1. Petroleum Licensing Parliamentary Portfolio Committee Briefing 23 August 2006

2. DME Team Nhlanhla Gumede – Chief Director Hydrocarbons Muzi Mkhize – Director Petroleum & Gas Ops Victor Sibiya – Deputy Director Licensing Nonhlanhla Ndebele – Deputy Director Promotions Avishkar Nandkishore – Chief Energy Officer Papali Bakane – Energy Officer

3. Licensing & Monitoring LFI Charter Margins setting Transport differentials Import control Regulatory accounting Supply Agreements Import parity pricing BFP Regulatory framework is a system

4. Not all petroleum products are regulated RetailCommercial Petrol Diesel Non-fuel products Unregulated? Regulated Unregulated Unregulated? Unregulated Unregulated? Non-controlled products Unregulated

5. Levers and effects Balancing different interests Licensing Pricing Import control Investments Consumer prices Transformation Security of supply Impact

6. Policies underpinning our regulatory framework Import parity system Rural-urban subsidies Cash basis Historical basis – margin setting Promotion of local refining Minimal product imports Industry transformation

7. Current problem areas Refining –Capacity running out Wholesale –Diesel “cross subsidies” –Retail customers subsidizing commercial customers Retail –Uneven treatment of DODO vs. CODO sites –Proliferation of service stations Distribution –Limited investment in logistical infrastructure

8. Ownership of New-to-industry (NTI) sites Source: Sapia OMC’s dominate NTI development (70-80%) of NTIs are company controlled

9. Ownership of oil company branded retail network Source: 1993 – Lambrecht’s Report, 1993; 1999-2004 Sapia Proportion of network controlled by the OMCs has risen from 41% in 1993 to 57% in 2004

10. Service station closures Typically 70 - 80% of site closures have been dealer service stations

11. Retail Vicious Circle Accommodate new players in Retail Retail Service stations over proliferation

12. New Players Accommodation Logistical constraints Different solutions to the same problem Problems Deregulation Industry Supply Agreements Sasol upliftment terminated in 2003 PetroSA MOU coming to end in 2007 Regulated upliftment Retail licensing framework Vertical integration prohibition Wholesale margin review A solution, including availing of appropriately sized logistical infrastructure, needs to be found before the industry can be liberalised Sasol & PetroSA, for historical reasons, do not have outlets for their product New participants have limited access to the market New players in refining cannot easily enter Not enough logistical infrastructure for product distribution. Mergers & Acquisition Accommodation of new players

13. RSA prices globally competitive Prices as at Nov 2004, sourced from gtz

14. RSA prices globally competitive Prices as at Nov 2004, sourced from gtz

15. Economic regulatory Models observed Cost-plus –bottom up, costs and margins regulated Benchmarking –prices set in relation to those in other countries/regions Import parity –prices set in line with import costs “Gold plating” problems Efficiency losses Security of supply concerns Allusive comparison Transparent but too simple, complex but less transparent Transparent but too simple, complex but less transparent Real costs subject to manipulation Real costs subject to manipulation Theoretical costs too simplistic Theoretical costs too simplistic

16. Licensing

17. Definitions “ ‘bulk’ means a 1500 litres, per transaction, of petroleum product” “ ‘retail’ means the sale of petroleum products to an end-consumer at a site” “ ‘wholesale’ means the purchase and sale in bulk of petroleum products –by a licensed wholesaler to or from another licensed wholesaler, or to or from a licensed manufacturer, or sale to a licensed retailer or to an end-consumer for own consumption” “ ‘manufacture’ means the manufacture of petroleum products for commercial purposes, and includes the blending and re-refining of petroleum products”

18. Petroleum products definitions Manufacturing –“any petroleum fuel and any lubricant, whether used or unused, and includes any other substance which may be used for a purpose for which petroleum fuel or any lubricant may be used” Wholesaling –“aviation gasoline, biofuels, diesel, jet fuel, liquefied petroleum gas, paraffin and petrol” Retailing –“liquefied petroleum gas used for the propulsion of vehicles, petrol and diesel”

19. Section 2A Prohibition Of Certain Activities 2A. ( 1 ) A person may not- (a) manufacture petroleum products without a manufacturing licence; (b) wholesale prescribed petroleum products without an applicable licence; (c) hold or develop a site without there being a site licence for that site; (d) retail prescribed petroleum products without an applicable retail wholesale licence; issued by the Controller of Petroleum Products

20. Objectives of licensing Give effect to the Charter Promote an efficient manufacturing, wholesaling and retailing petroleum industry Facilitate an environment conducive to efficient and commercially justifiable investment Create employment opportunities and the develop small businesses in the petroleum sector Ensure countrywide availability of petroleum products at competitive prices Promote access to affordable petroleum products by low-income consumers for household use

21. Licensing fundamentals Refining –Promotion of coastal refining and petrochemicals hub vs. –Diversification of primary supply Wholesaling –Promote competition –Unregulated commercial business Retailing –System of controlling number –Improved profitability Site –Environmental rehabilitation

22. Licensing fundamentals - Retail Retailing licensing “system” – 2E –Finite (10 year period) –Intention: an optimum number of efficient sites & achieve equilibrium amongst all participants –Must transform the retail sector - optimum number achieve an equilibrium amongst all participants in based on licensing objectives and 2C promote efficient investment –May link the issuing of a new site licence to termination or transfer limit number of service stations link the number to total volume traded

23. The “System” Basis Predictable Margin –(RPI – X) basis Predictable cost structure –Linked to indices Based on Cashflows Licensing System Retail licence satisfies a number of conditions –Viable business –Compliance to all relevant laws Prudent Investment Level Prudent value of business –determines prudent investment levels –Determines the appropriate type of infrastructure Prudent Value Use NPV methodology –Gives a realistic value of the business –Determines appropriate “key moneys” Retail licensing ‘system’

