A business model to overcome barriers to entry in the South African downstream petroleum industry

Abstract

The South African downstream petroleum industry was in the hands of Whites and Multinational Oil Companies during the apartheid era. Many Historically Disadvantaged South Africans (HDSA’s) were excluded from the mainstream industry through, among other instruments, laws passed by the government such as the Petroleum Products Act 120 of 1977. Against this background, the newly elected democratic government instituted a policy process aimed at restructuring and transforming the petroleum industry to allow HDSA’s to enter the industry, in order to achieve sustainable presence, ownership and control of approximately a quarter of the industry by previously disadvantaged individuals. Since the introduction of this process, which culminated in the release of the White Paper on the Energy Policy of the Republic of South Africa (1998), little progress has been made towards achieving this government’s key policy objective. Instead, there is still little entry into the industry by HDSA’s, and the Black Oil Companies (BOC’s) that are in the industry continue to struggle to increase their market share. This paper discusses the possible constraints on achieving the objective, by looking at barriers that impede HDSA’s from entering the industry and BOC’s from increasing their market share significantly. There are three possible categories of barriers in the downstream petroleum industry, namely, economic barriers to entry, noneconomic barriers, and cross-sectoral barriers to entry, which are discussed in this paper. These categories of barriers prevent entry by HDSA’s into the industry and hinder BOC’s from increasing their market share. To circumvent these barriers, and in order to make progress towards achieving the government’s key policy objective of control by approximately a quarter of the HDSA’s, a black economic empowerment model was developed. This model seeks to increase the market share of the BOC’s and the presence of the HDSA’s in the industry in a sustainable way without significantly harming the multinational oil companies. It foresees Government licensing BOC’s to purchase up to 5% of the existing South African fuel demand at an Import Parity Price (IPP) that is significantly less than the Basic Fuel Price (BFP). The reason for this difference is that the BFP is based upon the supply of the totality of South Africa’s needs from elsewhere, whereas the IPP merely supplies up to 5% of South Africa’s needs, and can therefore source the product from refineries that are closer, so reducing the transport component. The impact of the loss of 5% of the internal market for petrol and diesel on the revenues of the MOC’s is less than 0.5%, because the difference between the IPP and BFP is a small fraction of the BFP.