Briefings on the impact of increasing fuel prices on the economy, with Minister

Meeting report

The Chairperson said the Committee would be briefed by the Department of Mineral Resources and Energy (DMRE), National Treasury (NT), the Central Energy Fund (CEF) and the Council for Scientific and Industrial Research (CSIR) on the impact of the increasing fuel prices on the economy and possible alternatives or considerations in addressing increases in fuel prices.

Mr K Mileham (DA) said the Committee had only received the presentations that morning. This, he said, went against Parliament's standing position that presentations be sent 24 hours in advance, to ensure that Members are able to adequately prepare for the briefing. He asked that the Chairperson follow up on the reasons for the late submission.

The Chairperson agreed with Mr Mileham but declined to address the matter any further.

DMRE briefing on the impact of increasing fuel prices
Mr Tseliso Maqubela, Deputy Director-General: Minerals and Petroleum Regulation, DMRE, outlined the three main causes for the high fuel prices in the country
The Russo-Ukraine War
The Organisation of Petroleum Exporting Countries’ (OPEC+) decision to manage the increases in production of crude oil in support of higher prices
OPEC+ decision to limit crude supply

The Russo-Ukraine war has disrupted the global supply of oil, particularly due to the recent ban on Russian oil by the United States (US). As Russia is one of the top three producers of oil, the US ban has led to a sharp increase in the Brent crude oil price. The increased oil price has led to an increase in fuel prices, which has affected the expendable income of citizens. To mitigate these effects, the Department has proposed several measures, some of which were:
That the country should be more energy self-reliant, through exploration for gas and oil
That a buyer be found for South African Petroleum Refineries (SAPREF), to ensure that it does not close down
Biofuels must be enabled as a matter of urgency
Enforcement of speed limits must be implemented voluntarily
Encouraging companies to allow employees to work for home
Restrictions on how many litres each motorist is allowed per visit


[See the detailed presentation slides.]

NT briefing
Mr Clinton Joel, Senior Economist: Forecasting and Modelling at NT, and Ms Aalia Cassim, Economist at NT, briefed the Committee on the effect of the Russo-Ukraine conflict on rising full prices in SA. [See the detailed presentation slides.]

Mr Joel said that NT’s preliminary assessment showed that the sharp increase in commodity prices will add support to the mining sector and a possible windfall to revenue collections. However, the rising oil price and wheat supply constraints all pose the risks of higher inflation in the country. In addition, the rise in the global oil price has increased the basic fuel price (BFP) in the country, with NT projecting that motorists will need to pay R20.28 per litre of fuel in 2022. Depending on the duration of the war and other factors, the price could rise by R3.00, placing additional pressure on household incomes.

Ms Cassim outlined some of NT and the DMRE’s short-term and medium-term interventions.

Short-term interventions
In his 2022 Budget Speech, the Minister of Finance announced no change to the Road Accident Fund (RAF) levy and the general fuel levy

In 2018, the DMRE reviewed the BFP components of the petrol price. Proposed recommendations from the review can be implemented immediately with a potential once-off 3 - 18 cents/ litre reduction in the petrol price.

Medium-term interventions
A review of all aspects of the fuel price is under consideration by the DRME and NT
The DMRE has undertaken to review the Regulatory Accounting System (RAS), which research has shown, may lead to an 85.82 cents reduction in the fuel price.

Briefing by the CSIR
Dr Mathetha Mokonyama, Head Researcher: Transport and Operations area, CSIR, and Dr Clinton Carter-Brown, Energy Centre Head, CSIR, briefed the Committee. [See the detailed presentation slides.]

Dr Carter-Brown said there is a lack of strategic fuel reserves in the country, which also has an impact on the fuel price in the country. Mining operations currently consume 2.2 billion litres of fuel per annum, whereas transportation currently consumes 24 billion litres. The CSIR recommended that the country should look to reduce the reliance on liquid fuels in transportation and move towards the electrification of transport. This would include encouraging motorists to purchase electric vehicles (EVs). It further recommended that the government provide support to local miners to decarbonise to reduce cost.

He said that the increase in diesel price has an effect on Eskom, which utilises diesel for its open-cycle gas-turbines (OCGT). For instance, in 2021 Eskom spent R15 billion on diesel (diesel price per litre was R21). To decrease its reliance on OCGT, the CSIR recommended that the DMRE fast-track its renewable energy programmes, and reduce the red tape associated with obtaining a licence to produce up to 100MW through their own generation capacity.

