Study on Barriers to entry in Liquid Fuel Distribution in South Africa

Full text

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Working Paper 13/2014
STUDY ON BARRIERS TO ENTRY IN LIQUID FUEL DISTRIBUTION IN SOUTH AFRICA
Anthea Paelo, Genna Robb and Thando Vilakazi
1
Centre for Competition, Regulation and Economic Development, University of
Johannesburg
antheap@uj.ac.za
gennar@uj.ac.za
thandov@uj.ac.za
Abstract
Barriers to entry, by reinforcing the market power of incumbent firms in liquid fuel distribution,
have meant that the pace of transformation throughout the fuel value chain in South Africa
has been slow. The ability of new firms to enter the sector, develop capabilities, and become
effective competitors to the major oil companies is important for achieving transformation and
introducing dynamic rivalry in the liquid fuels sector. This paper draws on interviews with
market participants and publicly available sources to assess the nature and extent of barriers
to entry and expansion of firms in the wholesale of liquid fuels. The analysis categorises
barriers to entry along six main themes, namely: the costs of entry, skills and training, access
to supply, access to customers, and the reactions of incumbents to entry, and policy and
regulatory challenges. However, it is clear that these challenges at the wholesale level form
part of a broader set of concerns in the value chain as a whole, relating to access to
infrastructure and low levels of competition between the major oil companies themselves. The
paper concludes by suggesting a set of short and long-term remedies for increasing access
and competition in transportation and storage, wholesaling infrastructure, and in retail.
JEL classification L1, O1
1
Anthea Paelo, Genna Robb and Thando Vilakazi are researchers at the Centre of Competition,
Regulation and Economic Development (CCRED) at the University of Johannesburg.

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Contents
1 Introduction .................................................................................................................... 3
2 Background to fuel wholesale distribution ...................................................................... 5
2.1 Overview of market structure, value chain and main players ................................... 5
2.2. Review of regulation in the sector ........................................................................... 3
2.3. Review of competition cases in the sector ............................................................ 11
2.4. Conclusion on background of the fuel sector......................................................... 11
3 What are the barriers to entry and expansion in fuel distribution in South Africa? ........ 16
3.1 Costs of entry ........................................................................................................ 16
3.2 Skills and training .................................................................................................. 16
3.3 Access to supply ................................................................................................... 19
3.4 Access to customers ............................................................................................. 25
3.5 Incumbent’s reaction to entry ................................................................................ 31
3.6 Policy and regulatory ............................................................................................ 31
4 State of transformation and competition in liquid fuel distribution ................................. 36
5 Conclusion and recommendations ............................................................................... 39
6 List of references ......................................................................................................... 39
7 List of interviewees ...................................................................................................... 49

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1 Introduction
This research study has been conducted as part of the barriers to entry core research area of
the Centre for Competition, Regulation and Economic Development at the University of
Johannesburg. It contributes to understanding the barriers to entry and expansion of firms
involved in the wholesale distribution of liquid fuels in South Africa. The study locates itself in
the ongoing national debate regarding the transformation of the fuel sector value chain which
has historically been controlled by a handful of large multinational oil companies.
2
In this way
we hope to add to the discussion in terms of understanding challenges and opportunities in
liquid fuel wholesale in the broader context of the liquid fuel value chain from a competition
and regulatory policy, and economic development perspective.
Our approach has been to focus on understanding the market structure, main stakeholders
and interests, regulatory context, pricing and costs, competitive dynamics, and firm strategies,
as part of assessing the experiences of firms in entering and growing their businesses in fuel
wholesale. The study involved a review of publicly available resources and studies on the fuel
sector in South Africa, as well as conducting face-to-face and telephonic conferences with a
number of key stakeholders involved in the sector, including:
 Individual firms involved in fuel wholesaling and industry experts;
 Industry associations including the Liquid Fuel Wholesalers Association (LFWA), the
Petroleum Retail Alignment Forum (PRAF), and the South African Petroleum Industry
Association (SAPIA); and
 Responsible government departments and agencies including Department of Energy
(DoE), National Energy Regulator of South Africa (NERSA), and Transnet Pipelines.
3
The petroleum sector is a strategic one in terms of its wider impact on consumers, as a
provider of inputs into other productive sectors of the economy, and therefore as an important
influence on the trajectory of economic development. The history of the sector in the country
is that it benefited from substantial investments and support from the apartheid government
for security of supply and national security reasons in light of widespread sanctions in the
years prior to the democratic transition in 1994. A favourable policy environment over the years
created a sector characterised by a handful of large fuel importing oil companies with refining
capacity in strategic port locations, and a national champion in Sasol which grew to produce
fuel inland. Importantly, all of the incumbent firms exhibit high levels of vertical integration into
activities spanning the entire value chain including importing, refining and production,
distribution and retail. Following the democratic transition, greater emphasis began to be
placed on transforming the sector to be more inclusive at different levels of this value chain,
2
See, for example, http://www.parliament.gov.za/live/content-
mobi.php?C_Item_ID=4777&Item_ID=3536
3
A full list of interviewees is provided in section 7.

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culminating in the attachment of the Liquid Fuels Charter as an addendum to the Petroleum
Products Act.
The entry and growth of new, independent wholesalers as part of this process of
transformation is therefore of particular importance, with the aim of developing firm capabilities
that allow for dynamic rivalry between firms, and the gradual migration of those firms up the
value chain in competition with the incumbent oil companies. This is taken in the context of a
growing body of literature on the importance of addressing the market power of large firms
and entrenched insiders, and the ongoing work of the competition authorities in this process.
4
It also chimes with the increased global emphasis on inclusive growth and increased economic
participation which we understand to be, in part, about removing structural and strategic
barriers to new entry at different levels of the economy, and the sustainability of those firms.
5
The National Development Plan and the industrial policy framework also emphasise the
importance of creating a dynamic and entrepreneurial economy and addressing high levels of
concentration in the economy.
6
Barriers to entry, by creating and reinforcing the market power of large firms, tend to lead to
higher prices, lower levels of innovation and a less competitive economy. Incumbent firms will
lobby and employ strategies to protect their position in the market. Concerns arise where firms
seek to maintain their position by handicapping rivals and potential rivals, for instance, through
anti-competitive behaviour. This is different from a market in which firms compete to introduce
better prices or products and services and reduce costs and achieve returns which reward
dynamism, innovation and effort. In a country like South Africa where there are significant
challenges of unemployment, poverty and inequality, it is critical to understand the nature and
extent of barriers to entry in the economy, in order to ensure that regulatory and policy
interventions have a meaningful impact on creating inclusive and shared growth.
While over 1000 licences have been issued to potential entrants in fuel wholesaling, less than
10% of these licences are being used effectively by firms that have been able to enter and
survive in the industry. Independent wholesale firms currently distribute to between 40% and
70% of commercial customers, including to rural and peri-urban areas (LFWA, 2013). Our
findings suggest that outcomes are influenced by a range of endogenous and exogenous
considerations, including the modes and costs of entry of firms, restrictive long term supply
agreements and relationships with incumbent suppliers, restricted access to customers in
some cases, and the regulatory environment. There are also issues related to skills
development and the importance of tacit industry knowledge and challenges related to access
to finance and working capital. Challenges in the broader petroleum sector which impact on
barriers to entry at the wholesale level include mechanisms to ensure security of supply as a
national priority, constraints on the introduction of alternative sources of supply and routes to
market, and infrastructural limitations such as in refining capacity and storage which constrain
4
See, for example, Makhaya et al (2012); Roberts (2012); North et al (2009); and Acemoglu et al (2012).
5
See, for example, Spence (2008); and Ianchovichina et al (2009).
6
NPC (2013).

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the potential for more dynamic rivalry throughout the value chain. Our focus is on the impact
of each of these factors as barriers to entry and expansion in the wholesale distribution of
liquid fuels.
The report is structured as follows: in section 2 we provide a background on the structure of
the market and main players, the regulatory environment influencing fuel wholesale and
important government stakeholders, and we touch on previous competition law cases in this
area. Section 3 addresses the barriers to entry and expansion in fuel wholesaling drawing
primarily on the interviews conducted. Section 4 assesses the state of competition and
transformation in the sector as part of the broader petroleum value chain. We conclude and
provide recommendations in section 5.
2 Background to fuel wholesale distribution
2.1 Overview of market structure, value chain and main players
The current study primarily concerns the wholesale distribution of liquid fuels. However, by its
nature, the fuel value chain in South Africa is largely dependent on the activities of the fuel
producers at the upstream level, who are generally vertically integrated into the downstream
levels of the market as well. This level of the value chain involves the refining of inputs to
produce liquid fuels such as petrol, diesel, illuminating paraffin, LPG and chemicals which are
co-products and bi-products of the refining process (Mondliwa and Roberts, 2014: 6). There
are six oil refineries which are owned by the various oil companies including synthetic fuel
producers in Sasol (Sasol Synfuels) and Mossgas (PetroSA) (Table 1). The total production
capacity is 703 000 barrels per day although actual usage at a given point in time may be
lower (SAPIA, 2013).
Table 1: Production capacity, ownership and location of fuel refineries in South Africa, 2013
Refineries
Ownership
Capacity
(barrels/day)
Location
Share of total
capacity (%)
Sapref
BP (50%), Shell (50%)
180 000
Durban
26
Enref
Engen
120 000
Durban
17
Chevref
Caltex
100 000
Cape Town
14
Natref
Sasol Oil (64%), Total SA (36%)
108 000
Sasolburg
15
Sasol (Synfuels)
Sasol Oil
150 000
Secunda
21
PetroSA
State-owned
45 000
Mossel Bay
6
Source: SAPIA Annual Report 2013
Currently, the major oil companies are able to control the supply of fuel to the downstream
levels of the South African market, including through using branded wholesalers and retailers
to distribute fuel to final consumers. From the refineries liquid fuels are distributed by pipeline,
road and rail to storage facilities and/or depots around the country (of which there are
approximately 200) (Figure 1). This is commonly referred to as primary distribution. Secondary
distribution from the depot network to customers is conducted by road and rail to road and rail
depots (Naidoo, 2011).

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Figure 1: Fuel distribution (inland) flow chart
Source: Authors’ own interpretation
The main inland depots (Alrode, Langlaagte, Waltloo, Tarlton, Rustenburg and Witbank)
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are
situated along the main pipelines which are owned and managed by the transport utility,
Transnet Pipelines. The pipeline infrastructure is particularly important when considering that
60% of fuel demand in South Africa is in inland regions such as Gauteng, while the remainder
is coastal (Naidoo, 2011). The pipeline infrastructure operated by Transnet Pipelines
transports approximately 50% of total demand in South Africa, the majority of which is for
inland regions. Importantly, demand in the South African market currently outstrips available
supply and capacity on the primary pipeline, the Durban-Johannesburg Pipeline (DJP), is
constrained. The introduction of the New Multi-Product Pipeline (NMPP) is intended to
significantly reduce this constraint once it is fully operational. We return to this supply issue in
sections to follow.
7
And jet fuels to OR Tambo International Airport.
Refining and synthesizing by oil companies
(Into petrol, diesel, bi- and co-products etc.)
Oil company
own
distribution
Branded-
marketers/
Integrated
wholesalers
Independent
wholesalers
Commercial customers
Primary:
pipeline,
road & rail
Depots and storage

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The Transnet pipeline network distributes bulk petroleum products sourced from the two
refineries in Durban, the Natref intake station (Sasolburg), and the intake stations in Secunda
(Sasol 2 and 3 synthetic fuels plants). There are no inbound pipelines running from the Chevref
refinery in the Western Cape, and through swap agreements Chevron services that region on
behalf of the other oil companies that do the same for Chevron in the inland region. From the
pipeline depots, the oil companies store the fuel which is then distributed to road or rail
(secondary) depots or directly to final depots (Naidoo, 2011) (Figure 2).
Figure 2: Primary logistics overview for fuel distribution in South Africa
Source: Naidoo (2011)
Once fuel is transported to depots and storage facilities around the country, it is distributed to
different customers via three channels as follows:
Own distribution by oil companies: The oil companies distribute by road directly from their
depots and storage facilities to large wholesale customers such as those in food-processing
or mining. This distribution, as we discuss below, is primarily to large, lucrative customers in
urban centres. The companies also distribute to their branded service stations in these areas,
particularly those that require large volumes.

