Basic Fuel Pricing Formula: briefing; adoption of Committee Reports

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
31 May 2006
BASIC FUEL PRICING FORMULA: BRIEFING; ADOPTION OF COMMITTEE REPORTS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management
Presentation to Parliamentary Portfolio Committee on Basic Fuels Price

SUMMARY
The Committee adopted its report on the 2006/07 budget of the Department of Minerals and Energy. It also adopted the Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management, although expressing concerns about the storage of nuclear waste at Koeberg Nuclear Power Station. The Department also briefed the Committee on the formula used to calculate the Basic Fuel Price. Discussion ensued over the high prices of fuel and the reasons for it. Questions were also raised about the big difference between the basic fuel price and the end price at the pump. Due to the fact that the information was of a very technical nature it was agreed that a workshop would be a better forum to discuss the intricacies of fuel pricing.

MINUTES
Committee Report
The Committee considered recommendations to be included in the Committee Report on the budget of the Department of Minerals and Energy (DME). The issue of how the National Treasury allocated funding to the Department was addressed as funding constraints hampered the electrification process. Greater consultation with stakeholders was also identified as an issue that the Committee needed to improve on.

The report was adopted unanimously.

Joint Convention on the Safety of Spent Fuel Management and the Safety of Radioactive Waste Management: Department presentation
Mr T Maqubela (Chief Director- Nuclear), Dr S De Waal (Director- Nuclear Safety) and Ms D Kgomo (Deputy-Director- Nuclear Safety) presented the Joint Convention on the Safety of Spent Fuel Management and the Safety of Radioactive Waste Management to the Committee. Mr Maqubela noted that the convention was formed under the auspices of the International Atomic Energy Agency (IAEA) and that it was of the utmost importance that SA acceded to it. An explanation of what radioactive waste entailed and the current status of its management was given. The Committee was also given an outline of the legislative framework within which the directorate operated. Specifics on the convention and its objectives as well as the obligations of its contracting parties were elaborated on. Mr Maqubela concluded the presentation by emphasising the benefits of acceding to the convention. SA’s interaction with other contracting parties on spent fuel and radioactive waste management was regarded as a definite advantage. The international community would also have assurances that the safe management of radioactive waste and adherence to international norms and standards was a priority in SA.

Discussion
Mr G Morgan (DA) noted that contracting parties to the convention reviewed each other’s reports. Having said this he asked whether shortfalls in SA’s management of spent fuels and radioactive waste had been identified by other countries.

Mr Maqubela explained that SA was not as yet a contracting party to the convention and therefore no reports had been reviewed. He felt that any report submitted by SA would have been favorably received.

Ms N Mathibela (ANC) asked whether any NGOs were part of the SA contingent represented at the convention.

Dr De Waal stated that SA had not participated in past meetings due to the fact that it had not as yet acceded to the convention. The Department would consider the possibility of SA NGOs participating in future meetings.

Mr J Combrinck (ANC) was concerned that Koeberg was storing waste that had accumulated over a period of forty years. He asked how the waste was going to be disposed of and whether building a smelter was being considered.

Dr De Waal stated that the spent fuel pools at Koeberg had been redesigned and that it had a forty-year storage capacity. He added that waste could also be placed in dry storage once it had been pooled for many years. Dr De Waal explained that the Nuclear Energy Corporation of SA (NECSA) was considering building a smelter. The smelter would however be for scrap metal and not for high-level waste.

Prof I Mohamed (ANC) was concerned about the storage of high-level waste. He asked whether the convention made any suggestions as to where it should be stored. He pointed out that Koeberg was the only high-level waste storage facility in the country. It was felt that Koeberg was unsafe due to it having open storage ponds. Prof Mohamed said that SA lacked deep level cavities for the storage of high-level waste. The IAEA suggested the use of deep level cavities for the storage of high-level waste. He asked whether the convention had provisions that allowed for deep level sites to be used.

Mr Maqubela agreed that the issue of high-level waste was an important one. He said that policy approved by Cabinet allowed for the submission of plans by Eskom, Koeberg and NECSA on how to manage radioactive waste. It was stated that high-level waste could either be disposed of or it could be reprocessed. Many countries chose either option. Mr Maqubela said that the disposal of radioactive waste by means of deep geological burying was probably the most viable option for SA. The point was made that the convention did not prescribe the manner in which a contracting party should manage its radioactive waste.