Dr Mokonyama said the CSIR found that South Africans are more sensitive to public transport costs than to quality and ease of access. The increase in fuel prices has the knock-on effect of also increasing transport prices. This increase usually affects household incomes, and some passengers may choose to walk to work, to save money. He argued that the electrification of the public transport system. The introduction of a capital subsidy for energy-efficient public transport vehicles will improve the transport fares for passengers.

The Chairperson opened the floor for discussion.

Discussion
Mr Mileham suggested that the country should focus on obtaining more crude oil from other major players in the market. Whilst Russia is a significant exporter of crude oil, South Africa does not import refined or unrefined crude oil from the country: in fact, SA imports 450 000 barrels of unrefined oil a day from Ghana, Norway, Saudi Arabia, Togo, Nigeria and Angola. Furthermore, SA imports 200 000 barrels of refined oil a day from the United Arab Emirates, Bahrain and Saudi Arabia.

He felt that the Department’s presentation did not address the current impact of the fuel price and how it planned to ensure that the impact on SA citizens is softened. He asked what progress has been made regarding the review of the fuel price that was announced by both the Minister of Finance and the Minister of Mineral Resources and Energy. Had there been consultation with the National Economic Development and Labour Council (NEDLAC), the fuel industry and other stakeholders on ways to mitigate the impact of the fuel increase? Additionally, he asked whether the structure of the fuel pricing model has been reviewed.

He raised his concern regarding the lack of implementation of the 2007 Moerane Commission Report recommendations, which would have addressed the country’s issue of insufficient strategic reserves.

Regarding the sale of SAPREF, he asked what the margins made by refineries in SA were, as it seemed that refining in SA is uncompetitive in comparison to the larger players in the world market. In addition, he asked whether the continued imports of unrefined crude should continue and whether the country is competitive enough in the global market to have refineries.

He asked how up-to-date the NT’s slides were, as the presentation had forecasted that the rate of inflation would lead to the petrol price increasing to R21.60 per litre for 93 octane. However, the price is currently sitting at R21.35 and if it continues to rise, it will end up at R27. He was concerned that the chart did not provide a realistic picture of what the impact will be on consumers if there are significant price increases for petrol.

On the RAF and general levy, he asked if it were possible for the levies to be suspended until the fuel prices stabilised, as suggested by civil society.

He asked what impact the country’s reliance on imported goods and products has on the pricing model, and what can be done in the short-term to deal with it. Has there been any progress in reviewing the BFP and also in placing a price cap for fuel?

He thanked the CSIR for its presentation and said it added value to the Committee’s discussions.

Referring to slide 22, he said that during the load shedding the previous week, on several occasions Eskom did not utilise any of its OCGT. He asked whether this was reflective of the diesel shortage in the country or the financial constraints faced by the entity.  

Regarding the 100 MW embedded generation threshold, he said that one of the difficulties for the private sector is that even if a company seeks to produce less than 100 MW, it still has to follow the same process that it would when applying for a licence. He asked the Minister to request the National Energy Regulator of South Africa (NERSA) to cut the red tape surrounding the application process, as per the President’s commitment in his State of the Nation Address. 

He supported the CSIR’s call to accelerate the implementation of the Renewable Independent Power Producer Programme (REIPPP).

Ms P Madokwe (EFF) said that the country was on the verge of a crisis, mainly because it relied on imports. She asked what measures have been and will be put in place to ensure that the country is cushioned from the negative economic effects caused by the War in Ukraine. She then made various recommendations. First, the country takes adequate measures and should plan in a worst-case scenario. Two, that political leadership communicates with the leading oil producers in Africa. Three, the DMRE and the NT enter into discussions on the possibility of creating a relief fund. Both departments, she said, should ensure this time that they reach the people who it is intended for.

Touching on the need for oil exploration, she said the country was divided on the debate of oil exploration. On this, she recommended that the relevant stakeholders must find one another. The conversation on oil exploration should also focus on local beneficiation, as multinational companies are currently conducting [the exploration for oil and gas]. She urged that in pursuing these projects, the government, along with the companies, should not dismiss the concerns raised by the communities.

She voiced her support for the Department’s proposal to rescue the country’s refineries. In addition, she said that in a prior meeting with the Department (April 2021), no clarity was provided on whether government should rescue the refineries or not. In the same meeting, the Department mentioned that SA should look into developing a mega-refinery: she asked what progress has been made since then. She asked what happened to Saudi Aramco’s interest in developing a refinery in Richards Bay.