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Branded-marketers
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: These distributors operate as contracted agents of the oil companies
and distribute wholesale quantities of fuel to areas that are assigned to them by their supplying
oil company. These distributors operate under the brand of their supplier and will typically
service areas that are outside of urban centres that the oil companies do not service
themselves. The geographic areas where branded-marketers operate are typically those
assigned to them by the supplying oil company and contractually they are not allowed to sell
fuel outside of this area.
9
Branded-marketers are privately owned businesses however they
are subject to the policies of the oil company they are tied to with regards to branding, health
and safety and business procedures.
The contractual agreements between the oil company and the branded-marketers require that
the wholesaler buys all of its supply from the oil company with whom it has an agreement.
These are often rolling contracts and may be considered indefinite.
10
A significant proportion
of the owners of independent wholesale companies have worked in the industry for a number
of years which seems to aid them in starting their own businesses. For instance, due to pre-
existing relationships, many of them were able to buy up the assets or become the appointed
distributor in areas where some of the oil companies chose to disinvest their operations in
rural and peri-urban areas. In addition, because the infrastructure is already in place, the
distributor can leverage the established assets to start the business. These independents can
also easily contract with the major oil companies for supply of fuel and access to their customer
base. As branded-marketers, they have priority over non-branded marketers in terms of supply
of fuel and access to customers.
Independent wholesalers: Independent wholesalers also rely on the major oil companies for
their supply of fuel, and their fuel is branded in the name of their supplier. These distributors
may have a supply agreement with the oil company which speaks only to the volumes of fuel
and payment terms, for instance. However, they do not operate their businesses under the
brand of the oil companies and are free to service their own set of customers. These
distributors largely service rural and peri-urban areas and are free to service customers
throughout the country.
In many cases, these independent wholesalers are smaller operators that do not purchase
sufficient volumes of fuel to buy directly from the oil company. In this instance, the wholesaler
may develop a relationship with another established wholesaler, in most cases a branded-
marketer, to source fuel from them (See, for example, the case of Tipublox Petroleum, Text
Box 2 below). Due to the high capital requirements, one independent distributor interviewed
chose to enter the market and operate as an ‘agent’ that essentially finds customers and then
sources fuel from another wholesaler with no infrastructure of its own. Margins received are
8
We understand that the term ‘branded-marketers’ is specific to Chevron distributors however we use
it more widely here to encompass what are termed ‘branded distributors’ and ‘integrated wholesalers’
and ‘company-owned dealer-operated’ wholesalers for convenience.
9
Interview with Free State Petroleum Distributors, 23 July 2014.
10
Interview with Hammertone Fuels, 27 July 2014.

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then shared between the wholesaler, agent and the transporter. An advantage of this mode of
entry is that the agent has the flexibility to buy fuel from different companies or change
suppliers if dissatisfied with the service provided as they are not bound by a long term supply
agreement.
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However, this also presents a risk in terms of security of supply and reduced
profits because of having to share returns with suppliers and transporters.
There are certainly overlaps in terms of the different groups of customers serviced by
independent and branded wholesalers. For instance, a large proportion of their customers
would be located in areas outside of major urban centres where the oil companies will operate.
Commercial customers include fuel retailers that on-sell to consumers at service stations, as
well as more industrial customers that buy bulk loads for the purpose of providing their own
services downstream such as farmers, mines, processing and manufacturing companies,
municipalities and other distribution companies.
It is worth mentioning the characteristics of the retail market insofar as it represents a
significant group of customers for wholesalers. The retail ‘pump’ price for petrol is regulated
(Competition Commission, 2012) with the Regulatory Accounting System (RAS) determining
the margins which should be allocated to each level of the value chain. The diesel price is not
regulated however diesel is a controlled product for which there is a maximum Wholesale List
Selling Price (WLSP) which is published by the DoE.
There are approximately 4200 service stations in South Africa which is a significant proportion
of the more than 6000 retail licences which have been issued (Lewies, 2013). Approximately
60% of these retail sites are owned by the oil companies and they account for approximately
70% of volumes sold (Lewies, 2013). In retail there is also a broad distinction that can be made
between ‘company-owned retailer-operated’ (CORO) sites, and ‘retailer-owned retailer-
operated’ (RORO) sites. In the latter arrangement, the retailer would typically own the site
licence (i.e. confirming that the site/land is certified and fit to be used as a site for a service
station including compliance with environmental impact assessment requirements, health and
safety standards), as well as the retail licence for that service station. In CORO arrangements,
the oil company will typically own the site licence, whereas the dealer will own the retail licence.
Given that the price of petrol at the pump is regulated, competition between different service
stations is predominantly based on brands with a growing number of owners also focused on
the convenience store aspect of their service stations as this environment is not regulated. We
turn to the issue of regulation in the sector in the following section.
2.2. Review of regulation in the sector
There are two main bodies that govern or regulate the liquid fuels industry in South Africa; the
DoE and the National Energy Regulator of South Africa (NERSA). The DoE’s legislated
mandate is “to ensure secure and sustainable provision of energy for socio-economic
11
Ibid.

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development” (Department of Energy, 2014). The main act which informs the duties of the
DoE in respect of liquid fuels is the Petroleum Products Act No 20 of 1977 as amended by Act
No. 58 of 2003 and Act No. 2 of 2005. The Act deals mainly with the licensing of
manufacturers, wholesalers and retailers of petroleum products but has been amended to
allow for transformation in the industry, the amendment of outdated provisions, appeals and
arbitration, as well as to enable the Minister of Minerals and Energy to develop regulation. The
liquid fuels charter works hand in hand with the Petroleum Products Act to promote
transformation in the industry, and serves as an addendum to the Act.
The DoE mainly deals with the licensing and pricing in the industry. Entrants into the industry
require either wholesale or retail licensing depending on what area of the value chain they
wish to operate in. Obtaining licences appears to be relatively simple as an attempt by the
DoE to encourage entry into the industry of Historically Disadvantaged South Africans
(HDSA).
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Those operators who wish to import or export fuel must additionally acquire a permit. The
permit can be obtained from the International Trade Administration Commission (ITAC).
Attainment of the permit is subject to a recommendation from the Department of Mineral
Resources. Applicants for the import permit must either be licensed manufacturers or
historically disadvantaged South African wholesalers. The import and export of fuel is
governed by the International Trade Administration Act 71 of 2002 and the Guidelines
Governing the Recommendations by the Department of Mineral and Energy to the
International Trade Administration Commission in respect of the Importation and Exportation
of crude oil, petroleum products and blending components. Importing of fuel however has
been mostly restricted to the major oil companies due to a combination of factors including
lack of access to transport infrastructure and necessity of large balance sheets to hedge the
risk involved as discussed further below.
The DoE also regulates the pricing structure for liquid fuels in the industry. The current
structure in place is the Regulatory Accounting Systems (RAS) which replaced the Marketing
of Petroleum Activities Return (MPAR) system. RAS was instituted with a view to compensate
investment in all activities in the value chain including storage and handling, distribution,
wholesaling and retailing but excluding refining (SAPRA, 2013). This resulted in the separation
of some activities that had formerly been considered to fall under wholesale. For instance the
wholesale margin had formerly included a return on wholesale operations as well as a partial
return on retail assets (Mondliwa and Roberts, 2014). With RAS, the returns on different
activities in the value chain are allocated according to location in the value chain. Everything
related to retail including return on retail assets is therefore categorised under retail. The
wholesale margin is calculated using cost accounting wherein the company’s costs at every
level of production are factored in, including the costs of products, process and projects. The
12
Interview with DoE, 3 September 2014.

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reallocation of the returns on all retail assets to the retail level caused the wholesale margin
to reduce substantially.
A benchmark service station of approximately 300 000 litres per month throughput is used to
calculate the retail margin. The assets and cost recovery of this benchmark service station are
used to determine the return. Costs such as rental, interest, labour and overheads are all
included in the cost structure. The storage margin is calculated using four benchmark depots
while the secondary distribution margin is based on the number of trucks used to deliver the
benchmark retailer volumes. The vehicle maintenance costs are also added to the cost
structure of the secondary distribution margin (Mondliwa and Roberts, 2014). A more detailed
explanation of both RAS and MPAR is in section 3.6 which discusses the policy and regulatory
barriers in the industry.
The second body governing aspects of the fuel industry is the industry regulator; National
Energy Regulator of South Africa (NERSA) established in 2005 by the National Energy
Regulator Act No 40 of 2004. Section 4 of the Petroleum Pipelines Act No. 60 of 2003 indicates
the duties and functions of the regulator which includes setting tariffs for petroleum pipeline
operations and approving tariffs for petroleum storage and loading facilities (NERSA, 2007).
The Petroleum Pipelines Act is an important piece of regulation governing the distribution of
fuel. The objectives of the Act include: promotion of competition in the construction and
operation of petroleum pipelines, loading and storage facilities as well as the effective use and
development of the above assets; ensuring safety and environmentally responsible
transportation and storage of petroleum; providing security of the pipelines and related
infrastructure; enabling equitable access to petroleum pipelines and affordable petroleum
products, loading facilities and storage facilities; facilitating investment in the industry;
promoting transformation to allow for historically disadvantaged South Africans to enter the
industry through licensing; encourage the development of competitive markets for petroleum
products and to ensure sufficient supply of petroleum to meet market requirements. These
objectives are wide-ranging and may at times be in conflict with one another as will be
discussed further below. Section 20 of the Petroleum Pipelines Act allows NERSA to prescribe
licensing conditions to regulated entities.
In addition, it is necessary to apply for an environmental authorisation, which requires an
environmental impact assessment be done as well as other related environmental and land
use approvals depending on the nature of the facility.
The Act also gives NERSA the mandate to compel operators of pipeline, loading and storage
facilities to allow independents access to unused or “uncommitted” capacity. However,
NERSA is unable to compel the owners or operators to expand their facilities, a point to which
we return in sections to follow.
2.3. Review of competition cases in the sector
There have been a number of competition cases in this sector. Those with relevance to the
analysis of barriers to entry and expansion in fuel wholesaling are discussed briefly below.

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Sasol/Engen merger
13
In 2006, the Competition Tribunal prohibited a proposed merger between Sasol and Engen.
At the time, Sasol had 82% of the inland wholesale supply and was a part owner in Natref,
whereas Engen had refining capacity at the coast. The inland region represented over 60% of
national demand and through the Main Supply Agreement, the other oil companies had been
required to purchase Sasol’s product in the inland region but Sasol was prevented from
entering the retail market. At the downstream level therefore, Engen had a much bigger
network of retail outlets than Sasol. At the time government was talking about deregulating
the retail market and the pipeline capacity from the coast to the inland region was potentially
going to be expanded. In this context, Sasol gave 5 year’s notice of the termination of the MSA
in 1998 and subsequently entered negotiations with Engen.
The Tribunal found that there was a credible threat of foreclosure as a result of the merger
and that Sasol would have the incentive and ability to foreclose competing retailers inland.
The Tribunal considered that it would be some time still before increased pipeline capacity
came on-stream and in the meantime, Sasol could self-supply and exclude downstream
competitors in the inland region. The other oil companies would not be able to retaliate at the
coast as Sasol had access to Engen’s Durban refinery. According to the Tribunal, this was
likely to result in other oil companies “suing for peace” and agreeing not to compete with the
merged entity. In other words, a coordinated outcome was likely. The Tribunal considered that
the characteristics of the petroleum industry lend themselves to a collusive outcome:
“all the conditions for cartel formation and maintenance pertain: the structure of the
markets is oligopolistic; the products are homogenous and technologically mature;
entry barriers are very high; cost structures of the various oil companies are similar …
the rate of growth in demand is moderate and demand is highly inelastic; there is no
countervailing buyer power to speak of; the markets are highly transparent; there is an
extensive history of co-operation both at the level of the MSA and also in a range of
joint ventures and ubiquitous swap and hospitality arrangements”
The merger proceedings revealed the complex bargaining game that plays out between the
major oil companies as the controllers of the fuel supply in South Africa and the predisposition
of the industry towards a coordinated rather than a competitive outcome. It also highlighted
the dominance of Sasol in the inland market and the importance of the pipeline in terms of
weakening this dominant position.
Exemption application by SAPIA
14
13
See Tribunal case number 101/LM/Dec04.
14
This exemption was granted by the Competition Commission and subsequently appealed by a firm
called Gas2Liquids. The Tribunal upheld the Commission’s decision. See Tribunal case number:
013607.

