Import parity pricing, funding models lie at the heart of SA’s pipelines battle

20th March 2009 By: Terence Creamer - Creamer Media Editor

Not surprisingly, energy group Sasol refused to be drawn into the war of words that recently erupted between oil group BP and State utility Transnet over the latter’s application for an 80%-plus upward revision to its pipelines tariff.

But it is the so-called ‘locational advantage’ of South Africa’s inland oil refineries, such as Sasol, that lies at the very heart of the battle, given that these inland refiners are set to receive a commercial windfall they have done nothing to earn. And this locational advantage comes down to the highly vexed subject of import parity pricing.

The conflict can be distilled down to what BP and other coastal refiners see as a commercial imbalance in favour of inland refineries, that is built into the fuel-setting formula and is a reality that spans many decades.

But this perceived prejudice would be made all the more acute if the National Energy Regulator of South Africa (Nersa) acceded to Transnet’s application for an 82,5% tariff adjustment for 2009 and a 73,5% adjustment for 2010.

The utility asserts that the adjustment is needed to enable it to cover costs and raise the debt finance necessary to construct a new R12,7-billion multi-product pipeline network from Durban to Gauteng.

Nersa subsequently published a draft determination in which it indicated that it could well accede to the request for a material tariff increase and held a public hearing recently to field objections.

In its submission and subsequent press statements, BP acknowledged that the pipeline was necessary, owing to the fact that the current tariff was “inadequate to supply the inland market”. But the oil giant objected to the proposed funding model.

In fact, it noted that the tariff increase would result in its competitors – including Sasol, which operates a coal-to-liquids refinery in Secunda, and the Sasol-Total joint venture, which operates the Natref refinery in the Free State – receiving material income benefits they need not do anything to earn.

Now, this prejudice arises primarily from South Africa’s fuel-setting formula, which is governed by the Department of Minerals and Energy, and not Nersa. That is also possibly why BP decided to raise its objections outside the confines of the Nersa public hearing as the remedy it sought probably only fell partly within the power of the energy regulator.

Under the current system, the pipeline tariff is used as a proxy for the cost of transporting fuel inland, with the petrol price rising in sync with any increase in the pipeline tariff.

In other words, the received price for inland refiners would rise without a commensurate increase in costs, which would translate into a large income benefit.

In fact, BP asserts that only 25% of the proceeds from the tariff would accrue to Transnet, with the balance flowing to the inland refiners. In monetary terms, BP estimates the commercial prejudice to be worth R1,2-billion.

BP amplified the point by saying that the proposed tariff differential between the crude oil pipeline was discriminatory and anti- competitive. It suggested that a temporary fuel levy be considered as an alternative funding model, or that direct State funding be secured to ensure a strategic supply reserve.

In a statement responding to BP, Transnet suggested that the oil company’s “unfortunate attack” was a proxy for its long-standing complaint regarding its relative position arising out of a locational disadvantage in relation to the inland refiners.

The challenge for Transnet and, ultimately, Nersa, both of which had security of supply mandates, was to close the funding gap between construction and operation in a context where Transnet’s shareholder was not willing to inject equity capital.

There is also no other obvious alter- native funding model on the table. No public–private partnership has been discussed and the State, which has already been drawn in to support Eskom with a R60-billion subordinated loan and further guarantees, is loath to inject fresh capital into other State-owned enterprises.

So, as things stand, there is a pipeline project that all stakeholders agree is necessary, but disagree on how it should be financed.

This is a serious problem for Nersa as it has to find a way for Transnet to massively increase its asset base from R4-billion to R12,7-billion, without any prospect of assistance from its shareholder.

In effect, like its sister utility, Eskom, Transnet has a shareholder that wants to reap social and financial dividends, but is unwilling to risk its capital in what are vast expansion programmes.

The result is a highly constrained regulator that, in the end, has to err on the side of supply security through what is likely to be a fairly imperfect and contentious tariff remedy – not least because of its implications on the fuel price, which Transnet suggests will be 8c/ℓ and BP argues could be far higher.

Like Sasol, Nersa full-time member (Pipelines) Dr Rod Crompton would not be drawn into the debate when approached by Engineering News, saying only that reasons would be given for the determination once it was decided.

Nersa was still targeting to release its determination by the end of March, but Crompton said that there could be a delay, given that it was still awaiting responses to questions raised in oral and written submissions.

Crompton said that it was studying all the comments, including those made by BP, but stressed that it would make the final determination on the basis of the Petroleum Pipelines Act and the Nersa Act.