LPG Supply/Demand in the Western Cape & need for an LPG

Importation TerminalDate: 14th March 2012

LPG ConferenceBy: Barthlo Harmse & Thembisile Salman

Introduction - Project Ownership

Sunrise Energy is a JV company owned by Ilitha Group Holdings (BBBEE Company) with 51% shareholding and the Industrial Development Corporation who own 49%.

51% 49%

Project Developer

Engineering and Project Management

150 Staff, BBBBEE Level 3

Specialised in Energy & Hydrocarbons Industry Infrastructure

Africa’s Premier Development Financier

100% Owned by SA Government

Vast Experience in Energy Projects

e.g. PetroSA, Sasol, Mozal, Saldanha Steel

Project Update ….

• TNPA Section 56 preferred bidder for the LPG importation terminal at the Port of Saldanha, negotiations in progress to conclude terminal operator agreement.

• Onshore Property acquired.

• Scoping EIA completed, EIR & specialist studies (EIA Stages 4.5.6) in progress –aim to get ROD in June/July 2012.

• Rezoning process in progress – ROD June/July 2012.

• Throughput & Storage agreements -discussions initiated with LPG distributors.

• Basic Engineering completed and Detail Design completed

• Ready for procurement of long lead items(bullets, gantries, etc.)

Western Cape Energy Policies

• Western Cape government see electricity as a premium energy source that is too valuable for misapplication on household and industrial thermal and cooking applications.

• Electricity needs to be rather conserved and used for those unique applications that it is best suited for.

• Energy mix in Western Cape unhealthy – domestic use of energy should focus more on:

• solar water heating

• using LPG for cooking/space heating

• Using electricity mainly for lighting and unique applications (e.g. computers, rotating equipment etc.)

• Initiative to change energy mix but also to increase accessibility and supply reliability of affordable modern energy source to the public with specific focus on LIH.

Sunrise Energy Saldanha LPG Terminal Project Motivation…..

• Medium to long term LPG supply security concerns regarding future of LPG supply in Western Cape due to anticipated declining output from major Western Cape producers, reliability of LPG supply from the north, and substantial predicted domestic growth in LPG demand

• Major industries depend on secure reliable supply of LPG

• Significant domestic growth predicted especially in LIH energy use patterns

• Supply situation in a supply limited market is further compounded by reliability and online factor problems from existing refineries.

• There is insufficient LPG buffer storage and no strategic storagein the Western Cape and even the smallest glitches in the supply chain cause major supply interruptions

• As from 2009 LPG is 15% to 20% more affordable than electricity for cooking applications. Electricity costs are increasing more than 53% over 3 years.

Western Cape LPG per Capita Consumption…

• Per capita consumption for the Western Cape is about 3 times the per capita consumption for South Africa.

• LPG stats show an approximate LPG consumption of 6.9 kg/capita/annum for South Africa, and 21 kg/capita/annum for the Western Cape in 2006.

• This is due to disproportionate large industrial LPG users in the Western Cape (AMSA, Duferco, Consol etc.). In upcountry provinces major industries switched to pipeline gas. The adjusted consumption is therefore lower for the domestic sector, estimated at 4-6 kg/capita/annum

• Per capita consumption in other countries – developed and developing is more than 1000% higher:

• There is therefore considerable scope for expanding the low income household (LIH) residential LPG markets in the Western Cape and rest of South Africa.

Country kg/capita/annum

Brazil 40

Malaysia 65

Australia 157

Western Cape LPG Supply vs. Demand and Resultant Shortfall

4531,332

824 1,204

2,862 2,8623,383

3,8264,278

4,738

6,7086,688 7,877

8,3758,884

9,4039,932

10,47210,80211,13811,48111,83012,18712,55112,92213,300

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

ton

/mo

nth

PetroSA - LPG PetroSA - Propane Chevron Gap Case B - LPG Demand

Shortfall of 4500 ton/month predicted by year 2012

LPG Supply/Demand to the Western Cape 2011/2012

LPG Supply/Demand to the Western Cape 2015/2016

LPG Supply to the Western Cape

• Chevron – current & future 6650 ton/month, PetroSA – current, 6000 ton/month LPG and Propane; and will probably decrease to much smaller amounts by 2015/16

• Current shortfall addressed via imports from Port Elizabeth 850t/month (not economical due to high transport costs and sub optimum parcel sizes)

• Transfers from inland refineries (not economical due to high transport costs – approx R2.00 to R 2.50/kg)

• Undesirable to transport large volumes of LPG via major freeways – 30 to 40 tankers per day on the road (one every 40 min)

• LPG availability from inland refineries not sustainable due to substantial LPG market growth in northern regions

• Sustained shortfall in LPG supply to the Western Cape is due to:

• an increase in the LPG demand

• probable decrease in the production of LPG/Propane from PetroSA & Chevron

Strategic Storage….

