113 August 2013

TRANSFORMATION OF THE GAS SECTORTRANSFORMATION OF THE GAS SECTOR

Presented by Mr. Muzi MkhizeChief Director: Hydrocarbons Policy

Presented by Mr. Muzi MkhizeChief Director: Hydrocarbons Policy

PRESENTATION OUTLINEPRESENTATION OUTLINE

1. INTRODUCTION

2. CHALLENGES

3. SOUTH AFRICAN MARKET ANALYSIS

4. INTERNATIONAL BENCHMARK

5. STRATEGIC INTERVENTIONS

6. SUBSIDY CONSIDERATIONS

7. PRICING ISSUES

8. BENEFITS OF INCREASED LPG USAGE

9. TRANSFORMATION ISSUES

10. WAY FORWARD AND CLOSURE

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Areas 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.

INTRODUCTION – WHAT IS LPG?INTRODUCTION – 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 liquefy

• Usually 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 = 250:1

• Emits 50% less CO2 emissions than coal and 20% less than heating oil

• Improves 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.

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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.

• 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

INTRODUCTION – SA SITUATIONINTRODUCTION – SA SITUATION

CHALLENGESCHALLENGES

• BASIC CHALLENGE OF THE LPG INDUSTRY: UNAVAILABILITY OF

LPG [DOMESTIC SUPPLY CONSTRAINT]o Locally only dependent on LPG from refineries – by-product and LPG not

proved to be a developing market

o Constrained LPG import and storage infrastructure

o Generally increasing energy costs

• Transformation: Industry that still seems to be seeking to

distance itself from the Liquid Fuels Industry Chartero Refineries make up the “upstream” portion of the LPG value chain

o Vertical integration – LPG suppliers / marketers linked to refineries

• Safety concerns: “bomb”

• Cylinder management challenges

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USE OF ENERGY SOURCES BY ELECTRIFICATION STATUS USE 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

MAIN SOURCE OF COOKINGMAIN SOURCE OF COOKING

2% Electricity use by non-electrified households: Illegal connections and tapping into neighbour with or without payment.Vertical axis : % of total households

• 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) 2009

• In 2008, 337 000 tonnes of LPG were produced in South Africa with consumption at approximately 365 000 tonnes.

SOUTH AFRICAN LPG MARKET ANALYSISSOUTH AFRICAN LPG MARKET ANALYSIS

Sources of energy used for heating in South Africa:

Source:Team Analysis, Stats SA community survey of 2007

• LPG 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.

SOUTH AFRICAN LPG MARKET ANALYSIS (contd)SOUTH AFRICAN LPG MARKET ANALYSIS (contd)

Sources of energy used for cooking in South Africa:

Source: Team Analysis, Stats SA community survey of 2007

• High 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%)

SOUTH AFRICAN LPG MARKET ANALYSIS (contd)SOUTH AFRICAN LPG MARKET ANALYSIS (contd)

• Since 14 July 2010 Government is regulating the maximum retail

price of LPG supplied to residential consumers.o provides some predictability on LPG prices.

o Allows consumers to plan their future related energy purchases behaviour.

• Supply Factors of LPGo Crude type or feedstock diet;

o Vapour pressure specifications for petrol (winter & summer differences);

o Refinery economics - Complexity of the various refineries and their LPG

conversion ability;

o Availability of import, storage and distribution infrastructure;

o Environmental regulations;

• Local manufacturing of LPG cylinderso Mmapho Gas and Energy – Woman owned

SOUTH AFRICAN LPG MARKET ANALYSIS (contd)SOUTH 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:o LPG is rarely a business and usually yields a small portion of turnover;o Dealers are contracted and branded to a particular producer or wholesaler who owns

storage and filling equipment;o Dealers are supplied by distributors in branded cylinders;o 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.

SOUTH AFRICAN LPG MARKET ANALYSIS (contd)SOUTH AFRICAN LPG MARKET ANALYSIS (contd)

• Approximately 42 million household in Brazil use LPG in their residential sector.o They practiced a cross-subsidy scheme for several decades in order to make

LPG affordable to households in all parts of the country.o 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.o 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.o Government distribution of packages comprising of 3kg cylinders, stoves and

free gas (first fill) was a success factor for Indonesia.

