Minerals and Energy for Development and Prosperity Henry Nhlanhla Gumede Chief Director – Hydrocarbons Petroleum Products Amendment Bill & Petroleum Pipelines Bill Presentation to the National Council of Provinces 22 th September 2003

Hydrocarbons Chief Directorate 2 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction Liquid fuels sector major policy thrust Managed liberalisation with minimal dislocation Maintain regulatory system - with improvements - until removed Re/deregulation after milestones have been met Managed liberalisation  Protect small business and jobs  Elevate historically disadvantaged Lower intermediate input costs (energy) to create low-cost platform for economic development – esp. in industrial heartland Reduce monopoly rents in natural monopolies Energy Policy White Paper – Dec 1998

Hydrocarbons Chief Directorate 3 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction Government’s Approach Competition between and within energy carriers Protect country’s strategic interests Appropriate ‘rules of the game’ for investors Facilitate investment projects Regulation only where and to extent necessary

Hydrocarbons Chief Directorate 4 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction Liquid fuels sector managed liberalisation - phases and milestones Phase One: Achieve Milestones, Maintain regulation Phase Two: Re/Deregulation Phase Three: Phase Three - Monitoring and corrective action

Minerals and Energy for Development and Prosperity The Petroleum Pipelines Bill

Hydrocarbons Chief Directorate 6 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction The Bill seeks to untangle what has come to be known as the “Gordian Knot” Sasol Upliftment agreement Gordian Knot Liquid Fuels Price control mechanism Gas agreement with Sasol Fungibility and delivery of specific molecule On-railing agreements with Spoornet “Natref Neutrality” “Location advantage” Zone and Service differentials

Hydrocarbons Chief Directorate 7 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction Government considerations Pipeline network strategic importance – e.g. Natref fire Most pipelines currently state-owned Additional capacity & investment needed - +/ Concerns been raised about derivation of pipeline and storage tariffs Need for transparency in tariff formulation

Hydrocarbons Chief Directorate 8 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Consultation A number of stakeholders were consulted during the formulation of the Bill. Written submissions from 8 parties were received Cosatu Engen (Coastal refiners) Groundwork (Environmental NGO network) Petronet Sasol SA Institute of Civil Engineers Totalfinaelf Umhaba Estates

Hydrocarbons Chief Directorate 9 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Scope and scale of the Bill Purpose of the Bill Establish a national regulatory framework Establish a Regulator as custodian & enforcer of regulatory framework Provide for issuing of licenses Scope of Bill Crude oil Petroleum products Pipelines, storage facilities, off-loading facilities Excludes production facilities

Hydrocarbons Chief Directorate 10 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Objects of the Bill Promote competition in the construction and operation of petroleum pipelines,loading facilities and storage facilities Promote the efficient, effective, sustainable and orderly development, operation and use of petroleum pipelines, loading facilities and storage facilities Ensure the safe, efficient, economic and environmentally responsible transport, loading and storage of petroleum Promote equitable access to petroleum pipelines, loading facilities and storage facilities Facilitate investment in the petroleum pipeline industry Provide for the security of petroleum pipelines and related infrastructure Promote companies in the petroleum pipeline industry that are owned or controlled by HDSAs, by licence conditions that enable their competitiveness Promote the development of competitive markets for petroleum products Promote access to affordable petroleum products Ensure an appropriate supply of petroleum to meet market requirements

Hydrocarbons Chief Directorate 11 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator The Bill sets up an independent regulator (legal person). The functions of the regulator are to Issue licences for  the construction and conversion of petroleum pipelines, loading facilities and storage facilities  the operation of petroleum pipelines, loading facilities and storage facilities Gather and store information on construction, conversion and operation Undertake investigations and enquiries into the activities of licensees Act as mediator or arbitrator Set or approve tariffs and charges in the manner prescribed by regulation Monitor and take appropriate action, to ensure access in a non- discriminatory, fair and transparent manner Expropriate land or any right on behalf of licensees Promote competition in the petroleum pipeline industry Take decisions that are not at variance with published Government policy

Hydrocarbons Chief Directorate 12 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator Composition of the regulator 5 members – full time Appointed by Minister for 4 year term, renewable Limitations  RSA citizens; solvent; no convictions  Conflict of interest – disclosure To be phased into a Single Energy Regulator Qualifications Relevant experience Impartial & objective Balance between continuity & capacity building

