COSATU Parliamentary Submission on the

Liquid Fuels Aspects of the Energy White Paper

Presented to the Portfolio Committee on Mineral and Energy Affairs,
24 July 1998

 

Contents

  1. Introduction

  2. Broad Vision of the White Paper

    1. Policy Challenges

    2. The Restructuring Process

    3. Phasing Restructuring

    4. Deregulation of the Petroleum Industry

  3. Response to Specific Proposals in the White Paper

    1. Central Energy Fund (CEF)

    2. Soekor

    3. Procurement of Crude Oil

    4. Crude oil refining

    5. Price control

    6. Ratplan

    7. Control of import & exports of crude oil & refined products

    8. Inland transportation of oil & liquid fuel products

    9. Synfuels and Mossgas

  4. Additional Policy Proposals

    1. National Oil Company

    2. Process - Energy Policy Council

  5. Conclusion



  1. Introduction

    2. COSATU would like to thank the Portfolio Committee for the opportunity to make this submission on the liquid fuels aspects of the Draft White Paper on Energy Policy. This submission draws primarily from the inputs of COSATU’s affiliates in the liquid fuels sector, in particular the Chemical Workers Industrial Union (CWIU) and the National Union of Metalworkers in South Africa (NUMSA).

    This submission is divided into 3 parts:

    A consolidated COSATU response to the Draft White Paper on Energy Policy will also be distributed to the Committee today.

  2. Broad Vision of the White Paper

    1. Policy Challenges

      2. The policy challenges identified in the Liquid Fuels section of the Energy White Paper and the proposal that there should be minimal governmental intervention and regulation are problematic. Five key issues must be taken into account when commenting on these challenges:

      1. The above challenges, as defined, do not reflect a progressive and developmental approach to the industry. Instead, they focus on a competitive industry, an industry which will sell fuel at a 'fair' price, which will encourage investment, and where the interests of participants and consumers are balanced. This inevitably results in a weighting in favour of capital.

        2. It is important to ensure a supply of liquid fuels that will be affordable to and reach the majority of the South African population. Ensuring people have access to affordable energy should be the prime focus - not the pursuit of profits and investments.

      2. Government intervention is needed if a progressive and developmental approach is to be implemented and if need's of workers and the working class in both rural and urban areas are to be met. Minimal government intervention and regulation will leave capital to pursue profits - we can be sure that capital will not willingly and adequately embark on programmes to meet government's social and economic goals. Strong government is needed to drive development and retain and create sustainable employment.

      3. Balancing the interests of industry participants and consumers translates into keeping the price of products low (for the consumer) and keeping profits high (for the bosses). The impact that it will have on labour – both in terms of conditions of employment and job loss, is not highlighted. Without a recognition that the industry is an important employer of labour, and contributes both through supplying product and employing people, the white paper allows the fate of labour to be subsumed under the need for investment, competitive prices etc.

        4. A challenge is thus to ensure that the industry not only retains labour, but plays a role in job creation in the economy.

      4. It is also unclear what the concepts of 'fair and equitable' prices mean. No mention is made of ensuring that prices should be the same in urban and rural areas to prevent an urban bias in pricing. Through stressing competition etc, industry may not want to invest in or supply to rural areas since that may be less profitable. Alternatively, industry may raise prices of liquid fuels in rural areas.

      5. The premise that a withdrawal of government and a reliance on competitive pressures to bring down the price of liquid fuels, is flawed.

        6. Research has shown that competition in the industry does not lower prices significantly. In South Africa, we do not yet know how price sensitive the market is. We don't know the effect that lowering prices will have - other than that of retrenchment of workers. However, indications are that the price of petrol will rise initially - when and how much they will drop again is totally unknown. What is clear however, is that prices will be set by capitalists in pursuit only of increased profits. Some estimate that deregulation may in the longer term result in only half a cent decrease in price per litre. This cost saving (for the economy as a whole) will be offset by massive UIF claims of thousands of forecourt workers who lose their jobs.

    2. The Restructuring Process

      3. The White Paper states that there is "general consensus that current circumstances necessitate the amendment or withdrawal of regulatory mechanisms within an appropriate time frame".

      Government's only mention of labour is that there must be "adequate arrangements to address any labour-related consequences of restructuring".