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Following fuel shortages in late 2005, the Minister of Minerals and Energy appointed a task
team to investigate the causes of the shortage and make recommendations on how to avoid
similar situations in future. The Task Team suggested that greater coordination by industry
participants over issues such as supply lines and shut-downs was needed and recommended
that the industry apply for exemptions from the Competition Act in order to enable this. In 2009,
the Minister of Trade and Industry granted the industry a designation in terms of the
Competition Act for the period until 31 December 2015. SAPIA and its members applied for a
short-term exemption in 2010 to coordinate supply for the period of the World Cup. Before the
expiry of this exemption, however, SAPIA applied for a further exemption for a set of
agreements reportedly intended to ensure the continuity and stability of liquid fuels supply, to
cover the rest of the period of designation. The Commission granted this exemption in October
2011.
During its investigation of the exemption application, the Commission had received a
submission opposing the granting of the requested exemption. This was from the South
African Petroleum and Energy Guild and Others (SAPEG), a non-profit organisation
established to represent emerging companies in the energy sector. SAPEG argued that many
of the emerging players in the wholesale market are historically disadvantaged South Africans
and that they struggle to access the national infrastructure used by the major oil companies at
different stages of the supply chain (a concern echoed by the independent wholesalers we
interviewed). The Commission’s view was that these concerns were not relevant to an
assessment of the exemption as per the Competition Act, and that it rather falls within the
responsibility of NERSA and the DoE to ensure access for HDSAs and others to the
infrastructure.
Gas2Liquids, a member of SAPEG, decided to appeal the granting of the exemption, arguing
that the agreements are not required for economic stability of the industry and that stability
could be assured by less anti-competitive means. It also argued that the exemption would
benefit the major oil companies at the expense of independent wholesalers.
Ultimately, the Tribunal upheld the Commission’s decision, finding that none of the grounds
for appeal put forward by Gas2Liquids were sufficient to overturn the decision. On the subject
of the anti-competitive effects on independent wholesalers, the Tribunal stated firstly that this
is not a proper ground of appeal since an anti-competitive effect is the rationale for an
exemption to be granted. Secondly, the Tribunal did not agree that the exemption itself
contributed to the exclusion of independents or that to the extent that such exclusion would
occur, it would necessarily be anti-competitive. The Tribunal concluded that the Commission
was correct to provide for a permissive rather than a mandatory regime for access by non-
SAPIA firms.
There were conditions attached to the exemption, including one requiring SAPIA to open up
its membership to accommodate independents on “fair, reasonable and transparent grounds.”
SAPIA has done so, however, in terms of board representation the organisation is still stacked
in favour of the major oil companies. The major oil companies each have a representative on
the board whereas biofuels manufacturers, liquid fuel wholesalers and LPG wholesalers may

14
only have one representative each. This means that the 12 independent wholesalers who
have joined SAPIA between them only have one representative on the board.
15
Information exchange
16
In October 2012 the Competition Commission referred a case of price fixing and market
division regarding the supply of diesel to the Tribunal for adjudication. The case involves
Chevron, Engen, Shell, Total, Sasol, BP and SAPIA. The Commission uncovered extensive
sharing of information on sales volumes by the oil companies by magisterial district, customer
category and fuel type. According to the Commission, this allowed them to track one another’s
sales and allocate markets, effectively eliminating competition between the firms.
As discussed in Roberts and Mondliwa (2014), an oligopolistic market structure and a history
of cooperation renders the exchange of such information highly problematic, increasing
transparency and stifling competition. A player has no incentive to secretly discount to gain
market share if it knows that this action is immediately visible to its competitors through the
information exchange, prompting them to respond by also discounting (Das Nair et al, 2012).
Thus in such markets, even in the absence of a formal agreement not to compete, information
exchange may facilitate the maintenance of a tacit understanding with similar effects on
competition and on consumers.
The Commission sums this up as follows:
“The disaggregated sales information exchanged between oil companies in the case
being referred here removed any element of surprise in strategic decision making and
functioned as a reliable substitute to direct cartel interactions insofar as it made
monitoring of rivals possible. This, together with the history of coordinated behaviour
and other characteristics that exist in the petroleum industry, made achieving cartel
outcomes post the exemption period possible.”
17
This market structure and lack of competition between the major oil companies may also
explain some of the difficulties cited by the independent fuel wholesalers. Those interviewed
noted their lack of ability to effectively play the major oil companies off against one another in
order to obtain lower prices for the product. This is largely due to the mechanisms employed
by the major oil companies to control the market, particularly the use of branded distributors
who distribute product only for one company. The major oil companies assign these
wholesalers a portion of their customers based on a geographic area and it seems that they
are then not allowed to compete for customers outside these areas. The major oil companies
will not deal with a new independent wholesaler directly but will refer them to a branded-
15
SAPIA Annual Report 2013.
16
Competition Commission press release, 24 October 2012. Available online:
http://www.compcom.co.za/assets/Uploads/AttachedFiles/MyDocuments/Competition-Commission-
refers-a-case-of-collusion-against-oil-companies.pdf
17
Ibid.

15
marketer. Those interviewed reported that it is therefore difficult as a new entrant to negotiate
for lower prices, as there are typically few alternatives available. The history of information
exchange and its effects on the market may present a further reason that independent
wholesalers find it difficult to negotiate for lower prices.
Engen/Zenex merger
18
The challenges of operating as an independent wholesaler in the liquid fuel industry are also
discussed by the Tribunal in its decision to approve the merger between Engen and Zenex.
Zenex was a regional wholesaler and retailer of fuel that did not have its own refining facilities.
As the Tribunal describes:
“Zenex finds itself in the vulnerable situation where it is totally dependent on its
competitors for the supply of petrol and diesel and other petroleum products. In a
deregulated market Zenex will be unable to subsidize discounts given by its dealers,
as it does not possess the upstream profit resources that rival refining companies have.
This will cause Zenex’s service stations to become uncompetitive.”
This highlights the barriers to successful entry as an independent wholesaler in this industry
stemming from the structure of the market and the control exerted by the major oil companies
over the supply of inputs and infrastructure.
Petroline complaint
19
The Competition Commission has also received a complaint with regard to pipeline
infrastructure, however, this was from a potential competing infrastructure provider rather than
from a user of the infrastructure. In 2011 the Commission received a complaint from Petroline
RSA. In 2007, NERSA granted Petroline a licence to build a petroleum pipeline from Maputo
to Gauteng, in competition with Transnet’s existing pipeline and another pipeline that was
under construction by Transnet, the new multi-product pipeline (or NMPP). Petroline alleged
that its project was rendered unviable by policy and regulatory decisions (Robb, 2014). Firstly,
Transnet received a subsidy from the National Treasury in the form of a 7.5c/l fuel levy to fund
the NMPP. Secondly, NERSA granted tariff increases for Transnet’s pipelines which were too
low for Petroline to be able to operate profitably. Transnet’s coast to inland tariff is kept
artificially low through cross-subsidisation. Petroline argued in its submission to NERSA on
the 2011 tariff determination:
“The regulated cross subsidies presented render it impossible to compete with the
state enterprise”.
18
Tribunal case number: 26/LM/Dec99.
19
Commission case number: 2011May0059.

16
The Commission found that it did not have jurisdiction to consider the complaint as it is not
empowered to review decisions of National Treasury or NERSA, and it did not refer the
complaint.
Despite relating to competition in infrastructure provision rather than at the fuel wholesale
level, this case had important implications for the ability of independent fuel wholesalers to
compete effectively. The proposed pipeline from Maputo would have offered an alternative
source of product to independent wholesalers, reducing their reliance on the major oil
companies and hence weakening the control of the major oil companies over the liquid fuel
value chain. As discussed in the following section, independent fuel suppliers find it difficult to
access port infrastructure in South Africa, as the only facility for landing fuel in Durban is owned
and controlled by the major oil companies and available storage capacity is extremely limited.
This makes importing fuel from other sources almost impossible. Even if there was some way
of shipping fuel to Durban, getting it to the inland regions is challenging given the major oil
companies’ control of access to the pipeline via their refineries. If independent wholesalers
could import fuel through Mozambique, whilst this would be expensive and potentially risky, it
would at least provide for an alternative source of fuel and therefore alleviate their dependence
on the major oil companies to some extent.
2.4. Conclusion on background of the fuel sector
The background on the value chain, the regulatory environment and competition cases in the
sector sets the context for understanding barriers to entry in fuel wholesaling, which is the
focus of this study. The nature of regulation and the interdependent relationships between the
main oil companies is directly linked to some of the competition issues experienced in the
sector. As we discuss in sections to follow, some of these issues have resulted in stifled
competition between wholesalers, and the major oil companies themselves, which is aided by
the current constraints on infrastructure for pursuing alternative sources of fuel. The sections
which follow discuss the findings at the level of wholesale distribution of fuel, although it is
quite evident that dynamics at this level are directly influenced by and form part of the bigger
set of concerns in the petroleum industry as a whole.
3 What are the barriers to entry and expansion in liquid fuel distribution in
South Africa?
This section assesses the barriers to entry and expansion in liquid fuel distribution based
largely on information obtained in interviews, and publicly available sources. We categorise
the primary barriers into six main themes, namely: the costs of entry, skills and training, access
to supply, access to customers, the reactions of incumbents to entry, and policy and regulatory
challenges.
3.1 Costs of entry
The liquid fuel industry is one that requires large amounts of capital and a lot of specialised
knowledge which can make the costs of entry very high. In the first instance, licences are
required for operation. The application costs for the wholesale, retail and site licences are
generally not prohibitive as indicated in table 2 below. Application for a wholesale licence costs

17
R1000 and the annual licence fee is R500. The site and retail licence (excluding the annual
information fee) is no more than R2000.
20
Table 2: Cost for licences
Wholesale licence
Retail licence
Site licence
Application fee
R1000
R500
R1000
Annual licence fee
R500
R500
0
Total
R1500
R1000
R1000
Source: South African Government Services
21
The capital requirements however, tend to be high depending on the wholesaler’s mode of
entry. A wholesaler who chooses to enter the market as an ‘agent’ does not need any real
assets to begin operating. Essentially, the wholesaler finds the customers, negotiates a price
and acts as a go-between for the customer and the supplier (which is sometimes another
wholesaler). The agreed contract for supplying the customer is between the wholesaler and
their supplier and not the customer. The trucks used for delivery typically belong to the
supplier. The wholesaler negotiates a price whereby they can pay the supplier for the fuel and
trucks and still earn a profit. However, even at this level, customers often expect storage tanks
to be provided at their premises at the supplier’s cost. The wholesaler provides these services
as this is where competitive advantage is acquired given that the ability to compete on price
is limited.
An independent distributor prepared to invest in infrastructure, needs to consider leasing or
buying a strategic piece of land, equipment such as trucks, and tanks, and taking measures
to meet the environmental impact compliance requirements even before purchasing the fuel
to sell. A small new truck of 16 000 litres can cost anywhere between R1.8 million and R2
million while a second hand truck of the same size can cost between R600 000 and R800
000.
22
Installation of storage tanks can also cost between R30 000 and R70 000. If the
wholesaler wanted to vertically integrate into retail as well, setting up a retail site would cost
between R5-7 million excluding the retail store.
23
These assets also need continuous
maintenance which raises the operating costs of the business. It should be noted, however,
that these costs are not “sunk” in that the wholesaler would be able to sell the assets on exiting
the industry. Thus in theory this should not represent a large barrier to entry, as firms should
be able to get financing based on the value of the assets being purchased. To the extent that
there are capital market imperfections, however, which prevent firms from accessing
financing, this may represent a barrier to entry.
Another cost of entry for the wholesalers is the expected payment terms and contracts. Due
to the small profit margins wholesalers can only really compete on the basis of terms they are
20
Permits and Licenses, South Africa Government Services. 2nd September 2014. Available online:
http://www.services.gov.za/services/content/Home/OrganisationServices/permitslicencesrights/Petrole
umone/en_ZA
21
Ibid.
22
Interview with Sitanani Fuel Distributors, 24th July 2014.
23
Interview with Free State Petroleum Distributors, 23rd July 2014.