She suggested that research entities in the country should be better capacitated and that they place greater importance on energy research. She asked whether the research done by entities such as the CSIR inform the Department’s policy formulations and decisions. Were there partnerships between government departments and research entities?

She asked for feedback on the DMRE’s progress on the review of the basic fuel price model. On EVs, she asked the CSIR whether the move to EVs would be feasible considering the country’s unstable generation supply.

Mr M Wolmarans (ANC) said that the Department’s negotiations with other stakeholders on how to ensure improved energy self-reliance should continue. He recommended that the fuel price model review process must be fast-tracked so that the Department can discuss how to deal with other issues, such as the levies. He urged departments to work together to deal with the increase in food and fuel prices and that they should find short, medium and long-term solutions. He requested that the Department support the CSIR’s various proposals, to ensure that, in the future, the country is well-prepared and well-informed on such issues.

Mr M Mahlaule (ANC) asked the Department why it has not considered one of CEF’s entities or CEF itself, to purchase SAPREF. Regarding RAF’s future, he asked whether the NT has discussed the impact citizens moving to EVs would have on RAF, as it relies on the collection of petrol levies. He asked how the entity would generate revenue [as no levies are collected from electric vehicles for the RAF].

Mr W Boshoff (FF+) asked what the energy use losses on the CSIR’s Sankey diagram referred to [slide 12]. He asked whether Eskom pays R15 or R20 a litre for the diesel used in the Peakers. He asked the Department if there had been an attempt to compare timelines between the hydrogen society project run by the Department of Science and innovation, with the timelines of new refineries or increased capacity for refining and exploration on the coast. Current reports indicated that owners of existing refineries are contemplating discontinuing their operations, as the margins are not high enough.

Mr S Kula (ANC) called for an end to the war in Ukraine and for all parties involved to enter into diplomatic negotiations, to avoid the dire economic consequences and loss of human life. He added that due to the economic consequences, the country has an interest in calling for an end to the war. He asked what plan the departments had to decrease the country’s dependence on the importation of goods and products. He asked what the DMRE’s progress was in finding a buyer for SAPREF. What would the cost-benefit of selling the refinery be? When will biofuels be included in the energy mix, as their inclusion will assist in alleviating the pressures faced by the citizens? The DMRE had suggested, as a cost-saving measure, that certain companies should allow for their employees to work from home. He recommended that there should be a way to regulate which companies are chosen to do so because they would not feel compelled to do so.  He agreed with the proposal to enforce road speed limits to save fuel. He added that due to the uncertainty of the war, strict measures should be taken. He asked what steps the DMRE was taking to limit the significant consumption of diesel and petrol by certain companies. He argued that not instituting a cap on oil consumption by companies would be unfair towards citizens, who will be expected to limit their consumption.

Dr Carter-Brown said that [in the view of the CSIR] the DMRE should provide green energy alternatives for the companies to limit oil consumption, rather than a restriction, which would have serious negative economic effects for the country. Bringing on greener solutions speedily would require the cutting of red tape.

The losses in the Sankey diagram [on slide 12] referred to inherent energy lost through the conversion process of coal or gas into liquid. The direct electrification of transport systems is attractive because less energy is lost from the conversion process. 

He said that the question on Eskom’s use of diesel and diesel shortages should be referred to the entity. He explained that there are two different types of diesel-fired Peakers, the Eskom-owned Peakers and the DMRE-procured Independent Power Producer (IPP) Peakers; with the fuel being a pass-through cost. The IPP Peakers purchase diesel and charge Eskom the energy costs.

He welcomed the opportunity for the CSIR to engage further with the Committee, government departments and other relevant stakeholders, on finding solutions faced in the country.

He indicated that CSIR’s duty is not to pronounce on plans and policies, rather, it is to provide input through research and development, as well as data.

A significant proportion of the transport system can be electrified by increasing net electricity consumption by only 4 to 5% - so the impact of EVs on the country’s power system [can be accommodated]. Through the acceleration of the bid window rounds, the Department would be able to restore the balance and support the transition to EVs. EVs are more expensive to purchase but the running costs are a fifth of diesel, which translates to longer term savings.

Dr Mokonyama said that during discussions with various municipalities, the CSIR was informed that the lift-club regulations are inconvenient. The CSIR called for the digitisation of this space, to ensure that it is easier to find a lift club and to make it safer for travellers. This could also reduce costs for passengers.

