Sustainable development in the petroleum sector

February 1st, 2012

By Kuvashen Padayachee

The goal of sustainable development is to create the conditions necessary for long-term sustainability for present and future generations. It requires accommodation by economic development, social justice and environmental protection, and it includes the development of natural resources in a way that does not permanently destroy them (J Goldemberg ‘Development and Energy’ in Adrian Bradbrook et al The Law of Energy for Sustainable Development (Cambridge University Press 2005) 37 – 45).

In 1992 at the Rio de Janeiro Earth Summit, in Agenda 21 (the United Nations Programme of Action from Rio), governments called for the ‘further development of international law on sustainable development, giving special attention to the delicate balance between environmental and developmental concerns’. They also identified a ‘need to clarify and strengthen the relationship between existing international instruments or agreements in the field of environment and relevant social and economic agreements or instruments, taking into account the special needs of developing countries’ (Agenda 21, ch 39).

The 2002 World Summit on Sustainable Development reaffirmed these priorities and assumed a ‘collective responsibility to advance and strengthen the interdependent and mutually reinforcing pillars of sustainable development – economic development, social development and environmental protection – at the local, national, regional and global levels’. Countries committed to taking account of ‘significant legal developments in the field of sustainable development, with due regard to the role of intergovernmental bodies in promoting the implementation of Agenda 21 relating to international legal instruments and mechanisms’ (World Summit on Sustainable Development: Plan of Implementation).

In reaction to this commitment by the countries, South Africa included, this article intends to –

  • determine the necessary regulatory framework of a local energy sector in which an alternative energy source may be implemented to create a sustainable environment by meeting the current over-consumption and pressures for on-demand energy; and
  • look at the current regulatory framework in respect of use, production or processing of traditional sources of energy and the regulation in place to rehabilitate or conduct these activities in the promotion of sustainable development policies.

It also considers whether the current regulatory regime allows for the smooth transition from established energy sources to an alternative renewable energy source and evaluates the regulatory framework for the use of current energy sources in a manner that promotes sustainable development.

General framework

The accepted definition of ‘sustainable development’, as defined in the National Environmental Management Act 107 of 1998, is ‘the integration of social, economic and environmental factors into planning, implementation and decision-making so as to ensure that development serves present and future generations’.

The 2003 White Paper on Renewable Energy (the White Paper) expounded that the role of legal instruments is ‘to develop, implement, maintain and continuously improve an effective legislative system to promote the implementation of renewable energy’, with the following objectives –

  • to develop an appropriate legal and regulatory framework for pricing and tariff structures to support the integration of renewable energy into the energy economy and to attract investment;
  • to develop an enabling legislative and regulatory framework to integrate independent power producers into the existing electricity system; and
  • to develop an enabling legislative framework to integrate local producers of liquid fuels and gas as renewables into their respective systems.

In the South African context, the goals that must be met to achieve sustainable development are –

  • social sustainability in terms of job creation;
  • environmental sustainability or protection aimed at reducing environmental pollution; and
  • economic sustainability in improving industrial competitiveness. (draft Energy Efficiency Strategy of the Republic of South Africa, Department of Minerals and Energy, 2004).

The sector that will be discussed in this article is the liquid fuels and gas sector. The regulatory framework established for this sector includes the Central Energy Fund Act 38 of 1977, the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) (including the 2008 Amendment Act), the amended Petroleum Pipelines Act 60 of 2003, the Petroleum Products Act 120 of 1977 and the Gas Act 48 of 2001 (White Paper, x-xi, in addition to the other applicable legislation).

Regulatory framework

The Central Energy Fund Act is the enabling legislation in terms of which levies may be imposed on liquid fuels products for collection into the Central Energy Fund (CEF).

However, numerous financial, legal, regulatory and organisational barriers exist to the implementation of a renewable energy source, and these must first be resolved.

The fuel markets in their present form lend themselves to the formation and maintenance of cartels. The structures created are oligopolistic; the products are homogenous and technologically mature, resulting in very high barriers to entry to any potential renewable entrant (Sasol Limited Engen Limited Petronas International Corporation Limited and Sasol Limited and Sasol Oil (Pty) Ltd Engen Ltd (unreported case no 101/LM/Dec04, 23-2-2006) para 179). This is evident in the manner in which traditional players conduct themselves in the industry, which the competition authorities have likened to that of a cartel.

The Central Energy Fund Act allows for the provision of levies paid into the CEF for use as directed by the Minister of Energy for financing the acquisition, generation, manufacture, marketing or distribution of any other form of energy and research connected therewith (s 2(a)). This fund may be used as a source to fund the implementation of an alternative or renewable energy source and to market the product to raise consumer awareness.

