TRANSFORMATION OF THE GAS SECTOR Presented by Mr. Muzi Mkhize Chief Director: Hydrocarbons Policy 13 August 2013

PRESENTATION OUTLINE INTRODUCTION CHALLENGES SOUTH AFRICAN MARKET ANALYSIS INTERNATIONAL BENCHMARK STRATEGIC INTERVENTIONS SUBSIDY CONSIDERATIONS PRICING ISSUES BENEFITS OF INCREASED LPG USAGE TRANSFORMATION ISSUES WAY FORWARD AND CLOSURE Areas covered include: Update on overall transformation - policy, legislation, regulation investments, skills development, safety, infrastructure, economic spin-offs, land expropriation for infrastructure; Focus on BBBEE; Challenges experienced in the sector; Global comparison in terms of contribution to energy supply; Progressive market penetration as planned by government; Focus on gas prices; Extent of inclusion of gas infrastructure in SIP inclusion Saldanha Bay facility; Prospects of sourcing gas from SADC & globally.

INTRODUCTION – WHAT IS LPG? Liquefied petroleum gas [aka LPG, GPL, LPGas]: is a flammable mixture of hydrocarbon gases (propane or butane) used as a fuel for cooking, heating, commercial appliances and vehicle propulsion. For the latter use it is referred to as autogas. Its boiling point < room temperature and therefore pressurised to liquefy Usually supplied in pressurised steel vessels (LPG cylinders) typically filled to 80% - 85% of their capacity to allow for thermal expansion of the contained liquid. Typical Volumevaporised gas : Volumeliquefied gas = 250:1 Emits 50% less CO2 emissions than coal and 20% less than heating oil Improves both indoor and outdoor air quality by substantially reducing pollutants which are hazardous to health, such as SOx, NOx and Particulate Matter. produced during the refining of petroleum (crude oil), or extracted from petroleum or natural gas streams as they emerge from the ground ~3% of a typical barrel of crude oil is refined into LPG although as much as 40% of it could be converted into LPG. LPG is composed primarily of propane and butane, while natural gas is composed of the lighter methane and ethane. LPG, vaporised and at atmospheric pressure, has a higher calorific value (94 MJ/m3 equivalent to 26.1kWh/m3) than natural gas (methane) (38 MJ/m3 equivalent to 10.6 kWh/m3.

INTRODUCTION – SA SITUATION South African energy supply is characterized by unequal access to modern energy such as electricity and LPG. Low income households lack access to affordable, safe and cleaner energy sources for cooking and space heating. Power shortfalls in recent years - emphasis on the need for an energy mix that reduces the heavy dependence on electricity. Government has identified LPG as an alternative energy carrier of choice for household thermal needs. LPG industry can provide a quick and effective solution to household energy requirements. Domestic LPG supplied by refineries - constrained

CHALLENGES BASIC CHALLENGE OF THE LPG INDUSTRY: UNAVAILABILITY OF LPG [DOMESTIC SUPPLY CONSTRAINT] Locally only dependent on LPG from refineries – by-product and LPG not proved to be a developing market Constrained LPG import and storage infrastructure Generally increasing energy costs Transformation: Industry that still seems to be seeking to distance itself from the Liquid Fuels Industry Charter Refineries make up the “upstream” portion of the LPG value chain Vertical integration – LPG suppliers / marketers linked to refineries Safety concerns: “bomb” Cylinder management challenges

USE OF ENERGY SOURCES BY ELECTRIFICATION STATUS 2% Electricity use by non-electrified households: Illegal connections and tapping into neighbour with or without payment. Vertical axis : % of total households

Main Source of Cooking 2% Electricity use by non-electrified households: Illegal connections and tapping into neighbour with or without payment. Vertical axis : % of total households

SOUTH AFRICAN LPG MARKET ANALYSIS Demand for LPG is expected to grow as more households diversify their energy mix in response to rising electricity prices/tarrifs. Source: World Liquefied Petroleum Gas Association (WLPGA) 2009 In 2008, 337 000 tonnes of LPG were produced in South Africa with consumption at approximately 365 000 tonnes.

SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Sources of energy used for heating in South Africa: Source:Team Analysis, Stats SA community survey of 2007 LPG consumption is approximately 1% to 2% of the total amount of energy used for heating and cooking. The demand for LPG is influenced by increases in the price of electricity prices. In the past, low electricity tariffs, high prices of LPG have resulted in low uptake of LPG.

SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Sources of energy used for cooking in South Africa: Source: Team Analysis, Stats SA community survey of 2007 High prices of LPG than electricity has resulted in the majority of poorer households switching to fuels such as coal (1%), paraffin(15%) and wood (15%)

SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Since 14 July 2010 Government is regulating the maximum retail price of LPG supplied to residential consumers. provides some predictability on LPG prices. Allows consumers to plan their future related energy purchases behaviour. Supply Factors of LPG Crude type or feedstock diet; Vapour pressure specifications for petrol (winter & summer differences); Refinery economics - Complexity of the various refineries and their LPG conversion ability; Availability of import, storage and distribution infrastructure; Environmental regulations; Local manufacturing of LPG cylinders Mmapho Gas and Energy – Woman owned

