Adri Senekal de Wet
As winter approaches, the use of liquefied petroleum gas (LPG) heating will become topical again, as local refineries are unable to meet the demand. New storage facilities are expected to be commissioned in the Western Cape this winter. Sunrise Energy has built such a facility in Saldanha, and in a recent advertisement, the company indicated that its open-access terminal would be operational next month.

This should alleviate the product shortfall, especially in the Western Cape, but could come at a price due to the charges that Sunrise Energy will be able to levy.

A major driver for the projected high consumer cost is the method used for recovering cost of the build from the consumers - the more expensive the facilities are, the more the investors have to charge for their services to recoup these costs. In order for LPG to be imported into the country, a pipeline and storage terminal are required to be built.

The initial cost for Sunrise Energy was understood to be about R600 million for a 15 000 ton open-access import terminal. This would have been in line with international norms.

For example, a similar 150 00 ton terminal - complete with jetty and delivery pipeline - was commissioned by Petredec in Mauritius in 2014. However, the Sunrise costs have ballooned to more than R1.2 billion for just the initial 5500 ton portion - and this is a major reason why consumers could pay dearly.

Read also: Consumers face high gas prices

The impact of the high-cost build is that the tariff of R2.18 per kg that Sunrise was granted by Nersa is about six times the recommendation by the Department of Energy in its white paper on changing the refinery gate price.

The table shows the comparative international tariffs for storage and pipeline over a 5km distance similar to the Sunrise Energy pipeline stretch.

Cost escalation

The consequence on the consumer could be that the retail price of LP gas could increase by as much as 25 percent. This means that, as of April 2017, a domestic consumer could pay R220 when buying a 9kg cylinder compared to the current price of about R175.

Questions may be raised if the cost escalation of the Sunrise Energy project was accepted by the Transnet Port Authority, and whether these variations would have met their procurement processes. Curiously, some of the original shareholders in Sunrise Energy were also shareholders in the original EPC (engineering, procurement and construction) contractor. Sometimes a high-cost project may be in the interest of the EPC’s business, but could be detrimental if costs escalate.

A man carries an empty LPG tank for a refill. Local refineries may be unable to meet the demand this winter.Photo: Reuters

Moreover, the Industrial Development Corporation and the Public Investment Corporation were significant financers of the project, as compared to private funding from private shareholders. As these public funds were used, this could be a double-edged sword as the public may have to bear the burden of both the repayment of the huge cost of building the facility, as well as paying a higher price for the gas.

In a normal competitive environment this would make the recovery of such a large investment impossible, thereby placing public funds at high risk.