Sapia's Director reports on progress to a new era
The South African Petroleum Industry Association has been delegated by its members with the broad national tasks of improving understanding of the industry's operations and objectives, encouraging high standards and good governance and furthering the industry's efforts on environmental issues. These embodied only a few of the important issues and developments affecting the industry and the nation in 1996.
Shaking off Secrecy
One of the prime roles of our recently established Association has been to shake off enforced secrecy about "strategic fuels" and to introduce transparency and good communications with all South Africans. With this in mind, Sapia publicly launched its first annual report during the year under review. The event signalled the industry's formal rejection of the legal secretiveness of the past and its commitment to open discussion.
The 1996 chairperson, Mr Mike Rademeyer, has referred to Sapia's efforts to communicate better with the media. At the launch of the first annual report in May, more than 100 journalists took advantage of meet-the-media forums during the presentation of the annual report. The journalists represented metropolitan dailies, the business press, local newspapers, the specialist press, radio and television. Throughout the year, greatly increased media interest was evident, with Sapia and other industry sources fielding queries on a number of issues.
Sapia welcomes greater media coverage and comment, and trusts it will continue. Matters of energy policy are vital to the economy and to national renewal. It is important that public debate and discussion are vigorous, despite the inevitable risks of over-emphasis on contentious issues. Publicity can create adversarial positions, but good communication can eliminate these false attitudes. Thus, during the year Sapia spent time and effort talking directly to parliamentary groups, industry analysts, bankers, and delegates to various conferences. In addition, many international requests for information were received
Broadened statistics given with this second annual report recognise some of the more frequent requests for data.
As a result of past government policy of deliberately suppressing information on the oil industry, there is today still a lack of reliable and comprehensive data on the subject. Sapia intends to work with the new government and other role players to develop a better data base of industry statistics. We believe this will be of value. Such information not only promotes the industry, but encourages further investment in the industry and the economy.
Sapia intends in the future to be even more pro-active in communicating.
Major Events of Year Under Review
In retrospect 1996 was a year of preparing for change, preparing to move to a promising new era.
Some of the main events of 1996, looked at in isolation, were negative. The lack of movement on policy development following the November 1995 Energy Policy Summit and the failure of Government to approve a marketing margin increase are examples.
It is necessary to make some comments on the existing regulatory system. This system, by controlling wholesale margins on certain products (petrol, diesel and paraffin) restricts Sapia member companies from setting their own margins on these products. The import parity (IBLC) formula, which is used to determine the basic coastal ex-refinery price in the regulated pricing structure, is also the basis for the prices paid to Sasol for purchases of all products, including jet fuel (the price of which is not controlled by regulation). Through the Rationalisation Plan, the system also prescribes rules governing the establishment and operation of service stations. Sapia members are bound by these constraints. On the other hand Government has not felt itself bound and has not approved the margin increase owed to the industry on controlled products in terms of the system.
The effect of this failure to approve of an increase in the marketing margin is apparent in the aggregate financial results of Sapia members as set out in Appendix 1. The outgoing chairperson has highlighted the concern that is being caused by the inadequate returns that the industry is earning. In this context it is important to state that Sapia members have indicated a willingness to work with Government and other role players on establishing new rules appropriate to the new South Africa.
Earning a Fair Return
The apartheid era demonstrated how limiting, inept and costly State control of industry could be. Free and fair competition remains the most efficient, for competition encourages the best and eliminates the worst. It allows a local industry to compete on the world market.
When profit margins are regulated, as they are in the case of the South African petroleum industry, it is necessary to define what constitutes a fair return. It is Government concern over this issue which bedevilled the industry's MPAR margin application in 1996. Government was concerned that the formula might be too generous. The result was that no adjustment at all was made. To resolve the current impasse there needs to be clarity on what is a fair return. This is an urgent necessity. Inaction will cause hardship to thousands of people as well as losses to the oil industry.