SOUTH AFRICAN LPG MARKET ANALYSIS (contd) LPG supply value chain: Characterised by refineries, distributors, retailers and other stockists. Total number of wholesalers is not known, the major wholesalers and bulk distributors include Afrox, BP, Easigas, Total Gas and Reatile. Approximately 452 of dealers mainly comprising fuel stations and ~4,000 small dealers that sell from informal shops and trading stores. Fragmentation in Retailers and Dealers due to: LPG is rarely a business and usually yields a small portion of turnover; Dealers are contracted and branded to a particular producer or wholesaler who owns storage and filling equipment; Dealers are supplied by distributors in branded cylinders; Generally a cash business, retailing LPG at a premium by re-filling end user owned small cylinders (usually < 7kg) Transportation and storage costs in supply chain results in higher price of LPG being sold to consumers. Small market size has not warranted larger-scale infrastructural investments for importation or local optimisation and distribution of bulk LPG. GGG

INTERNATIONAL BENCHMARKING Approximately 42 million household in Brazil use LPG in their residential sector. They practiced a cross-subsidy scheme for several decades in order to make LPG affordable to households in all parts of the country. Subsidy and voucher system was used in expanding and making LPG available only to lower income households respectively. In India 162 million households use LPG for cooking. The Government of India removed all subsidies on petroleum products except for LPG. Indonesia achieved more than 5.3 million users of LPG in their programme. Government distribution of packages comprising of 3kg cylinders, stoves and free gas (first fill) was a success factor for Indonesia.

END-USER PRICES OF LPG IN DECEMBER 2010

SHARE OF HOUSEHOLD INCOME REQUIRED TO BE SPENT ON LPG FOR REGULAR USE

STRATEGIC INTERVENTIONS Objectives of the LPG Expansion Strategy: Targets 1.2 million households from all income groups over a period of 5 years Provide access to safe, cleaner, efficient, environmentally benign and affordable thermal fuel Switch low income households from the use of coal, paraffin and biomass to LPG as the thermal fuel Contribute to demand side management by minimising the use of electricity on cooking and space heating Enhance the level and quality of energy services currently available to residential users Contribute to the green economy programmes that aims to reduce greenhouse gas emissions The development of the Strategy was put on hold last year to focus on LPG supply issues but has been incorporated in this FY’s programme. Quick wins will be identified and implemented.

STRATEGIC INTERVENTIONS (contd.) Avoid any mixing of cylinders by competing companies, and swopping of cylinders Expedite local manufacturing of LPG cylinders and appliances. Launch a major concerted awareness campaign to assist the development of the market for LPG. Subject to concrete plans on ensuring security of supply Investigate the possibility of eradicating the dependence of the LPG Safety Association on voluntary member contributions Cooperation with: COGTA to encourage different municipalities to support the rollout of the project throughout the country DEA regarding prioritising assessment of Environmental Impact Assessments (EIA). National Treasury regarding possible subsidies NERSA on subsequent Multi Year Price Determination (MYPD) Industrial Development Corporation (IDC) regarding support programmes for the expanded use of LPG as an energy carrier in supporting green economy. Transnet National Ports Authority (TNPA) to facilitate the development of import infrastructure at the identified ports.

COMPOSITION OF THE MAXIMUM LPG RETAIL PRICES Current prices applicable from 07-Aug-13 to 03-Sep-13, in cents per kilogram: Price Element Coastal Zone 1A Inland Zone 9C Maximum refinery gate price (MRGP) 1,029.342 Primary transport costs 37.120 175.960 Operating expenses 343.000 Working capital 26.000 Depreciation 126.000 Gross margin: Cylinder-filling plant 161.000 Sub-total (1) 1,722.462 1,861.302 Retail Margin: [15% of subtotal (1)] 258.369 279.195 Sub-total (2) 1,980.831 2140.497 Value-added tax [14% of Sub-total (2)] 277.316 299.760 Maximum Retail Price (rounded to full cents) 2,258.000 2,440.000 Price tracked everyday and adjusted every month

LPG PRICING MECHANISM REVIEW Review of the Maximum Refinery Gate Price: Published Discussion Document Held Stakeholder Workshop Comments received being duly considered Final position on MRGP by end of Q3 2013/14 Review of Working Rules for the Maximum Retail Price of LPG Supplied to Residential Customers Internal drafting Revised Working Rules will be published for public comment during Q3 2013/14 Revised MRGP will be an equivalent of a Basic Fuels Price for LPG

BENEFITS OF INCREASED LPG USAGE Savings in electricity consumption Increased use of LPG in the residential sector could alleviate the pressure off the electricity grid to the extent that the reserve margin of electricity could be improved. Contribution to the Green Economy LPG produces less air pollution; fewer soot particulates, nitrogen oxides, and sulphur and therefore fewer emissions of carbon dioxide. Versatility It can be transported using sea, rail or road. Efficiency Energy-rich fuel source with a higher calorific value per unit than other commonly used fuels. Reduced Energy Poverty Provide a first modern alternative to traditional cooking fuels such as firewood, charcoal, dung, and which are extremely harmful to human health.

WAY FORWARD MRGP Review Conclusion work-in-progress: MRGP Review Review of Working Rules for the Maximum Retail Price of LPG supplied to Residential Customers Conclusion of the LPG Expansion Strategy Identification of quick wins and facilitation infrastructure development Transformation Issues

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