1. Briefing to the Select Committee on Economic Development The South African Petroleum Industry Association November 2011

2. Presentation outline 1. SAPIA overview 2. Benefits of the South African petroleum industry 3. Liquefied Petroleum Gas (LPG) 4. LPG economic regulation and legislation 5. LPG security of supply 6. Challenges 7. Way forward November 2011

3. SAPIA overview

4. Membership –BP Southern Africa (Pty) Limited –Chevron South Africa (Pty) Limited –Engen Petroleum Limited –Sasol Limited –Shell South Africa Marketing (Pty) Limited –The Petroleum Oil and Gas Corporation of South Africa (Pty) Limited (PetroSA) –Total South Africa (Pty) Limited November 2011

5. Benefits of the SA petroleum industry Energy is the engine room of a countrys economy. - Deputy President Kgalema Motlanthe

6. Benefits of the SA petroleum industry November 2011 The petroleum industry is a significant source of jobs, income and taxes. Its economic significance is larger than suggested by direct measures, because it interacts with many other industries and has a wider effect than most industrial sectors. The petroleum industry is also considered to be the back bone of the economy because it is the primary source of energy in the world. Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilisers, pesticides, paints, packaging, detergents and plastics.

7. Benefits of the SA petroleum industry November 2011 The SA petroleum industry accounts for: More than 100 000 jobs (direct and indirect employment); R195-billion in total sales; R5-billion in annual payroll; R40-billion in annual excise and sales taxes; R190-million in income tax; and R158-million spent by SAPIA member companies on corporate social investment projects during 2010. The member companies corporate social investment programmes are directed towards seven main areas: education; health and welfare; environment; community development/skills development; arts, culture and sport development; road safety; and job creation.

8. Liquefied Petroleum Gas What is it and for what is it used?

9. LPG – what is it and for what is it used? November 2011 Mixture of hydrocarbons, mainly Propane (C3s) and Butane (C4s) Gaseous liquids recovered from the processing of natural gas and the refining of crude oil. Gaseous at ambient temperature and pressure, yet liquid when stored and transported under pressure or in refrigerated state. Wide range of uses: Households Commercial – restaurants Industrial - heating of bitumen for road building and roofing, firing furnaces, welding equipment, industrial food production (bread), ceramics, brick- making, forging and bending, galvanising and special metallurgical processes. Agricultural & transport fuel

10. Liquefied Petroleum Gas Economic regulation and legislation

11. November 2011 MAXIMUM REFINERY GATE PRICE OF LPG Minister of Energy sets the maximum refinery gate price (MRGP) of LPG. Refinery gate price means: The maximum price at which a refinery shall be permitted to market LPG for consumption within RSA. The MRGP is calculated as follows: Average c/l Basic Fuel Price (BFP) of 93 Octane LRP for the month preceding the price adjustment Convert the BFP – density of 0.75 Rand value minus R74.00 per metric ton Expressed in RSA c/l – density factor of 0.555 The current MRGP = R8.15/kg

12. Economic regulation and legislation November 2011 Maximum Retail Price of LPG Minister of Energy set maximum retail prices for Liquefied Petroleum Gas (LPG) for residential customers on a monthly basis. The maximum retail price includes the following elements: Maximum Refinery Gate Price (MRGP) for LPG; Primary transport costs (zone differential); Operating expenses; Working capital; Depreciation Final distribution costs; Wholesale margin; and Retail margin. The current maximum retail price = R21.60/kg in Gauteng

13. Economic regulation and legislation November 2011 Maximum Retail Price of LPG… Challenges that need to be considered: MRGP Primary transport cost – true reflection of the distances Is the full value chain reflected in the price build up, e.g. secondary filling of cylinders filling of cylinders? Clarification of working rules and finalisation of draft regulation

14. Liquefied Petroleum Gas Security of Supply

15. South Africa – Estimated Refinery Yields – 2010 (PFC Energy)

16. South Africa - Estimated Refinery Utilization Rates (PFC Energy) Secunda and Mosselbay on oil equivalent basis

17. Current LPG shortage November 2011 Shortage due to: Early shutdown – due to fire Late start-up after maintenance Un-planned shutdown Supply unable to meet demand Long import lead-times Limited import facilities Outlook Chevrefproducing to plan Enref planned shutdown, expected back 3 rd week of November Natrefproducing to plan PetroSAunplanned shutdown, not producing, expected back 2 nd week of November Saprefproducing but not to plan Sasol Synfuelsproducing to plan Situation expected to improve as supply chain is filled by increased production and lower heating demand.

18. Consumption of petroleum products in SA November 2011

19. LPG Production and Importation November 2011 At the current MRGP refineries typically utilise LPG streams to manufacture petrol. MRGP not reflective of LPG supply and demand (local/international) In order to meet the shortfall suppliers would want to import LPG. However: Limited LPG import facilities and Imports are uneconomic at current MRGP. Therefore – urgent need for: Pricing of LPG at refinery gate and import terminal at a price that encourages LPG production at local refineries; Review of the current discount of R74/ton which is not based on any operational reality; and Review of coastal storage and handling element in MRGP – to incentivise investment

20. Response to the shortage November 2011 Logistics Planning Team (LPT) chaired by the Department of Energy (DoE) monitors supply of petroleum products SAPIA members submit production and stock data to the DoE Industry response actions are discussed and agreed to DoE monitors implementation of remedial actions Within LPT there is consensus view that LPG supply situation will only improve once all refineries are back on full production.

21. Challenges - Infrastructure November 2011 Lack of import terminals (currently only two – one in Richards Bay maximum capacity 3.7 kt and two spheres in Port Elizabeth maximum capacity 1.1kt) Appetite for investment definitely exists by industry players Ability to make a return on investment hampered by regulated price levels Appetite suppressed by bureaucratic administrative procedures (regulatory processes) Lack of resources for rail movements of product (rail tank cars) No synergy between government departments (NERSA versus DoE versus TNPA)

22. Challenges - Pricing November 2011 No incentive for refineries to produce additional LPG No correlation between MRGP and actual logistical cost of imports No adjustment to cost recovery elements in regulated pricing during the last 18 months Issuing of wholesale licenses to parties that do not have resources or customer base that leads to a mushrooming of middlemen that charge exorbitant prices Lack of enforcement

23. Way forward November 2011 Address complaints that have been received about the current regulations and rules relating to: Maximum Refinery Gate Price LPG pricing at a level that encourages local production LPG pricing at a level that encourages importation Maximum Retail Price for residential customers Annual cost adjustments Incentivise the industry to build import facilities

24. End November 2011 Thank you