18
willing to offer to their customers. To be able to offer credit terms the wholesaler requires large
amounts of working capital and good cash flow especially since purchases of fuel from the
major oil companies have to be done in cash and upfront. If the credit terms offered are for a
month for example, this means that the wholesaler must still purchase fuel, and continue
paying other operational costs, having not received any income for that period. This might be
one of the reasons for the failure of new entrants. The DoE stated that several applications
are received daily for transfer of licences and ownership which is indicative of the challenges
of financial viability faced by firms that enter the market.
24
This barrier to entry is not so much
about the cost of entry as it is about the business skills and understanding of the industry
required in order to be successful. This will be discussed in more detail in the next section.
Furthermore, there are safety and compliance requirements that a distributor needs to adhere
to which cost money and can cause costly delays. A wholesaler must comply with
environmental regulations in line with the National Environmental Management Act 107 of
1998 (NEMA) as well as local and municipal council requirements. An environmental impact
assessment needs to be carried out before construction on a wholesale, retail or storage site.
The minimum number of days that an assessment can take is 106 days
25
although the
assessment may take up to two years. Application for a basic assessment costs R2000 while
a full environmental impact assessment costs R10000.
26
Once the necessary authorisations
are received, it could still take some time before the site is constructed and the owner is able
to earn a return. After construction of a retail site for example, it could take a year or two before
the owner is able to sell viable volumes. There is thus an opportunity cost in terms of the
alternative uses to which the capital invested in the site could be put. These costs are sunk
and therefore would affect the decision of investors to enter the industry.
3.2 Skills and training
Lack of skills is a general problem in South Africa and the fuel industry is no exception. There
are several aspects to running a business as a fuel distributor and most of the owners
succeeding in the industry are those who have already been in the industry in one capacity or
the other and have a lot of experience. The knowledge required in the industry can at times
be specialised to the industry including local area knowledge. New entrants need to be aware
of how to access supply of fuel, purchase and transport it. Local area knowledge is particularly
important when entering a new local market and trying to build a customer-base to the extent
that some companies will look to actively attract sales people that have experience in that
market from other companies.
27
Entrants also need to be aware of the regulations pertaining
to the distribution, storage and sale of fuel, including health and safety provisions.
24
Interview with DoE, 3 September 2014.
25
SADC Environmental Legislation Handbook 2012. Available online on:
http://www.saiea.com/dbsa_handbook_update2012/dbsaFrameSet.html
26
Ibid.
27
Interview with Hammertone Fuels, 27 July 2014.

19
The business is largely dependent on relationships, which is often the competitive advantage
of those who have already worked in the industry for the major oil companies. It is these same
relationships that often influence whether a major will contract with a wholesaler or retailer.
Owners who have been in the industry and worked with the major oil companies before are
more likely to get supply contracts from them. Being in the industry would have also given
them valuable industry experience.
The DoE is encouraging the entrance of HDSAs however the Liquid Fuels Charter audit report
of 2011 showed that very few are involved in the management and ownership positions in
which they would acquire the relationships and experience necessary to run their own
wholesale companies. Moreover, those HDSAs in ownership positions appear to be mostly
non-operational
28
and only present to raise the BBBEE score for the companies. While oil
companies do budget some funds for the training of their staff, capacity building of HDSAs
dropped from 71% to 55% between 2006 and 2011 (DoE, 2011). It is also not clear whether
the training given includes management skills.
Another area of skills shortage in the industry is cash flow management (DoE, 2011). As
mentioned above, one of the major requirements in the fuel wholesale industry is significant
working capital. The finances are needed to hedge the risks created by offering credit terms
to customers and for the operational costs of the firm. Therefore, to derive efficiencies in
distribution a good understanding of the business as well as finance and accounting skills is
important. While a firm may decide to enter on the back of having entrepreneurial capital to
invest, this does not mean that those owners or the managers they hire have required industry
experience.
3.3 Access to supply
As a liquid fuel wholesaler, it is extremely important to have a reliable, high quality supply of
fuel. Customers, particularly large customers such as the mines, cannot afford to run dry, and
in a market where independent wholesalers are unlikely to get access to cheap sources of
product, quality of service and reliability may be the only dimensions on which they can
compete. There are several reasons why gaining access to fuel is challenging for independent
wholesalers in South Africa.
All of the independent wholesalers interviewed confirmed that the major oil companies control
access to liquid fuels supply in South Africa. In general, the major oil companies will not supply
a new entrant directly as the volumes required will be too low. Instead new entrants must
usually rely on another wholesaler, either a branded or independent wholesaler, to sell fuel to
them. This, combined with the fact that a new entrant will be buying relatively small volumes,
means that the price at which he can buy fuel is unlikely to be low enough for the entrant to
make a significant margin.
28
Interview with DoE, 3 September 2014.

20
Even those wholesalers who are longer established in the industry describe the stranglehold
that the major oil companies have on supply and explain that this means they can essentially
dictate terms to wholesalers. Where the wholesaler is a branded-marketer on behalf of one of
the oil companies, it must buy from that oil company according to the terms of their agreement.
Even those which are not branded state that it is not usually fruitful to play the major oil
companies off against one another in order to get fuel at a lower price. All those interviewed
cited that the market is generally short of fuel, due to a lack of refining capacity and other
infrastructure in the country, as well as the age of the existing refineries which means that
shut-downs and supply disruptions are quite frequent. This gives the major oil companies an
even stronger bargaining position.
A further problem with being a non-branded wholesaler in this environment is that when there
are disruptions to supply, the major oil companies will usually supply fuel to their own retail
customers and branded-marketers first, and only after their own customers have been
satisfied will they supply to independents. Thus independent wholesalers sit in a precarious
position and are more likely to let down customers when fuel supplies are tight.
An alternative to purchasing fuel from the major oil companies would be to import fuel from
the world market, effectively bypassing the major oil companies. This, however, is fraught with
complications. First of all, importing fuel is an extremely risky endeavour requiring a large
balance sheet and well-managed cash flow. Even a small tanker-load of fuel is around 20
million litres, and it takes a minimum of 3 weeks for the ship to reach the port, in which time
currency and oil price fluctuations may have changed the economics of the deal. Once the
fuel has landed, there can be problems with the quality of fuel which are very difficult for an
independent wholesaler to manage. The major oil companies have refineries in the country
and therefore can fairly easily rectify any deficiencies in the quality of landed fuel. The
independents do not have access to these facilities. Even if several independents club
together, importing fuel is therefore still a substantial risk to take on.
The second major difficulty with importing fuel arises once again from the size and entrenched
position of the major oil companies. The port facilities for landing fuel in Durban are owned by
the major oil companies in a joint venture. Thus, in order to land fuel currently, an independent
player would have to negotiate with the major oil companies for access to this. Similarly, the
existing storage facilities in Durban are mainly owned by the major oil companies. One
commentator noted that there is no commercial imperative for the major oil companies to
construct more storage capacity than they expect to use. In addition, even when there is
apparently spare capacity in their facilities, it may not be practical to rent it out to independents
since the major oil companies need to ensure that there is always sufficient available capacity
for the arrival of their next fuel shipment. Demurrage costs are high if the product is left
unloaded on the ship for a lengthy period of time.
Independent storage facilities are available through companies like Vopak. However, these
facilities are extremely expensive to build and in order to get financing, storage companies are
usually required to acquire long-term “use or pay” contracts with customers for at least 80%
of the capacity to be built. This generally means engaging the major oil companies who would
have substantial volume requirements and the ability to guarantee volumes for five or six
years. Smaller companies by contrast take on a substantial risk by signing up for a long use
or pay contract. In addition, storage companies sometimes require guarantees to be paid up-

21
front while the capacity will only come online in 18 months to two years. This is onerous for a
small firm.
There is a small amount of independent storage available which can be utilised by smaller
firms but in general, even the independent facilities are contractually bound to the major oil
companies. The table below shows that only 6% of storage capacity for petrol and diesel at
the port in Durban is currently in the hands of independents. The remaining 94% is owned by
the major oil companies.
Table 3: Current storage volumes at the port in Durban for petrol and diesel, by company
Petrol
Diesel
Petrol
Diesel
BP & Shell (Natref)
191 541
132 820
66%
74%
Engen
57221
6711
20%
4%
FFS
0
30
0%
0%
Sasol
22 027
15 153
8%
8%
Total SA
0
14 364
0%
8%
Vopak
17 400
11 515
6%
6%
Total volumes
288 189
180 593
Source: Data provided by NERSA, 2014
Overall, only 1.7% of storage capacity is used for independents currently.
29
NERSA has tried
to improve the situation by forcing facility owners to have an explicit allocation mechanism for
giving out uncommitted capacity. Each storage owner produced one of these allocation
mechanisms and these are on NERSA’s website. Some of the mechanisms and requirements
are quite complex, however. This is justified to some extent as there are safety and
reputational risks to the major oil companies from granting access to their facilities and new
entrants often do not understand what is involved. NERSA has only had one formal complaint
about storage facilities in nine years which is a surprisingly low number. It may be that
independents have not attempted to access storage facilities, or that they are reluctant to
antagonise the major oil companies, whom they rely on for the supply of fuel.
If an independent wholesaler does manage to successfully import fuel through the port and
find storage facilities, it would then need to move the fuel to the inland region, and to do this,
it would need access to the fuel pipeline owned by Transnet. Access to the pipeline is open to
all in theory, as Transnet is mandated to ensure that independent firms are able to get their
product into the pipeline. However, currently fuel is put into the pipeline directly from the
Durban refineries and, therefore, in practice independents would again have to negotiate with
29
Interview with NERSA, 10 September 2014.

22
the major oil companies for access.
30
This problem may be mitigated to some extent once the
new NMPP and associated infrastructure is complete as the pipeline will have substantially
greater capacity and terminals are to be constructed at both ends through which product will
be inserted into the pipeline. This suggests that there may be greater scope for independent
access to the pipeline going forward, if fuel can be landed in Durban and available storage
capacity can be found.
Finally, at the other end of the pipeline, storage capacity is again an issue. To use the pipeline,
companies need access to storage facilities very close to the terminal which are linked by
pipeline to the terminal. Once again, independently owned storage capacity of this nature is
in short supply.
The Petroleum and Liquid Fuels Charter recognized the importance of access to infrastructure
for the success of small and emerging players in the industry and had the following as an
explicit objective:
“Access to large infrastructure for the movement and storage of crude oil and
petroleum products, such as SBMs, pipelines and depots and storage tanks, is
acknowledged as a critical weakness in the supply chain of emerging companies.
Owners to provide third parties with non-discriminatory access to uncommitted
capacity.” (Petroleum and Liquid Fuels Charter, 2000)
However, an audit of progress in fulfilling the aims of the charter carried out in 2011 found that
there had been very little advancement in terms of access (DoE, 2011). The audit found that
the major oil companies own and operate most of the petroleum facilities and infrastructure in
the country and they claim not to have uncommitted capacity which they could provide to
independents. Although they have been closing down storage facilities, these have not been
availed to HDSAs. The pipeline is also used almost exclusively by the major oil companies. It
was also found that access to facilities at the ports was largely based on “gentlemen’s
agreements” with no room to accommodate new participants. The audit found that NERSA
had not been sufficiently enforcing the Petroleum Pipelines Act regarding access.
When combined, these various challenges mean that the barriers to importing fuel via the port
in Durban are extremely high, as illustrated by the example of Royale Energy which is
discussed in Box 1 below. The biggest difficulty is that in order to import, a firm must have a
solution to all of these problems simultaneously – it is of no use to have access to the pipeline
without available storage capacity in Gauteng for example. There is also significant risk
involved and the process requires a substantial cash flow and balance sheet. Altogether this
is a daunting prospect for an independent wholesaler. Nonetheless, due to the stranglehold
the major oil companies have over supply currently, some are trying to tackle these
challenges.
30
Teleconference with Transnet Pipelines, 26 August 2014.