Hydrocarbons Chief Directorate 13 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator Meetings of the regulator Procedures prescribed by regulator Open to public unless confidential, proprietary or commercially sensitive information discussed Decisions to be reduced to writing Record of proceedings The Regulator - Duties Act in justifiable & transparent manner Not act in own interests Act independently of undue influence or instruction Act in a manner required & expected from holder of public office

Hydrocarbons Chief Directorate 14 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator Decisions of the regulator are bound by a number of principles Procedurally fair Based on facts & evidence Legally consistent In public interest Written Explained Appeals to court having jurisdiction

Hydrocarbons Chief Directorate 15 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator The regulator will be supported by a competent staff CEO & professional/administrative support staff CEO may be person employed by another energy sector regulatory authority Support to be common to eventual single regulatory authority

Hydrocarbons Chief Directorate 16 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Regulator The regulator will be funded from a number of sources Appropriation from national revenue Levies by separate legislation (has been drafted) Fees earned – e.g. dispute resolution  Accounts to be audited by Auditor General

Hydrocarbons Chief Directorate 17 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing Issuing of Licenses Applications advertised Objections within 30 days Decision period 60 days after replies to objections Separate licenses for each activity Existing activities must apply and get licenses

Hydrocarbons Chief Directorate 18 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing Authority may impose licence conditions within the following framework (1) A licensee must carry out the construction or operations activities for which the licence is granted Promote historically disadvantaged South Africans Provide for an appropriate supply of products to meet market requirements Licensees must provide the prescribed information to the Authority on the commercial arrangements regarding the participation of HDSAs Loading, pipeline and storage activities of vertically integrated companies may be required to be managed separately, with no cross-subsidisation A pipeline may be licensed for either crude oil or petroleum products, or both Sufficient pipeline capacity availed for crude oil to enable uninterrupted operation of Natref, at its current normal operating capacity Shippers must have access to petroleum pipelines in proportion to their needs and within the commercially reasonable constraints

Hydrocarbons Chief Directorate 19 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing Authority may impose licence conditions within the following framework (2) Parties allowed to negotiate changes with pipeline licensees in the routing, size and capacity of proposed petroleum pipelines  Licensees not obliged to incur any additional expenditure to provide the changes and the total cost must be shared equitably between parties Licensees must allow interconnections with the facilities of other licensees  The interconnection is technically feasible  Costs are borne by person requesting the interconnection 3 rd parties must have access to loading facilities with the capacity in proportion to their needs, subject to an appropriate payment 3 rd parties must have access on commercially reasonable terms to uncommitted capacity in storage facilities  On provision that an applicant may elect to give users access in proportion to their needs Parties may negotiate with storage licensees for changes in the capacity of storage facilities

Hydrocarbons Chief Directorate 20 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing Authority may impose licence conditions within the following framework (3) Tariffs for petroleum pipelines set by the Authority Tariffs for loading facilities and storage facilities approved by Authority Licensed loading facilities, petroleum pipelines or storage facilities in a fully operational condition The time period within which pipelines & facilities must become operational fixed Licensees to provide information necessary for the Authority to perform its functions Standards of construction and operation approved by the Authority include HSE standards required by the Authority, Licensees must  Submit to the Authority annually an emergency plan for implementation  Train the appropriate operating and maintenance employees  Establish liaison with the appropriate emergency response officials Pipeline licensees to have a plan for reviewing changes in conditions affecting the integrity and safety of their pipelines, including periodic patrolling Licensees to establish and maintain liaison with local authorities that issue permissions for excavations

Hydrocarbons Chief Directorate 21 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing Other issues that will be considered Non-discrimination; term; amendment, revocation Regulator can amend licenses Regulator arbitration on request Contraventions  Suspend or revoke  Fines up to R2 mill / day  Appeals to high Court

Hydrocarbons Chief Directorate 22 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Other provisions Entry, inspection & information gathering by Regulator Voluntary resolution of disputes Compulsory resolution of disputes Expropriation – rights of way