Criticism of Sapia
Notwithstanding the fact that Sapia has repeatedly called for lifting of regulations and for minimum Government intervention in the industry, certain airline organisations and retail store groups have in the past year made formal submissions to Government, not accurate and apparently designed to bring the industry into disrepute, seeking to imply that Sapia members benefit unduly by the existing system. Were it but so! Observing the biblical call to turn the other cheek, Sapia and its members have thus far resisted the temptation to respond in kind, but have, in measured fashion, restated to Government the facts and their desire for less regulation of the industry.
There have also been persistent allegations that Sapia members indulge in "transfer pricing". The Sapia members, in denying the allegations, have offered to both Minister R.F. Botha and Minister P.M. Maduna, to open their books to audit on the issue. The offer has not been taken up.
A New Minister is Appointed
The welcome appointment during the year of a Minister and Deputy Minister of Minerals and Energy from within the ranks of the ruling party will, we hope, end the hiatus and bring the changes in energy policy so badly needed if the nation is to progress efficiently. Minister P.M. Maduna is now in a position to bring together all the role players so as to develop a sound energy policy during 1997. His tenure creates a timely opportunity, and his perspective should provide a smooth transition from the government priorities of the past to the national priorities of the future. Effective and productive change will require the enthusiastic co-operation of the major industrial investors.
Sales Growth
Sales growth continues, and additional refining capacity is needed.
In 1996 petroleum sales volumes continued to grow (by 6% or some one billion litres a year) and demand for petrol is now close to the limits of South Africa's refining capacity. This makes it important that there be clarity on policy to encourage the necessary heavy capital investments in greater refining capacity. Failure to acquire investment for new refineries and for other assets such as distribution and marketing, will mean that South Africa will have to use up foreign exchange in importing petrol. Consumers will also suffer.
Free and fair competition remains the most efficient, for competition encourages the best and eliminates the worst.
Though there is still adequate refining capacity for middle distillate for several years, the need for a clear policy is becoming urgent. The policy is critical, in the sense that it must be a balanced and wise policy - not one giving undue favour to the synthetic fuels industry, as was done by a past government waging its own war against international boycotts.
Sapia's members, who include South Africa's largest foreign investors, wish to lead a new wave of investment. They can do so in the most vital area of the nation's infrastructure - but only if the climate is fair, and settled. Foreign investors, Sapia members or others, will come only if there is a reasonable prospect of profit - and profit provides the country with wealth through taxes and re-investment. For the sake of GEAR and the RDP as well as in the interests of the oil companies, therefore, Sapia intends to co-operate fully in creating a fair national climate.
White Paper
Sapia intends to participate to the full in the process of finalising the Energy Policy White Paper. The White Paper is of such importance that it is dealt with under a separate heading in this annual report.
Increases in the Price of Oil
As a result of the decline in the value of the rand compared to the dollar, and an increase in dollar-prices of oil on world markets, the year was marked by a series of local price rises. While these higher prices are regrettable and unavoidable, they should be a spur to efficiency and conservation in the use of energy. Huge advantages could flow to South Africa from such savings. Sapia supports this concept (even though it is not in the short term interests of its members that consumption growth be curbed!).
We support the view that South Africa's use of energy should be more efficient. South Africa's GDP is growing at about 3% - but energy usage is increasing at 6%. Again, something needs to be done, preferably by the State and the private sector co-operating to reach agreed goals.
Mossgas
Sapia members have purchased Mossgas production since the plant came on stream in late 1992 though there was no statutory obligation or commercial gain for them to do so. The members believe that they have complied fully with the terms of such interim commercial agreements with Mossgas as have been in place from time to time. However, it has unfortunately not yet been possible to reach agreement with Mossgas and Government on a fair basis for the longer term upliftment and purchase of the Mossgas production. This situation has led to misunderstanding and conflict, and even to intentions being expressed by the Auditor-General to investigate the commercial arrangements between Mossgas and Sapia members.