23
A further possibility for independent wholesalers is to import through Mozambique where the
major oil companies do not have control of all the port facilities. The fuel would then have to
be transported to South Africa, either by rail or truck. These methods are both expensive and
unreliable, however.
31
In the past firms have had bad experiences with fuel acquired through
this route in terms of quality and reliability. Given the costs involved and the zone pricing
differentials currently in place, those interviewed suggested that it is not viable to supply the
inland regions except in Mpumalanga and Limpopo via Mozambique.
31
Interview with LFWA, 15 August 2014.

24
Box 1: Royale Energy – successful entry
Royale Energy is one of the larger independently owned, BBBEE non-integrated wholesaler and
marketer of petroleum products. Key products distributed are:
Petrol, Diesel, Illuminating Paraffin Liquefied Petroleum Gas (LPG) and Lubricants.
Key operations involve distribution and wholesaling, multi-brand management of own and third
party brands and retail network and packaging and distribution of products. Royale Energy is a
(Level 2) 71% BBBEE owned wholesaling and retail fuel company which started in 2003. In 2004,
it secured a supply agreement with Sasol and began trading in the inland provinces. Its initial
customers were the smaller commercial and industrial businesses. Its milestones are:
2003 Royale Energy is founded to trade in Liquid Fuels Industry
2004 Secures an evergreen supply contract with Sasol
2004 Commences fuel trading in the inland provinces
2008 Buys Viva Oil to establish a retail trading business
2008 Eyabantu completes a transaction to purchase 30%
2008 Secures additional fuel supply from PetroSA
2012 Acquires the Mpumalanga South Cluster from Chevron
While Royale’s growth has been phenomenal compared to many new entrants, there are barriers
to its increased growth. The two main barriers are access to infrastructure (coastal and inland) and
finance. Most storage facilities are owned by or reserved for the major oil companies, and storage
facilities provided by independent storage owners are also reserved by these companies. Costs
charged are more favourable to the majors given the international links and agreements. Attempts
to secure their own inland storage facilities were unsuccessful. These facilities were lost to an oil
company with headquarters overseas. As is the case with most locally based independent
wholesalers, Royale is forced to depend on the majors for access to storage and refineries. This
means that in case of shortages or emergencies, Royale is pushed to the back of the queue when
needing to uplift its contracted product from the facilities owned and supplied by the majors.
Acquiring finances from institutions (PIC, National Empowerment Fund, DTI etc.) and Banks is far
more challenging than meets the eye. Royale has found it much easier to obtain financial support
from companies outside of the country.
Certain “high volume” customers also request that Royale (and other independent wholesalers)
provide payment terms (30 and 60 days) that are unsustainable and far more challenging for
smaller role-players than the major oil companies.
To ensure future sustainability and success of the independent non-integrated oil companies in
South Africa like Royale Energy, Royale believes that access to infrastructure at more affordable,
realistic tariffs (as determined by NERSA) would be paramount.

25
3.4 Access to customers
Effective entry into a market entails not only entering the market, but being able to undertake
independent business strategies in order to gain a customer base in that market (See Box 2
on the entry of Tipublox Petroleum). In the fuel sector, this is affected by a number of the other
factors discussed in this report such as the applicable regulatory environment and the
reactions and strategies of incumbents. However, it is also reliant on the ability of entrants,
and small players, to contest markets and compete for customers through better pricing,
efficiencies or quality of service, for instance.
The contestability of markets and access to customers is an important aspect of fuel
distribution, particularly insofar as the major oil companies already dominate key markets,
customers and routes to market. For example, while there may be a large number of
customers in a market, if the majority of those customers are in fact tied up in long-term
exclusive supply agreements then the actual contestable share of the market for an entrant is
very limited. In the case of liquid fuel, the distinctions between branded and independent
wholesalers, as noted above, also have a bearing on the degree of competition and the
contestability of markets due to the ability of the major companies to influence the geographic
area and specific customers that a wholesaler can supply on the basis of their contractual
agreement.
The wholesalers interviewed held that as a function of the regulated pricing environment from
the 1990s, the oil companies over time have tended to remove themselves from servicing
customers in rural and peri-urban areas where the regulated pricing model as measured
against the significant costs of distributing to those areas, did not yield attractive returns. While
this change in the market created opportunities for new and existing wholesalers to distribute
fuel to these more distant markets, it also had the effect of limiting the scope of the markets in
which these operators could compete as we discuss below.
In terms of the supply of fuel, customers prefer to source fuel which is refined by one of the
major oil companies and under their brands which is associated with a certain level of quality.
In this context, branded-marketers effectively run distribution operations that service the
business of the major oil companies in rural and peri-urban areas. At times branded-marketers
will also distribute for oil companies in urban areas however this does not appear to be in
competition with the supplier but rather complementing their distribution network.
32
This brand
association is an important asset for branded-marketers in terms of gaining customers who
associate brands with particular levels of service and quality and will sometimes forego
cheaper prices for a more reliable offering.
33
Due to the fact that branded-marketers operate as extensions of the main companies and
tender to operate in a particular area, they are allocated a specific geographic area and are
32
See, for example, interview with Hammertone Fuels, 27 July 2014.
33
Interview with Hammertone Fuels, 27 July 2014.

26
not allowed to compete outside of this area.
34
This relates to the fact that other geographic
areas may be allocated to another marketer for the same oil company, or the area may be
serviced by the oil company directly. Branded-marketers therefore do not face competition
from other marketers falling under the same brand in their allocated geographic area and only
compete with independent wholesalers and the branded-marketers of other oil companies.
Independent wholesalers are able to sell fuel throughout the country which gives them a
greater opportunity to source customers, but also presents additional costs in terms
distributing to those customers.
35
In many cases, independent wholesalers are reliant on
branded distributors for their supply of fuel.
An important aspect of these vertical arrangements between branded-marketers and their
suppliers is that the agreements tend to vary in terms of duration and the terms which are
typically linked to the level of investment that the oil company has made in the facilities used
by the distributor.
36
Independent operators function under simple supply agreements which
are likely to be of a shorter term given the limited investment in their facilities that is made by
the oil company.
This discussion is important for understanding the contestability of markets and the ability of
wholesalers to compete for new customers, and has effects which take on several dimensions:
Product quality and competition - While customers generally value obtaining a good price for
fuel, they appear to also consider the reliability of supply and quality of service and product as
important determinants of their choice of supplier. In the case of branded-marketers aspects
related to the brand association act in their favour. They are also likely to benefit from the fact
that if there were significant shortages of fuel, oil companies would be expected to supply their
own customers and those of their branded-marketers before supplying other independent
operators.
37
However, independent wholesalers are also able to leverage the fact that the fuel
which they distribute is sourced from the same, reputable refineries. It is only in the case of
imports from unknown sources that customers are likely to raise concerns about the quality of
the fuel supplied.
Price competition and value-added services - Most wholesalers interviewed noted that if the
product is sourced from one of the major oil companies, then the distinction between fuels
from different refineries is not significant and differs only on certain additives to the fuel.
Coupled with the fact that the price at the pump for petrol is regulated it means that wholesalers
are forced to compete with one another on a range of other aspects. Even where the costs
incurred by the wholesaler are higher than those accounted for in the regulated price,
customers typically do not want to pay any more than the regulated price and may consider
another supplier as a result.
38
Customers are price-sensitive, especially in the case where the
34
Interview with Free State Petroleum Distributors, 23 July 2014.
35
Interview with Tipublox Petroleum, 24 July 2014.
36
Interview with LFWA, 15 August 2014.
37
Interview with Sitanani Fuel Distributors, 24 July 2014.
38
Interview with Tipublox Petroleum, 24 July 2014.

27
fuel expense is a significant portion of their expenditure and/or when their volumes consumed
are relatively high.
39
The transparency in the industry pricing mechanism seems to ‘guarantee’
a margin for wholesalers, but it also significantly impedes their ability to negotiate with
customers.
40
Wholesalers therefore compensate for this by offering certain value-added
services, at times in competition with those offered by the oil companies.
Specifically, most wholesalers interviewed noted that their competitive advantage in
competing with other distributors and the oil companies was through deriving efficiencies in
their distribution processes and offering additional services. These services can include
providing infrastructure, fuel management services and building strong professional
relationships with customers. This last aspect is important in so far as customers often
complained of feeling neglected or being ‘just another customer’ when doing business with
the major oil companies.
41
Offering to provide and install fuel infrastructure such as above-ground storage tanks at the
premises of customers seems to be one important aspect of attracting customers. Some
wholesalers indicated that they would offer to provide these services, particularly where it was
financially feasible to do so. However, these investments are also linked to the other terms of
agreement with that customer. For instance, it becomes more feasible to provide infrastructure
at the customer’s premises if the customer is likely to consume significant volumes on a
regular monthly basis or if there was some compensation in terms of the agreed contract price
(or discount).
Other competitive advantages draw from distributing your own fuel and doing your own
equipment installations at customers’ sites.
42
Smaller wholesale businesses also have lower
overhead costs compared to the major oil companies, which can also make them more
efficient than other competing wholesalers. They are therefore able to pass these advantages
on to customers which influences customer switching.
Favourable payment terms and contracts - Another important aspect of competition is the
ability to offer favourable credit terms to customers. Most wholesalers noted that commercial
customers required credit terms even where their volumes consumed are low. Some
customers will purchase fuel on consignment with a view to only paying for the fuel once it is
sold or used. Customers who are government departments such as municipalities tend to also
only pay for fuel a month or more from when the fuel is actually delivered to them. Each of
these aspects, and the ability of the wholesaler to provide this support, is a critical aspect of
attracting and securing customers and as such requires wholesalers to have sufficient working
capital to cover their operations until payments come in. It was noted that in some cases
getting customers was not necessarily difficult (for instance, if the wholesaler is able to offer
39
Interview with Tipublox Petroleum, 24 July 2014.
40
Importantly, this can obviously be viewed as a pro-competitive outcome that benefits consumers.
41
Interview with Tipublox Petroleum, 24 July 2014.
42
Interview with Free State Petroleum Distributors, 23 July 2014.

