Fourth Annual Report : February 2000
INTRODUCTION As an organisation we set the pace in cooperation and effective communication with all role players. Our vision of fairness, consistency and cooperation must work for us  and must offer a true win-win solution for the industry and all its stakeholders. WORLD MARKETS On the global front, the unusual activity of the oil market and foreign exchange rates is causing problems for South Africa and particularly the oil industry. Movements in petroleum prices in 1999 have been so sharp that the recent increases deserve separate analysis in this report. (See page 37). The current steeply rising prices immediately followed a global glut on the market, when greater oil output and falling demand had brought a steep drop in crude prices  to the lowest levels in 20 years. This exacerbated the impact on consumers of the sudden turn-round in pricing. The glut had also added to enormous pressures on the viability of oil companies internationally and locally. The worldwide trend to remain competitive by pooling and rationalising assets is likely to continue. This trend is evidenced by the merger of BP and Amoco, and later Arco, of Mobil and Exxon and of Total and PetroFina. International mergers are not confined to the oil industry, but are occurring in the motor, banking and pharmaceutical industries as well. Our local industry is deeply affected by these re-alignments. The growth of the gas industry, not only in this sub-region but in many other countries, reinforces the constant need to reassess alternative energy sources. Driven as it is by environmental and cost protocols, gas is a real, cost effective and viable option for many societies. The melt-down of the Far Eastern economies in the past two years has affected our industry severely. The combined effect of lowered demand and the volatility of crude prices has had a depressing effect on the oil business globally. Linked to this has been a world-wide glut in refining capacity which has resulted in the lowest refining margins in decades. This has also had an effect on investment capability in new projects around the world. In South African terms this means that any local investment opportunity is fighting for its rightful share against global opportunities. Global investment capital will flow to those regions with sound industry fundamentals, the lowest risk and the highest potential for growth. DOMESTIC CHALLENGES The Southern African reality is that we are one of the smaller players on the world stage. As such we are buffeted by global forces outside of our direct control. This is not something that will change in any envisioned future scenario. On the other hand, it is our market. We know it well and we know it's strengths and weaknesses. It is up to us to develop and work at keeping it world class. South Africa has a well-run economy. The sound fiscal policy that we have seen from the government has resulted in a decline in the budget deficit, lower inflation, lower corporate tax and a measure of exchange control relaxation. These, and the acceleration of economic reform have boosted overall investor confidence. These strengths, together with Southern Africa's well developed infrastructure, provide a sound foundation for the future. There are, of course, problems which need to be resolved. High unemployment and growing crime rates create uncertainty about the future and are a constraint on long term capital investment. Indeed we have seen large fluctuations in short term capital flows in the review period. Low savings ratios for the population as a whole are also of concern and exacerbate exchange rate volatility. For an industry reliant on imports of crude oil, this volatility creates risks for investment; similarly, for our customers in manufacturing, transport and agricultural industries it creates an environment of uncertainty for budgets, for growth and for viability; finally for individual households, fluctuations in the proportion of household budgets required for transport makes it difficult to plan savings. Stakeholders in the industry will need to continue to work together to create more certainty particularly during the transition to deregulation. Other than Mossgas and Oribi, South Africa does not have primary hydrocarbon resources. This again creates vulnerability. The synfuel industry has created unique structures in the industry supplyline which will require unique solutions as we move toward deregulation. We trust that the solution to the current state of affairs regarding the synfuel industry, including the issue of government subsidies, will be completed in full consultation with the oil industry. The renegotiation of the synfuel supply agreements will present the biggest single challenge to the liquid fuels industry over the next few years. Many stakeholders beside the main principals, all with competing interests will necessarily be involved, including state owned and controlled enterprises. Issues of subsidies, logistics tariffs, commerciality of arrangements and equitability will add to the complexity of the discussion. At this stage we believe that achieving an outcome which will serve all interests simultaneously will require creative leadership by all concerned. HARD REALITIES The reality of global super-mergers, the Far-eastern crisis and OPEC countries cutting production to increase oil prices offers two lessons for South Africa: The first is that in the oil world, viability in some key parts of the value chain is dependent on large volumes and small profit margins. To survive in these