Hydrocarbons Chief Directorate 23 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Regulations Made by Minister after consulting Regulator & inviting public comment Procedures Record keeping Forms Publishing of information Methodology to be used by Regulator Land rehabilitation

Hydrocarbons Chief Directorate 24 Department of Minerals and Energy Minerals and Energy for Prosperity and Development General Prohibition on agreements contrary to Act Short Title – Petroleum Pipelines Act

Minerals and Energy for Development and Prosperity Petroleum Products Amendment Bill

Hydrocarbons Chief Directorate 26 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Introduction Although there were a number of conflicting interests, the formulation of the Bill benefited from an extensive interaction with key stakeholders Most submissions very helpful Background and context are very important An amendment Bill Competition issues: public interest prevails for the transitional phase Ministerial discretion: dynamic and complex industry The drafting complicated by current negotiations on main supply agreement

Hydrocarbons Chief Directorate 27 Department of Minerals and Energy Minerals and Energy for Prosperity and Development The Challenges in the Petroleum sector The Bill has been configured in a manner that addresses these challenges ChallengeResponse Transitional licence conditions Regulate key economic inputs Regulated “system” Regulated standards/specs Licensing & Petroleum Pipelines Fuel standards regulation HUB – Manufacturing licensing Licensing/Full service Regulate for efficiency (Feebate) Vertical integration/Licensing Liberalization and competition Internationally competitive Synfuels industry Supply of quality products Efficient network Safety and environment Investments - Petrochemicals HDSA participation & preserve jobs Energy Efficiency SMME

Hydrocarbons Chief Directorate 28 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Objects of the Bill The primary aim for amending this Act was to modernise it The Petroleum Products Act, 1977 is outdated It is no longer in line with the socio-political and economic dynamics pertaining to the liquid fuels sector The PPAB will ensure that governance of the liquid fuels sector is in line with Government’s policy objectives It gives effect to policy issues identified the Energy White Paper It provides for a licensing dispensation that includes refiners, wholesalers and retailers petroleum “Give effect” to the Charter through licensing Allow for provision information

Hydrocarbons Chief Directorate 29 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2 amendments, extension of regulatory powers The Minister may Prescribe conditions under which the selling or buying of petroleum products other than in accordance with the prescribed, maximum or minimum price may take place and oblige any person to publish the prices at which petroleum products are “available for sale” Make regulations for the purposes of ensuring a saving in, and the efficient and safe use of, petroleum products Prescribe the quantities of crude oil or petroleum products to be maintained by any person

Hydrocarbons Chief Directorate 30 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2A Prohibition Of Certain Activities The Bill prohibits a number of activities No person may without a appropriate licence hold or develop a site,manufacture petroleum products or conduct the business of wholesaler or retailer No person may make use of a business practice, method of trading, agreement, arrangement, scheme or understanding that is aimed at or would result in  Whereby a wholesale oil company may own and operate a service station(maintenance of small businesses) oExcept for training oExcludes LPG & paraffin  The sale of petroleum products using a system of self-service by consumers

Hydrocarbons Chief Directorate 31 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2B Licensing Objectives The Controller of Petroleum Products must issue licences. In considering the issuing of any licences, the Controller shall give effect to the provisions of section 2C and the following objectives Promoting an efficient manufacturing, wholesaling and retailing petroleum industry Facilitating an environment conducive to efficient and commercially justifiable investment The creation of employment opportunities and the development of small businesses in the petroleum sector Ensuring countrywide availability of petroleum products at competitive prices Promoting access to affordable petroleum products by low- income consumers for household use.

Hydrocarbons Chief Directorate 32 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2C Licensing Objectives Transformation of South African petroleum and liquid fuels industry In considering licence applications in terms of this Act, the Controller of Petroleum Products shall  Promote the advancement of historically disadvantaged South Africans  Give effect to the Charter The Controller of Petroleum Products may require any category of licence holder to furnish information, as prescribed, in respect of the implementation of the Charter

Hydrocarbons Chief Directorate 33 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2D Transitional licensing provisions The Act makes provisions for existing businesses The provides deems any person to a holder of a licence who, at the time of commencement of the Petroleum Products Amendment Act, 2003  Holds and is in the process of developing a site  manufactures or wholesales petroleum products, or retails The person shall, within a period of six months apply for an appropriate licence The licence shall lapse if the person fails to apply for a licence within the stipulated period The applicant shall, on application,be entitled to a licence if the applicant is in compliance with all national, provincial and local government legal requirements, that are in force immediately prior to the commencement of this Act Such applicant subject to the general conditions of a licence but not financial security requirement prescribed by regulation