The MPRDA provides for sustainable development of the nation’s mineral and petroleum resources and its preamble recognises that minerals and petroleum are non-renewable natural resources. The preamble also reaffirms the concept of sustainable development by including the three pillars that form part of the definition, namely environmental protection, economic and social development.

‘Petroleum’ in s 1 of the Act includes ‘any liquid … or gas in a natural condition in the earth’s crust…’. The definition should have included those alternative petroleum resources so as to make the Act’s intention clear as to where the sustainable development is directed – either at the drilling and rehabilitation of the environment or through diversifying the sector with provision for cleaner, alternative and renewable energy sources. The definition in its current state makes provision for liquid or gas in its natural state extracted from the earth’s crust, while a renewable form of energy such as biofuel or biomass has to be processed.

The definition of ‘processing’ includes the refining of a natural petroleum resource. The Act should therefore include those instances where vegetable or natural plant matter can be processed into biofuel in the form of ethanol or production of natural gas through biomass outside of processes in relation to drilled fuel.

While it should also define the elements of renewable and alternative energy sources, it only provides on face value the standard definition of sustainable development as expounded by the Brundtland Report (Report on the World Commission on Environment and Development: Our Common Future (Oslo: 1987)).

Further evidence of this is s 2(h) of the Act, which suggests that the Act gives effect to the environmental right in s 24 of the Constitution. This section suggests that instead of actually promoting the use and development of renewables or alternative fuel sources to meet growing demand and over-consumption, it provides for the cleaner implementation and processing of traditional products.

Section 2(h) read with s 23(d) suggests that sustainable development in terms of the Act relates to mining that will not result in unacceptable pollution, ecological degradation or damage to the environment.

Section 39 of the Act bears testament to this and calls for environmental management plans and programmes to be implemented. In respect of the use and promotion of renewables and alternative sources, it bears nothing in forwarding a role for biofuels and biomass, and effectively shuts the door to any aspirations of bringing in a new renewable or alternative energy provider to meet growing demand in a sector under unstable economic pressures from wars waged in the Middle East and an increasing fuel price. The promotion of renewable and alternative energy sources is a prerequisite to creating a sustainable environment, especially in South Africa. Without provision for this, in the short-term the environmental impact will minimise, but this will not spur the growing demand and as such resources will continue to be depleted. If provision had to be made for renewables or alternatives then the demand would be met and the depletion of resources would be minimised and their continued use for future generations would be maximised.

The legislation is therefore in need of amendment to remedy the situation. It tries to create conformity with the 2002 world summit goals but fails in furthering the goals of renewable or alternative energy in favour of sustainable development from the perspective of the creation of an ecologically and environmentally sustainable system where petroleum and minerals are processed.

The Petroleum Pipelines Act contains three elements important to the implementation of alternative or renewable energy sources in the petroleum sector. The definition of ‘petroleum products’ opens the door to the implementation of alternative or renewable energy sources, included under ‘… any other substance which will be used for which petroleum fuel or any lubricant may be used’. Subsections 2(b), (c), (e), (h), (j) are the enabling parts of the statute that in my opinion foster the development of an energy sector that allows for the implementation of new alternative and renewable energy sources and that allows for a system that enforces practices that promote the efficient, effective, sustainable and orderly development, operation and use of petroleum pipelines in a safe, efficient, economic and environmentally compliant environment (s 2(b) and (c) ).

Taking into account the incredible cost of implementation of new and alternative energy sources, the Act facilitates investment in the pipeline industry. In addition to the CEF, this investment can be used to facilitate the implementation of these sources (s 2(e)). The Act further requires the promotion of competitive markets for petroleum products. In addition to the Competition Act 89 of 1998, this section effectively facilitates the fostering of an environment conducive to the implementation of a renewable or alternative energy, effectively coming from a party unknown to the traditional industry firms and, as such, would close the door to any tactics by those firms to close the markets to new entrants by acting uncompetitively (s 2(h)).

The most important provision forces the industry suppliers to ensure that the supply of petroleum meets market requirements (s 2(j)). Taking into account the spiralling oil price and the uncertainty of supply, this forces the industry to consider alternative and renewable energy sources. The Petroleum Pipelines Act therefore meets the three pillars of sustainable development – one that promotes environmental protection, protects competitors for economic development, and protects the supply of energy.

The purpose of the Petroleum Products Act is to provide for measures for the saving of petroleum products and an economy in the cost of distribution of these products. The definition of a ‘petroleum product’ is similar to that in the Petroleum Pipelines Act, facilitating incorporation of an alternative or renewable energy source.

