Petroleum Licensing

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
Regulatory framework is a system
Import parity pricing
BFP
Import control
Licensing Monitoring
Margins setting
LFI Charter
Regulatory accounting
Supply Agreements
Transport differentials
4
Not all petroleum products are regulated
Retail
Commercial
Petrol
Regulated
Unregulated?
Diesel
Unregulated?
Unregulated?
Non-controlled products
Unregulated
Unregulated
Non-fuel products
Unregulated
Unregulated
5
Levers and effects

• Balancing different interests

Import control
Consumer prices
Pricing
Impact
Investments
Transformation
Licensing
Security of supply
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
OMCs dominate NTI development (70-80) of NTIs
are company controlled
9
Ownership of oil company branded retail network
Source 1993 Lambrechts 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
12
Accommodation of new players
Different solutions to the same problem
Problems

• Industry Supply Agreements
• Sasol upliftment terminated in 2003
• PetroSA MOU coming to end in 2007

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.
New Players Accommodation Logistical
constraints

• Retail licensing framework
• Vertical integration prohibition
• Wholesale margin review

Regulated upliftment
Mergers Acquisition
A solution, including availing of appropriately
sized logistical infrastructure, needs to be
found before the industry can be liberalised
Deregulation
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

16

• Licensing

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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

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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

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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

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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

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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

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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

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Retail licensing system
The System Basis
Prudent Investment Level
Prudent Value

• Predictable Margin
• (RPI X) basis
• Predictable cost structure
• Linked to indices
• Based on Cashflows

• Prudent value of business
• determines prudent investment levels
• Determines the appropriate type of infrastructure

• Use NPV methodology
• Gives a realistic value of the business
• Determines appropriate key moneys

Licensing System

• Retail licence satisfies a number of conditions
• Viable business
• Compliance to all relevant laws

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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

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

• 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
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Accepting the application

• 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
28
Accepting the application

• 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
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Accepting the application

• 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
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Evaluation Process All licenses

1. In evaluating an application for any license, the
   Controller must give effect to Section 2C of the
   Act

Licensing under the PPA
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Evaluation Process - Site

• 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
32
Evaluation Process - Retail

• 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
33
Evaluation Process - Wholesaling

• 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
34
Evaluation Process - Manufacturing

• 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
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

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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

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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

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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

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Timelines

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

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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

Licensing under the PPA
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Number of License applications accepted,
evaluated issued

License Type Conversion New Evaluated Issued
Site 1 300 3 50 2
Retail 1 300 3 50 2
Wholesale 35 20 20 1
Manufacturing 1 0
Current focus is acceptance Envisaged number of
applications gt 12 000
Licensing under the PPA
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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

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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.

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Additional benefits of licensing

• Data provision publication
• Improved security of supply
• Planning
• Secrecy avoidance
• Tourist information/Navigation