24. Who should apply? Based on definition of petroleum products in the Act Refining –Any manufacturer of petroleum products Wholesaling –Wholesaler of “prescribed” petroleum products Retailing site –Owner of site Retailing –Retailer of “prescribed” petroleum products

25. Applicant lodge an application Process of applying for a license Application accepted? Evaluation stage Decision Accept Decision License issued Appeal Return application License Decline NO YES Licensing under the PPA 90 days By PostWalk in

26. 1)Before accepting a site license application, the Controller must be satisfied that – a corresponding valid retail licence application has been lodged for that site; the applicant is the owner of the site or in the case of a publicly owned land, has the written permission of the owner the application form has been completed in full; and all documents specified in regulation 3(b) have been submitted with the application form Licensing under the PPA Accepting the application

27. 2)In accepting a retail license application the Controller must be satisfied that – a corresponding site license application has been lodged for that site or a valid site license exists; the applicant is the owner of the business the application form has been completed in full; and all documents specified in regulation 15(1)(b) have been submitted with the application form Licensing under the PPA Accepting the application

28. 3)In accepting a wholesale license application, the Controller must be satisfied that – the applicant is the owner of the business the application form has been completed in full; and all documents specified in regulation 15(1) have been submitted with the application form Licensing under the PPA Accepting the application

29. 4)Before accepting a manufacturing license application, the Controller must be satisfied that – the applicant is the owner of the property or has the written permission of the owner of the property on which the manufacturing facility is or will be located; the application form has been completed in full; and all documents specified in regulation 16 have been submitted with the application form. Licensing under the PPA Accepting the application

30. 4)In evaluating an application for any license, the Controller must give effect to Section 2C of the Act Licensing under the PPA Evaluation Process – All licenses

31. 1)In evaluating an application for any site license, the Controller must verify that – the information and the documents submitted with the application form are true and correct; there is a need for a site; the site will promote the licensing objectives stipulated in sections 2B(2) of the Act; and where required, a notice contemplated in regulation 4(1) was published Licensing under the PPA Evaluation Process - Site

32. 2)In evaluating an application for any retail license, the Controller must verify that – the information and the documents submitted with the application form are true and correct; the retailing business is economically viable; the retailing business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and where required, a notice contemplated in regulation 16(1) was published In determining the economic viability, the Controller must be satisfied that the net present value has been correctly calculated and is positive. Licensing under the PPA Evaluation Process - Retail

33. 3)In evaluating an application for a wholesale license, the Controller must verify that – the information and the documents submitted with the application form are true and correct; The wholesaling business will be economically viable; the wholesaling business will promote the licensing objectives stipulated in sections 2B(2) of the Act; and where required, a notice contemplated in regulation 4(1) was published Licensing under the PPA Evaluation Process - Wholesaling

34. 4)In evaluating an application for a manufacturing license, the Controller must verify that – the information and the documents submitted with the application form are true and correct; where applicable except in the case of an application for a facility manufacturing biofuels, that there is a need for additional capacity; the manufacturing business will promote the licensing objectives stipulated in comply with sections 2B(2) of the Act; and where required, a notice contemplated in regulation 4(1) was published Licensing under the PPA Evaluation Process - Manufacturing

35. Conditions of licensing Manufacturing –activity must remain a going concern –manufacturer may only manufacture petroleum products within the maximum design capacity stated on its licence –maintain minimum working stock levels in compliance with applicable regulations –comply with Charter –comply with the provisions of the fuel specifications

36. Conditions of licensing Wholesale –activity must remain a going concern –Wholesaler must Purchase or sell petroleum products only in bulk Not make use of a business practice, method of trading, agreement, arrangement, scheme or understanding which would result in a licensed wholesaler holding a retail licence except for training purpose comply with the Charter keep minimum working stock levels in compliance with applicable regulations

37. Conditions of licensing Site –Licence and corresponding retail licence displayed at place of business –A licensee must at all times- comply with the Act and these Regulations carry out legitimate instructions from the Controller

38. Conditions of licensing Retail –retailing activity remain a going concern –retailer must only- Only retail from the site specified on the retail licence Only purchase petroleum products from a licensed wholesaler or a licensed manufacturer comply with the Charter submit prescribed information comply with the Act and these Regulations not allow self-service

39. Timelines Act operationalised – 17 th March 2006 End of transitional period -15 th September 2006 Evaluation period –1 st year – 250 days –2 nd year and after - 90 days

40. Licensing under the PPA Section 2D - Transitional licensing provisions The Petroleum Products Amendment Act, 2003 – commenced on the 17 March 2006 Any persons who qualify according to Section 2D must apply within six months from 17 March 2006 to be deemed a holder of a licence

41. Licensing under the PPA License TypeConversionNewEvaluatedIssued Site1 3003502 Retail1 3003502 Wholesale3520 1 Manufacturing10 Number of License applications accepted, evaluated & issued Current focus is acceptance Envisaged number of applications > 12 000

42. Future regulations Conditions relating to the advancement of HDSAs Obligation to hold, keep, furnish records and frequency Continuity of supply of petroleum products Specifications and standards of petroleum products

43. Fines As a last resort 12. (1) Any person who contravenes a provision of this Act, shall be 15 guilty of an offence and be liable on conviction to a fine not exceeding R1 000 000,00, or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment: Provided that if a directive issued in terms of section 2A(2)(c) or (3) is complied with within the period specified therein, the person concerned shall be absolved from criminal liability.

44. Additional benefits of licensing Data provision & publication Improved security of supply Planning Secrecy avoidance Tourist information/Navigation