The Act, largely through evaluation, regulates the relationship between the supplier and the distributor of fuel at the service station level and empowers the Minister to make directions based on saving petroleum products through the implementation of directions prohibiting distribution. By expanding the definition of petroleum to include other sources of energy, biofuel or biomass can be distributed at the service station level, effectively creating a market for the distribution of these products.

Perhaps to illustrate the inconsistency with the legislature in addressing renewable energy, the Petroleum Products Amendment Act 58 of 2003 (2003 amendment), on the one hand, expressed an intention by the sector to take up biofuel or biomass as a preferred alternative or renewable energy source under s 2B(6) and s 2E(3) (s 2B provided for licences for the manufacture or wholesale of petroleum products manufactured from coal, natural gas or vegetable matter and s 2E(3) stated that the use of the licences must intend to transform the retail service station sector into an optimum number of efficient sites), only to find that the Petroleum Products Amendment Act 2 of 2005 (2005 amendment) deleted the reference under s 2B(6) and left it to be regulated at the instance of the Minister under s 12C of the Petroleum Products Act. In view of this change, where does it leave licencees who may have commenced with processing of vegetable matter following the 2003 amendment?

The Act also provides that the licences must promote efficient investment in the retail sector and the productive use of retail facilities, such that the wholesalers provide retailers with products manufactured from coal, natural gas or vegetable matter that meet prescribed specifications and standards. This creates a sector for alternative energy sources and promotes the use of current energy sources in an efficient manner so as not to deplete current resources to the point of the Minister halting distribution in the retail sector. By making provision for an alternative source of petroleum in the form of vegetable matter, and the efficient use of other traditional sources, the need for such a directive will not be necessary. Further, s 2B(2) of the Act provides that in issuing a licence, the objectives that are evaluated are those that promote efficient manufacture, wholesale and retail in the petroleum industry. The objectives of the Act must also create employment opportunities and develop small business in the sector.

The way forward

In 2005 treasury approved an increase of the fuel levy exemption for biodiesel from 30% to 40% and the South African Revenue Service (SARS) introduced an allowance for a 100% exemption for small biodiesel producers who produce less than 300 m3 annually.

Investments in biofuels also qualify for a tax-depreciation write-off in the ratio of 50:30:20% over a period of three years. Treasury again in 2006/2007 approved a Renewable Energy Capital Subsidy Scheme administered by the Department of Minerals and Energy (now Department of Energy). The subsidy provides for 16,7 c/l subsidy for bioethanol and 27,3 c/l for biodiesel, up to a maximum of R20 million.

In 2006 a Cleaner Fuels Programme phased out leaded petrol and reduced sulphur in diesel to a maximum of 0,05% (mass). Regulations gazetted in June 2006 in support of this programme included a specific allowance for biodiesel addition and mandates fuel specifications according to the South African National Standards (SANS) (Biofuels Industry Strategy of the Republic of South Africa, Department of Minerals and Energy, 2007) .

These concessions and efforts realise two viewpoints –

  • they assure us that the government is firmly intent on furthering efforts in the sustainable development arena; and
  • they further my view that government is leaning towards biodiesel, biofuel or biomass
  • as the key to attaining a sustainable environment where resources are maintained and the depletion of resources is minimised for the use of future generations.

The Mineral and Petroleum Resources Development Amendment Act 49 of 2008 aims to, inter alia, align the Act with the National Environmental Management Act in order to create one environmental management system. Although the legislature had the opportunity to address the other sectors of the market in the amendment, it instead limited the issue of sustainability as it related to the prospecting, mining, exploration or production of mineral resources.

The major problem with promoting a sustainable environment is the non-recognition of alternative and renewable energy sources and the relevant legislation in these instances is vague and contradictory. Notably, the MPRDA does not include alternative or renewable energy sources as part of the definition of ‘petroleum’, which conflicts with the provisions contained in s 12(c) of the 2005 amendment.

If this is not corrected, government’s efforts to spur development with biodiesel/biofuels in the forms of tax concessions and to highlight government programmes may be hindered as a result of this lacuna.

In light of the above, it can be stated that the legislation regulating the liquid petroleum and gas sector does not pose a major hindrance to the implementation of sustainability as a whole. There are clear attempts by the legislature and key stakeholders to address the issue through job creation, environmental protection and in creating a competitive marketplace to foster sustainability in accordance with the three pillars of sustainable development.

In my view, to achieve ultimate sustainability, there must be an appropriate definition providing for alternative energy sources as possible viable sources in order to meet current excess demand. This will be done by balancing the current stock of energy sources with those of new alternative energy sources in the form of biofuel and biomass in order to meet the definition in the Brundtland Report, that is, ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’.

Kuvashen Padayachee LLM (Wits) is an attorney at Koikanyang Incorporated in Johannesburg.

This article was first published in De Rebus in 2012 (Jan/Feb) DR 34.