) 40 - 80VOPAK SA Developments (new 38 Jamesson Parktanks) 2010 (Gauteng) <1 500Shell (additional 4 tanks) 2010 Alrode <500 Cape TownFFS Refinery (additional tank) 2010 Harbour 2–5BPSA, Shell Engen & Total (new four Island Viewarms) 2010 Berths 6 80 - 120Sunrise Energy (new 6 tanks LPG) 2011 Cape Town <1 000 17
  18. 18. Loading Construction approved Petroleum Loading Facilities Area Rm Licences Granted YEAR ApprovedBPSA, Shell Engen & Total (new Island View four arms) 2010 Berths 6 50-150Sunrise Energy (new 6 tanks LPG) 2011 Cape Town 350-750TOTAL (Rm) 5,228 to 5,964 18
  19. 19. Construction applications under consideration Applicant AreaOil Tanking Grinrod Calulo (new 18 tanks & loading facilities) Coega IDZTotal SA (additional tank) WaltlooTotal SA (additional tank) PolokwaneTotal SA (additional tank) OhrigstadBPSA (additional tank) WaltlooBPSA (new 4 tanks) Rand Airport 19
  20. 20. Storage Capex approved 1400 1200 1000 Sunrise VOPAKCAPEX Rm 800 Shell Sasol FFS 600 Saosol Oil ACSA 400 Engen Chevron 200 0 2006 2007 2008 2009 2010 2011 20
  21. 21. Challenges • Delays • Costs For example
  22. 22. 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• 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 22 • next ????
  23. 23. Statutory options for late delivery Option Consequence1. Extend construction 1. Capacity constraints. period Upsets orderly development of capacity?2. Don’t extend 2. Construction halts? construction period Liquidation? Shortages?3. Impose fine for breach 3. Construction halts? of licence condition Liquidation? Shortages? 23
  24. 24. Statutory remedies for cost over runs Option Consequence1. “Prudent” - allow 1. Higher tariffs over run into tariffs2. “Imprudent” - 2. Lower tariffs. disallow over run Liquidation? from tariffs Shortages?
  25. 25. Options for risk allocationfor late delivery & cost over runs Options Risk bearer • Licensing (current legal 1. Consumers requirement) • Deregulate market 2. Investors & consumers access & let the market decide? • Competitive bidding 3. Fairer to all? rounds for additional capacity. (locked in tariff. Locked in premium. Construction Co. collusion?)
  26. 26. Prices and tariffs 26
  27. 27. Petrol ULP Petrol price structureApril 2011 93 (c/l)Basic Fuels Price 546Incremental InlandTransport Recovery Cost 3 %Wholesale Margin 54 International component + refining margin 56Petroleum Products Levy 0Transport Cost 23 Taxes & Levies 27Delivery Cost 11 Administered prices 18Retail Margin 81Demand side 100management levy 0 Small businessRAF 80 Job creation 26c/lCustoms &excise 4 Cost drivers:Fuel tax 178 •Accident rateRetail price 980 •Admin costs 27
  28. 28. Taxes & administered components of petrol price 200 180 160 140cents/litre 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fuel Tax RAF Transport Wholesale margin Retail Margin Delivery Cost (road) 28
  29. 29. Administered components of petrol price 90 80 70 60cents/litre 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Transport Wholesale margin Retail Margin Delivery Cost (road) 29
  30. 30. Issues1. SA needs new pipelines2. How to finance?3. Transnet Pipelines: >quadruple asset base without equity injection4. Only remaining financing option is tariffs5. Debt service cover ratio6. Security of supply levy: 7.5c/l for 3 years = R4.5 bn 30
  31. 31. Transnet: funding by Tariffs 140% 128% 120% 100% 80% 83% 83% ? Licence application 60% 60% 51% Tariff applications* 40% NERSA decisions* 20% 15% 12% 0% 7.7% -20% -11% 08/09 09/10 10/11 11/12 12/13* Allowable Revenue 31
  32. 32. Pipeline tariff impact on Gauteng petrol price 60 Forecasts → 50 40cents per litre 24” Trunkline into 30 operation 20 Full NMPP Project 10 completed - 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 32
  33. 33. Storage tariffs 33
  34. 34. Tariffs (c/litre) 65 Engen Storage facilities250200150100 50 0 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 Total Capacity of facility (m3)
  35. 35. 200 Refined Products Storage facility sizes (m3)200 000180 000160 000140 000120 000100 000 80 000 60 000 40 000 20 000 0 35
  36. 36. Security of Supply & Strategic Stocks 36
  37. 37. 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)• 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
  38. 38. Nersa Estimates Road and rail requirement is indicated by the area between the demand lines and the bars 20 000 NMPP pipeline capacity 18 000 16 000 DJP pipeline capacity million liter / annum 14 000 Inland Jet Fuel supply 12 000 10 000 Inland IP supply 8 000 6 000 Inland Diesel supply 4 000 Inland Petrol supply 2 000 0 Inland Fuel demand 2011 2006 2007 2008 2009 2010 2012 2013 2014 2015 Inland Fuel demand incl. exportsNMPP commences operation 1 January 2012. The whole project will be completed by 1 April 2014 i.e. NMPP reaches fullNote: Data availability an issuecapacity at 1 April 2014. This is as per Transnets presentation to NERSA on 7 December 2010. 38
  39. 39. Estimated impact of pipeline constraints on roads No. of road 2009 2010 2011 tankers from Durban to GautengPer annum 16 931 24 497 42 351Per day 47 68 117Per hour 2 3 5Minutes 31 21 12between trucks 39
  40. 40. Strategic Stocks• Currently held as crude at Saldanha Bay• Draft regulations 23 September 2010 – switch to 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
  41. 41. Biofuels compulsory blending? 41
  42. 42. • Blending currently voluntary• Draft regulations 16 September 2011: – Compulsory blending bioethanol in petrol and biodiesel in diesel• Biofuels require subsidies – fuel levy?• Affect pipeline operations? Increase tariffs?• Impact on storage costs? 42
  43. 43. Thank youwww.nersa.org.za 43

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