A NEW BASIC PRICE FORMULA FOR SOUTH

AFRICADepartment of Minerals and Energy

Republic of South Africa

The “Basic Fuels Price” (BFP) will replace the “In Bond Landed Cost” (IBLC) as the basis for fuels product cost valuation in the regulated fuels pricing system, i.e. for:

- local ex refinery prices -deemed value for imports-value for slate-accounts

IBLC Background

Originated in 1954 with the first (Mobil) refinery in Durban

Revised by NEDLAC in 1995 Based on 80% contract prices and

20% spot prices 75% Singapore and 25% Arab Gulf

IBLC in the Petrol pricePetrol Price Gauteng February 2003

392c/litre

28

33

512

95

41912

194

Wholesale margin

Retail Margin

ServiceDifferentialZone Differential

Fuel Levy

SARS duty

Road AccidentFundSlate

Equalisation Fund

IBLC

Shortcomings of IBLC

IBLC relies on “Posted” [term]FOB prices of overseas export refineries which are outdated and no longer reflect the realities of petroleum markets

Shifts in world markets For this and other reasons, does not

provide a realistic, market-related import parity basis required for the regulated fuels system

Process

Several investigations done

Consultations with SAPIA & AMEF

Underlying Principles of B F P

To represent the realistic, market-related costs of importing a substantial portion of SA’s liquid fuels requirements

From overseas refining centres capable of meeting SA’s requirements in terms of both product quality and sustained supply considerations

Main differences – BFP vs IBLC

BFP relies on “spot” [cash] F.O.B prices quoted in Platts which tracks actual daily fuels trading prices at export refineries

BFP reflects all the other costs incurred in actual imports

Composition of the Basic Fuel Price

Spot prices – Platts daily quotations- Petrols = 50/50 Med. & Singapore- Diesel & I P = 50/50 Med & Arab Gulf

Ocean freight, demurrage and wharfage Insurance & sundries Ocean loss Coastal storage and finance costs

BFP / IBLC comparisons

[BFP less than IBLC, c/l - averages]

1996 to 2002Petrol [93 leaded] 4

Diesel 7

Paraffin 10

(larger in last two years)

The BFP will lead to

Savings to motorists Lower income to the refining

industry (particularly when compared with the recent past)

Concerns expressed

Refiners: • the long term viability of the refinery industry• new investments in the industry to meet

improved fuel specifications BEE companies: (without refining

interests) where profitability is to a large extent dependent on discounts

Synthetic fuels producers: who do not have marketing operations

National Perspective

The BFP methodology will result in more realistic, defensible and market-related pricing of fuels, which will result in lower prices than if continuing with the outdated IBLC system

Every 1 c/litre saving in petrol and diesel equates to some R150 million per year in S A.

Implementation should be possible without compromising the viability of the local liquid fuels refining industry.

Details at

http://www.dme.gov.za/