COASTAL REFINERS COMMENT ON THE PETROLEUM PRODUCTS AMENDMENT BILL (B25 -2003)

· The Coastal Refiners fully support the submission made by the South African Petroleum Industry Association ("SAPIA") to this Committee

· We wish to contribute additional perspective to the debate in order to amplify the SAPIA submission from a 'Coastal Refiner-specific' perspective

· Our detailed written submission has been distributed to Members and provides the background and context to the debate about the regulatory framework for the liquid fuels industry

· We do not wish to repeat that submission, but rather to highlight and expand on a very few specific issues of concern

The Coastal Crude Refiners are represented by BP, Caltex, Engen and Shell, 4 of the major refiners of crude oil in South Africa, distinguishable from the synthetic fuel refiners by reference to feedstock and/or location.

Distinct from the SAPIA submission on this Bill which documented the shared views of all SAPIA members, the crude refiners have specific concerns based on legacies of our country's past regime. Historically:

crude oil refiners were obliged to purchase not only all Sasol's synfuel production but also almost all its production from the Natref crude refinery crude refiners thus had to cut back their own production substantially.

In exchange, Sasol accepted restricted participation in marketing via the retail service station industry, its production being largely marketed by the other oil companies.

As a result, other oil companies were limited from accessing the "economic heartland" of South Africa with their own refined products.

Both sides have derived a balance of benefits and prejudices from these arrangements which will terminate on 31 December 2003.

It is our view that no party should receive preferential treatment as a result of these historical arrangements, unless a specific public interest purpose will be served.

· Historical arrangements distorted competition in the liquid fuels industry and created a monopoly wholesale supplier in the heartland of the SA economy

· The mechanisms which served to support the Apartheid regime's strategic objectives have left in their wake distortions in this industry that will continue to hamper Government's high-level objectives for the SA economy until a balance for the co-existence between synfuels, natural gas and hydrocarbons is found.

· The proposed legislation creates the tools for achieving this balance, but appears also to preserve some of the historical distortions into the future, Specifically Section 2 D of the Bill is concerning

· During the development of the Bill it has been argued by the synfuel producers that they should receive preferential treatment in the future allocation of licenses in order to facilitate their desired entry into the retail service station market

· in support of this argument, it is suggested that, historically, they were excluded from the market" and are therefore deserving of special treatment.

· We submit that these arguments are particularly self-serving and do not stand up to scrutiny from a public interest perspective

· It must be borne in mind that Sasol has always enjoyed the significant benefit of full import parity prices from other oil companies, not only for all its synfuel production, but also for most of its crude based Natref production.

· No other refiner has enjoyed the benefit of having its production placed preferentially in the local market - on the contrary, crude refiners were forced to cut production, defer expansions and export their surpluses, resulting in a loss of refining profits to Sasol for over 20 years.

· The only quid pro quo has been the limitation on Sasol's direct marketing

· Sasol has now made a commercial decision to enter the retail market and we contend that there is no valid rationale for preferential treatment of Sasol at the expense of its competitors.

· Section 2D of the Bill is an enabling provision which empowers the Minister to make regulations that will prescribe a system for the allocation of site and retail licenses, by which the Controller will be bound.

· This is an important section of the Bill as allocation of licenses in future will be critical to stakeholders and licenses will become a valuable commodity.

· Section 2D(2)(c )(ii) of the Bill reads as follows: This system may link the issuing of site and retail licenses to the total mass of pp's manufactured in South Africa or imported into South Africa".

· Coastal refiners object to the use of this specific criterion to determine "who gets licenses" on the basis that Sasol produces (between Secunda and Natref) more than 40% of the country's total product requirements and manufactures substantially more product than any other refiner in South Africa.

· In this regard, we object to an allocation of licenses based on historical distortions in the market which have obliged us to cut back refining capacity and reduce our manufacturing volumes.

No historical inequities between stakeholders should be perpetuated

No new unfair, non-transparent or anti-competitive measures should be allowed to creep into the proposed new regulatory regime.

The SA liquid fuels industry must strive to become an industry that can claim to abide by free and fair competition. In this regard we support DME's policy of "managed liberalization" unreservedly.

Failure to adhere to these objectives and vision for the future will result in damage to the South African economy.

 

Managed Liberalization

We accept the stated objectives of the Bill

· We support the intentions expressed in the White Paper and by DME to engage in a process of Managed Liberalization of industry that will lead to greater competition in future

· It is however also important that the new regulatory changes are in keeping with these statements of policy

· We are concerned that the changes proposed in this Bill go beyond what is necessary and appropriate in the context of a managed liberalization

· There should, in principle, be no restriction of competition in industry, beyond that which is strictly necessary on an interim basis to achieve the stated objectives of the Bill

· In that regard we accept that regulation of the Retail sector will continue until government is satisfied that liberalization will not have undue negative impacts in terms of jobs, small business and HDSA advancement.

· For these reasons, ongoing price regulation in the retail sector is accepted and there has to be a system of licensing in the retail sector to avoid a proliferation of sites in this environment of price control

· However, we submit that competition, rather than regulation, is the best way of achieving the other stated objectives of the Bill, such as efficiency, commercially justifiable investment, and countrywide availability of products at competitive prices.

Competition rather than regulation should achieve the Bill's objectives

Regulation should be limited to that which is strictly necessary to achieve identified public interest objectives.

As a point of principle, we believe that there should be minimum distortion of fair competition and no preferential treatment of any stakeholder, except in legitimate circumstances for HDSA's.

We question the intention of the Bill to extend licensing requirements to wholesalers and refiners and to enable further control of prices beyond that which presently prevails.

These interventions appear to go beyond a Managed Liberalization process.

In summary, we wish to emphasize the following:

· keep the competitive playing field level, and don't regulate more than is strictly necessary.