28
these favourable payment terms), however maintaining customers is more difficult due to the
need for scale economies, efficient distribution and cost management systems and capital.
This is particularly interesting when considering that in most cases the customers that
independent wholesalers and branded-marketers compete for are those with smaller volumes
located in distant geographic areas which means the costs incurred to distribute to them are
higher. Given the narrow regulated margins, wholesalers have argued that their return on
investment has declined in recent years and reinvestment into expansion of their operations
is extremely challenging.
43
Quality of service and reliability - In order to maintain customers, it seems that independent
wholesalers (and even branded-marketers) need to be more flexible and efficient in their
operations relative to the main oil companies. For example, flexibility and timeliness is a pre-
requisite to supplying commercial customers especially where those customers run their
facilities during ordinary daytime business hours which means there is a relatively small
window each day for making fuel deliveries. The ability to deliver on time and in a reliable
manner is critical to retaining customers, whilst offering favourable terms of supply such as
credit to customers is important in attracting customers in the first instance. Customers in fuel-
intensive industries such as mining are especially difficult to attract and maintain due to the
large volumes they demand along with favourable payment terms, discounting and service
level requirements.
44
An overarching theme is that the apparent oversupply of wholesalers in some areas means
that customers can play wholesalers off against one another not necessarily on price but on
credit terms, provision of facilities etc. This seems to present both a risk as well as an
opportunity for wholesalers in so far as they may lose customers on a regular basis to another
supplier or major oil company with a better offering in the short-term, but can also poach
customers that leave their current supplier and are in the market for another. Customers do
not seem to commit to long-term supply agreements with independent wholesalers and
branded-marketers (except in the case of CORO retailers), and ongoing supply relationships
rely on trust and performance history, but also prevailing market conditions such as the price
of fuel or fluctuations in demand in terms of the customers’ own businesses. On this aspect,
several wholesalers noted that many of the distributors that have remained in the industry for
a relatively long period have relied on long-term relationships with the main suppliers of fuel
as well as good area-specific knowledge (and staff) and relationships with specific customers.
In light of the above, it seems likely that there is scope for independent and branded
wholesalers to compete against each other for customers particularly in rural and peri-urban
geographic areas. However, while there does appear to be scope for independent wholesalers
to compete directly with the major oil companies, their ability to do so is limited by their price
disadvantage compared to the major companies, their relatively high transport cost-base, and
43
See, for example, interviews with Tipublox Petroleum, 24 July 2014, and Hammertone Fuels, 27 July
2014.
44
Interview with Tipublox Petroleum, 24 July 2014.

29
the presence of branded-marketers in the same areas in which they wish to compete on and
whom they may well be reliant for the supply of fuel.
We note that the analysis above suggests a degree of rivalry in the wholesale market. In our
view, this speaks to competition in a particular, small, geographic market, largely on service
rather than price, and does not address the broader competition concerns throughout the
value chain. As we discuss below, the vertical supply agreements described in this section
add to the creation of symmetry between the major oil companies and along with the very
transparent pricing mechanism create fertile ground for tacit forms of coordination. The less
competitive outcomes observed at lower levels of the value chain, for instance the inability of
many wholesalers to effectively compete for customers on price or with one another due to
the terms of their supply agreements, are likely to be symptoms of a wider concern with respect
to competition in the sector.

30
Box 2: Tipublox Petroleum – Entry against the odds
Tipublox, which was started in 2009, has three staff members that include the two directors and a
consultant. The company was able to deliver its first load of lubricants in 2011 and fuel in March
2012. In preparing for entry, the Directors engaged in a lengthy process of building a database of
potential clients and developing a knowledge-base on the industry. While one of the Directors had
previously worked for Engen for five years, this role was not linked to fuel distribution and as such
did not provide the benefit of tacit knowledge and direct experience of the industry. Subsequent to
entry, the firm has been able to gradually build a client base although the pace of growth has been
slow. The company does not currently have its own infrastructure and transportation network, and
have outsourced these activities. Several aspects of the entry of Tipublox are of particular interest:
 Compliance with licensing requirements was made easier by the months of research conducted
prior to application. The business was registered within a month of the directors meeting one
another, and compliance with licensing requirements including providing a business plan, plan for
transportation, and the objections process took a total of 9 months. The firm had to invest some
initial funds in this process.
 Upon registration, the Directors began meeting with each of the six oil companies which was a
difficult process. Some of the companies cancelled meetings and expressed no interest in the
venture, whilst others suggested the firm builds up a client base before returning to contract
directly with them. Therefore, the firm started off by buying fuel from other wholesalers and
leveraging their existing infrastructure and trucks to distribute to customers, an approach
suggested by one of the oil companies. Their initial supply was sourced from Gulfstream Energy,
an established wholesale company.
 To gain customers, Tipublox has applied various strategies including speaking directly with mining
companies and approaching construction sites, and enlisting on municipal databases. One of the
businesses’ first customers was a client who had experienced an interruption of supply from their
usual source, which Tipublox was able to successfully address.
 Their first client was a public sector client that required lubricants and weapon oils. It is apparently
far easier to enter the market as a supplier of lubricants. To this day, 80% of their business is with
government clients, and the remainder comprises construction firms, mines, transport companies
and the commercial market. They have experienced some turnover in their client-base and
currently have five clients. Their business is national and not constrained to any geographic area
which has been an advantage – most of their clients have been in KZN, Gauteng, Northern Cape,
and North West province.
 Government contracts are difficult to service because Tipublox buys the fuel upfront from their
supplier, and government departments will typically only pay in 30 days or more meaning that it
is important to have a good cash flow.
 To secure their first load of fuel, the business had to raise over R500 000 to pay upfront for the
fuel and be able to deliver it, which they were somehow able to raise in five days. The Directors
approached a wide range of potential funders including the Banks, National Youth Development
Fund (NYDA), friends and family and personal loans. Only friends and family committed funding
which Tipublox paid in full within 6 months.
 It has not been possible to compete with incumbents on price. They compete by offering a wide
range of services and a ‘turnkey solution’ to the client including: installing storage infrastructure
(at their own cost in some cases), introducing fuel management systems, offering credit terms
where feasible, and through ensuring timely and efficient delivery.
 The aim is to grow the business to sell a million litres. The company is currently trying to establish
their own infrastructure, and will be launching a logistics company with another wholesaler in the
near future. However, the Directors are conscious not to rush the growth of the business and
make sure it remains sustainable. The business sources fuel from different wholesalers and 1
major oil company. As customers are very sensitive to delays, they have had to switch suppliers
in some cases to maintain customer satisfaction.


31
3.5 Incumbents’ reactions to entry
Firms’ decisions to enter a market are based primarily on an evaluation of the costs of entry
versus the likely benefits of entry. As initial outsiders to the market, potential entrants do not
always take into account the possible reactions of incumbent firms to their entry. In many
cases, incumbents have an incentive to react to entry in strategic ways that counteract the
threat that an entrant presents, if it is a significant one. In industries with a small number of
firms, it is also important for smaller entrants to look to account for the likely reaction of
incumbent players, including any pre-emptive entry deterrence strategies that they may
undertake (Cabral, 2000).
In fuel distribution, the incumbent players are large vertically integrated companies as
discussed above. Entrants into fuel distribution such as wholesalers mostly compete with
incumbents at the level of distribution, and only a handful of companies have expanded their
operations to levels where they distribute sufficient volumes to pose some competitive threat
to the major oil companies in some areas (e.g. Brent Oil, Khulaco, Gulf Stream and Royale
Energy). These firms have typically had the capital to be able to make investments at the retail
and wholesale levels of the value chain. This distinction is important. Most other wholesalers
are smaller operators existing as agents or small-scale independent distributors supplied by
the larger incumbent oil companies. This suggests that these firms are less likely to pose a
competitive threat to the major oil companies, including through diversification up the value
chain.
Incumbent firms face a strategic choice as to whether to accommodate new entry or to deter
it. This decision relates largely to the competitive threat posed by rival firms, and the costs of
entry faced by those firms. For example, if the threat is significant, the incumbent firm may
respond by expanding their capacity in the market, thus signalling to rivals that they have the
capability to flood the market in response to greater competition (especially where the cost of
expansion is smaller). Similarly, if the costs of entry faced by a potential rival are large, as is
the case in the fuel value chain, then incumbents do not need to respond to the entry of rivals
in downstream markets. This is particularly the case in the current market where entry costs
are high, and there is transparency in the pricing model such that incumbents have a good
sense of the costs faced by downstream rivals. This means that incumbents have insight into
the capacity to grow and expand of downstream rivals, and because they also have an
influence on the rivals’ access to key inputs, they can ‘manage’ the extent of growth of rivals.
In such an environment, incumbent firms may accommodate entry, as they are not concerned
about the competitive threat posed by entrants.
Information from interviews suggests that in this case incumbent oil companies have indeed
accommodated new entry rather than sought to deter it, especially in the current period
wherein the oil companies have taken less of an interest in distribution to certain areas of the
country. In one case, an oil company even gave advice to a potential entrant on how to go
about entering the market and building up their business including through linking the potential

32
entrant to another established wholesaler who could supply them.
45
In most cases, the oil
companies seem to have an incentive to accommodate entry in the downstream markets in
that wholesalers who enter the market and are able to identify new customers which increases
the volume of fuel that the incumbent firm sells. This also has the advantage of allowing the
incumbent firm to benefit from selling additional volumes of fuel to new customers, without the
additional investment and distribution costs of having to service those customers themselves,
particularly in rural and peri-urban areas where the cost base is typically higher than in urban
areas.
The control of supply is an important competitive advantage for the major oil companies.
Another important tool that incumbent firms are able to use to affect the entry and expansion
of rival wholesalers is through tying customers to medium- to long-term supply agreements as
discussed above. Together these advantages, as well as high entry costs, allow the incumbent
firms to accommodate entry without the threat that entrants will grow and achieve sufficient
scale to sponsor entry upstream (at the refining level), import fuel in competition with the
incumbent or compete directly with the major companies for some of their larger customers.
This is symptomatic of the pricing system, the control over infrastructure, and high entry costs.
If a situation arose where the major oil companies’ control over supply at the upstream level
was challenged, however, threatening to undermine their ability to extract maximum possible
rents from the value chain, a different reaction would be likely.
3.6 Policy and regulatory barriers
Acquiring licences, particularly for distributors appears to be relatively easy and as such is not
a real barrier to entry as discussed above. The main requirement for a licence appears to be
the provision of a business plan that is very easily outsourced. The DoE’s policy on the
provision of licences also appears to be accommodating, allowing for the approval of most
applications. The stance seems to be to allow many entrants into the market and then have
them compete to stay in the market.
46
Policy and regulation does, however, act as a barrier to entry in certain ways, in particular
through environmental regulation, municipal regulations, pricing regulation and the inadequate
support offered to new entrants.
Firstly, environmental legislation is particularly important in the liquid fuel industry where the
potential for environmental pollution is significant. However, adherence to environmental
regulations can form a barrier to entry as they often take a long time and in some cases a lot
of money to fully comply with. For instance, Vopak, an independent storage provider, had to
postpone investment in Germiston, when an environmental impact assessment found that
construction of a storage facility would result in the displacement of the blue spotted frog.
47
45
Interview with Tipublox Petroleum, 24 July 2014.
46
Interview with DoE, 3 September 2014.
47
Interview with NERSA, 10 September 2014

33
The solution to this is to buy an offset area for the frog which adds considerable cost to the
project, not to mention delaying the process.
Similarly, municipal and national authorisations can also require time and money especially in
cases where the different authorities give contradicting permissions. This ties in with zoning
requirements. Before a wholesale or retail site can be acquired, potential distributors must
ensure that they fit the zonal requirements or that they can get the permission necessary for
rezoning a particular area.
The above regulatory barriers mostly apply to new entrants during the application stage and
initial entry into the market. Once an independent distributor has entered into the market, there
are barriers to growth as well such as the pricing regulation. The implementation of RAS and
MPAR before it have had an impact on independents’ ability to enter and grow in the market.
MPAR aimed to allow benchmark returns on marketing and guaranteed wholesalers a margin
of 15% on marketing assets (see Figure 4 for a comparison of MPAR and RAS). Under this
system, the aggregate oil marketing profit expected was within 10-20% of assets. If there were
increases or decreases outside the range, a margin increase or decrease would be indicated
(SAPIA, 2002). This system resulted in an oversaturated retail market as oil companies over
invested in retail sites in order to take advantage of the downstream profits allowed through
using MPAR (Tait, 2009). While the major oil companies and wholesalers benefitted from this
regulation, the retailers were greatly disadvantaged.
Figure 4: Difference in margin allocation between MPAR and RAS
Source: McGregor (2012)
The greater proportion of the profit margin was allocated to the higher levels of the value chain.
The other problems with MPAR had to do with delays in calculating the industry margin (the
process could take 6-12 months) with no means to correct for over/under recovery; and where
there were more expensive assets than necessary, the higher return would simply be passed

