Presentation on theme: "TRANSFORMATION OF THE GAS SECTOR"— Presentation transcript:
1TRANSFORMATION OF THE GAS SECTOR Presented by Mr. Muzi MkhizeChief Director: Hydrocarbons Policy13 August 2013
2PRESENTATION OUTLINE INTRODUCTION CHALLENGES SOUTH AFRICAN MARKET ANALYSISINTERNATIONAL BENCHMARKSTRATEGIC INTERVENTIONSSUBSIDY CONSIDERATIONSPRICING ISSUESBENEFITS OF INCREASED LPG USAGETRANSFORMATION ISSUESWAY FORWARD AND CLOSUREAreas covered include: Update on overall transformation - policy, legislation, regulation investments, skills development, safety, infrastructure, economic spin-offs, land expropriation for infrastructure; Focus on BBBEE; Challenges experienced in the sector; Global comparison in terms of contribution to energy supply; Progressive market penetration as planned by government; Focus on gas prices; Extent of inclusion of gas infrastructure in SIP inclusion Saldanha Bay facility; Prospects of sourcing gas from SADC & globally.
3INTRODUCTION – WHAT IS LPG? Liquefied petroleum gas [aka LPG, GPL, LPGas]:is a flammable mixture of hydrocarbon gases (propane or butane) used as a fuel for cooking, heating, commercial appliances and vehicle propulsion. For the latter use it is referred to as autogas.Its boiling point < room temperature and therefore pressurised to liquefyUsually supplied in pressurised steel vessels (LPG cylinders) typically filled to 80% - 85% of their capacity to allow for thermal expansion of the contained liquid.Typical Volumevaporised gas : Volumeliquefied gas = 250:1Emits 50% less CO2 emissions than coal and 20% less than heating oilImproves both indoor and outdoor air quality by substantially reducing pollutants which are hazardous to health, such as SOx, NOx and Particulate Matter.produced during the refining of petroleum (crude oil), or extracted from petroleum or natural gas streams as they emerge from the ground~3% of a typical barrel of crude oil is refined into LPG although as much as 40% of it could be converted into LPG.LPG is composed primarily of propane and butane, while natural gas is composed of the lighter methane and ethane. LPG, vaporised and at atmospheric pressure, has a higher calorific value (94 MJ/m3 equivalent to 26.1kWh/m3) than natural gas (methane) (38 MJ/m3 equivalent to 10.6 kWh/m3.
4INTRODUCTION – SA SITUATION South African energy supply is characterized by unequal access to modern energy such as electricity and LPG.Low income households lack access to affordable, safe and cleaner energy sources for cooking and space heating.Power shortfalls in recent years - emphasis on the need for an energy mix that reduces the heavy dependence on electricity.Government has identified LPG as an alternative energy carrier of choice for household thermal needs.LPG industry can provide a quick and effective solution to household energy requirements.Domestic LPG supplied by refineries - constrained
5CHALLENGESBASIC CHALLENGE OF THE LPG INDUSTRY: UNAVAILABILITY OF LPG [DOMESTIC SUPPLY CONSTRAINT]Locally only dependent on LPG from refineries – by-product and LPG not proved to be a developing marketConstrained LPG import and storage infrastructureGenerally increasing energy costsTransformation: Industry that still seems to be seeking to distance itself from the Liquid Fuels Industry CharterRefineries make up the “upstream” portion of the LPG value chainVertical integration – LPG suppliers / marketers linked to refineriesSafety concerns: “bomb”Cylinder management challenges
6USE OF ENERGY SOURCES BY ELECTRIFICATION STATUS 2% Electricity use by non-electrified households: Illegal connections and tapping into neighbour with or without payment.Vertical axis : % of total households
7Main Source of Cooking2% Electricity use by non-electrified households: Illegal connections and tapping into neighbour with or without payment.Vertical axis : % of total households
8SOUTH AFRICAN LPG MARKET ANALYSIS Demand for LPG is expected to grow as more households diversify their energy mix in response to rising electricity prices/tarrifs.Source: World Liquefied Petroleum Gas Association (WLPGA) 2009In 2008, 337 000 tonnes of LPG were produced in South Africa with consumption at approximately tonnes.
9SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Sources of energy used for heating in South Africa:Source:Team Analysis, Stats SA community survey of 2007LPG consumption is approximately 1% to 2% of the total amount of energy used for heating and cooking.The demand for LPG is influenced by increases in the price of electricity prices. In the past, low electricity tariffs, high prices of LPG have resulted in low uptake of LPG.
10SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Sources of energy used for cooking in South Africa:Source: Team Analysis, Stats SA community survey of 2007High prices of LPG than electricity has resulted in the majority of poorer households switching to fuels such as coal (1%), paraffin(15%) and wood (15%)
11SOUTH AFRICAN LPG MARKET ANALYSIS (contd) Since 14 July 2010 Government is regulating the maximum retail price of LPG supplied to residential consumers.provides some predictability on LPG prices.Allows consumers to plan their future related energy purchases behaviour.Supply Factors of LPGCrude type or feedstock diet;Vapour pressure specifications for petrol (winter & summer differences);Refinery economics - Complexity of the various refineries and their LPG conversion ability;Availability of import, storage and distribution infrastructure;Environmental regulations;Local manufacturing of LPG cylindersMmapho Gas and Energy – Woman owned
12SOUTH AFRICAN LPG MARKET ANALYSIS (contd) LPG supply value chain:Characterised by refineries, distributors, retailers and other stockists.Total number of wholesalers is not known, the major wholesalers and bulk distributors include Afrox, BP, Easigas, Total Gas and Reatile.Approximately 452 of dealers mainly comprising fuel stations and ~4,000 small dealers that sell from informal shops and trading stores.Fragmentation in Retailers and Dealers due to:LPG is rarely a business and usually yields a small portion of turnover;Dealers are contracted and branded to a particular producer or wholesaler who owns storage and filling equipment;Dealers are supplied by distributors in branded cylinders;Generally a cash business, retailing LPG at a premium by re-filling end user owned small cylinders (usually < 7kg)Transportation and storage costs in supply chain results in higher price of LPG being sold to consumers.Small market size has not warranted larger-scale infrastructural investments for importation or local optimisation and distribution of bulk LPG.GGG
13INTERNATIONAL BENCHMARKING Approximately 42 million household in Brazil use LPG in their residential sector.They practiced a cross-subsidy scheme for several decades in order to make LPG affordable to households in all parts of the country.Subsidy and voucher system was used in expanding and making LPG available only to lower income households respectively.In India 162 million households use LPG for cooking.The Government of India removed all subsidies on petroleum products except for LPG.Indonesia achieved more than 5.3 million users of LPG in their programme.Government distribution of packages comprising of 3kg cylinders, stoves and free gas (first fill) was a success factor for Indonesia.
16SHARE OF HOUSEHOLD INCOME REQUIRED TO BE SPENT ON LPG FOR REGULAR USE
17STRATEGIC INTERVENTIONS Objectives of the LPG Expansion Strategy:Targets 1.2 million households from all income groups over a period of 5 yearsProvide access to safe, cleaner, efficient, environmentally benign and affordable thermal fuelSwitch low income households from the use of coal, paraffin and biomass to LPG as the thermal fuelContribute to demand side management by minimising the use of electricity on cooking and space heatingEnhance the level and quality of energy services currently available to residential usersContribute to the green economy programmes that aims to reduce greenhouse gas emissionsThe development of the Strategy was put on hold last year to focus on LPG supply issues but has been incorporated in this FY’s programme. Quick wins will be identified and implemented.
18STRATEGIC INTERVENTIONS (contd.) Avoid any mixing of cylinders by competing companies, and swopping of cylindersExpedite local manufacturing of LPG cylinders and appliances.Launch a major concerted awareness campaign to assist the development of the market for LPG.Subject to concrete plans on ensuring security of supplyInvestigate the possibility of eradicating the dependence of the LPG Safety Association on voluntary member contributionsCooperation with:COGTA to encourage different municipalities to support the rollout of the project throughout the countryDEA regarding prioritising assessment of Environmental Impact Assessments (EIA).National Treasury regarding possible subsidiesNERSA on subsequent Multi Year Price Determination (MYPD)Industrial Development Corporation (IDC) regarding support programmes for the expanded use of LPG as an energy carrier in supporting green economy.Transnet National Ports Authority (TNPA) to facilitate the development of import infrastructure at the identified ports.
19COMPOSITION OF THE MAXIMUM LPG RETAIL PRICES Current prices applicable from 07-Aug-13 to 03-Sep-13, in cents per kilogram:Price ElementCoastal Zone 1AInland Zone 9CMaximum refinery gate price (MRGP)1,Primary transport costs37.120Operating expensesWorking capital26.000DepreciationGross margin: Cylinder-filling plantSub-total (1)1,1,Retail Margin: [15% of subtotal (1)]Sub-total (2)1,Value-added tax [14% of Sub-total (2)]Maximum Retail Price (rounded to full cents)2,2,Price tracked everyday and adjusted every month
20LPG PRICING MECHANISM REVIEW Review of the Maximum Refinery Gate Price:Published Discussion DocumentHeld Stakeholder WorkshopComments received being duly consideredFinal position on MRGP by end of Q3 2013/14Review of Working Rules for the Maximum Retail Price of LPG Supplied to Residential CustomersInternal draftingRevised Working Rules will be published for public comment during Q3 2013/14Revised MRGP will be an equivalent of a Basic Fuels Price for LPG
21BENEFITS OF INCREASED LPG USAGE Savings in electricity consumptionIncreased use of LPG in the residential sector could alleviate the pressure off the electricity grid to the extent that the reserve margin of electricity could be improved.Contribution to the Green EconomyLPG produces less air pollution; fewer soot particulates, nitrogen oxides, and sulphur and therefore fewer emissions of carbon dioxide.VersatilityIt can be transported using sea, rail or road.EfficiencyEnergy-rich fuel source with a higher calorific value per unit than other commonly used fuels.Reduced Energy PovertyProvide a first modern alternative to traditional cooking fuels such as firewood, charcoal, dung, and which are extremely harmful to human health.
22WAY FORWARD MRGP Review Conclusion work-in-progress:MRGP ReviewReview of Working Rules for the Maximum Retail Price of LPG supplied to Residential CustomersConclusion of the LPG Expansion StrategyIdentification of quick wins and facilitation infrastructure developmentTransformation Issues