Hydrocarbons Chief Directorate 34 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2E - “ System” for allocation & supply of site licenses Framework for allocation of site licences Intend: an optimum number of efficient sites Intend equilibrium – all participants Promote efficient and productive retail facilities by  Cap on number of sites  Link total sites to total consumption Wholesalers can trade obligations to retailers Supplies (on spec.) – give preference to products made from  Coal, natural gas, vegetable matter  Other raw materials Link new licenses to terminators or transfers

Hydrocarbons Chief Directorate 35 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2E - “ System” for allocation & supply of site licenses The system for allocation and supply of site licences is not intended for certain products For “prescribed” products Minister to review efficacy of the system  Against objectives from time to time  Revise system if necessary

Hydrocarbons Chief Directorate 36 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Licensing in general For the purposes of accountability, the applicant must be linked to the activity for which the licence is intended Any person who apply for a licence must  Manufacturing – be property owner or with their permission  Site – property owner  Wholesale & retail – be business owner

Hydrocarbons Chief Directorate 37 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 2F - System for allocation of licences for LPG and Paraffin Minister may prescribe licensing systems for the wholesaling and retailing of liquefied petroleum gas or paraffin Additional objective “promote access to affordable petroleum products by low income consumers for household use” New section: Minister may regulate”system” for LPG/Paraffin licensing “targeted at poverty alleviation for low income households” In designated areas may restrict to one or more retailers

Hydrocarbons Chief Directorate 38 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 4 - Controller of Petroleum Products The Minister Shall appoint any person in the public service as Controller of Petroleum Products May appoint persons in the public service as regional controllers of petroleum products or as inspectors for the Republic May, in consultation with the Minister of Finance determine, appoint or authorise any other person or person belonging to any other category of persons to act as regional controller of petroleum products or as inspector

Hydrocarbons Chief Directorate 39 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 12 - Offences and Penalties Any person who contravenes a provision of the Act, shall be guilty of an offence Be liable on conviction to a fine  not exceeding R  Imprisonment for a period not exceeding ten years  Both such fine and such imprisonment Compliance may result in a directive to absolve from criminal liability

Hydrocarbons Chief Directorate 40 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 12A - Appeal Any person directly affected by a decision of the Controller of Petroleum Products may, appeal to the Minister against such decision An appeal shall be lodged within 60 days after such decision has been made known to the affected person The appeal shall be accompanied by  A written explanation setting out the nature of the appeal  Any documentary evidence upon which the appeal is based The Minister shall consider the appeal, and shall give his or her decision thereon, together with written reasons therefor

Hydrocarbons Chief Directorate 41 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 12B Arbitration The Controller of Petroleum Products may, on request by a retailer or by a wholesaler, alleging an unfair contractual practice, require that the parties submit the matter to arbitration Arbitrator to make awards to correct unfair and unreasonable contractual practices Determine if allegations “frivolous or capricious” – compensatory awards Orders, including costs, final and binding

Hydrocarbons Chief Directorate 42 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Section 12C - Regulations The Minister may make regulations regarding Conditions or restrictions in respect of licences Conditions relating to the advancement of HDSAs The obligation of a licence holder to keep records and to furnish particular information The form and manner of an application for a license Prohibiting a business practice which conflicts with any licensing objective The records and information to be kept by the Controller of Petroleum Products The continuity of supply of petroleum products by licensees under normal operating conditions, and in cases of potential or actual emergency The specifications and standards of petroleum products The prohibition of the blending or mixing of different petroleum products The rehabilitation of land used in connection with a licensed activity

Hydrocarbons Chief Directorate 43 Department of Minerals and Energy Minerals and Energy for Prosperity and Development Fuel Specifications and Standards In the case of fuel specifications, the Minister shall, prior to promulgating any regulation contemplated in subsection (1)(e)— Invite public comment thereon by publishing it in the Gazette Allow a period of not less than two months for the submission of public comment duly consider such comments

Minerals and Energy for Development and Prosperity Thank you