minerals and energy for development and prosperity department of minerals and energy presentation to...

Min

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Develo

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and P

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Department of Minerals and Energy

Presentation to Parliamentary Portfolio

Committee onBasic Fuels Price

Scheduled Time: 11H00 – 13h00

Venue: Cape Town

Wednesday, 31 May 2006

2Department of Minerals and Energy

Our team

Nhlanhla Gumede …… Chief Director – Hydrocarbons

Muzi Mkhize ………… Director – Petroleum & Gas Operations

Hein Baak ……………. Deputy Director – Pricing & Statistics

Sylvester Malatji ……… Energy Officer


Recent crude oil price movement

Recent fuel price increases are linked to crude oil price changes


World Oil Reserves


Map of Major Oil Trade Movements

(Millions of Tons)


Resources vs. Production RateAfrica, South America and Asia have a problem!


Global oil challenges

• Strength of global oil demand growth

• Poor or unreliable data availability

• Lack of confidence in long-term oil prices

• The oil industry facing challenge of adding 18 mbpd new production by 2020

• Changing petroleum product slate demand

• Clean fuels refinery investments

• Investment in oil supply chain

Tight refinery capacities High refinery margins


White Paper on Energy Policy

The White Paper on Energy envisages import parity system for pricing

• The refining industry was deregulated in 1991 and although the income of refineries is determined by the deemed import parity cost of fuels there is no control in respect of refining margins

• “Government will not extend regulatory control over the crude oil refining industry”

• “The government believes that competitive market forces should determine prices … However, as long as price control is applied the import parity pricing approach will be retained, with suitable improvements if necessary.”


Our policy position

• Deregulation

• Stable and continued countrywide availability of quality product at internationally competitive and fair prices

• Preservation and promotion of formal sector employment

• Commercially based retail pricing - no inter-fuel or rural-urban cross subsidies

• BEE at all industry levels and significant domestic black ownership

• Promotion of coastal refining and petrochemicals hub for future investments

• Adequate provision for national strategic considerations relating to security of supply

• Tariff protection for vulnerable sectors where justified by cost-benefit analysis


Balancing act

In regulating, attempt is made to balance interests of a different stakeholders

Industry Survival& Security of Supply

Social issues including HDSAEmpowerment

ConsumerPrices &

Input Costs


DME’s regulatory pillars

The regulation of the petroleum industry is premised on three main regulatory pillars

Retail price maintenance

Import & Exportcontrol

Licensing


Unleaded comparison

International Petrol Price comparison

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

Ven

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RB

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Trin

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and

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Sta

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Eth

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Pak

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Nam

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Arm

enia

Sri

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New

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land

Bhu

tan

Sou

th A

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Chi

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Moz

ambi

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Sin

gapo

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Bul

garia

Bos

nia

and

Her

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el S

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Mor

occo

Côt

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re

Cha

d

Bel

ize

Fra

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Sw

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land

Kor

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Rep

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)

Ger

man

y

Den

mar

k

Chi

na,

Hon

g K

ong

Net

herla

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US

Cen

ts p

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iter

Prices as at Nov 2004, sourced from gtz


Pretax basic fuels prices - IBLC

Basic Prices without Taxes (US$ per liter)

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

Jan-

96

Mar

-96

May

-96

Jul-9

6

Sep-9

6

Nov-9

6

Jan-

97

Mar

-97

May

-97

Jul-9

7

Sep-9

7

Nov-9

7

Jan-

98

Mar

-98

May

-98

Jul-9

8

Sep-9

8

Nov-9

8

Jan-

99

Mar

-99

May

-99

Jul-9

9

Sep-9

9

Nov-9

9

Jan-

00

Mar

-00

May

-00

Jul-0

0

Sep-0

0

Nov-0

0

US$/L

Canada France Germany Italy Japan Spain South Africa UK US


International pre tax prices

International Pretax Petrol price comparison

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

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Kin

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US

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Prices as at Nov 2004, sourced from gtz


South African demand supply balanceRSA Refinery Capacities (and Shortfalls)

