LPG industry in South Africa needs competition

Investor interest in the liquid petroleum gas (LPG) industry in South Africa has increased markedly over the last few years, but there are structural issues in the industry which need to be addressed for future growth to be assured.

In particular, competition needs to be actively promoted to prevent monopolies which could influence pricing structures, Atose Aguele, managing director of Avedia Energy, said.

Speaking during a panel discussion at the Argus Liquid Petroleum Gas conference in Cape Town, Aguele said although the biggest investment in the industry over the last five years had come from foreign investors, both foreign and domestic players faced the same challenges. These included the ‘misuse’ of industry regulation by certain market players, particularly with regards to import terminals and storage facilities.

“The local LPG industry requires imports to grow – last year 16% of the 400 000 tons of LPG consumed in South Africa was imported. Competition with regards to import terminals is thus especially important. But we are still debating how many terminals South Africa should have, which pose a real constraint for companies looking to import gas. And the various national and local authorities are not always aware of what their counterparts are doing, which leads to regulations being misused in an attempt to keep competitors out,” he said.

Rod Crompton of the National Energy Regulator of South Africa (NERSA) said industry players were using the country’s environmental and economic regulators as ‘instruments to fight competition battles’. “The regulator has become the ham in the sandwich. It has nothing to do with regulation, but with resistance to competition.”

He said investors in the LPG industry were expecting much higher returns compared to those expected from investors in the renewable energy projects of the Department of Energy’s Integrated Resource Plan. “Some of these LPG players are looking for returns of 20% and above. Anecdotal evidence is that these are South African companies, not foreign investors or BEE entrants.”

Aguele said there was a ‘disconnect’ between the international price of LPG and the local price. “The maximum retail price in South Africa has been capped by the Department of Energy since 2010, and we currently have the fourth highest priced LPG in world. At issue is the maximum refinery gate price (MRGP). The price of LPG is linked to the price of gasoline, which is at odds with what is happening internationally. We have been talking about the MRGP for years without any action being taken. The non-predictability of pricing needs to be addressed urgently.”

Another issue the industry was grappling with was that of cross-filling – the practice of illegally filling a gas cylinder owned by another party, Aguele said. “The problem needs to be addressed by all players in the industry, and the Department of Energy should set up an inspectorate with the powers to shut down plants found guilty of cross-filling.”

Kevin Robertson, president of the LPG Safety Association of Southern African (LPGSASA), told the panel the association had identified acceptability of LPG in the market as an important area of focus going forward. “There is a perception among South Africans that LPG is somehow unsafe and this needs to be addressed through awareness and information drives. We need co-operation between all stakeholders and industry role-players in this regard.”

Robertson added LPG was ‘ideally poised’ to address South Africa’s energy poverty issues, but more work needed to be done to make LPG accessible to the broader community. “The barrier to entry is not the gas itself, it is the cost of the cylinder and the cost of appliances,” he said.

Press Release, September 18, 2014; Image: Avedia Energy