Mr Morgan asked whether there was concern about skills shortages. He asked what the level of vacancies in the directorate was at present and for specifics on plans to acquire the required skills. He also asked whether SA was even considering the option of reprocessing spent fuel. He noted that France was the world leader on reprocessing. Finally, he asked what SA’s position was on the importation or exportation of spent fuel.

Mr Maqubela said that what was concerning was the transitional phase from academic qualification to actually being competent to do the job. It was a problem that the directorate was grappling with. He stated that at any given moment in time 60 students from universities were earmarked for possible placement within the directorate. At present seven interns were completing internships with the Department. A further concern was the ever-increasing numbers of engineers and managers from the sector that was being poached by the rest of the world. The issue was one of remuneration. He stated that even the USA and Germany were grappling with skills issues.

Mr Maqubela said that the reprocessing of spent fuel should be an option as uranium was a finite resource. Another factor to consider was that the price of uranium was always on the increase. He pointed out that Koeberg was sitting on a valuable re-usable resource. The sad reality was that SA’s reprocessing capacity was very small. It was made abundantly clear that SA allowed no imports or exports of spent fuel. The policy did however make provision for NECSA to stabilise radioactive waste abroad.

Mr E Lucas (IFP) noted that extending the fuel racks at Koeberg was not a solution. It was only a postponement of an inevitable problem. He emphasised the need to better educate the public on the problems that existed as nuclear energy was seemingly part of the solution to SA’s energy crisis.

Mr Maqubela conceded that the Department could do more to educate the public. He did however mention that a booklet would be published in all the official languages to try to better educate the public.

Mr G Mosala (ANC) asked, regarding capacity building, whether SA was in line with the convention.

Mr Maqubela said that a quality assurance programme was part of the regulatory framework of the National Nuclear Regulator (NNR). He stated that radioactive waste management was one of the regulations of the NNR. This was in fact a stipulation of the convention.

Prof Mohamed felt that deep level storage of high-level waste was the best option. He asked whether a request had been made to the Council for Geosciences (CGS) to consider the possibility of deep level storage.

Mr Maqubela said that CGS was considering the option and had already engaged in preliminary work. Having a policy in place could only assist in their work. He noted that political will was what was needed in order to deal with the issue of spent fuel. Finland was apparently the world leader in deep level storage of spent fuel waste.

Mr C Molefe (ANC) felt that much more needed to be done to educate the public. He asked what protection beyond borders meant.

Mr Maqubela noted that workshops had been held to engage the public and civil society on the policy. Comments had been received and responses were provided. He explained that protection beyond borders prevented countries from building waste depositories on its borders. The idea was to protect neighboring states.

Mr Morgan asked about the possibility of re-employing persons that had worked for the directorate under the old regime. He asked whether these individuals were regarded as undesirable. He also asked about the possibility of building a new nuclear power plant as was alluded to by the Minister of Public Enterprises.

Mr Maqubela reacted that the Department would welcome previously employed persons to once again work in the directorate. He however said that the challenge remained that these individuals had already been employed abroad. The possibility of a new nuclear power plant did exist but it could only be completed by 2015.

Ms Mathibela asked where persons would be evacuated to in the event of a catastrophe occurring at Koeberg.

Dr De Waal said that the risk of an evacuation at Koeberg was minimal. He stated that emergency procedures and processes were set out in the NNR regulations and the Disaster Management Act. The latter made provision for mass care centers to where persons could be evacuated.

The Committee unanimously adopted the convention.

Department briefing on Basic Fuel Price

The Department briefed the Committee on the Basic Fuel Price (BFP). The contingent comprised of Mr N Gumede (Chief Director- Hydrocarbons), Mr M Mkhize (Director-Petroleum and Gas Operations), Mr H Bark (Deputy Director- Pricing and Statistics) and Mr S Malatji (Energy Officer).