      COSATU cannot agree with the assumptions behind the restructuring process and the restructuring process as outlined in the White Paper:

      • COSATU has never agreed to deregulation - for the White Paper to imply that there is a "general consensus" on the need to deregulate is a distortion of all the inputs given by COSATU and its affiliates on the issue of deregulation.

      • COSATU is also not satisfied with the scant attention paid to addressing labour-related consequences of restructuring.

    3. Phasing Restructuring

      4. COSATU has a number of serious concerns regarding government’s phased approach to restructuring. The following are concerns not discussed in other parts of COSATU's submission:

      1. No bodies are being set up to monitor change e.g. a body to monitor and prevent transfer pricing.

      2. The state cannot successfully form a national oil company if it is selling off its assets in the industry, since this would leave the state with an empty shell with which to work. If CEF is to be restructured it must be guided by a clear and detailed vision from the Minister.

      3. The government has not committed itself seriously looking at the negative effects restructuring will have on labour - both in terms of job loss and working conditions and health and safety

      4. The state seems to be abandoning synfuels in favour of negotiations between the synfuel producers and industry. Massive state investment in synfuels needs to be protected.

      5. The phasing out of the ratplan will result in massive job loss, entrench current ownership of prime sites, make it harder to break into the market, encourage the development of a high number of service stations at lower levels of profitability (and hence lower wages & benefits), and will not encourage investment in rural areas.

      6. The government is giving itself no role regarding monitoring of service stations' standards, health and safety etc.

    4. Deregulation of the Petroleum Industry

      5. Government's view is that restructuring is inevitable and there are no fundamental reason why the industry should not be deregulated, even though there be a negative effective on labour and small business in the short and medium terms. Government is optimistic that opportunities for sustainable employment should be created and maintained and new entrants should be nurtured.

      Much of COSATU's criticism of the above statements have already been made. Two additional points need to be noted here:

      • Government does not say how sustainable employment will be created and maintained - the plan as it stands threatens thousands of jobs.

      • Government, in rhetoric, focuses on nurturing new business. However, the plight of labour is hardly regarded as important. The paper as it stands, will benefit the established multinationals, not new entrants.

  3. Response to Specific Proposals in the White Paper

    1. Central Energy Fund (CEF)

      2. The White Paper states that the restructuring of CEF will take place in terms of the NFA.

      COSATU is very disappointed that more is not said on the issue. It is not enough to say that restructuring will take place on the basis of the NFA and not comment on the definite options that the government is taking in the White Paper. From the contents of the White Paper it is clear that the notion of the restructuring that the government has is that of limiting and direct economic role played by state utilities. COSATU's view is that:

      • The Minister, in the White paper, must give greater detail on the direction in which CEF is to be restructured - only then can the restructuring of CEF be negotiated under the NFA.

      • The restructuring of the CEF group of companies must be located in the formation of a newly formed integrated National Oil Company.

      • Until details are provided regarding government's vision for CEF and a newly formed integrated National Oil Company are provided, the government should not continue to try and restructure its state assets. Selling off state assets and retrenching workers now will leave the state with only an empty shell to try and form a National Oil Company

    2. Soekor

      3. The White Paper states that the appropriate capacity to perform regulatory functions in respect of gas & oil exploration will be maintained.

      COSATU believes that Soekor's role must not be limited to licensing and the maintenance of a regulatory framework. Soekor should, as part of a newly formed integrated National Oil Company, be involved in limited exploration and production activities. Soekor should be an important arm of the state-owned National Oil Company, in terms of exploration and production. All activities of Soekor must be conducted in a transparent manner.

    3. Procurement of Crude Oil

      • Procurement

        • The White Paper states that crude oil refiners can continue to purchase their own crude oil and that as long as SFF can buy & sell, it can do so with the oil industry on a willing seller - willing buyer basis.

        COSATU's position is that:

        • In a post embargo environment crude procurement can be done in a more transparent manner and with reduced dependence on SFF and greater independence for crude refiners.

        • An official government body (such as the Reserve Bank) should monitor crude transactions and conduct random detailed investigations to prevent transfer pricing.

        • SFF, as part of the integrated National Oil Company, could still procure crude to manage its stockpiles and trade.

        • State to state barter deals should be transparent.