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

2000 Actual RefineryCapacity

2000 Actual demand Actual surplus(shortfall)

2005 Refinerycapacity

2005 Low growthdemand

2005 low growthSurpl/ (Shortf)

2005 high growthDemand

2005 High GrowthSurpl/ (Shortf)

Million

s of

litr

es

Petrol Diesel Kerosene*


In bond landed price

IBLC was also based on import parity pricing at the refinery gate

• Originated in 1954 with the first Refinery in Durban

• Protection to the local refinery industry

• Outdated posted (term contract) price used

• Changes in international fuels markets

• Not a realistic, market-related import parity basis


In bond landed price

IBLC was calculated daily by considering a basket of prices of refineries postings in Singapore and spot prices in the Gulf

• FOB – combination of 80% postings and 20% spot price for 3 refineries in Singapore and 1 in Bahrain respectively

• Freight costs – MR AFRA rates for medium range vessels

• Insurance – 0.1009% of (FOB + Freight)

• Ocean leakage – 0.3% of CIF

• Landing and wharfage – 1.78% of FOB


Economic Models observed

Cost-plus

• bottom up, costs and margins regulated

Benchmarking

• prices set in relation to those in other countries/regions

Import parity

• prices set in line with import costs

“Gold plating” problems“Gold plating” problems

Efficiency lossesEfficiency losses

Incentives lossesIncentives losses

Barrier to entry problemBarrier to entry problem

Allusive comparisonAllusive comparison

Transparent but too simple,complex but less transparentTransparent but too simple,

complex but less transparent

Real costs subjectto manipulation

Real costs subjectto manipulation

Theoretical coststoo simplistic

Theoretical coststoo simplistic


Composition of IBLC versus BFP

Element IBLC BFP

FOB X X

Freight X X

Insurance X X

Ocean leakage X X

Wharfage X X

Coastal storage X

Coastal stock financing X

Demurrage X

International Refinery Singapore, Arab Gulf and Bahrain

Med, Arab Gulf & Singapore


Calculation of the Basic Fuel Price

• Spot prices – Platt's daily quotations

Petrol = 50/50 Med. & Singapore Diesel & Paraffin = 50/50 Med & Arab Gulf

• Ocean freight

• Demurrage

• Port dues

• Insurance

• Ocean losses

• Coastal storage

• Finance costs


How is BFP determined

Element Value

FOB 272.899

Freight Plus Demurrage

23.580

Insurance 0.445

Ocean Leakage 0.891

Cargo Dues 1.892

Coastal Storage 2.209

Stock Financing 1.745

BFP Value 303.661

95 Octane ULP - May 2006

The largest element in the BFP is the free-on-board component


BFP for different products

Different regulatory approaches applied to different fuel types

Fuel Type BFP Price (R/kg) as at May 2006

Point of regulation

Petrol (95RON)

4.67 Retail

Diesel (500ppm)

4.30 Maximum wholesale

LPG 4.37 Maximum refinery gate


SA Oil – No upstream margins

Operating Revenues of SA Oil Companies – 2000/ 2001

Operating Profit

Operating USA

R mil Profit*** Benchmark USD/bbl

USD/bblUpstream* 2437 696 0.4 4 10Refining 30 071 2074 1.3 1.3 100Wholesale** 16 737 586 0.4 0.25 160Retailing 20 184 1048 0.6 0.25 240Other 742 12.5 Negl. Negl.TOTAL 70 171 4 417* Upstream includes everything to get crude to refinery, ie. finding

costs plus lifting costs plus shipping** Includes Lubes manufacture and transport*** Assumed 500 kbpd for SA

TurnoverR mil

SA versus USA , as %


SA Oil Industry Performance by StreamsHigh returns, yet excludes the real value - upstream

Business No. T/over Turnover Operating Profit

Operating profit

ROA

Stream Employees Less taxes

Per employee

R mil Per employee

(R ‘000) (R ‘000) %

Upstream* - 2437 2437 No data 696 No data 2174 32Refining 1792 30 071 30071 16781 2074 1157 8852 23

