South African Energy Policy FES Briefing Paper 11| August 2007 Page 8 “… these events exposed underlying structural and regulatory weaknesses in the sector. If the weaknesses referred to in this Report are not addressed with urgency, petroleum product supply shortages will become a feature of the future economic environment. … The Investiga­ting Team finds it difficult to accept that histori­cal and current expenditures have been adequa­te, given the high incidence of production inter­ruptions which have been reported. It is probab­le that a shortage of skills, both engineering and technical, has contributed to these problems… From a review of the submissions it is apparent that there are a number of regulatory issues that need to be resolved.” According to a BP Release 14 : “Putting it plainly, our refineries are operating at full capacity; our road and rail transport systems for carrying fuel are stretched to the limit; our pipelines are too expensive and too few and our roads are crumbling under the weight of increa­sed loads. …… the truth is that we are now at a point at which any unplanned break in the supp­ly chain(i.e. refinery breakdowns, pipeline inter­ruption, shortage of rail tank-cars) will create shortages.“ “ By 2008, the supply chain will be"significantly constrained". Without investment in manufactu­ring capacity within Southern African the amount of imports will need to"escalate drama­tically". The existing infrastructure is"unable to support the requirements for increased imports in the short term and will need to be upgraded." While on paper there has been stable policy ag­reed on by all in an inclusive process, in practice the implementation of policy has led to a level of policy and regulatory uncertainty that has led to under-investment in the sector with the conse­quence that the liquid fuels supply system, in all links of the chain, is overstressed and failing un­der pressure. Like the electricity system, rectifica­tion of the problems will take years, once this begins. And like the electricity sector the capacity crisis provides an opportunity, in terms of stated poli­cy agreement and commonalities of interests between South Africa and G8, for cooperation between South Africa and G8 in this area. Establishment of independent regulation Government is committed to implementation of independent regulation, and there is clear evi­14 “Who will invest in our fuel infrastructure and why should they?”, 14 May 2007 dence of this both in the energy sector and other sectors, but the principles and practice are new in South Africa. The lack of capacity and alignment in goals between G8 and South Africa offer potential for collaboration. Currently, a significant proportion of inland fuel (the largest market) is transported by road tan­ker from coastal refineries, reportedly at a loss, by oil companies. The state-owned pipeline company, Petronet, recently had its application for a tariff increase declined by NERSA and so re­joined that it would not be able to go ahead with building a new multi-product pipeline from coastal refineries inland. This is not necessarily an indication of policy and regulatory failure but more an indication of the kinds of challenges fa­ced in re-arrangements of relationships required in an environment where independent regulati­on is being established. Beforehand, state­owned enterprises such as Petronet would mere­ly have obtained approval for tariffs in non­transparent internal government processes, and in fact Petronet did this for years and ran at hu­ge profit margins that were used to subsidise sis­ter companies in the state-owned Transnet group. During the current phase of establish­ment of independent regulation, NERSA has ru­led that according to current regulations it is on­ly authorized to grant certain tariff increases, which don’t take future investments in additio­nal capacity into account. In any case, to resolve the issue, on NERSA’s side, moves have been made to develop a methodology to assess tariffs which includes new investment requirements. On Petronet’s side, the company has moved to a cooperative position where Transnet CEO stated that:“an Executive-Level unit is being establis­hed to conduct relationships with the new eco­nomic regulators”. This has taken months and has shown what is necessary in the transition towards independent regulation. 5. Enhancing energy efficiency and energy saving This is another important goal because huge ef­ficiency improvements are possible and econo­mically feasible along the entire energy supply chains across all energy sub-sectors. Inevitable increases in South Africa’s very low energy prices will make a larger range of efficiency improve­ments and savings economically viable. Some of these measures will help to lessen the negative economic impacts of other mitigation measures and need to be evaluated, as is being done in the Integrated Energy Planning and Integrated