      • SFF

        • The White Paper states that government will determine the countries strategic crude oil requirements & ensure that these are maintained at a 3 months total consumption level (taking into account synfuel production).

        COSATU’s position is that:

        1. Crude stockpiles are important to ensure energy security and to save foreign exchange when the world crude price is high.

        2. The SFF should retain responsibility for managing and retaining crude stockpiles and should thus retain a capacity to purchase crude oil for this purpose. This should be done as part of the activities of an integrated National Oil Company.

        3. Decisions on how much stock to keep must be made in consultative manner.

        4. The storage tanks that are not required if the country decreases its reserves could be leased to producer countries or commodity traders to generate a return.

    4. Crude oil refining

      5. The White Paper states that government will not extend regulatory control over the crude oil refining industry.

      COSATU believes the government has a vital role to play regarding the regulation of the crude oil refining industry and that a form of re-regulation needs to be in place. This is vital if investment in local refineries is to be afforded some protection and jobs are to be created.

    5. Price control

      6. Government's position in the White Paper is that market forces should determine prices and until this happens import parity pricing will be retained with improvements if necessary

      COSATU supports a reviewing of the pricing mechanism within the liquid fuels industry. Specifically, a review of import parity mechanisms appropriate to the South African industry is required including shipping factors; use of Singapore posted prices, ratio of spot to posted prices etc.

      However we feel that the proposal to introduce market forces in the pricing of products is arbitrary and dangerous. Such a move, taken without clear objective besides the blind commitment to the market can:

      • lead to job losses

      • the emergence of monopolies

      • the entrenchment of dominance of companies already dominant in the market

      • hinder entry of new entrants into the industry

      • lead to an immediate increase in the price of petrol

      • lead to uncertainty in an unstable price of petrol which is subject to market forces and capitalists' drive to increase profits.

      It is our firm belief that any review of the pricing mechanism must take place with a clear understanding of what the implications are for:

      • restructuring the industry

      • dealing with existing ownership patterns within the industry

      • entry of new players into the industry

      • existing jobs

      • the petrol price.

    6. Ratplan

      7. The White Paper states that while there will be a temporary moratorium on self-service &vertical integration, the Ratplan will be amended and phased out. The labour implications of marketing related restructuring will be addressed with the DOL

      COSATU strongly believes that the Ratplan and the ban on self-service must remain in place. The government should regulate to ensure a greater degree of compulsion to be bound by the Ratplan.

      Should the Ratplan be phased out the consequences for labour, consumers and the economy will be negative, as:

      • Up to 80 000 jobs could be lost with the introduction of self-service;

      • New entrants, particularly new black entrants, will have little chance of successfully breaking into the market;

      • The existing market power of established petroleum companies will be entrenched and strengthened, as they already have access to prime sites, and the economic resources to buy further prime sites;

      • Synfuel producers (such as Mossgas), through a new integrated National Oil Company, will be severely disadvantaged because of the dominance of existing players who have access to prime sites, capital and will not sell sites to the National Oil Company to ensure their own market share is not reduced;

    7. Control of import & exports of crude oil & refined products

      8. The White Paper supports the free importation and exportation of crude oil and refined product.

      COSATU's view is that:

      • While South Africa is a signatory to the World Trade Organisation, no bindings have been agreed yet on oil products. Our commitments on trading on oil products must be informed by the objectives of restructuring the industry in a progressive manner - as specified in our input.

      • Free importation should be allowed in the long term, as long as local demand is first met by local refineries and the synfuel producers. However, given the important role of fuel within society and on the environment, government must retain some control over the importation of crude oil and refined product by ensuring that fuel standards and specifications must be adhered to.

    8. Inland transportation of oil & liquid fuel products

      9. The White Paper states that industry will be allowed to negotiate commercial transport rates with carriers of their preference.

      COSATU's position is that:

      • A review of the zonal transport build up factors needs to be conducted by an independent third party.

      • There is a need to investigate ways of subsidising oil companies to supply remote areas to prevent an anti-rural price bias.

      • Given the critical role played by Transnet’s subsidiary – Petronet, of inland transportation of oil and liquid fuel product, this entity must remain in public hands. Petronet is important building block in the establishment of a National Oil Company.

      • There should be no contracting out of transport since this results in job loss, unsafe working conditions, and economic hardship for workers.

