The oil and gas industry is material to any economy as it has an impact on our everyday lives in various areas, including transportation, electricity, heating, lubricants and a variety of petrochemical products. The downstream sector of the oil and gas industry involves the activities of petroleum product distributors, natural gas distribution companies, petrochemical plants and oil refineries.
In this issue of Dentons South Africa Insight we address matters related to wholesale licensing in the downstream petroleum industry in South Africa and highlight certain regulatory specifics in this area in Angola, Kenya and Zimbabwe.
In South Africa, the downstream petroleum industry is more than 100 years old. There has been a historic reliance on imported crude oil, due to the fact that South Africa has very limited known oil reserves and the majority of its crude oil requirements are met through imports from the Middle East and Africa. In addition, at the present time there are six refineries operating in South Africa, four of which are located on the coast and two are situated inland.
In South Africa the Department of Energy has the responsibility of regulating the petroleum industry. The downstream petroleum industry is regulated in accordance with the provisions of the Petroleum Products Act, 1977 (Act No. 120 of 1977) as amended by the Petroleum Products Amendment Act of 2003 and the Petroleum Products Amendment Act of 2005 (Petroleum Products Act). The National Energy Regulator of South Africa (NERSA) is also responsible for regulating the petroleum pipelines industry.
By way of background, prior to 1977, the style of regulation of the South African oil industry was one that appeared to have relied less upon legislation and more upon government-initiated agreements intended to resolve market problems. In addition, a number of agreements were entered into by government which determined the relationships along the manufacturing and marketing chain.
A new era of a more formal, legislative regulation commenced in 1977 with the enactment of the Petroleum Products Act. However, key elements of the Petroleum Products Act were designed to shroud the industry in secrecy, making it difficult for those who were not in the industry or in the South African government to acquire information due to the biting effects of economic sanctions and the attempts at circumventing these restrictions.
With the end of apartheid in 1994, South Africa experienced fundamental policy shifts resulting in significant changes in various industry regulations, including the oil and gas industry. In 1994, South Africa granted the opportunities for Historically Disadvantaged South Africans (HDSAs), who had been previously excluded from participating in some of the country’s important industries and, particularly, the downstream petroleum industry.
In December 1998, the South African government published the White Paper on the Energy Policy (White Paper) with the aim of starting the review of existing policies. By publishing the White Paper, the South African government set out to regulate the promotion, development and regulation of oil and gas exploration and production. In 2000, the Charter for the South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry (Charter) was published.
The South African government’s key policy objective in publishing the Charter was to achieve entry into the downstream liquid fuels industry in a sustainable way by the HDSAs, along with sustainable presence and ownership by approximately 25 per cent of HDSAs in all facets of the downstream petroleum industry. The Charter was the first empowerment charter in the history of South Africa where policies on Black Economic Empowerment (BEE) were enacted in 2003 in terms of the Broad-Based Black Economic Empowerment Act 2003 (Act 46 of 2003) (B-BBEE).
In 2003, the Petroleum Products Amendment Act of 2003 was enacted which allowed the Minister of Energy to prescribe a licensing system to transform the South African oil industry into one that has the optimum number of efficient sites to achieve equilibrium among all participants in the petroleum products industry.
Through the Petroleum Products Amendment Acts of 2003 and 2005, the liquid fuels industry supply chain was licensed for the first time. The licensing framework is provided for in the Petroleum Products Amendment Act 2003 (administered by the Department of Energy).
The Petroleum Products Amendment Act of 2003 emphasises the promotion of transformation, including the empowerment of HDSAs in the South African petroleum and liquid fuels industry. The Act supports the Charter in terms of the licence application procedure as it states that “In considering licence applications in terms of this Act, the Controller of Petroleum Products shall – promote the advancement of historically disadvantaged South Africans; and give effect to the Charter”.
The Petroleum Products Act regulates the manufacturing and sale of petroleum products. A manufacturing licence is required to manufacture petroleum products. To conduct the business of a wholesaler in petroleum products a wholesale licence is required and in order to retail petroleum products a retail licence must be obtained. A retail licence will be granted provided the site to which it relates is licensed.
In advancing the objectives of the licensing framework under the Petroleum Products Act as amended, the Guidelines Governing the Recommendations by the Department of Minerals and Energy (now renamed to be the Department of Energy) to the International Trade Administration Commission in respect of the Importation and Exportation of Crude Oil, Petroleum Products and Blending Components (Guidelines) was published in 2006.
In terms of the Guidelines, only licensed manufacturers and licensed HDSA wholesalers may apply for a recommendation to import petroleum products or blending components unless elsewhere specified in the Guidelines. A permit may only be issued to the person in respect of whom the recommendation was made.
Presently, petroleum wholesalers in South Africa include the seven major oil companies as well as a large number of independent non-refining wholesalers. According to the data of the South African Petroleum Industry Association, approximately 600 independent wholesalers have been licensed by the Department of Energy of South Africa. Wholesalers operate storage terminals and distribution facilities throughout the country.
Furthermore, according to the South African Petroleum Industry Association, all integrated, privately owned members involved in downstream petroleum activities have concluded equity ownership deals where most of these deals are in respect of 25 per cent of the full value chain in accordance with the Charter, including both refining and marketing. Most of these deals are also broad-based and include women’s groups and the community.
