The need for new infrastructure and refurbishment in the petroleum storage industry in South Africa has attracted investor interest, which has led the National Energy Regulator of South Africa (Nersa) to seek public opinion on the appropriate return on equity that is commensurate with the risk taken by investors when building petroleum storage facilities.

In its ‘Discussion Document for Petroleum Storage and Loading Facilities’ issued last month, Nersa states that government has courted foreign direct investment to attract investors into areas that need infrastructure. One such area that needs new infrastructure or refurbishment is the petroleum storage industry.

“After a hiatus of investment in this sector of many years, there has in the last several years been a growing investment boom. Investments in this sector are critical for security of supply; however, this expansion in petroleum storage infrastructure has revealed signs of a structural change in ownership patterns.

“Merchant-type storage companies are seeking to invest more heavily than the traditional investors – oil companies Engen, Shell, BP and Chevron. This new wave of interest by merchant companies brings with it several new phenomena,” Nersa points out in the document.

Nersa further highlights that merchant companies are not vertically integrated in the petroleum value chain, and unlike the vertically integrated oil majors, merchant companies are not able to diversify risks away from the storage link in the value chain.

“Naturally, the merchant owners can reduce that risk by entering into ‘use-or-pay’ agreements with customers. However, it seems that the term of such agreements is often much shorter than the term of debt that merchant investors can acquire and this exposes such merchant investors to risk.”

The regulator further notes

that the return expectations of these merchant storage companies are much higher than what it has been accustomed to in this sector with some companies even approaching nominal equity returns of 30%.

With this being the case, Nersa shares its concerns that, if it allows a cost of equity that is too low, there is a risk that potential investors will not invest and the economy will bear the burden of being associated with infrastructure shortages and the higher prices associated with reduced competition.

Moreover, this public consultation on the cost of equity will augment the reasonableness checks that Nersa performs when approving a return on investment that is commensurate with the risk taken in the construction of petroleum storage facilities.

Nersa urges the public to submit their comments on this matter to its petroleum pipeline tariffs department by June 8.