Sapia has entered its sixth year as an instrument for communication about the industry and as an organisation for the advancement of change and transformation. South Africa has been experiencing various forms of change for almost a decade  hesitantly at first; then in celebration following the peaceful general election in 1994 (the year of the founding of our organisation); and somewhat slowly since. The success of the 1999 elections bodes well for the future of our emerging democracy and will create a climate that will encourage and speed up further positive change. For this the country owes a great debt of gratitude to former President Mandela for ushering in a policy of national reconciliation.
Looking back we can see that our country has experienced stunning peaceful change. Despite potential tensions stemming from social imbalances and understandable wariness, we have managed to avoid splitting the nation asunder. Crime which has a negative effect on the economy and potential foreign investment will have to be dealt with through a combined effort by all the social partners.
The year 1998 / 1999 was a time of great progress.
The White Paper on energy policy was issued by government and the marketing margin system (MPAR) was improved and applied. Negotiations on the future relationship between the conventional and synfuel industries have begun and black controlled oil companies have achieved substantial growth in market shares.
The new millennium marks a time which is ripe for increasing the pace of change. We must build on the successful 1999 elections and ensure that the South African economy will meet the global and domestic challenges to which it is exposed. This need for a faster, firmer pace applies to the oil industry whose role it is to smooth the way for the national economy.
The government has, after wide consultation, produced a White Paper on energy policy that seeks to cater for the interests of all the stakeholders in the liquid fuels industry  and to meet the national priorities of growth and development. That should be the signal for a quick start down a clear track. However since the interests of stakeholders can be narrow and self-serving, there is a danger of position-taking and lobbying around the detail of the White Paper for some time to come.
No amount of "white paper" will be able to transform the industry, let alone the national economy, if there is no collective will on the part of the stakeholders to seek to resolve their differences. This resolve must include existing differences and new ones that are bound to arise from time to time.
Sapia is anxious further to co-operate with other stakeholders and move forward. Our reservation about the White Paper's lack of a specific timetable is expressed with the positive desire to speed up implementation and ensure that it succeeds.
Without the discipline of a target date to focus the collective minds of the stakeholders  and to hold them accountable  little is likely to be achieved over a long period. This will increase the risk of an eventual uncontrolled slide to deregulation, which would harm all stakeholders, particularly the very ones that government wishes to assist in terms of its empowerment policy.
Without a clear programme, industry will find it difficult to plan its own development path to harmonise with that of the government.
A separate section in this report looks at the White Paper in more detail.
It is appropriate to highlight the value that Sapia members add to the nation.
The health of the industry is of crucial importance not only to its shareholders but also to the whole economy.
The members of Sapia have consistently invested some R1.5bn per year in their South African operations. This is a very important contribution to capital formation in South Africa.
They collect some R19bn annually in indirect taxes, which amounts to more than 10% of all taxes collected. This is done efficiently and at little or no cost to the fiscus.
They bring to South Africa technology, managerial skills and leadership in the Health, Safety and Environmental fields.
Through the nationwide provision of fuels and lubricants, particularly paraffin and LPG, Sapia members make an important contribution to the provision of energy for development and upliftment.
Quality products are provided to the nation at prices, which are, on a pre-tax basis, globally competitive.
SHARPER COMPETITION
Sapia's members have always been fiercely competitive with each other in marketing fuels and serving the public. But competition will be sharper still when Sasol, the synfuels giant which is not yet a member of our organisation, terminates its supply and "Blue Pump" agreements with the oil companies, and joins battle in the market-place. However, the playing fields in this area need to be levelled.
To hold down costs throughout the country, the cost of transporting fuel also has to be competitive. It is imperative that tariffs are set at realistic levels. The Gauteng region, which handles two-thirds of national manufacturing production, is the area most affected by fuel transportation costs, and refiners need to be able to serve this area with prices unfettered by arbitrary transport tariffs. The distortions created by the tightly regulated and 'closed' system of the past have to be eliminated. Arbitrary price setting has to be abolished if we are to keep consumer prices down.
The subsidy to the privatised, profit-making synfuel companies is a major factor in the price of South African petrol. A separate section in the report gives details.