INTERNATIONAL BENCHMARKINGINTERNATIONAL BENCHMARKING

END-USER PRICES OF LPG IN DECEMBER 2010END-USER PRICES OF LPG IN DECEMBER 2010

SHARE OF HOUSEHOLD INCOME REQUIRED TO BE SPENT ON LPG FOR REGULAR USE

SHARE OF HOUSEHOLD INCOME REQUIRED TO BE SPENT ON LPG FOR REGULAR USE

Objectives of the LPG Expansion Strategy:

•Targets 1.2 million households from all income groups over a period of 5 years

•Provide access to safe, cleaner, efficient, environmentally benign and affordable thermal fuel

•Switch low income households from the use of coal, paraffin and biomass to LPG as the thermal fuel

•Contribute to demand side management by minimising the use of electricity on cooking and space heating

•Enhance the level and quality of energy services currently available to residential users

•Contribute to the green economy programmes that aims to reduce greenhouse gas emissions

STRATEGIC INTERVENTIONSSTRATEGIC INTERVENTIONS

The 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.

• Avoid any mixing of cylinders by competing companies, and swopping of cylinders

• Expedite local manufacturing of LPG cylinders and appliances.• Launch a major concerted awareness campaign to assist the

development of the market for LPG.o Subject to concrete plans on ensuring security of supply

• Investigate the possibility of eradicating the dependence of the LPG Safety Association on voluntary member contributions

• Cooperation with: o COGTA to encourage different municipalities to support the rollout of the project

throughout the countryo DEA regarding prioritising assessment of Environmental Impact Assessments (EIA).o National Treasury regarding possible subsidieso NERSA on subsequent Multi Year Price Determination (MYPD)o Industrial Development Corporation (IDC) regarding support programmes for the

expanded use of LPG as an energy carrier in supporting green economy. o Transnet National Ports Authority (TNPA) to facilitate the development of import

infrastructure at the identified ports.

STRATEGIC INTERVENTIONS (contd.)STRATEGIC INTERVENTIONS (contd.)

COMPOSITION OF THE MAXIMUM LPG RETAIL PRICESCOMPOSITION OF THE MAXIMUM LPG RETAIL PRICES

Price tracked everyday and adjusted every month

Price Element Coastal Zone 1A

Inland Zone 9C

Maximum refinery gate price (MRGP) 1,029.342 1,029.342

Primary transport costs 37.120 175.960

Operating expenses 343.000 343.000

Working capital 26.000 26.000

Depreciation 126.000 126.000

Gross margin: Cylinder-filling plant 161.000 161.000

Sub-total (1) 1,722.462 1,861.302

Retail Margin: [15% of subtotal (1)] 258.369 279.195

Sub-total (2) 1,980.831 2140.497

Value-added tax [14% of Sub-total (2)] 277.316 299.760

Maximum Retail Price (rounded to full cents) 2,258.000 2,440.000

Current prices applicable from 07-Aug-13 to 03-Sep-13, in cents per kilogram:

• Review of the Maximum Refinery Gate Price:o Published Discussion Document

o Held Stakeholder Workshop

o Comments received being duly considered

o Final position on MRGP by end of Q3 2013/14

• Review of Working Rules for the Maximum Retail Price of LPG Supplied to Residential Customerso Internal drafting

o Revised Working Rules will be published for public comment during Q3 2013/14

LPG PRICING MECHANISM REVIEWLPG PRICING MECHANISM REVIEW

Revised MRGP will be an equivalent of a Basic Fuels Price for LPG

• Savings in electricity consumptiono Increased 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 Economyo LPG produces less air pollution; fewer soot particulates, nitrogen oxides, and

sulphur and therefore fewer emissions of carbon dioxide.

• Versatilityo It can be transported using sea, rail or road.

• Efficiencyo Energy-rich fuel source with a higher calorific value per unit than other commonly used

fuels.

• Reduced Energy Povertyo Provide a first modern alternative to traditional cooking fuels such as firewood, charcoal,

dung, and which are extremely harmful to human health.

BENEFITS OF INCREASED LPG USAGEBENEFITS OF INCREASED LPG USAGE

Conclusion work-in-progress:

• MRGP Review

• Review of Working Rules for the Maximum Retail Price of LPG supplied to Residential Customers

• Conclusion of the LPG Expansion Strategy• Identification of quick wins and facilitation infrastructure development

• Transformation Issues

WAY FORWARDWAY FORWARD

THANK YOUTHANK YOU

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