The so-called ‘locational advantage’ of South Africa’s inland oil refineries, which itself is a factor of South Africa’s fuel-setting formula, lies at the heart of the intensifying war of words between oil group BP and State utility Transnet.

The conflict, ostensibly sparked by Transnet’s tariff application of November 11, appears to have its true genesis in a commercial inequity enjoyed by inland refineries over their coastal counterparts, which spans many decades.

But it was brought to a head when Transnet approached the National Energy Regulator of South Africa (Nersa) for an 82,5% tariff adjustment for 2009 and 73,5% for 2010, which the utility said was needed to cover costs and raise the debt finance necessary to construct the R12,7-billion new multi-product pipeline network from Durban to Gauteng.

Nersa subsequently published a draft determination in which it indicated that it could grant a material tariff increase and held public hearing last week to field objections.

In its submission and subsequent press statements, BP acknowledged that the pipeline was necessary, owing to the fact that the current was “inadequate to supply the inland market”.

But the oil giant objected to the proposed funding model, which it noted would result in its competitors – including Sasol, which operates a coal-to-liquids refinery in Secunda, and the Sasol-Total joint venture, which operates the Natref refinery in the Free State – receiving material income benefits that they need do nothing to earn.

This prejudice arose primarily from South Africa’s fuel-setting formula, which is governed by the Department of Minerals and Energy (DME) rather than Nersa, and which was based on import parity pricing.

Under this system, the pipeline tariff was used as a proxy for the cost of transporting fuel inland, with the petrol price rising in sync with any increase in the pipeline tariff.

In other words, the received price for inland refiners would rise without a commensurate increase in costs, which would translate into a large income benefit. In fact, BP asserts that only 25% of the proceeds from the tariff would accrue to Transnet, with the balance flowing to the inland refiners. In monetary terms, BP estimated the commercial prejudice to be worth R1,2-billion.

BP amplified the point by saying that the proposed tariff differential between the crude oil pipeline was discriminatory and anticompetitive. It suggested that a temporary fuel levy be considered as an alternative funding model, or that direct State funding be secured to ensure a strategic supply reserve.

In a statement responding to BP, Transnet suggested that the oil company’s “unfortunate attack” was a proxy for its long-standing complaint regarding its relative position arising out of a locational disadvantage in relation to the inland refiners.

The challenge for Transnet and ultimately Nersa, which both had security of supply mandates, was to close the funding gap between construction and operation in a context where Transnet’s shareholder was not willing to inject equity capital.

Nersa full-time member (Pipelines) Dr Rod Crompton would not be drawn in to the debate when approached by Engineering News Online, saying only that reasons would be given for the determination once it was decided.

Nersa was still targeting to release its determination by the end of March, but Crompton said that there could be a delay, given that it was still awaiting responses to questions raised in oral and written submissions.

Crompton said that it was studying all the comments, including those made by BP, but stressed that it would make the final determination on the basis of the Petroleum Pipelines Act and the Nersa Act.