Retailing 1005 20 184 11656 20083 1048 1043 3294 32Other 3385 742 742 219 12.5 3.7 157 8TOTAL 8246 70 171 54571 8510 4 417 536 19699 22

ex SAPIA Ave salary = R303k, or 4.5 % of turnover

5014 41451 12.1

** Data ex 2001 Report for DME on Review of Control by Historically Disadvantaged South Africans

5222 11.2

TurnoverR mil

Assets

Wholesale** 1964 16 737 9665 8 522 586 298

Oil is capital, not labour-intensive industry


Producer Supply Cost Curves

Crude oilGTLRefining

Less sophisticated Lower yield


Possible future R.S.A scenario

The next move could be a move from a deemed system to a true import parity approach

• Based on real contract based imports into RSA

• Could result in a reduction of between 10 – 20 cpl

• Not expected to be different for South Africa’s end state

• Similar to global best practice


Thank You


Supporting slides


Basic Fuel Price components

Demurrage Product are charged at loading ports

at overseas Refining centers and discharged at South African ports

Calculated using a 3 days period Based on the Demurrage rates published

by the world scale Association Limited expressed in USD/Tons

Applicable to Vessels falling within the range of 35 000 to 39 999 DWT class of Tankers.



Storage costs This is to cover the cost of providing storage

and handling facilities at coastal terminals The formula seeks to allow for the cost

realistically incurred in a substantial import scenario

In such a scenario a different minimum level of stock is required than when relying on local resources of supply

The cost of storage was initially assessed in 2002 at 2.5 SA c/l per Month

The BFP makes provision for 25 days of storage

Escalated annually in accordance with movement in the production price index for June each year



Stock financing This is the real cost faced by importers

and local Refineries Stock Financing costs is based

On a period of 25 days At an interest rate of 2 percentage

points below the ruling prime interest rate of Standard Bank of S.A.



Example - 95 Octane Unleaded Petrol Free On Board Value FOB value obtained from PLATTS – an energy

information provider FOB 95 Octane $/BBL=( Med/Italy Premium

unleaded 95 $/Ton /8.35 x 50% + Singapore 95 unleaded $BBL X 50%)

FOB 95 Octane SA c/l = FOB 95 Unleaded $/BBL/42 X 100/3.8038 X Rand/ Dollar Exchange rate



…Freight (95 Octane Petrol)… Freight rates are published by London

Tankers Brokers Panel Freight applicable from Augusta ( Med Port

in Sicily), Mina Al Ahmadi ( Arab Gulf) and Singapore to RSA ports

15% Premium ( Differential between actual rates to RSA ports and world scale rates AFRA: Average Freight Rates Assessment

Calculation of Freight Cost: (AFRA + Freight Rate) * 15% Premium



… Insurance (95 Octane Petrol example)… Covers insurance and cost such as letter of

credit, surveyors, agent fees and laboratory costs

Calculated as follows: 0.15 % x (FOB + Freight)

FOB( also referred to as cost ) + Insurance + Freight = CIF Value



…Ocean loss (95 Octane Petrol)… A loss allowance factor of 0.3 % to be

calculated on CIF value for product to provide for typical uninsurable loss during transportation

Calculated as follows: 0.3% x (FOB + Insurance + Freight)



…Cargo dues (95 Octane Petrol)… Cost to utilise the facilities at South

African ports Cargo Dues rates are fixed rate for a

twelve month period Cargo Dues are payable to the National

Ports Authority of South Africa



…Landed cost value (95 Octane petrol)… Landed cost Value =

FOB + Freight + Demurrage + Insurance + Ocean Loss + Cargo Dues



…Coastal storage (95 Octane petrol)...Typical International Storage

assessed at USD 3.00/Ton /Month or 2.5 c/l in 2002

Escalated on 1st August annually in line with movement in the production price index



…Stock finance (95 Octane petrol) Calculated for each product on a monthly

“Landed Cost Value” Basis of calculation:

25 days Stock Deemed interest rate of two percentage points

below the ruling rate of the Standard Bank of S.A

Calculation: SFC = [ LCV X (PR- 2%)] X 25 /365 SFC = The Stock Financing Cost LCV = The Landed Cost Value for the

applicable product PR= The prime rate of Standard Bank of S.A

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