Can South Africa’s heavily regulated and structurally distorted fuel industry be opened up, even if the dominant wholesale player, Sasol, teams up with with one of the biggest retailers, Engen?
It is a question that currently has competition authorities tied up in arcane supply contracts, pipeline tariffs and demand projections; it could soon have important implications for consumers as the Department of Minerals and Energy (DME) begins to make more aggressive moves toward liberalisation.
The planned merger of Sasol, which controls the supply of fuel to the industrial heartland of the country, and Engen, which has a larger retail network than any of its rivals, has moved from the competition commission, which approved it conditionally, to the competition tribunal. Its deliberations are shining a stark light on state of play in a bitterly divided industry. Positions which had previously only been hinted at in off-the-record briefings are now being loudly articulated in a public forum.
It has quickly become clear that relations between Sasol and the coastal refiners (Shell, Caltex and BP, so-called because their refineries are close to major ports where oil-tankers can offload) are barely civil. And the government’s frustrations with the synthetic fuels producer go a lot futher than irritation with its apparent reluctance to appoint black executives.
BP and Shell are both opposing the merger and, initially, the DME served notice that it would also weigh in against the deal. In an affidavit signed by chief director of hydrocarbons Nhlanhla Gumede, the department cites the merger’s negative impact on competition, exaggerated empowerment claims and Sasol’s history of abusing its dominance. In a move that baffled most observers, the affidavit has since been withdrawn.
Gumede told the Mail & Guardian that this does not mean the department has resolved all its concerns about Sasol. The department, he says, was persuaded by new Sasol CE Pat Davies and lawyers from the merging parties that the tribunal was not the place to raise concerns over Sasol’s past behaviour or the progress of liberalisation.
‘We are going to be looking at their empowerment with or without this deal,” Gumede said, ‘and the tribunal is better placed to deal with the competition concerns. Our issues with Sasol remain but we can’t relate them to the merged entity.”
Gumede insists that this abrupt U-turn does not mean that the merged entity, Uhambo, will get an easy regulatory ride. ‘Even though we withdrew it, perhaps our intervention application has served to warn the empowerment partners in this deal that they might not be getting what they think out of it once new legislation is fully in force.”
A combination of a more robust interpretation of the Petroleum Products Amendment Act, which bans vertical integration, and a new formula for regulating retail profits will make Uhambo a less attractive proposition, he suggested.
The widespread industry practice of deals in which service station ‘owners” lease their sites from fuel companies and pay back a percentage of sales would not be allowed to persist. ‘The Petroleum Products Amendment Act makes it very clear that we want to separate retail and wholesale ownership completely, and at the moment there are a number of schemes designed to make it look as if they are separate, when, really, they aren’t. We will put an end to that.”
Changes to the controversial Marketing of Petroleum Activities Return formula, which regulates the profits of retailers, will also reduce the attractiveness of a merged marketing and refining entity, he says. Critics have long called for changes to the formula, which aims to give fuel companies a 10% return on their retail assets. Some believe this approach creates perverse incentives to the industry to build more and larger service stations in order to inflate its asset base. The industry argues that it encourages efficiency, because the formula is based on the assets of the whole industry, so those companies with the leanest asset structure get the highest effective return.
Debate at the competition commission did not deal with these issues. Instead, it centred on the structural legacy of the apartheid era, which saw the oil-from-coal company created as a strategic alternative to crude imports. That legacy, opponents of the deal argued, would enable the post-merger company, Uhambo, to combine refining and retail dominance into a force no other company could compete with.
Situated close to the highveld, and the coal fields that feed it, Sasol’s Secunda plant and the Natref refinery (which it co-owns with Total) supply 37% of the country’s petrol and diesel — very nearly all the requirements of Gauteng.
One pipeline brings fuel inland from refineries in Durban, but it is small and has generally been emptied at local depots by the time it reaches Secunda, where Sasol tops it up. That means coastal refiners must buy from Sasol to supply their Johannesburg and Pretoria forecourts, although they can bring a limited amount of fuel inland via the more expensive alternatives of road and rail tankers.
Until two years ago, this situation was codified in the Main Supply agreement, which forced all the other oil companys to satisfy 40% of their requirements from Sasol at a regulated price, but also stipulated that it could not become a retailer.
The expiry of that agreement has seen Sasol rush to try and build a retail network in a market the DME believes is already grossly overtraded.
According to industry sources, Sasol has used its de facto monopoly on inland wholesale to extract terms of trade — including prices — its competitors believe are unfair. ‘Basically, they threatened to let our pumps run dry,” one industry executive told the M&G.
The DME has complained that Sasol already refuses to supply smaller empowerment wholesalers, citing spurious legal constraints to freeze them out of the Gauteng market. Another industry insider says that supply contracts with the coastal refiners stipulate that if there is a fuel shortage in Gauteng, Sasol can supply its own retail network first. Clearly, in a situation where Uhambo included all of Engen’s petrol stations, this could mean that other companies would find themselves unable to meet their requirements.
BP — the one coastal refiner with enough capacity to supply all the needs of its own retail network, given adequate transport arrangements — told the commission it believes that Gauteng will run into the limits of its current pipeline, road and rail supply capacity around 2009 as economic growth and a booming vehicle market push up demand for fuel.
This is the scenario the commission tried to address. The conditions it set for approval deal with the way Sasol treats the other oil companies. Until new pipeline capacity ends its monopoly, it may not use its dominant position to extract higher prices, it must supply Uhambo and other retailers equally in the event of a shortage, and the commission must be allowed to monitor all contracts for signs of abuse.
That, initially, wasn’t enough for the DME, which, until the meeting with Davies, worried that the government, through its pipeline company Petronet, would be forced to invest in a new pipeline to Durban. Gumede says he is now persuaded there are adequate alternatives in place.
Shell and BP both believe the measures imposed by the commission are far from adequate, industry sources say, and they are rolling out their heavy legal artillery as they fight the merger at the tribunal, which holds its next public hearing in October.