On the RAF fuel levy, he explained that the CSIR has a programme that looks into transport safety. The programme models road accident risks, so that RAF and the Department of Transport can find ways to create a safe environment for drivers. The public transport subsidy policy proposes that 5% of GDP be dedicated to financing public transport. This, it is believed, will ensure the safety of passengers on the road.

He said more action should be taken to assist RAF with its poor financial situation, as it is projected in the next year to have deficits amounting to R500 billion, which is more than Eskom. If nothing is done, the entity’s revenue will only be dedicated to paying out claims. He suggested two solutions to ease the deficits, one, for the government to regulate the consumption of alcohol, as it did during the Lockdown. This policy reduced the number of road fatalities. Two, he recommended that the government look into how to package insurance so that it is less dependent on state funding.

On the electrification of public transport vehicles, he said the CSIR is looking into recapitalisation of the taxi industry, by ensuring that the finance provided does not only assist with the acquisition of the vehicles but also addresses other issues faced by owners. 

Ms Cassim said that the BFP was not reflective of SA transitioning to a net importer of refined fuel. It was rather a blunt instrument. The idea behind its introduction was to protect manufacturers so that they could invest in refining capacity; however, they have not done this to the extent expected. She cautioned against rescuing the refineries, as she felt that the country might not be able to reach the economies of scale [required for cost-effectiveness]. The refineries face several challenges, such as the fires when production is stopped and the public violence towards infrastructure. She suggested that more consideration should be given to the cost of investing in refinery capacity rather than looking at strategic stock policies.

She said that NT has had a number of discussions with the DMRE on the RAS methodology, and they are in agreement on what needs to be done. Both departments are yet to discuss the timelines for the review.

Ms Dumebi Ubogu, Director: Transport, Public Finance, NT, said that the suspension of the RAF fuel levy would require a change in the RAF Act 56 of 1996, which states that the fund will be financed using a road accident fuel levy. This levy is paid directly to the National Revenue Fund. One issue in suspending the fuel levy would be how to replace the loss of the R44 billion that RAF currently receives. With the increase in the number of EVs, fuel levies would decrease, thus affecting RAF's revenue. With this in mind, she believes that it is important to push for the finalisation of the Bill for Road Accidents Benefits Scheme, which moves RAF from acting as an insurer to a defined benefits scheme. Even with this change, the RAF fuel levy will still be used to finance the entity. Through the Bill, NT will be able to model how many accidents will happen on the road and what will be paid out. 

Mr Joel, referring to NT's petrol price forecasting, said that the oil and fuel price data incorporates the year-to-date data, at the time of the analysis. To conduct the forecasting, NT also made use of the Brent crude oil futures. This information was sourced as of 9 March 2022 and it showed that the oil price is likely to peak in March/April and ease throughout the rest of 2022.

Based on the oil price futures and the assumptions utilised in the scenarios, NT does not assume that oil prices will remain at the current levels for an extended period of time. However, it does emphasise that there are uncertainties surrounding the conflict and the risk possible escalations may have on the price of fuel. Additionally, the NT did project the petrol price estimates as full year, rather than current point. Any developments surrounding the rand exchange rate may provide an offsetting impact as a result of elevated commodity prices.

Mr Maqubela said that while the country does not currently import finished products from Russia, areas such as the European Union do. The global market has been disrupted and this has a significant impact on an emerging economy such as SA.

Regarding rescuing the refineries, he said that without refinery capacity, the country would have to import paraffin, jet fuel and lubricants. He believed that Glencore’s decision to restart its refinery and invest in fixing the infrastructure was a clear indication that there are monetary returns to be made for investors. Previously, India invested in export refineries to meet the demand of Indian consumption, however, as the demand increases, that capacity will be redirected internally to service the country’s citizens. This, he believes, will leave the globe in a precarious situation.

On the proposed relief fund, he indicated that as the world is in the midst of a global economic emergency, food production must be protected, particularly as the price of staple foods will increase. In addition, the taxi and bus industries, which carry the majority of the working population, will need to be looked at. 

When the Department completed its BFP review, it felt disappointed by the outcomes, especially as it was proposed that only 3 cents would be taken off the fuel price. As such, it decided to restart the review to add other components and establish if there could be more savings.

He said that Saudi Aramco had pulled out from its proposed investment into building an oil refinery in Richards Bay.

On biofuels, he said that the industry requires a subsidy to operationalise – similar to the one used to enable renewable energy in the country. The Department believes that a feed-in scheme for the biofuels industry will ensure that it is able to function on its own.