Free procurement of crude oil is vital to a developing economy such as South Africa's, for it ensures the best prices at the most efficient refining standards. The White Paper states specifically that free and untaxed procurement is government policy. Sapia would be opposed to the imposition of any tax or levy on the importation of crude oil.
In the context of currently higher fuel prices, Sapia reiterates its support for campaigns to increase efficiency and save fuel. In the long term fuel efficiency will help national growth. Sapia therefore encourages the development of fuel management systems, which discourage theft and wastage. It is also a way of meeting the challenge of higher world oil prices, and conserving scarce foreign exchange.
The oil industry's returns on capital are at the lowest level in a decade. The after-tax return on assets in 1990 was 11.8%, or 4.2c/l, and for the period 1995Â97 the return average dropped to 7.1% or 3.9c/l. The 1998 figures were 4.5% and 2.9c/l. This is cause for concern, for these returns are lower than the inflation rate, and substantially lower than the return on a bank deposit. The unrealistic return unnecessarily jeopardises future operations and investment in South Africa.
Although the MPAR system has been reviewed recently and is being applied more consistently by government, the cumulative effect of the delays in the granting of increases due to the industry are hugely damaging. Between 1996 and 1999 the delays have cost industry in excess of R1bn in pre-tax income.
It is important that whenever government addresses the crucial issue of profitability under the regulatory system, it does so fairly. Sapia is pleased to note that government recognises the seriousness of the situation, for the White Paper clearly states: "During the (transitory) period of regulation, government is committed to the use of a fair and transparent method to set the margins in order to encourage investment in the industry". With prompt review, this statement will translate good policy into fair practice.
There is also the question of taxes, which do not necessarily encourage investment. As South African companies and individuals are among the highest taxed in the world, it was gratifying that the Minister of Finance reduced corporate tax this year. The reduction has been welcomed by local and foreign investors, and should encourage the acceleration of industrial development.
Slower than expected growth in the demand for petroleum products has reduced the urgency - reflected in past reports  for expanded refinery capacity. Nonetheless during the year there was an expansion of 15 000 bbls/day at a refinery and other expansions are being planned. This demonstrates the ability of the oil industry to provide South Africa with the refinery capacity it needs.
Agreement was reached between Mossgas and the members of Sapia and the African Minerals and Energy Forum on the principles which will apply to the purchase by the oil companies of the Mossgas products in the longer term.
A memorandum of understanding (MOU) setting out these principles was signed by the parties in November 1998, and with effect from 1 July 1998 has governed the purchase arrangements. While this MOU continues to serve as the agreement in the interim, it is anticipated that it will be replaced by the fourth quarter of 1999 with detailed individual operating agreements between each oil company and Mossgas. The conclusion of the agreement set out in the MOU resolved, to the mutual satisfaction of the parties as well as the Department of Minerals and Energy, the longstanding disputes between Mossgas and the members of Sapia over purchases and pricing.
As stated last year, Sasol indicated its intention to re-introduce alcohol as a petrol blending component in part of the inland area (mainly in Gauteng and Mpumalanga).
Sapia members last year made it clear that they would accept alcohol supplies from Sasol for inclusion in petrol only if they and the motor industry were fully satisfied that the motoring public would experience no difficulties or diseconomies with the product. Thorough testing and other preparatory work was done and it has been ensured that the petrol blended with alcohol is "fit for purpose". Sasol's agreement that the alcohol used for the blend would consist of a minimum of 95% ethanol helped to achieve this.
The petrol/alcohol mix was introduced to the market on 26 July 1999.
During the year sales of unleaded petrol (ULP) amounted to only about 10% of the market  far below the target of 15% to 25%. The relatively small price differential at the pump has proved insufficient to persuade motorists to switch to ULP.
Another important inhibiting factor has been that the octane rating of ULP sold in the inland areas needs to be increased. It had originally been planned to increase from 91 RON to 92 RON by 1 May 1999 and to 93 RON by May 2002. However a joint decision by the motor industry, government and the oil industry has now been taken to rather increase to 93 RON in early 2000. This is an example of an industry acting to meet the needs of its customers.
Africa has rich energy resources, but its people do not have the means to access these resources. Sapia encourages all initiatives aimed at correcting this anomaly.
