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OVERVIEW OF THE INDUSTRY
Some of the outputs of this new partnership, are already very visible and relate largely to the accelerated process of transformation of the major companies in the industry and the emergence of new participants in different parts of the value chain. Additionally, a substantial amount of co-operative work is underway to review the regulatory environment associated with the industry and to move towards the restructuring of some key aspects of the industry. This work is expected to culminate in a revised set of ‘rules of the game’ within the next twelve months or so, and will point the path towards a liberalised market within a decade. The reduction in the uncertainty about the future profitability of the industry will be a key, progressive milestone for the industry, for two important reasons. Firstly, it will enable reasonable valuations of businesses to be done – a critical part of giving effect to the introduction of new shareholders. Secondly, it will assist the oil companies in the process of informed decisionmaking about future investments, particularly in refining where huge capital outlays will be required as product specifications change and environmental controls tighten. The members of Sapia would like to express their appreciation to the Minister of Minerals and Energy and her team for the constructive way in which the industry, individual member companies, and other stakeholders have been engaged. It has enabled progress to be made in areas of great complexity and sensitivity. During the period under review, fuel prices world-wide have reflected the very high levels of the crude price achieved by OPEC’s effective management of production. High prices have curbed consumer demand for petroleum products and in South Africa, the situation was exacerbated by the weakening rand exchange rate. This, together with rising costs and the lag in the implementation of wholesale margin adjustments, led to severely depressed margins in marketing, with the average return on assets for the industry being well below 10%. By contrast, international refining margins were stronger than anticipated, and the returns delivered by refining improved over the low single digit figures of recent years. Around midyear, the country experienced a very tight product supply situation as a result of a fire, which put one of our major refineries out of action for some months. The mishap coincided with a maintenance shutdown at another refinery, and resulted in the necessity to import emergency product cargoes. Additionally, the crude pipeline had to be converted to carry product inland at short notice. During this crisis the industry worked together constructively and in lose co-operation, in order to minimise any national and regional product shortfalls. I would like to thank our customers for their understanding and my colleagues from our member companies for their dedicated efforts to ensure that our customers were serviced as well as possible under difficult ircumstances. TRANSFORMATION The year ahead will be a critical year for the continuing transformation and restructuring of our industry. In November 2000, Sapia and its member companies, together with Government and empowerment groups, signed “The Charter for the South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans (HDSAs) in the Petroleum and Liquid Fuels Industry” (the Charter). The Charter was a demonstrable example of constructive consultation and co-operation between Government and the members of an industry. The Charter provides a framework for reaching “the sustainable presence, ownership or control” by HDSAs of approximately a quarter of all facets of the industry within ten years. Strategic focus areas in the Charter include employment equity, capacity building, ownership/control, financing, procurement and the legislative and regulatory environment. The documentation of the Summit meeting at which the Charter was signed can be found on our Sapia website (www.sapia.co.za). Prior to the signing of the Charter, one of our member companies was already majority owned by HDSAs, whilst a second was 20% owned by a HDSA group, Subsequently there have been further significant developments. These include equity sharing and other initiatives announced by three additional companies. A number of awareness and educational workshops have been held to identify and discuss opportunities in refining; retailing; and the management, re-imaging and maintenance of service station forecourts; as well as in tendering for work in many other aspects of our business. PRICES Growing world demand for crude oil, now some 75 million barrels a day, has placed pressure on supplies, leading to a prolonged period of relatively high prices. In South Africa, the weakness of the Rand – in part the result of the increased cost of crude oil – has exacerbated this effect. Sapia member companies are conscious of the cost of crude oil to the country and of the need for their operations to be efficient so as to ensure that this input to the economy is on a globally ompetitive level. This is a key requirement of South Africa’s industrial development policy. We are also conscious of the foreign exchange costs of crude oil and of the impact of high and fluctuating oil prices on the nation’s inflation targets. We recognise the need to be efficient in the use of oil, to have an overall energy plan for the nation and to develop sustainable renewable energy sources. Each of these three points is dealt with in the White Paper on Energy Policy for the Republic of South Africa (White Paper) and is receiving attention from both the industry and the Government. These discussions are taking place in the spirit of partnership mentioned earlier in my report. MANAGED LIBERALISATION The Government has made a commitment to the “managed liberalisation” of the industry, subject to the achievement of key social and transformational objectives. The Petroleum Products Act is to be amended to empower the Minister to make the necessary regulations to effectively manage the liberalisation of the industry. Sapia and its members support the principles of a free market and also accept that the process leading to this should take account of the Government’s social objectives. The industry is tightly regulated and the dismantling of the present rules under which the industry operates will be a complex process. We believe that the critical issue concerning this period of transition, is that it needs to be carefully managed and that, in particular, the changes should preserve equity amongst participants and enable reasonable returns to be generated in the industry so that ongoing investments will be encouraged. SKILLS DEVELOPMENT The key to sustainability of the economic transformation relies heavily on capacity building within the industry, on education and on skills development in relevant disciplines. All our member companies are extensively involved in investments in communities, in education, and in the training and development of their employees. Some additional, broader based initiatives are also underway. Recently, the Vukani Petroleum and Energy Institute was launched by one of our member companies with the objective of it becoming an industry wide initiative. This industry-specific institute is the first of its kind in South Africa and provides programmes specifically designed to deliver competency based career development training which will facilitate employment equity and will assist in the provision of