The members consider that, in the national interest, this matter should be resolved promptly, and they remain ready and willing to purchase the Mossgas production on a basis which neither advantages nor disadvantages them financially. They have on several previous occasions made what they consider to be constructive proposals in that regard, and remain committed to negotiating with Goverment a mutually satisfactory solution to this long-outstanding and contentious issue.
Launching Unleaded Petrol (ULP)
May 1996 also witnessed the introduction of unleaded petrol (ULP) to the South African market.
Today unleaded petrol is available at every forecourt in the land. Creating this huge distribution channel in the space of a few months was a major achievement for the companies concerned.
About 9% of total petrol sales, or about a billion litres, is accounted for by ULP. Penetration has stagnated at this level and there is now a need for an increased price differential to reach the targeted 20% penetration.
The infrastructure for this service cost the oil companies in the region of R300 million. This infrastructure provides choice. Choice for consumers, choice for legislators and choice for the motor industry. Legislators concerned about vehicle emissions may in future choose to encourage the use of catalytic converters on exhaust systems - knowing ULP is now readily available. Motor manufacturers may choose to introduce models featuring the latest international engine technology.
Sapia Membership
There were no additions to Sapia membership during the year under review, though there are developments in 1997 to which the current chairperson refers in his address. Sapia is not a closed association. Membership remains open to oil industry companies which subscribe to Sapia's founding articles - essentially a belief in free and fair competition, a commitment to ethical standards and recognition of obligations to protect the environment. Members are expected to show willingness to be good corporate citizens, eager to contribute to the well-being of the community and the development of the national economy.
A widening of membership is expected in view of the dynamic change within the South African oil industry.
Sapia's structure and belief system mean the Association would welcome new entrants in the industry. Economic empowerment of previously disadvantaged sections of the population is leading to new groupings within the industry and the Association welcomes this. Sapia believes such developments are essential. It is up to entrepreneurs to bring them about.
Sapia is willing to welcome Sasol as a member. Sapia and Sasol already work together on specific issues such as environmental safeguards. Sapia recognises that the assets of Sasol, originally created with taxpayers' money, should not be wasted, but used fairly in the national interest.
Crime, Security and Safety
The eradication of crime has to be part of the national effort to ensure that a dynamic new South Africa is built.
In our own sector, service stations have been the targets of armed robberies. Sapia members have formed the Oil Marketers Safety and Security Group to co-ordinate action on matters relating to crime, security and safety. Closed circuit television and bright lights have appeared on forecourts. To forestall criminals, the amounts of cash available on the forecourts have been reduced.
Sapia members are also enhancing forecourt safety through an extensive technical audit and upgrading exercise in respect of forecourt dispensing and storage equipment. The safety requirements flowing from the flammable nature of the products also receive much attention.
The petroleum industry is most certainly playing its part in the fight against crime and corruption in our country and will continue to do so in conjunction with Government and other sectors involved in the national crime prevention strategy.
Sapia members have taken steps to reduce the risk of hijacking of their delivery vehicles and to enhance road safety by improving the driving skills of their drivers. There are ongoing efforts to reduce theft of petroleum products.
Summing Up
The urgency of issues such as
the need for a clear energy policy,
a settled economic atmosphere in
the fuel industry
and a fair and reasonable return on capital employed
is emphasised by the fact that no major new investments in refining capacity or
in infrastructure were undertaken by Sapia members during the past 12 months.
The Malaysian oil and gas company, Petronas, did become a participant in the
South African industry during the course of the year, but this was through
investment in an existing member of Sapia.
Much more is required.
The immediate future is almost certain to be shaped by four core needs:
The need, especially by the historically disadvantaged sections of the
community, for affordable sources of energy.
The need, especially in the
light of likely long term increases in the rand price of oil, for more
efficient national usage of energy.
The need for continued and increased
foreign and local, including black, investment in South Africa, and in the oil
industry in particular.
The need for a thorough policy reappraisal to
ensure a fair outcome for members of the public, and a fair return for members
of our industry.
The Sapia directorate looks forward in the coming year to
contributing to the processes which will meet these vital needs which would
ensure a new era and promising future for all South Africans.