    9. Synfuels and Mossgas

      10. The White Paper states that subsidies must be phased out by 1999 and synfuels will be uplifted until synfuel producers have viable access to the retail sector. Interaction b/n crude oil industry & synfuel industry should be on a negotiated basis;

      The White Paper proposes that Mossgas will continue in its present role as a synfuel producer and satellite gas fields will be developed to enhance the life-expectancy of Mossgas. However, government will not increase its role in the manufacture or marketing of synfuels.

      Cosatu welcomes the government’s acknowledgement of the economic contribution of the synthetic fuels industry. However we do not support the proposal in the White Paper that synfuel subsidies are phased out by 1999. Instead we would like the see the Cabinet decision of December 1995 being upheld - that the subsidy will be reviewed in the year 2000.

      A commission should be established to determine an appropriate level of tariff protection for both synfuels operations, taking transfer pricing into account, and the role the producer may play as part of a National Oil Company. While we remain opposed to the burden of protecting the synfuels industry being borne by consumers, the phasing out subsidies should be renegotiated in the Energy Policy Council under the auspices of Nedlac (see below).

      In order to advance the development of synfuel operations, government should support Mossgas' attempts to find more feedstock and develop gas fields. Furthermore, synfuels – as an integrated component of the National Oil Company - should have access to the retail market.

      Regarding the debt owed by SASOL to the government, government should explore the possibility of transforming the debt owed by SASOL to the state into equities i.e. state ownership of shares in SASOL.

  4. Additional Policy Proposals

    1. National Oil Company

      2. Minister Maduna had, in a previous budget speech, committed himself to developing a national oil company. COSATU affiliates have demanded the establishment of a national oil company. However, the white paper makes little mention of the establishment of a national oil company. Where the White Paper has put forward that the establishment of a state-owned oil company should be explored as an option, almost all the proposals in the document fly against this option.

      Government seems bent on deregulating the liquids fuels industry in such a manner that it would be difficult if not impossible to explore the option of a state-owned oil company. Government seems committed to restructuring its state assets in the industry - thus leaving it with an 'empty shell' with which to form a state-owned oil company. The White Paper seems to conclude that government's role should not stretch beyond provision of a regulatory framework within which the liquids fuels industry can prosper.

      It is our firm belief that a strong player in the form of a state-owned oil company must be the vehicle for restructuring. The national oil company can be used to deal with the dominance of multi-nationals within the industry, and to restructure the industry in a developmental and progressive manner that will serve the interests of the working class,. We also feel that having a state-owned company accountable to the public is the best form of empowerment.

      The existence of an integrated national oil company also hold economic benefits for the country. Its size and involvement in exploration, production and distribution of oil and petroleum products would ensure it benefits from economies of scale. Furthermore, large vertically integrated oil companies are able to cross subsidise their divisions giving them a high degree of overall flexibility. Petrochemical, petroleum and synfuel production are inherently risking undertakings in which to be involved. An integrated national oil company would reduce risk by bringing these different operations together. In the event of a depreciation of the rand, for example, the squeeze of the national oil company's oil refining margins might be recouped from the enhanced competitive position of synfuel production.

      In line with COSATU's policy and demands, we would like the White Paper to give a greater commitment to establishing a national oil company, as well as more details on how this should be done. Once more details have been provided, negotiations around the formation of a national oil company can start in earnest. It is very important, that until these details are provided, the government does not continue to try and restructure its state assets since selling off state assets and retrenching workers now will leave the state with only an empty shell to try and form a national oil company.

    2. Process - Energy Policy Council

      3. COSATU's position is that an Energy Policy Council must be established under the auspices of Nedlac. One sub-sector of the Energy Policy Council should be liquid fuels. In these structures:

      • regulation and restructuring in the industry will be monitored

      • information will be shared

      • all changes in policy/ regulation for the sector will be negotiated.

  5. Conclusion

    6. COSATU welcomes this opportunity to address the Minerals and Energy Portfolio Committee on important policy questions facing the liquid fuels industry.

    We believe that further discussions between ourselves and members of the Committee on matters raised in this submission would be valuable, particularly as we would urge the Committee, in its report on these public hearings, to propose amendments to the liquid fuels aspects of the Draft White Paper in line with the submissions which we have made today.



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