areas of the business, small players will need to access the global scale economies via participatory arrangements rather than direct local ownership. Opportunities to exercise local ownership or direct control will need to be carefully selected to ensure sustainable participation in the industry. In these latter areas we in Sapia support the transfer of skills and the building of experience. Secondly, global competitiveness demands that producers, manufacturers and retailers absorb increasing operating costs and hold down prices. The habit of passing on directly to consumers increased labour and other costs will no longer suffice. If we hope to be competitive, we have to offset increased costs by pooling resources and increasing productivity. As regards our own industry, the sound infrastructure that has been built up over the years, ongoing investment in refining capability and a sound working relationship between government and the key stakeholders are factors which have, and will continue, to contribute to success. The White Paper on Energy Policy charts a clear vision of goals, and the challenging task remains of steering our way through the difficult waters of the transition. It is in no-one's interest to have deregulation by default and, whilst Sapia members will work closely with government to ensure that an orderly transition is planned, we will need to rely on government for enforcement of the transition rules. The Kyoto protocols have yet to make a deep impact on this developing economy. South Africa has indicated a willingness to be a signatory to the agreement but no time frame has yet been decided. It is our opinion that the concomitant demand for cleaner fuels and lowered emission standards will in time also have an effect on this market as technological and social feedback cycles between developed and developing markets continue to shorten. We are not far off from emission trading which has been the focus of some debate as a flexible mechanism to bring down overall worldwide emission levels. These are the hard realities of rejoining the international arena, but they are challenges we must overcome if we are to achieve real growth. Initiatives such as the recent Job Summit are a necessary but insufficient condition to serve as a foundation for business development. Economic growth is the sole provider of jobs, training and social upliftment in this transforming society. The key question remains whether and when South Africa will be rewarded by new major international investments for the sound economic framework it currently has in place. If we work together with all the stakeholders in this society  government, private enterprise, labour, consumers, the informal sector, the unemployed  towards the common goals of economic growth, social order and social upliftment, we will succeed. GO WITH THE WHITE PAPER The White Paper on Energy  published in its final form in December 1998  is the result of years of active consultation between government, labour and business. It is a clear policy statement for the future governance and growth of the energy sector. Sapia has, on numerous occasions, publicly welcomed the policy framework on liquid fuels contained in the White Paper, as it reflects the collective vision necessary for the stability and further development of this strategically vital component of the South African economy. We support the principles and policy challenges contained in the document, not least of all the need to achieve : * An internationally competitive industry * Stable availability of quality product at internationally competitive prices within appropriate health, safety and environmental standards. * An environment conducive to synergistic investment in liquid fuels and petrochemicals. * The inclusion of those interests which have been historically disadvantaged. * An efficient network of pipeline and storage infrastructure based on internationally recognised standards We welcome government's recognition in the White Paper that there is presently no need for a new refinery in Southern Africa  expansion of existing capacity will be sufficient to meet anticipated demand for some years to come. The support for a future refining and petrochemicals hub on the coast near Durban is also welcomed by Sapia. These and other policy challenges, which have as a focus a future environment of minimum government intervention, will need to be faced with combined resolve. The trade-offs between job creation, attracting direct foreign investment and the provision of cheap fuel need to be clearly understood. As mentioned before, government and industry must collectively strive to ensure that the transition to deregulation is managed in a controlled and equitable manner. Specific issues such as the logistics of product supply, via road, rail, sea and pipeline, need to be carefully evaluated by all parties, including the Departments of Transport, Minerals and Energy, State Enterprises, Trade and Industry, Environment as well as petroleum and synfuel interests, to reduce uncertainty of outcome. BLACK EMPOWERMENT The White Paper on Energy states that before the process of freeing the industry begins, a number of key milestones must be reached, notably ". . . the sustainable presence, ownership or control by historically disadvantaged South Africans of approximately a quarter of all facets of the liquid fuels industry or plans to achieve this . . ." While we recognise the milestone, it needs to be further defined. We actively support change and transformation. A number of our members have embarked