The briefing was of a very technical nature and comprised mainly of graphs, tables and maps. The initial part of the briefing revolved around crude oil; its pricing trends, world reserves, resources vs production rate and its supply routes. Mr Gumede made a point of mentioning that global oil challenges existed. Amongst those mentioned were the strength of global oil demand growth, lack of confidence in long-term oil prices and that the oil industry had to add 18 million barrels of oil per day to new production by 2020. The Committee was also given a breakdown of the Department’s policy position. Some of the issues highlighted were the possibility of deregulating the industry, a pricing system that would be the same in rural and urban areas and lastly Black Economic Empowerment (BEE) at all industry levels including black domestic ownership.

Mr Gumede emphasised that regulating the industry was a continuous balancing act between consumer prices and input costs, social issues including empowerment and lastly industry survival and security of supply. It was noted that the issues in most instances tended to be conflicting. Regulation of the industry was premised on three main regulatory pillars: retail price maintenance, licensing and import and export control. Mr Gumede noted that the BFP was a deemed import parity system based on calculations. He said that the possible future scenario for SA could be to move to a true import parity approach.

For greater detail on actual calculations please refer to the attached document.

Discussion
Ms B Tinto (ANC) asked why most garages in SA did not stock 95-octane petrol.

Mr Gumede said that 95 octane was mainly provided to coastal areas whereas 93 octane was promoted inland. He said that the availability of 95 octane depended on the ability of refineries to produce it. Mr Gumede said that 95 octane was allowed inland and that it was a policy issue that had to be reviewed.

Ms Mathibela asked why petrol prices were higher in rural areas than in urban areas.

Mr Gumede said that petrol cost more in rural than in urban areas. It was called a zone differential and it was based on the primary mode of transport cost.

Mr Lucas asked whether SA produced or imported 95-octane petrol. He also asked why the pump price was so high. It was felt that there were too many added costs.

Mr Gumede noted that 95 octane was produced at refineries. He said that a breakdown of the pump price would be given to the Committee in due course. The huge demand for crude oil in the USA and China were given as part of the reason why crude oil prices were so high. Mr Gumede said that the issue of increasing or decreasing taxes on petrol in SA was fraught with conflicting interests.

Mr Mosala asked what was being done to encourage off-shore oil exploration in SA. He also asked why petrol was cheaper in Botswana than in SA.

Mr Gumede explained that SA’s coastline did not yield much oil, but that it was rich in natural gas. It was for this very reason that the Department was driving for a move towards gas as an energy source.

Prof Mohamed asked whether self-service petrol pumps were still being considered.

Mr Gumede stated that in 2003 legislation had been passed to prevent the use of self-service pumps. If it had been put in use ninety eight thousand jobs would have been lost.

Mr S Louw (ANC) felt that many service stations were closing down because refining costs were too high. If refining costs were lower garage owners would be able to see greater returns. He asked what the vulnerable sectors that received tariff protection were. It was also asked what could be done to encourage BEE. Mr Louw felt that the pricing issue was far too complex and that the Committee needed to attend a workshop on it.

Mr Gumede conceded that problems existed in setting internal margins If SA imported petrol a saving of perhaps 10c per litre could be achieved but importing brought with it a whole new set of problems. He noted that the White Paper made provision for tariff protection for vulnerable sectors in the event that it was needed.

Mr W Spies (FFP) asked why diesel was regulated at wholesale level and petrol at retail. If petrol was regulated at wholesale it could lead to greater competition on petrol sales. At present many service stations were competing for diesel sales as they tried to undercut each other. He further asked why the coastal price of petrol per litre was 20c cheaper than what it was inland. Mr Spies felt the deemed system created systemic problems and that the price being paid by the consumer was not anywhere near the true cost. The problem was that cost was being based on international prices.

Mr Gumede pointed out that all-out free competition was not without its drawbacks. He used Liquid Petroleum Gas (LPG) as an example to prove his point since it was not regulated. He noted that the cost of LPG was R4.37 per kilogram, but that the average selling price was between R12-R16 per kilogram. The high selling price was concerning to the Department and it was hoped to regulate the selling price by the end of the year.

The Chair urged the Committee to engage more on the issue of LPG. He also tentatively placed the possibility of a workshop on pricing with the Department on the agenda of the Committee. The Committee agreed to it.

The meeting was adjourned.