A NEW BASIC PRICE FORMULA FOR SOUTH AFRICA Department of Minerals and Energy Republic of South Africa

The “Basic Fuels Price” (BFP) will replace the “In Bond Landed Cost” (IBLC) as the basis for fuels product cost valuation in the regulated fuels pricing system, i.e. for: - local ex refinery prices -deemed value for imports -value for slate-accounts

IBLC Background l Originated in 1954 with the first (Mobil) refinery in Durban l Revised by NEDLAC in 1995 l Based on 80% contract prices and 20% spot prices l 75% Singapore and 25% Arab Gulf

IBLC in the Petrol price

Shortcomings of IBLC l IBLC relies on “Posted” [term] FOB prices of overseas export refineries which are outdated and no longer reflect the realities of petroleum markets l Shifts in world markets l For this and other reasons, does not provide a realistic, market-related import parity basis required for the regulated fuels system

Process l Several investigations done l Consultations with SAPIA & AMEF

Underlying Principles of B F P l To represent the realistic, market- related costs of importing a substantial portion of SA’s liquid fuels requirements l From overseas refining centres capable of meeting SA’s requirements in terms of both product quality and sustained supply considerations

Main differences – BFP vs IBLC l BFP relies on “spot” [cash] F.O.B prices quoted in Platts which tracks actual daily fuels trading prices at export refineries l BFP reflects all the other costs incurred in actual imports

Composition of the Basic Fuel Price l Spot prices – Platts daily quotations - Petrols = 50/50 Med. & Singapore - Diesel & I P = 50/50 Med & Arab Gulf l Ocean freight, demurrage and wharfage l Insurance & sundries l Ocean loss l Coastal storage and finance costs

BFP / IBLC comparisons [BFP less than IBLC, c/l - averages] 1996 to 2002 Petrol [93 leaded] 4 Diesel 7 Paraffin 10 (larger in last two years)

The BFP will lead to l Savings to motorists l Lower income to the refining industry (particularly when compared with the recent past)

Concerns expressed l Refiners: the long term viability of the refinery industry new investments in the industry to meet improved fuel specifications l BEE companies: (without refining interests) where profitability is to a large extent dependent on discounts l Synthetic fuels producers: who do not have marketing operations

National Perspective l The BFP methodology will result in more realistic, defensible and market-related pricing of fuels, which will result in lower prices than if continuing with the outdated IBLC system l Every 1 c/litre saving in petrol and diesel equates to some R150 million per year in S A. l Implementation should be possible without compromising the viability of the local liquid fuels refining industry.

Details at