on a path of empowerment which should help put the industry back on a level playing field. However, if the government's aims are to be met  particularly in regard to economic stability and sustainability of empowered companies  clarity must be gained on the implications and intentions of some of the clauses of the White Paper. Members of Sapia, together with other stakeholders in the industry and with government will need to participate in developing practical business definition to the concepts to ensure sustainable participation. Our members continue to encourage growth of black ownership and further advancement and management skills at company level. We shall also step up the programmes which are basic to black empowerment. These include formal education across a wide front, technical training in many spheres, cultural development and sport. Privatisation of state assets may well be used to accelerate black economic empowerment. But care must be exercised to ensure that these operations are sustainable in the long term without the need for government subsidies. Sapia welcomes the Central Energy Fund (CEF) process of normalisation, reorganisation and restructuring which will lead to separation of the regulatory and commercial functions within the CEF group and position the commercial functions for possible privatisation. We in Sapia believe that the aspirations as set out in the White Paper are both feasible and deliverable. THE OIL INDUSTRY'S ROLE The White Paper on Energy has emphasized the strategic necessity of a stable petroleum industry. Liquid fuels underpin the national economy, directly affecting its efficiency and costs. The oil industry's wholesale turnover is now more than R40 billion annually. Besides enabling jobs in every sector in every part of the country, the industry itself directly provides 10,000 jobs, apart from the 4 900 petrol stations that employ some 45 000 pump attendants. In this context we must mention that the industry's returns, as disclosed in Appendix 1 of this report  were in 1998 at the lowest level in the decade. This is of concern as, unless revenues improve, oil companies will find it difficult to carry into the millennium the investment programmes needed to underpin the growth of the industry and the economy. THE GOVERNMENT's ROLE We believe that, in the spirit of the White Paper, there is a genuine political will to create equitable reform. It is the dual role of government and industry to clarify the rules, especially in relation to clearing up some of the uncertainties on implementation reflected in the document. It is then up to the government to apply the rules fairly and transparently. SAPIA INTO THE NEW CENTURY We fully accept that the old way of doing things is past. This organisation, that has served us well in the years of transition must now increase its pace. Member companies agree on the need to move towards a goal of greater inclusiveness in this body by bringing about the inclusion of companies that are currently not members of Sapia. Moreover, as a group we should define and clarify for ourselves those areas of common interest that affect us. Finally, in those areas of our business where there are no common interests we should recognise that we are competitors. To this end governance principles should be laid down to define mechanisms for decision making by government. NEW LEADERSHIP For five years President Nelson Mandela led our nation through its transition to democracy. His leadership has consolidated and nurtured the fragile process of reconciliation that is vital to the future of our nation. President Thabo Mbeki will build on these foundations as he sets about making us a nation at work to build a better life for all, Sapia and its members intend to be part of this process of nation building. We welcome Minister Phumzile Mlambo-Ngcuka, as Minister of Minerals and Energy, and assure her and her Deputy, Ms Susan Shabangu, of our support. Our thanks go to Minister Penuell Maduna for his support during the past three years, and wish him well in the challenging Justice and Constitutional Development portfolio. SUMMING UP We enter the new century with much to be thankful for; with many challenges, and  if we work together as a nation  excellent opportunities. * We can be thankful for political change that entrenches freedom and a level playing field. * The sound economic and monetary policies followed by government  not without cost and pain  have set South Africa on track for future success. * The challenges we face require all of us in the industry to look at the big picture and to prevent the potential for dislocations in the transformation process. * There are many opportunities and we must have the vision to identify them and the collective courage to grasp them. Sapia intends to continue pioneering the route to social and economic normalisation through healthy economic growth. Our members are intent on contributing to South Africa's well being, because we prosper only if all prosper. I would like to express my sincere thanks to my fellow governors for their assistance and support. We all manage companies which compete fiercely with each other on many fronts every day. It requires a special commitment and discipline to come together to make progress on the matters of critical importance and national interest we deal with at Sapia. I also pay tribute to three colleagues who retired as Governors during the year  Rob Angel, Dennis Poole and Mike Rademeyer. They had all served as chairperson of Sapia. I wish them well in their new directions.