1 12 November 2013 STRATEGIC STOCKS – A REGULATOR PERSPECTIVE Presented by Mr Muzi Mkhize Chief Director: Hydrocarbons Policy Presented by Mr Muzi Mkhize Chief Director: Hydrocarbons Policy

What are Strategic Stocks? Strategic stocks defined as both crude oil and refined products physical in nature, held by both Government and the oil companies to cater for catastrophes or severe fuel supply disruptions. They exclude dead stock in tanks, pipeline fills, refined products in road and rail tankers, stocks held on behalf of armed forces, commercial and safety stocks held by the oil industry. The products to be kept as strategic stocks will include diesel, petrol, jet fuel and liquefied petroleum gas (LPG). The mandatory strategic stocks will only be released on instruction by Government via the Minister of Energy OECD countries and developing countries such as China, India, Kenya and also lately SA’s neighbouring BLNS (Botswana, Lesotho, Namibia and Swaziland) countries also keep strategic stocks. Govt, through Minister of Energy, declares SS state of emergency.

Position w.r.t. Strategic Stocks Based on country’s supply & demand and risk exposure, SA should keep a total of 60 days of strategic stocks: o 42 days of stocks in crude oil; and o 18 days of stocks in refined products. All the 60 days of stocks would be kept by Government. The 42 days is based on: o Average lead time of 4 weeks (28 days) from the sources of supply [order placing to arrival at port of entry]; and o Average 14 days for demurrage, offloading, refining and transportation to the Inland region. Oil companies to be obliged to keep 14 days of refined products as strategic stocks. 3 The White Paper on Energy Policy of 1998 requires SA to keep SS equivalent to 90 days of net imports like the International Energy Agency member countries - this does not reflect South Africa’s risk exposure: Task 135 study).

Cabinet approval of Draft SSP for public comment on 03-Mar-13 o NB: DoE, in conjunction with NT (and other relevant organs of State), need to resolve financial challenges associated with SS. Draft SSP and Draft Implementation Plan SSP published in terms of S17 of National Energy Act, 2008 (Act No. 34 of 2008), in Government Gazette No of 08-Mar-13, for public comment. o 60 day window period for comments. o Stakeholder Engagement Workshop held on 04-Jul-13. Comments duly considered Development of a Funding Mechanism in progress o Phased approach; and o Minimal negative impact to the economy / motorists. Development of SSP SSP CONTEXT SHOULD ALWAYS BE: SECURITY OF SUPPLY. SSP AND IMPLEMENTATION THEREOF NOT DONE IN ISOLATION –. 20YEAR ROADMAP OUTPUTS TO BE FACTORED IN

Matters related to SS holding by oil companies – challenges for Integrated Marketers (SAPIA defn: companies that are involved in the entire supply chain of the petroleum products.i.e. refining, wholesaling and retailing); exoneration of oil companies from holding SS? o Draft Regulations for SS-holding by oil companies discussed and put on hold o Matters related to admin, stock-turning issues, etc.? ‒ Challenges e.g. SBM (and other shared/common infrastructure) serving companies’ interest ahead of the country’s? The financial implications of the project to the South African public: o Prioritization against projects competing for same funding as well alternative projects o All intervention moving price southward Elimination of unintended consequences Main Issues Risk premium needs to be commensurate of the risk mitigated

Resolution of Funding Mechanism o Working towards announcement in 2014 Budget Speech Resolution of main areas of concern o Mainly from SS-holding by oil companies, noting afore-mentioned funding issues; Phased implementation o Strategic Fuel Fund (SFF) being the key implementing agent Next Steps

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