Mr Gwede Mantashe, Minister of Mineral Resources and Energy, said that his discussions with the Minister of Finance were ongoing and were looking into several issues.

Proposals on simply purchasing oil from other countries were not well founded. They ignored how the oil market works, especially as OPEC operates as a cartel.

Neither NERSA nor the Department have red tape which is making it difficult for companies to begin work on power projects within the 100MW energy generation threshold. Any purchase of more than 10 MW requires compliance with the National Environment Management Act (NEMA). He questioned why the DMRE and NERSA have been blamed for this issue when this [environmental law compliance] responsibility lies with the Department of Forestry, Fisheries and the Environment. The DMRE has raised the issue of red tape with the President and has asked him to ensure that the other departments comply with the two month process announced last year.

On accelerating the REIPPP, he said that exploration for oil is important in ensuring energy security for the country. He believed that if the companies were to move to neighbouring countries, the country would not obtain economic benefits.

He disagreed with NT’s assertion that it would be better for the country to import finished fuel products, instead of rescuing its refineries. The NT was essentially stating that the country must deindustrialise. The maintenance and expansion of refineries is not a luxury but rather part of the country’s efforts to industrialise. Having refineries in the country will remain important until oil deposits are found.

He said it would be inappropriate for the DMRE to provide an update on specific projects such as Saudi Aramco, [in a meeting on the fuel price]. He suggested that if it requires an update, the Committee should schedule another meeting with the Department.

He extended an invitation to the CSIR, to assist the Department on how it should implement the just energy transition. It would be expected to assist on questions such as how the country should scale down its coal-powered stations. Currently, the Department had requested Transnet to find more ways to facilitate greater assistance for coal miners [with freight availability], to ensure that they can capitalise on the high coal prices.

There were two ways to limit the country’s exposure to rising fuel costs: One, to look into exploration of oil and gas. Two, to maintain and increase refining capacity.

On limiting the consumption of diesel by companies, he said there is only one company that reduces its use of diesel when prices increase. However, he would not name the company.

The Chairperson said that the Department had created the impression that the war was the reason for this crisis. Whilst it might have intensified the matter, it was not the cause.  As the issue cuts across several departments, he proposed that the Committee source more information on the matter, and then compile a report on its stance. 

Ms V Malinga (ANC) agreed with the proposal. Ms Madokwe seconded the proposal.

The Chairperson thanked the Minister and his team for their responses. He requested that all stakeholders involved work together to find solutions on this matter, as it has serious implications for SA citizens.

Adoption of committee minutes
Mr T Langa (EFF) said that the minutes of the 8 March meeting had not captured the EFF’s reasons for abstaining from the Committee’s vote to not continue with its investigation into the Risk Mitigation Independent Power Producer Programme (RMIPPP) procurement process. The party had abstained from the vote due to connectivity challenges, which prevented it from hearing the presentation and participating in the subsequent discussions.

The Chairperson said that a party does not need to elaborate on why it abstained during a vote. He requested a mover for the adoption of the minutes.

Ms Malinga moved for the adoption of the minutes. Mr Wolmarans seconded the mover to adopt the minutes.

The Chairperson asked if there were any matters arising.

Mr Mileham mentioned that the Committee’s decision to rescind its probe into the RMIPPP was based on a factually incorrect legal opinion provided by the Parliamentary Legal Advisors (PLA), which stated that DNG Energy had not appealed the judgement. Following the meeting with the PLAs, he circulated the appeal document to the Committee. He asked if the Committee had based its decision on incorrect legal advice and if so, what action should be taken.

The Chairperson said that it was not correct to state that even with the appeal document, the Committee would not have taken the same decision. Further, it was agreed in a prior meeting that the Committee would rely on the legal opinion of the PLA when making its decision on whether to continue with the investigation or not.

Ms Malinga said there was no evidence that DNG lodged its appeal by the court’s deadline of 18 February 2022. The documents shared with the Committee did not have a stamp certifying the date at which the appeal was submitted.

Mr Mahlaule said it was incorrect to state that the Committee took its decision based on whether DNG had filed an appeal or not. Rather, Members agreed that the court judgement indicated that the [intended] Committee investigation would not arrive at a different conclusion from the court.

The Chairperson said that if the appeal is in favour of the appellant, the Committee would then have to look into the implications, as raised by the court in its judgement. However, until such time, the Committee’s decision would remain.

Regarding the judgement on the Mining Charter, he said that the Committee will have to prepare and table a report on its views regarding the matter. The Committee will also have to do so with the fuel crisis.

The meeting was adjourned.