Under South African law, oil companies are required to obtain licences in order to establish new service stations and distribute petroleum products. These operating licences are normally granted subject to conditions, including but not limited to the issues of BEE and the environment. In terms of the Petroleum Products Act, a person may not engage in the following activities:
- manufacture petroleum products without a manufacturing licence;
- wholesale prescribed petroleum products without an applicable wholesale licence;
- hold or develop a site without there being a site licence for that site; and
- retail prescribed petroleum products without an applicable retail licence,
without being issued a licence by the Controller of Petroleum Products (Minister of the Department of Energy, or an official that has been appointed by the Minister).
The Petroleum Products Act provides that if a person engages in an activity prohibited in the Petroleum Products Act, the Controller of Petroleum Products must by written notice direct that person to cease such activity forthwith.
The Controller of Petroleum Products may allow a person to continue with a prohibited activity contemplated in the Petroleum Products Act pending an application to carry on the activity and the issuing of a licence if the cessation of such an activity is likely to lead to a material interruption in the supply of petroleum products. In considering licences, the Controller must give effect to the objectives of the Petroleum Products Act and the transformation of the South African petroleum and liquid fuels industry.
In Angola, the Law on Refining Crude Oil, Storage, Transportation, Distribution and Trading Oil Products (Law 28/11), published on 1 September 2011, establishes inter alia the bases for oil wholesales trade and requires that oil wholesale trading activities are subject to the issuance of a licence by the Angolan Oil Ministry.
According to the supplementary regulation issued in terms of the Law 28/11, which is set forth by Presidential Decree 132/13, dated 5 September 2013 (Decree), the companies applying for an oil wholesale trading licence have to be controlled by Angolan citizens. “Control” is defined by full compliance with the following requirements:
- Angolan citizens must own at least 51 per cent of the share capital;
- Angolan citizens possess more than half of the voting rights;
- Angolan citizens have the right to appoint more than half of the board of directors or management board; or
- Angolan citizens have the power to determine the company’s operational policies and strategies.
Pursuant to the Decree, the importation of oil products is made exclusively by the Angolan public company, Sonangol, which is the sole concessionaire for oil and gas exploration on the subsoil and continental shelf of Angola, and is responsible for the exploration, production, manufacturing, transportation and marketing of hydrocarbons in Angola (activities that it carries out solely or in association with other parties).
In Kenya, petroleum energy matters are regulated by the Energy Act, 2006 (the Energy Act). The Energy Act repealed the Petroleum Act, Cap 116 of 1948 (the Petroleum Act), which for a long time was the prevailing law dealing with regulation of the petroleum industry.
The Energy Act requires persons engaged in wholesale distribution of petroleum or petroleum products in Kenya to do so in accordance with terms and conditions of a valid licence issued by the Energy Regulatory Commission (ERC). The Energy Act also prohibits a licencee from selling petroleum to a person for the purpose of exportation or for resale in Kenya unless that person has a valid exporters or retail licence under the Energy Act.
Furthermore, a new Energy Bill, 2015 is expected to be passed into law in Kenya. Reportedly, the Energy Bill will specifically address downstream petroleum licensing in Kenya and will require the licensing authority to take into consideration the impact of the undertaking on the social, cultural or recreational life of the community, the need to protect the environment and to conserve the natural resources, maritime laws and international maritime treaties ratified by Kenya. It is also expected that the other matters to be taken into account by the licensing authority would be compliance with occupational safety and health regulations, economic and financial benefits to the country or area of supply of the undertaking, and the ability of the applicant to operate in a manner designed to protect the health and safety of users of the service.
In Zimbabwe, wholesale licensing of the downstream petroleum industry is governed by the Petroleum Act [Chapter 13:22] (Petroleum Act). Section 31A of the Petroleum Act deals specifically with wholesale licences and defines a wholesale licence as a “licence that authorises the licensee to purchase bulk petroleum products from any procurement licensee or production licensee.” Notably, a wholesale licencee is only authorised to sell petroleum products to the holders of a retail licence.
Notably, in Zimbabwe it is mandatory to blend imported unleaded petrol with anhydrous fuel ethanol. The Mandatory Blending of Anhydrous Ethanol with Unleaded Petrol Regulations, 2013 provide that no procurement licencee or wholesale licencee or retail licencee shall sell unleaded petrol to end users, unless the unleaded petrol (which is produced by an ethanol blender) has been blended with:
- 10 per cent locally produced anhydrous ethanol, being blend E10; or
- 15 per cent locally produced anhydrous ethanol, being blend E15; or
- 20 per cent locally produced anhydrous ethanol, being blend E20.
Analysis of regulatory specifics of wholesale licensing in the downstream petroleum industry in South Africa shows that the downstream petroleum sector is regulated by legislation which aims at empowering all who want to participate in the sector. Wholesale licences in the downstream petroleum industry are issued on condition that those who had been previously excluded from the participating industry are included.
Regulations related to wholesale licensing in the downstream petroleum industry in Angola, Kenya and Zimbabwe also aim to take into account local social and economic specifics to a varying degree.