PRESENTATION TO THE PUBLIC SECTOR CONSULTATIVE FORUM SUPPLIER COLLABORATIONS AND COMPETITION LAW COMPLIANCE CSIR Conven

1. PRESENTATION TO THE PUBLIC SECTOR CONSULTATIVE FORUM SUPPLIER COLLABORATIONS AND COMPETITION LAW COMPLIANCE CSIR Convention Centre Friday, 26 March 2010 Muzi W. Mkhize Chief Director: Hydrocarbons Tel: 012 444 4015/6

2. Outline of Presentation • Context • Department of Energy’s role • Strategic importance of the sector • Legislative framework • Collaboration • Challenges

3. The Role of the Department of Energy • MANDATE: ensure secure and sustainable provision of energy for socio-economic development • MISSION: To regulate and transform the sector for the provision of secure, sustainable and affordable energy • STRATEGIC OBJECTIVES • Ensure energy security • Achieve universal access and transform the energy sector • Regulate / govern the energy sector • Effective and efficient service delivery • Optimal utilisation of energy resources • Ensure sustainable development • Enhance DoE culture, systems and people • Promote corporate governance

4. The Role of the Department of Energy (contd) • National Energy Regulator of South Africa (NERSA) • National Energy Regulator Act, 2004 (Act No. 40 of 2004) • Regulates petroleum pipelines: Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) • Piped Gas: Gas Act, 2000 (Act No. 48 of 2000) • Department of Energy as a regulator • Petroleum Products Act No 120 of 1977, as amended • Petroleum Products Amendment Act No. 58 of 2003 • Petroleum Products Amendment Act No. 2 of 2005 (only technical changes) • Petroleum product prices: petrol but not diesel at retail; SMNRP for IP • Trading licences • Fuel quality – specs & stds • Import and export control

5. Strategic importance of the sector • Transport fuels play an important economic part in the movement of goods, services and people • Regulation of sector stems from the recognition of the strategic importance of petroleum products to the economy • DoE Study: ~R1 billion (in 2005 figures) loss if country were to run out of liquid fuels for a day • NB: Security of Supply – interactions of the petroleum sector with various other economic sectors and the convergence of energy carriers • Fuel shortages reduce a country’s competitiveness and its ability to attract investments & tend to give an impression that the state is failing to govern the country properly • RSA market includes Botswana, Lesotho, Namibia and Swaziland (BLNS) countries and southern Zimbabwe

6. Refining Capacity * Barrels of oil equivalent per day

7. Liquid Fuels Demand in South Africa [Source: SAPIA & ETP analysis]

8. Geographical Location of South Africa

9. Jigsaw Puzzle Investments, Mergers and Acquisitions Fuel specs & stds and other regulatory activities Industry Supply Agreement (Product swaps) Natref Neutrality Empowerment of HDSA Import/Export Control Zonal Pricing Promotion of Competition Licensing

10. Relevant Legislation • Mineral and Petroleum Resources Development Act No. 28 of 2002 • Petroleum Products Act No 120 of 1977, as amended • Petroleum Products Amendment Act No. 58 of 2003 • Petroleum Products Amendment Act No. 2 of 2005 (only technical changes) • Central Energy Fund Act No. 38 of 1977, as amended • CEF Amendment Act No. 48 of 1994 • National Energy Regulator Act No. 40 of 2004 • Petroleum Pipelines Act No. 60 of 2003 • Petroleum Pipelines Levies Act No. 28 of 2004 • Pipeline tariffs set by the National Energy Regulator of South Africa (NERSA) • Gas Act No. 48 of 2000 • Promotion of Administrative Justice Act No. 3 of 2000, as amended • Promotion of Administrative Justice Amendment Act No. 53 of 2002 • International Trade Administration Act No. 71 of 2002 • Section 21w.r.t. importation and exportation of crude oil and petroleum products • Administered by the International Trade Administration Commission

11. Some of published Government policy • White Paper on Energy Policy of November 1998 • Moerane Commission Report of 2006 • The Energy Security Master Plan – Liquid Fuels of August 2007 • The National Biofuels Industrial Strategy of December 2007 • Notice 692 of 05 June 2009: Designation of the petroleum industry for purpose of section 10(3)(b)(iv) of the Competition Act, 1998 (Act No. 89 of 1998)

12. Historical Perspective • Agreements that may not necessarily be legally enforceable • Ratplan (Retail rationalisation plan) • Agreement between Government (DME), wholesale oil companies and the fuel retail industry to limit the number of service stations • Not a legal instrument • Limitations of the Plan • Non-compliance • Concerns of the erstwhile Competitions Board • Termination of the Sasol-oil industry upliftment agreement (Blue Pump Agreement) • Blue Pump Agreement • Framework of a collective upliftment agreement in which the oil industry uplifted almost all of its inland requirements from Sasol. Sasol was allowed to market 6,72 % of its fuel throughout the crude oil industry retail network. • 1998: Sasol issued termination notice (five year notice period) • 2003: Agreement termination and ushering of a willing buyer/ willing seller basis. • Same willing buyer / willing seller basis applies for upliftment of product from PetroSA’s refinery in Mossel Bay

13. The balancing act Collaboration for energy security Competition National Interest In some cases achieving harmony among all three is very difficult It’ depends on circumstances; perception vs. reality Competition for vs. competition in – the market It is in the country’s interest that domestic fuel supply be jointly planned by Government and the industry players because of : the complexity of the oil industry; the interdependence of producers as well as the owners of essential infrastructure; and the need for coordinated refinery shutdown and logistical planning.