skilled people for the future sustainability of our industry in South Africa and also further afield in the rest of Africa. ENVIRONMENTAL ISSUES The oil industry, both locally and globally through the International Petroleum Industry Environmental Conservation Association (IPIECA) recognises their responsibility for sustainable development and the need therefore to create economic wealth in a way which is considerate of those people and environments impacted by our operations. The members of Sapia are continuing to work with the relevant authorities and communities to ensure that consistent and realistic policies are put in place. Many of our companies are practicing self-regulation and are meeting standards well beyond those that are legally required, notwithstanding the costs involved. A good example of an initiative in this area in the past year is the Refinery Managers Environmental Forum which was established to co-ordinate and resolve common environmental issues among refineries in South Africa to ensure that a ommon approach is adopted to achieve sustainable development goals. Sapia has also joined other interest groups, including the motor industry and environmental groups, in a Fuels Reformulation Task Force. The issues of pollution and engine emissions are being approached in two stages. The first stage involves further upgrades in quality of diesel and unleaded petrol. The second stage will investigate options for further specification changes to be introduced after 2006. Significant new capital expenditures, particularly by the refining business, will be required for this second stage. Consequently, costs and benefits will have to be reconciled so as to ensure progress without losing refineries or reducing jobs. From a national point of view, it is particularly important, that there be larity in Government policy regarding self-sufficiency. Historically, policy was driven by the desire for self-sufficiency. However, given the changed political environment and globalisation, it may well be timeous for this policy to be reviewed by Government. Any change in policy would have a profound impact on the future of refining in South Africa and would potentially impact on any future investment and expansion plans. In the event that policy remains in favour of self-sufficiency, the maintaining of a reasonable level of profitability in the refining industry will be critical. THE WORLD SUMMIT The important World Summit on Sustainable Development is to be held in Johannesburg during September 2002. This event will serve to place a spotlight on our progress in this area in South Africa and the rest of the ontinent. One of the basic requirements for rural development is the availability of energy - either as electricity or as liquid fuels. Sapia’s members will continue to play a meaningful role to support future requirements and to assist in the education of communities in the efficient and safe use of fuels. Attention is being given, in particular, to ways of making both paraffin and LPG more affordable and safer to use. BROADENING OUR MEMBERSHIP I am pleased to report that Sapia’s membership has grown over the past year and is now more representative of the different participants involved in the liquid fuels industry in South Africa. Our membership now includes Sasol, representing their synthetic fuels and conventional refining and marketing businesses; Mossgas, the state owned producer of liquid fuels from gas; and Tepco Petroleum, a leading empowerment company. As we grow more representative, we embrace more competitive and conflicting interests. We believe this is a healthy trend and is ultimately beneficial to all parties. It does, however, add complexity to the building of consensus positions by Sapia. As an organisation, we have accepted that there may well be more than one view amongst our members on important policy issues. In such ases, Sapia will record both the majority and differing points of view. As an organisation, we believe that the best interests of the industry will be served by an inclusive approach. We will continue to engage with other individual companies and organisations in the industry, to search for ways to bring about a merged industry association. There has been some progress on this front, and I am pleased to report that discussions have taken place with the African Minerals and Energy Forum (AMEF), whose membership is exclusive to BEE companies. It has been agreed that Sapia and AMEF will work towards the ultimate creation of one association over a period of time. The first step of progress towards this point is in our agreement to engage in co-operative discussions and exchanges on issues of common interest (and disagreement), to foster an improved understanding of the views and priorities of all parties. SUMMARY The period ahead is likely to be a challenging one. In ommon with the rest of South Africa, the industry will be operating under conflicting priorities. We will need to balance the desire for regulatory ontrol and the attainment of social objectives against the need for a more competitive industry via the managed liberalisation process. We will need to balance the necessity for environmental improvement with the urgent need for national economic growth. Also we will need to balance the need to maintain affordable energy prices and rural development against the need for more stringent product specifications with their attendant higher prices. Despite their many differences and strongly competitive spirit, members of Sapia are in agreement on the key issues that affect South Africa and our industry. We support adapting liquid fuel regulations to promote the national agenda, prior to moving into an era of less regulation. We support empowerment and the Government’s desire to ensure that a part of the oil industry is owned by Historically Disadvantaged South Africans. We believe that, while regulation of prices and margins ontinues, it is important not only to combat rising fuel prices, but also to enable fair returns for refiners, marketers and retail dealers so that the investment necessary for the maintenance and development of the industry can take place. It is important that all stakeholders seek to maintain a fair and stable business environment during the period of transition to a less regulated industry. A holistic approach must be taken on decisions to upgrade fuels to protect the environment, and the billions that must be spent on new refining systems must provide commensurate benefits for the public. The guiding principles must be what is in the best interests of South Africa as a whole. Meeting those guidelines will help our industry to contribute optimally to the growth of our nation. In conclusion, I would like to thank our director and his team for their substantial contribution during the past year and my fellow governors for their counsel and support. |
Since our last annual report the liquid fuels industry has
progressed through an exciting, challenging and eventful period. I believe that
in the years ahead we will look back at the year 2000 as a watershed year. This
is because it marks a time when we saw a major new public-private partnership
forged; the first such significant partnership in democratic South Africa. The
member companies of Sapia are pleased and privileged to be part of a new way of
delivering transformation and growth in an industry which not only provides
fundamental inputs into the South African economy, but also one which makes a
major contribution to development, growth, value creation and employment.