The diverse energy resources in various Southern African Development Community (SADC) countries include:
* oil in Angola
* coal in RSA and Zimbabwe
* gas in Mozambique,
Angola and Namibia
* hydro in the Democratic Republic of Congo and many
other countries.
The potential for renewables - solar, wind and biomass - is also important.
There is scope for joint efforts - for example in the Southern African Power Pool and in oil refining.
The key to the way forward is to establish the trust needed for governments to feel encouraged to enable the private sector to take the initiative. The fear, which some governments may have that the private sector may not invest enough to meet the needs of their countries, must be addressed.
Efforts are under way and a number of key meetings have been held in South Africa  something that would not have been possible before achieving our democracy:
* African Mineral and Energy Ministers' Meeting in Durban, November
1997
* Sixth International Energy Ministers' Meeting in Cape Town, October
1998
* Twenty-fourth SADC Energy Ministers' Meeting in Durban, July
1999
There are advantages to Africa in its linking with the world energy industry in spheres such as:
* Technology
* Capital
* Skills
* Health,Safety and
Environmental protection
PETROL PRICE MOVEMENTS
As a result of the sharp movements in petroleum prices this year a separate section of this report is devoted to this subject. See Pricing petroleum products.
MILLENNIUM BUG
International concern about the effects of the "Millennium Bug" (Y2K) apply equally to South Africa.
Sapia members have for a long time realised the significance and potential of the "Millennium Bug" and have taken all reasonable steps to ensure that their systems are Year 2000 compliant.
Our members support the government's initiative to ensure that all municipalities are abreast of Y2K problems, and are working closely with relevant government departments to ensure that there will be no interruption to fuel supplies.
CAPACITY BUILDING
Sapia recognises the vital importance of education and the spreading of information and knowledge to the growth and development of South Africa.
Sapia is thus participating in an education programme, designed to enhance the level of knowledge of the industry, in conjunction with local and international higher education institutions and other key stakeholders in the industry.
CHANGES IN LEADERSHIP
Our Minister of the past three years, Dr Penuell Maduna, has been appointed Minister of Justice and Constitutional Development. I want to wish him well in his new portfolio and to thank him for all his assistance and warm friendship during his time as Minister of Minerals and Energy. His term of office saw the liquid fuels industry enter the new South Africa and the completion of the new Energy Policy White Paper.
We welcome to our industry the newly appointed Minister of Minerals and Energy Ms Phumzile Mlambo-Ngcuka, and we also welcome the reappointment of Deputy Minister Ms Susan Shabangu. We look forward to moving into the new millennium under their guidance.
We also welcome the appointment during the year of Mr. Smunda Mokoena as Deputy Director-General with responsibility for energy. His appointment will play an important role in the transformation and restructuring of the industry.
The reappointment of Mr Duma Nkosi as the chairperson of the Parliamentary Portfolio Committee on Minerals and Energy is also welcomed.
We salute our former President, Mr. Nelson Rolihlahla Mandela  it was he who made it possible for us to change our nation without tearing it asunder  and we welcome our new President, Mr. Thabo Mvuyelwa Mbeki.
Sapia looks forward to helping to build a better life for all under President Mbeki and, in so doing, building on the foundations laid by President Mandela.
SUMMING UP
Achieving success in the oil industry in the year 2000 and beyond will not be an easy task. Companies will require total commitment to reaching the competitive edge  and staying on top. This will be true even within a regulated market during the transition period.
Our industry fully supports all policies that will build the economy, eliminate ignorance and poverty and uplift the disadvantaged. This is not altruism. Our industry, like most other industries, is dependent on people who are healthy and live in an environment that is conducive to growth and stability. I repeat the message of Sapia's chairperson: Our wellbeing will depend on the wellbeing of the country because we prosper only if all prosper.
The challenges facing the oil industry, though complicated, are not insurmountable. I am optimistic about the future. I believe that any country that can give rise to the calibre of leadership that we have cannot but move forward. It will take mutual cooperation and require confidence and trust in many key areas.
Sapia wants to be part of the emerging partnership of government, labour, business and the community, which is now rapidly forming to take us all to a better future.