14. Constrained Supply Chain • Generally inefficient and unreliable rail system for petroleum products • Significant benefit can be derived from optimising block train operations • Single Buoy Mooring (SBM) • Import crude for Durban refineries and Natref via Durban harbour SBM • New Durban Offshore SBM installed on 11-Jun-09; discharged 4 crude ships on 02-Jul-09 • From SBM piped into the crude oil storage tanks the Durban refineries • TPL’s crude oil pipeline (COP) • Crude oil pipeline (COP) Line-fill capacity: 490 000 barrels • From SBM to NATCOS tanks piped through COP into Natref crude oil storage tanks of the • Operational optimisation: introduction of diesel in COP • For Chevron refinery in Cape Town, crude is discharged into the Saldanha storage facilities and then piped by a dedicated pipeline into the crude oil storage tanks of Chevref

15. Constrained Supply Chain (contd) • Overloaded logistics infrastructure for the transfer of petroleum products from coastal to the inland regions • Durban Port • Currently congested due to over-reliance by petroleum industry and the economy in general • Congestions cause major delays in berthing that result in increased demurrage costs • Durban-to-Johannesburg Pipeline (DJP) • 16-inch Durban to Johannesburg Pipeline (DJP) Line-fill capacity : 78 million litres of finished product • Introduction of drag reducing agents (DRAs) to increase throughput • DJP is still inadequate – rail and road usage costing more • R15.4 billion, 24-inch New Multi-Product Pipeline (NMPP): 350 000 m3 of product per week by 2015 • Jet Fuel to ORTIA • 70% transported via dedicated 24 Ml/week capacity pipeline from NATREF (50% crude-derived and 50% synthetic ex Secunda) • Remainder of 30% transported by rail (TFR) from coastal refineries • Use of DJP not preferred – quality concerns and backing out diesel and petrol RSA market size is small by global standards and would tend to render duplication of infrastructure unviable, thereby requiring some form of joint planning

16. Collaboration Platforms • Joint Initiatives, Studies or Projects • Government (mainly the DoE, DPE, the dti and DoT), State Owned Enterprises and the petroleum industry players • E.g. FSSTT, Implementation of ESMP; development of a Regulatory Accounting System • Development of alternative energy and promoting security of supply through diversity (e.g. incorporation of biofuels) • New refining capacity development (Mthombo and Mafutha projects) • Storage and distribution (e.g. NMPP and associated storage facilities at the depots; and consolidating rail tank cars (RTCs) into block trains) • Supply Managers’ Forum • Managing the risks that could cause petroleum product supply shortfalls • Established to manage product supply and logistical issues impacting on product availability in the market. One forum for liquid fuels and another forum for liquefied petroleum gas (LPG) Since infrastructure development lags the demand increase throughout the value chain means that the industry needs more rigorous operational management than normal, requiring joint fora among all stakeholders

17. Collaboration Platforms - contd • Logistics Planning Team (LPT) • Convening during emergencies (as for Dec-05 shortages) to deal with urgent supply matters • Meeting could even be held on a daily basis until the situation reverts to normal • Consultations on Regulatory Framework changes • Regulatory framework hinges on 3 pillars: Retail price maintenance (for petrol); Import and export control; and (Industry transformation through) Licensing. • policy formulation & operational elements - especially in respect of price regulation by the Department; legal instruments for, e.g., mandatory stockholding; third party access, etc. • Refinery shutdown / maintenance scheduling • Statutory (min 2 weeks p.a.) over and above the non-statutory and/or unplanned shutdowns of operating units in a year • Operational challenges throughout the supply chain • Challenges of overlapping shutdowns (e.g. delays in starting / ramping up; planned and unplanned shutdown coincidence) – Dec-05 scenario

18. Challenges • Concurrent jurisdiction between DoE and the CC for enhanced governance of the petroleum industry • It’s about behaviour not just structure • Companies using CC as an excuse to withhold information In recognition of need for collaboration that is not anti-competitive, the CC has granted SAPIA an unconditional exemption in terms of section 10(2)(a) of the Competition Act, 1998 (Act No. 89 of 1998), as amended, solely for the purposes of the FIFA 2010 Soccer World Cup

19. WE THANK YOU