Working Storage Capacities at the Various Refineries within South Africa

Working Storage Capacities at the Various Ports within South Africa

PetroSA Chevron Sasol Natref Sapref Engen

Storage Capacity in,

m3 1940 3570 6290 9430 3650 1820

Storage Capacity in,

ton 1050 1930 3400 5100 1970 980

PE Durban Richards Bay

Vessel Size, ton 1000 1000 3500

Capacity in account, ton 850 850 2970

The Western Cape has only 4 storage days. The smallest upsetcondition in supply will straightaway result in major supply interruptions.Ideally strategic storage of a minimum of 14 days need to beprovided – 6000 tons. This can be integrated into the Saldanha siteadding 3 additional 1000 tons bullets assuming the balance ofoperational capacity can also be used for strategic storage.

Project Basis

• Product specification LPG mixture, Commercial Propane, Commercial Butane in accordance with SANS 1774:2007

• A new LPG Import Facility at Saldanha Bay with a throughput of 5000ton/month initially will be required to fulfil the future shortfall in LPG supply to the Western Cape.

• The facility can be expanded in a modular fashion as the demand for LPG increases. Expected throughput initially 5000 tons/month expandable to 52000 tons/month throughput.

• Shipping maximum 6000 DTW pressurized vessels with draft 6 to 9.5 meters via the marine facilities in the port of Saldanha.

• Provision for Rail & Road dispatch.

• Modular design based on mounded storage – initially 5 x 7m x 60m bullets – expandable to 15 x 7m x 60m bullets in modular batteries of 5 bullets each

Project Schematic

Modern modular expandable design, intrinsically safe, zero emissions

How do Parties Participate in the Sunrise Energy Project?

• The Sunrise Energy facility is an Open Access Facility : any qualifying wholesale distributor, importer, trader or industrial user may import LPG using this facility, all on an open access equal access basis.

• The Sunrise Energy facility creates a level playing field - reduce entry barriers to ALL LPG wholesalers, distributors, retailers, new entry SMMEs etc.

• Sunrise Energy is a terminal operator that will own, operate and maintain the importation terminal assets (consisting of the marine berth, pipelines, storage bullets, utilities and auxiliary systems, rail and road dispatch facilities), Sunrise Energy will not own any stock

• Sunrise Energy will manage the importation process, stock management and dispatch of the throughput client’s LPG parcels.

• Throughput clients will source their own LPG, arrange for the shipments, be responsible for port services, customs clearing and also the dispatch rail and road logistics. Sunrise Energy operations battery limits will start at the ship rail manifold and end at the rail/road loading facilities connection.

How do Parties Participate … basis of Throughput Agreements..

• Throughput charges will be based on a R/ton throughput volume. Throughput volumes will be allocated to clients - there will be a basic “throughput or pay portion” and free nominated portion.

• Allocation of throughput volumes will be on a first come first serve basis. Once the capacity is take up then customers need to wait for future expansion phases before they can be accommodated.

• Proposed Storage Charges basis

• First 15 days storage will be free of charge and is included in the basic throughput charge.

• Between 15 days and 30 days storage will be charged at a nominal rate –calculated at a % of cost of dedicated storage

• Between 30 and 45 days storage will be charged at dedicated storage costs plus a premium.

• After 45 days Sunrise Energy reserves the right to sell the stock o.b.o. the client and (recover storage costs) and pay the client

• The motivation for the above structure is to ensure parcels move quickly through the facilities and not create bottle necks for other customers.

How do Parties Participate … basis of Storage Agreements..

• Sunrise Energy also provides for dedicated storage rentals. This is based on a R/m3/month fixed charge term contract and is not dependent on throughput volumes.

• This will give throughput customers the opportunity to rather use their balance sheet Capex for market expansion, cylinders etc. as opposed to large expensive on site storage to cater for for supply interruptions. They can then optimise their operations on just in time deliveries.

• Sunrise Energy’s storage & throughput charges will cover the following:

• Port costs i.e. servitude and berth retails, concession fees, etc.

• Operations, wages, salaries, contractors, services

• Utilities, security, insurances, municipal costs etc.

• Maintenance costs, integrity management

• Facilities integrity management, maintenance & statutory inspections

• Finance costs

Stabilizing LPG Gas Supply…..couple of thoughts

• Streamline regulatory processes will significantly assist in attracting LPG private infrastructure investment. For an investor to get a project sanctioned the project need to comply with the following regulatory processes.

• NERSA construction, tariff & operating license

• EIA & EIR and MHI

• TNPA section 56 process

• Rezoning processes, municipal agreements etc..

• Petroleum Products Act: Wholesale licence, Import permit

• Petroleum Pipelines Act: Facility licence

• The disconnect between these regulatory authorities produce unintended consequences and delays

Stabilizing LPG Gas Supply…..couple of thoughts

• Regulated LPG price needs to take into account that more than 20% of LPG demand will be imported in the immediate future (and this will grow to more than 50% in the near future) – this necessitates the urgent need to change from illogical 93UL gasoline pricing structure to true LPG import parity.

