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LPG contracts 'hindering new players'

Energy
Johannesburg - The Competition Commission wants liquefied petroleum gas (LPG) producers to cap supply agreements at 10 years, saying long-term contracts hindered the entry of new players, because the contracts were offered on a preferential basis.

In its report on the results of its inquiry into the LPG sector, released yesterday, the commission said refineries preferred long-term contracts with wholesalers. But the anti-graft agency said the practice gave wholesalers with long-term contracts a competitive advantage over those that relied on short-term contracts.

It said the preferential terms that wholesalers negotiated with refineries enabled them to entrench their position in the market “regardless of new entries”.

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A man carries an empty LPG tank for a refill. Photo: Reuters

The commission said the competitive position of wholesalers - large and small - depended on their ability to obtain a consistent supply of LPG.

The body said that, in order to improve small wholesalers’ access to LPG, refineries should allocate a minimum of 10 percent of LPG production to small wholesalers on supply agreements of at least two years.

“The commission believes that the 10-percent allocation must not be made on a take-or-pay basis, as this would increase the barriers created by financial institutions. In the event that small wholesalers are unable to purchase the entire 10 percent, the remaining LPG can be sold in the spot market to any buyer,” it said.

LPG, which is produced during the refining of crude oil or the processing of natural gas, is used mainly as a thermal fuel for industrial, commercial and residential purposes.

The commission instituted the market inquiry in September 2014, because it suspected that there were features in the LPG sector that could prevent, distort or restrict competition. At the time, it said it had received a number of complaints about the sector.

Commissioner Tembinkosi Bonakele said the commission launched the inquiry because it was concerned about structural features of the market, high switching costs, the regulatory environment and its impact on competition, as well as the limited usage of LPG by households.

The commission also shone the spotlight on regulatory shortcomings, which it said had hindered competition. It said the current maximum refinery gate price framework did not give refineries adequate incentive to prioritise the production of LPG, compared with other petroleum products. “The lack of incentives by refineries impact negatively on the security of supply of LPG,” the commission said.

Read also: LPG market inquiry

It said there was “limited” evidence that the Department of Energy was monitoring and enforcing LPG prices. “The (Department of Energy) has only nine inspectors across the country responsible for monitoring all petroleum products, including LPG,” it said.

The nine inspectors covered an estimated 5112 retail service stations and sites.

In its report, the commission cited concerns about the concentration of ownership in the LPG market.

“At wholesale level, the market is highly concentrated, with four large wholesalers accounting for significant market share. The major wholesalers are Afrox, Easigas, Totalgaz and Oryx. These major wholesalers collectively account for more than 90 percent of the wholesale market. In addition to the high levels of concentration, new entrants and small existing firms must overcome high barriers to entry in the wholesale market,” it said.

The commission said South Africa imported LPG to supplement production from refineries, but it said the existing import infrastructure was inadequate and stifled the uptake of LPG.

BUSINESS REPORT

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