34
on to the consumer since there was a guaranteed return of 10-20% regardless of efficiency of
the refineries’ distribution (Mondliwa and Roberts, 2014).
RAS was intended to regulate the price in such a way that the retailers got a fairer profit margin
by dictating the consumer price and to increase transparency in the process. Despite the
positive benefits expected from implementation of the system, a number of complaints have
arisen from different stakeholders. The wholesalers for instance believe that they are not as
well protected as the retailers (LFWA, 2013). They argue that the wholesale margin and
service differential is not calculated based on all the costs experienced in servicing the market
such as the distance to independent wholesalers’ depots in distant rural areas and delivery to
small customers requiring small volumes.
48
In order to determine this consumer price, RAS assumes a benchmark service station which
it acquires by averaging the costs of 50 depots. As a result, service stations located farther
from the benchmark station bear higher transport costs which reduces the margin they can
receive in petrol where the retail price is regulated. Distributors that are closer to the
benchmark station receive higher profit margins than those farther away. The major oil
companies’ response to RAS was to sell off the sites that were in the rural areas and far from
the benchmark station leaving them to the independents. The major oil companies therefore
retain the sites with the highest profit margins. While the retailers are better off than they were
before, the independent wholesalers have a reduced margin. Some of the independent
wholesalers interviewed mentioned that they receive a margin of between 5-10 cents per litre
of fuel which is far below the 15 cents per litre specified by RAS.
Moreover, despite RAS having the intention of raising the retailers’ margin, it largely depends
on the goodwill of the major oil companies. Most of the retailers are tied into contracts with the
major oil companies in which there is an already prescribed margin. In some cases the major
oil companies will stick to the margin agreed in the supply contract with the distributor, rather
than giving the retailers the full margin advocated by RAS. For instance where the regulated
margin for the retailer is R1.40 per litre, some of the major oil companies choose to provide a
lesser amount in the region of only R1.00.
49
While the intention and spirit of RAS is
acknowledged and appreciated in the market, there appears to be a failure in terms of ensuring
its proper implementation. This means that independent distributors may have the ability to
enter, and to a lesser extent, compete in the industry but the returns received through the
pricing mechanism do not allow for expansion.
Prior to its implementation, a RAS committee was created to allow stakeholders to engage
with the DoE on some of the issues surrounding RAS. According to independent wholesalers,
however, this was not an effective forum for engagement, and there appears to be a
48
It is worth noting that the liquid fuel wholesalers have not been able to produce estimates which
show the significance of these cost differences which weakens their bargaining position with both
suppliers and regulators.
49
Interview with Petroleum Retail Alignment Forum, 26 August 2014.

35
perception amongst independent wholesalers that private lobbying by the major oil companies
was conducted alongside the formal engagement, to the detriment of the process.
Another point to note with regards to regulatory barriers is that while recent regulation makes
it easy for new entrants to get into the market, particularly if the firm has good BBBEE
credentials, the available regulation does not seem to provide sufficient support for the new
entrants. However, it may be that the new entrants are not aware of or underestimate the high
levels of knowledge, skill, cash flow and infrastructure required in this market. This speaks to
provisions of the relevant legislation and efforts to train and support entrants.

36
4 State of transformation and competition in liquid fuel distribution
The combined effect of all of the barriers to entry noted above is that whilst DoE has licensed
a large number of BEE wholesalers, very few are actually operating in the industry and still
fewer are operating successfully. Even if a new entrant does manage to secure both a fuel
supply and customers for the product, the environment remains challenging and most struggle
to grow beyond a small scale of activity.
Competition appears to be relatively muted in the industry due to a combination of factors
including the vertical agreements between the major oil companies and their branded-
marketers and retailers, the fact that the upstream market is concentrated and there are few
sources of supply and the nature of economic regulation in the sector. The state of competition
at the different levels of the value chain is illustrated in the diagram below.

37
Figure 3: Illustration of competition in the liquid fuel value chain
Source: Authors’ own interpretation
Note: Dotted line indicates not currently feasible
Major oil
companies
(OCs) Imports
OC
distribution Branded
distributors Independent
distributors
CORO retail
sites RORO retail
sites (branded) Commercial
customers
RORO retail
sites
(independent)
State of competitionLevel of the value chain
Refining/importing
6 major OCs with refineries around the country
Imports only by OCs
Fuel “swaps” to service different parts of the country
Competition Act exemption in terms of coordinating fuel
supply for security of supply
Information exchange case referred by Competition
Commission - alleged to have dampened competition
Distribution
Customers
Branded distributors locked into OC value chain with
exclusive contracts
Independents cannot compete hard with OCs/branded
distributors - dependent on them for supply
Independents accommodated in a niche if they can provide
new customers –e.g. due to BEE status
Competition usually on service, does not seem to be
vigorous price competition
Price regulation at wholesale (diesel) and retail (petrol)
level.
Formula determines indicative margins at each level of
value chain based on “average” service station/depot
Provides focal point around which firms can coordinate
Transport and
storage
OC storage
facilities
Independent
storage
facilities
Transnet
pipelines
Storage capacity extremely limited, esp. in Durban
Access to uncommitted capacity mandated in theory but not
going to independents in practice
Independent storage capacity mainly committed to OCs
Pipeline access mandated but not usable without storage at
each end
Independents cannot import due to lack of storage

38
At the refinery level, the six major oil companies each own refineries or part-shares in
refineries in different parts of South Africa and also import some fuel. They then organise the
supply of fuel across the country by means of swap agreements as well as by transporting
fuel from Durban to the inland region via the Transnet pipeline (and to a lesser degree by road
and rail). The coordination of the supply of fuel around the country is allowed in terms of an
exemption from the Competition Act as discussed above. Although in theory it is possible for
an independent player to import fuel, in practice there are a series of constraints which make
this very difficult, if not impossible. These constraints mainly relate to the availability of storage
infrastructure which has been discussed at length above.
This results in a situation where new entrants at the distribution level are usually
accommodated into the industry by existing players, rather than entering independently and
challenging the status quo. For example, a well-established wholesaler may agree to supply
fuel to a new entrant if the entrant can deliver a new customer that the established player
would not otherwise have served, but would be unlikely to do so if the new entrant plans to
compete for existing customers. Similarly, the more established wholesalers do not typically
compete with the major oil companies for customers as they are usually tied in to a branded-
marketer agreement which dictates the area in which they may trade. Even where this is not
the case, it is difficult for wholesalers to compete with the major oil companies for customers
when they are dependent on them for the supply of fuel. These dynamics would not matter if
there was strong competition between the major oil companies themselves and therefore
between the different vertical chains present in the market. However, this does not seem to
be the case. According to market participants, such competition as does take place is typically
based on service levels and there is not vigorous price competition in the market.
The reason for this may be attributable in part to the economic regulation of the industry. The
fact that prices are regulated serves as a further disincentive for competition in the industry.
Even though prices are directly regulated at only one level of the value chain, the price formula
includes wholesale and retail margin components, which means that the “fair” compensation
level for the average wholesaler is common knowledge throughout the industry. Similarly the
return that the average retailer should make is published as part of the formula. According to
those interviewed, the fact that the retail price of petrol is regulated means that the total rents
available are determined by the regulator. The control that the major oil companies have over
supply means that they can dictate what proportion of this total margin goes to wholesalers
and retailers, and they generally do not allow them more than these average amounts, no
matter whether the wholesaler or retailer in question is located in a high cost or low cost area
to service.
The price regulation system may also explain why wholesalers report that they are generally
unable to play the major oil companies off against one another, as it provides a focal point
around which the major oil companies can easily tacitly coordinate. Coordinated outcomes in
oligopolistic markets are the result of repeated games where the market conditions mean that
competitors find it more profitable to adhere to the collusive agreement (whether tacit or
explicit) than to compete strongly with one another. For this to be the case, firms must have a
means of reaching agreement and a mechanism for detecting and punishing deviations from
that agreement. This suggests a set of conditions in which coordination is more likely. These
include high levels of concentration, symmetry between firms, transparency in the market, and
product homogeneity (Motta, 2003).

39
As discussed by the Tribunal and highlighted above, all of these conditions are met in the
petroleum industry. Transparency in particular is very high in this market as a result of the
swap agreements between the major oil companies, the pricing formula used by the regulator,
and the need to coordinate supply in the interests of security of supply. Market transparency
enhances the ability of firms to monitor the behaviour of competitors and detect any deviation
from the coordinated outcome. The information sharing arrangement which the major oil
companies were party to until recently would have further enhanced their understanding of
one another’s businesses and ability to maintain tacit coordination and avoid head-on
competition. Even now, there seems to be no incentive for the major oil companies to disrupt
the profitable status quo by diverging from this behaviour. As noted above, the transparent
pricing formula published by the regulator provides an easy means for firms to reach a tacit
understanding on price.
In this context, the long-term exclusive contracts which the major oil companies sign with their
branded distributors could also be interpreted as a means of committing to maintain the
agreement, as the agreements effectively prevent the firms from undercutting one another to
customers and allow them to maintain high margins upstream. This may also partially explain
the major oil companies’ decision to disinvest from the wholesale level. Independent
wholesalers on the other hand are prevented from competing effectively by the control which
the major oil companies hold over supply. They have neither the ability nor the incentive to
compete strongly on price as the major oil companies control the price at which they receive
the product, and the independent wholesalers are effectively reliant on them for their
existence. Unless the independent wholesalers are able to access an alternative source of
supply, the major oil companies’ control of the market and ability to extract the majority of the
available rents is likely to continue.
As discussed above, it is important to note that the liquid fuels industry is one where there are
a number of competing imperatives. In addition to stimulating transformation in the industry,
DoE is also concerned with ensuring security of supply and preventing costly shortages of fuel
in the country. Still in addition to this, is the need to ensure that fuel is affordable to consumers
in all provinces, a goal which may be thwarted if consumers in outlying areas had to face the
full costs of distributing fuel to these areas, and which therefore necessitates some cross-
subsidisation. In this environment, competition concerns may be relatively low down on the
list of priorities. However, the analysis above has shown that to a large degree the problems
with competition and transformation in the industry are interlinked. True transformation and
true competition will not flourish under the current market conditions.
5 Conclusion and recommendations
The report sets out to use publicly available data and information from interviews with industry
stakeholders to assess the extent of barriers to entry and expansion in wholesale fuel
distribution. As noted in the report, the constraints in wholesaling are in fact directly linked to
the broader market structure, regulatory environment and resulting constraints to greater
competition in the industry as a whole. Our view, as established in the analysis, is that while
there is some competition between wholesalers in local markets through (limited) discounting

40
and efficiency and service-related value add, the vertical integration of the major oil companies
and the regulatory environment create distortions in the competitive process. This is
exacerbated by the structural barriers imposed by the lack of alternative fuel sources due to
the cost and ownership of essential infrastructure and limited coordination between
government and private enterprises in terms of relieving this constraint. The role of
government is important insofar as it has an interest in increasing the pace of transformation
in the sector as a whole, without somehow compromising security of supply.
Within this context, we have sought to understand the challenges which are specific to
wholesaling by categorising the inputs from the interviews conducted into the main themes,
which are: the costs of entry, access to supply, the ability to attract customers, policy and
regulation and the lack of skills and training. We review the main findings below.
 Costs of entry: Obtaining a licence and the requisite licensing fees are generally not
prohibitive barriers, although there may be some delays in this process in some cases.
However, the costs of entry in terms of the capital requirements are a constraint,
particularly when entering the market as a wholesaler with infrastructure and a depot,
and trucks. There are also additional considerations in terms of the working capital or
cash flow requirements due to the fact that suppliers of fuel require upfront payment
for product, whereas customers will generally ask for deliveries on consignment or with
favourable payment terms. The extent of financial constraints to entry and expansion
tend to vary with the mode of entry chosen by the wholesaler.
 Access to supply: The major oil companies control the supply of liquid fuels and will
typically not deal directly with new entrants in wholesale distribution because they do
not sell sufficient volumes. This seems to apply more to independent entrants who
often source from other established wholesalers whereas those that enter the market
as branded-marketers have more direct access to the oil companies. The widespread
use of supply agreements, and their duration, does provide some security of supply for
wholesalers, although the sentiment in the industry is that branded-distributors would
have preference over independent wholesalers in terms of getting supply of fuel in the
event of a shortage.
An alternative to relying on the major oil companies is to import fuel from the
international market although this is currently nearly impossible given difficulties
around landing fuel of the right quality and at the right time, exposure to fluctuations in
the exchange rate and world market prices (due to how long it takes to land the fuel),
the lack of alternative refining capacity once the fuel is landed to correct any quality
deficiencies, and the lack of alternative independent storage capacity. Where there is
independent storage capacity, use or pay requirements mean that those providers
such as Vopak still need to contract with the major oil companies to guarantee usage
and sustainability of the facility. Whilst NERSA has made efforts to ensure that
uncommitted capacity is made available to independents, through requiring owners of
storage facilities to produce written storage allocation mechanisms, this does not seem
to have had much effect on the ability of entrants to access storage facilities in practice.
Accessing the pipeline, particularly the NMPP once it becomes operational, is less of