• Need to completely revise the current LPG regulated pricing structure:

• gate/producer price to be based on true LPG import parity

• make provision for LPG bulk importers

• less provision for bulk distributors

• more provision for retailers

• reduce the overall price to end cylinder consumer

• rethink transportation zones & tailor this for LPG producers & importers

• Consider exemplifying cylinder LPG from VAT

Prim Transp.R371 / t

OpexR3430 / t

Working Cap.R260 / t

DepreciationR1260 / t

Gross MarginR1610 / t

Bu

lk D

istr

ibu

tor &

Cylin

der F

illin

g

Pla

nt

R 6

56

0 /

t

Retail Margin

R2317 / t

VATR2487 / t

Cylinder ConsumerR 2015 / t

93UL Gate Price

R 8515 / t

Stabilizing LPG Gas Supply…..couple of thoughts

• Its a much cheaper for government to invest in LPG infrastructure, cylinders etc. than power infrastructure – only 10% of the cost per MW installed

• Make the decision to establish strategic storage inDurban/Richards Bay, Gauteng, Saldanha. Piggyback government sponsored strategic storage onto the proposed the Richard Bay & Saldanha importation terminals and build a new open access strategic storage redistribution terminal in Gauteng

• Introduce highly subsidised cylinders into the markets targeting LIH. In the Western Cape the immediate need is 1.5 million cylinders in the size range 4.5 – 5.5 kg

• Also introduce complimentary subsidised appliances into the markets targeting LIH

• Need to rethink LPG cylinder deposit structure (that is often used to control the market) to maybe subsidized owner owned cylinder structures

Sunrise Energy … Any Questions ?

Sunrise Energy (Pty) Ltd

Northbank Building, 3rd Floor

Northbank Lane

CENTURY CITY, 7441

Cape Town

Tel: 021-552 9993

Cell: 082-572 7703

Contact Person: Project Development Director, Barthlo Harmse

Sunrise Energy welcome all LPG distributioncompanies, traders, SMME’s to make use of this Saldanha LPGimportation terminal opportunity to grow/enhance/boost theirbusiness on the back of reliable importation & supplyinfrastructure - Sunrise Energy is open to discuss the detailsof how to participate in this opportunity.

Backup Slides

Backup Slides

South Africa Inc. …..Motivators

• When the Sunrise facility is reaching the 30 000 tons/month (or 360 000 tons/year) throughput it will replace the equivalent of 600 MW Eskom capacity calculated at source, that is 12% of a major coal power plant (Medupi Project), costing in excess of R80 billion.

• When LPG reaches 1.5 million tons per annum in South Africa it will replace 2500 MW electricity generation equivalent – not taking transmission losses into account. .

• The Capex of an LPG facility in R/MW including all logistics infrastructure is less than 10% that of the an upcountry Eskompower station – its obvious where RSA inc. should focus its spend on energy projects….

• Only about 25% of actual heat generated or input into fossil fired power stations ever reaches the end user for domestic thermal use.

• LPG is environmentally attractive, LPG derived CO2 emissions are only 20% of coal powered electricity emissions.

RSA Government LPG Strategy…extract

• Strategy to encourage greater use of LPG in place of electricity –this will delay the need for new electricity generation capacity.

• The foundations for the scale-up plan have been laid through a price regulation regime implemented in 2010….this point warrants further discussion.

• The DoE want the LPG strategy to target all sectors of society but targeting those currently without access to electricity first.

• Currently 3% of South Africans use LPG and the intention is to target at least one-million additional users over the 5 years.

• Challenges that need to be addressed include the cost of appliances, access to retailers, cylinder costs and bulk product availability/supply reliability. Through cooperation with other departments, notably the DTI, the department intends to oversee a reduction of the price of cylinders.

• Shortfall in supply will be augmented by importing LPG through new/upgraded Richards Bay and Saldahna Bay terminals.

LPG Usage Patterns in South Africa

• Globally the use of LPG is increasing: usage increase by 2% per annum overall – 2000-2006 (for Indian Subcontinent it is 8.5% and for Africa 5.6% growing).

• The use of LPG in South Africa, relative to other refined petroleum products, is very low (3%) when compared to other developing countries (e.g. Brazil – 10.8% & Malaysia – 9.5%).

• LPG consumption for the Western Cape/South Africa is very low when compared to other developing countries (Brazil had a per capita LPG consumption 500% more than that of the predicted LPG consumption for South Africa by 2020, and Malaysia 600% more)

• When comparing the use of LPG in South Africa to the rest of the world, and in particular to other developing countries, it is clearly evident that LPG is a very under-utilised source of energy in South Africa

LPG Producers and Imports…

Chevron16%

PetroSA10%

Natref3%

Sasol 2&345%

SAPREF17%

Engen9%

• In total, South African producers have the capacity to produce approximately of 480ktpa LPG per annum.

• Imports via Durban, Richard Bay and based on Customs records -average 136 ktpa (max case)

• South Africa is already importing up to 15-20% of its LPG.

• Imports ad. hock and erratic due to imparity's between LPG regulated pricing (93 UL) and true import parity pricing.

• The Western Cape has no importation facility and shortfall in LPG needs to be transported (mainly by road tankers) from the north

LPG Mounded Storage

Bulk LPG storage is based on a modular mounded storage concept

LPG Mounded Storage