41
a constraint. However, independent importers of fuel may still have to negotiate with
the incumbent oil companies for access to their facilities for off-loading fuel at the port.
 Access to customers: Customers value purchasing fuel from the major oil companies
which is associated with quality and reliability. This restricts customer switching and
weakens the potential for sourcing imported fuel. The regulated price environment (and
constraints on discounting) means that wholesalers compete for customers on the
basis of value added services such as reliability and timeliness, efficiency, offering
favourable payment terms, and assisting customers with infrastructure and fuel
management systems, often at the wholesalers’ expense. The widespread use of
supply agreements and the vertical arrangements entered into by branded-distributors
mean that while there is some competition between wholesalers in specific local
markets or niches, this is not an optimal level of competition. Competition would be
greater at the wholesale level if there was greater competition between the oil
companies themselves at all levels of the value chain.
 Policy and regulation: While the DoE rightfully, in our view, allows entry of many new
players and encourages them to find ways to compete effectively, this stance can also
restrict meaningful entry by creating a system which doesn’t provide the required
support mechanisms for entrants. This speaks to training and capacitation, the
implementation of a fair pricing system, and ensuring a regulatory compliance system
that is easy and financially feasible for entrants to comply with (e.g. on environmental
and municipal authorisations). Furthermore, challenges in terms of the correct
implementation of the RAS pricing mechanism seem to have resulted in wholesalers
being undercompensated in terms of the stipulated margins relative to their costs of
doing business. Finally, independent wholesalers are of the view that the mechanisms
which have in the past been provided by DoE for engaging around proposed changes
to regulation and other issues affecting the sector have not been very effective. There
is a perception that important decisions are taken outside these forums and are subject
to lobbying behind closed doors by the major oil companies.
 Skills and training: Knowledge of the workings of the industry including regulation and
tacit local market knowledge acquired through industry experience are essential for
new entrants. Those entrants who have a history of working for or with the major oil
companies have benefited from having this knowledge and the relationships built over
time with suppliers and other market participants. This knowledge is also critical to
attracting new customers. The DoE has recognised the importance of capacitating
entrants with the ‘coded’ knowledge in terms of regulation and minimum standards,
although the progress of training and development seems to be muted, contributing to
the exit of many new entrants.
Collectively these factors serve as barriers to entry and importantly expansion, for wholesalers
although their impact varies depending on whether the entrant is an independent or branded-
marketer. It is clear, as discussed above and in previous sections, that issues in the sector
are not only specific to wholesalers but grounded in the overall market structure, the role of

42
the vertically integrated oil companies and muted competition between them, and some
aspects of the regulatory environment. Therefore, we consider that any recommendations that
can be drawn from this study should make a distinction between the short- and long-term
remedies and suggestions, and should tackle distortions at all levels of the value chain. The
recommendations which we present in Table 5 below are not prescriptive and seek to
stimulate a discussion of the possible avenues that could be explored in addressing barriers
in this market.
Table 5: Summary of recommendations on barriers to entry and expansion
Upstream
Short
term
Reconsider competition exemption - due to expire in 2015
Competition authorities should investigate a less anti-competitive means
of achieving the objective
Long
term
Ensure independent imports can be brought into the country (see
recommendations on transport and storage)
Transport
and storage
Short
term
Further efforts by NERSA to ensure access to existing uncommitted
capacity
Long
term
Ensure sufficient capacity is built to meet independent wholesalers’
needs. Possible options for achieving this:
 Government-facilitated investment in new storage capacity. This
could be through providing guarantees and/or
encouraging/facilitating collective action by independent
wholesalers
 Additional licence conditions mandating setting aside of storage
capacity in existing and new facilities for independents – look at
what has been done in coal in terms of access to RBCT
Wholesale
Short
term
DoE review of implementation of RAS
DoE provide more constructive engagement opportunities and leadership
Independent wholesalers engage with regulators, particularly around
costs and provide input into the review process
DoE increase access to and provision of capacity building and assistance
for new entrants
Long
term
Address exclusive territories and pricing in long term supply agreements
perhaps linking duration to investments made
Deregulate the market once a sufficient level of competition is achieved
upstream
Retail
Long
term
Deregulate the market once a sufficient level of competition is achieved
upstream
Source: Authors’ views

43
First of all, at the upstream level, the degree of transparency in the market could be reduced
through finding different ways of achieving security of supply objectives. The Competition Act
exemption currently enjoyed by SAPIA and the major oil companies is due to expire in 2015,
and we suggest therefore that if an application is brought for its renewal, the competition
authorities should consider whether the same objectives can be met through less anti-
competitive means. For example, it may be possible for an independent third party such as a
government agency or auditor to coordinate supply rather than the companies themselves.
Secondly, it is clear that developing alternative sources of supply would undermine returns to
the incumbent oil companies who would be expected to adjust their competitive strategies in
response to this. Significant benefits would accrue to downstream operators and consumers
if distributors could play oil companies off against one another to get better prices and terms.
Furthermore, oil companies would most likely have to compete with one another more
aggressively, which it appears is not currently happening in the market. In order for this to be
possible, however, interventions are required at the transport and storage level.
In this regard, facilitating access for independent wholesalers to storage infrastructure is
absolutely critical to enabling alternative sources of supply into the market, and hence to allow
for greater levels of competition in the value chain. In the short term, NERSA should continue
to make efforts to enable independents to gain access to existing uncommitted capacity. In
the longer term, it is necessary to ensure that there is sufficient uncommitted capacity in the
market for independents to use. DoE and NERSA could do this by leveraging storage facility
licence conditions to mandate that players set aside a certain proportion of capacity for
independents to use. Alternatively DoE could facilitate investment in new independent storage
capacity, either through providing guarantees or through encouraging collective action by
independent wholesalers to make such an investment.
At the wholesale level, there are a number of interventions which could be made in the
relatively short term to assist independent wholesalers to be effective competitors. Firstly, from
the information obtained from the market participants, it does seem that a review of the
implementation of RAS would be beneficial and could include consideration of situations
where wholesalers are not receiving the margins recommended in the RAS pricing
mechanism. To the extent that there are problems in the current implementation of RAS this
could quite quickly lead to independent wholesalers leaving the market and therefore it would
be useful to establish, even at this early stage, whether the pricing mechanism is really
allocating a fair margin to all parties, both in theory and in practice. We note that for this review
to be effective, input from independent wholesalers regarding their costs of doing business
and their experiences in the market will be crucial. As noted above, to-date independent
wholesalers have not found forums for engagement with the regulator to be particularly
effective and there is a perception that the DoE is too strongly influenced by the major oil
companies, to the detriment of other industry participants. A review of regulation in the sector
would require leadership and commitment from the regulator, but also depends on the
constructive engagement and participation of the independent wholesalers in order to be
effective.

44
Also at the wholesale level, increased efforts in terms of capacity building and assistance for
new entrants could help to address the skills deficiency in the industry. This could include
providing information and advice to new licensees as well as assistance with making relevant
industry contacts. It should be noted, however, that increased access to training and advice is
unlikely to substantially change the experience of new entrants unless some of the other
barriers to entry are addressed as discussed above.
A long term intervention could be to address the exclusive and long term nature of the
agreements between the major oil companies and their branded distributors. The agreements
between wholesale distributors and the major oil companies serve to restrain competition by
specifying geographic territories (in the case of branded-distributors) and in some cases the
customers which a wholesale firm is required to service. In the case of independent
wholesalers, the supply relationships with the oil companies would probably not exist if the oil
company thought that those wholesalers threatened to compete with them directly. If supply
contracts were known to be for a shorter period of time, then it is more likely that oil companies
would have to compete to retain those wholesalers as distributors for them in specific area
and especially those that they would rather not service themselves. However, this would
potentially be constrained by the fact that oil companies would most likely remove their
infrastructure from a wholesaler’s site if they could no longer supply that wholesaler, for
competitive and environmental reasons.
Finally, we note that in the long term, the deregulation of the industry at the wholesale and
retail levels could be an effective means of encouraging competition. However, there are two
significant caveats which must be attached to such a recommendation. Firstly, deregulation
should not be considered until such time as there is competition at the upstream level of the
value chain, most likely through the channels for independent imports of fuel into the country
being opened up. If the industry was deregulated in the current environment, the likely result
would be large numbers of independent wholesalers and retailers going out of business and/or
substantial increases in the price of fuel in outlying areas.
Secondly, a key factor to keep in mind when considering the regulation or deregulation of the
industry is the issue of geographic cross-subsidisation. If it is true (which certainly seems
plausible) that the cost of supplying fuel to outlying areas of the country is higher than the cost
of delivering it to urban areas, then a choice needs to be made around whether it is desirable
for customers in outlying areas to face the full cost of supplying fuel to those areas. To the
extent that this is not considered desirable, then some means of cross-subsidisation is
required. This is at least partly the root of the current problems being faced by independent
wholesalers – they generally supply into the most high cost parts of the country but are
constrained by regulation in terms of what they can charge customers, while the major oil
companies have held on to the lower cost parts of the country to service themselves. This is
an issue which would need to be resolved before any decision to deregulate could be taken.
It is of course important to keep in mind the issue of security of supply in considering
interventions that impact the sector. However, with well-designed policies, the objectives of
competition, transformation and security of supply should be able to be met simultaneously. It

45
may be that for some time transformation of the sector will only be reflected in increased
shareholding of HDSAs, however as mentioned above this often results in participation and
experience gained at the board level and not in the intricacies of operating and competing in
the different levels of the market. Unfortunately, this scenario has been shown to perpetuate
the status quo in the market in terms of achieving the goals of transformation, as recognised
by the DoE.

46
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48
7 List of interviewees
Contact
Company
Designation
Date
Sector
Dixen
Sunderlall
Hammertone Fuels
Owner
23 July 2014
Wholesale
Jean Snyman
Free State Petroleum
Distributors (Pty) Ltd
Owner
14 August
2014
Wholesale
Greg
Moldenhauer
Sitanani Fuel Distributors
Owner
24 July 2014
Wholesale
Phenyo
Ntshabele
Tipublox Petroleum
Owner
24 July 2014
Wholesale
Peter Morgan
Liquid Fuel Wholesalers
Association (LFWA)
15 August
2014
Wholesale
Leslie Naidoo
Transnet Pipelines
Commercial
Manager
Operations
26 August
2014
Transport
MC Lamprecht
Petroleum Retail
Alignment Forum
Chairperson
26 August
2014
Retail
Grove Steyn
Ports Regulator of South
Africa
Part time member
27 August
2014
Transport
Gosetseone
Leketi
Department of Energy
(DoE)
Director: Licence
Analysis
3 September
2014
Regulation
Rod Crompton
National Energy
Regulator of South Africa
(NERSA)
Full time member:
Petroleum
10 September
2014
Regulation
Peter Noke
Royale Energy
Owner
11 September
2014
Wholesale
and Retail
Avhapfani
Tshifularo
South African Petroleum
Industry Association
(SAPIA)
Executive Director
30 September
2014
Wholesale
and Retail