PetroSA explains why Eskom’s diesel prices are so high

 ·3 Feb 2023

National oil company PetroSA says it is not overcharging Eskom for diesel, claiming that the higher prices are a result of market dynamics and a lack of a proper demand forecast from the embattled power utility.

Responding to claims by energy experts at EE Business Intelligence that Eskom was being charged ‘extortionate rates’ for diesel to run its open-cycle gas turbines, PetroSA said that the allegations misunderstand how prices are linked to product supply nominations.

EEBI noted in an article on Thursday that Eskom paid R1.3 billion for a tranche of 50 million litres of diesel from PetroSA in November 2022, which translated to an “extortionate” R26.00 per litre – about R1.00 per litre above the retail pump price at the time.

A second procurement of 56 million litres of diesel from PetroSA in January came to R1.265 billion, which translates to a price of about R22.59 per litre, and a third tranche of diesel on 23 January cost R1.5 billion.

According to EEBI, PetroSA is currently the biggest supplier of diesel to Eskom, but the utility also procures smaller quantities from other commercial diesel suppliers, namely Astron, Engen, and Shell.

Eskom’s current normal contact prices for diesel are R23.51 per litre with PetroSA, R20.36 per litre with Engen, R20.28 per litre with Astron, and R20.22 per litre with Shell.

PetroSA said that its contractual terms with Eskom are based on the Basic Fuel Price (BFP) pricing mechanism, which ensures that PetroSA sells to Eskom in line with the M-1 BFP. Knowing market dynamics would come into play, PetroSA said it engaged Eskom in October and asked for a three-month forecast for their demand for diesel.

“This was mainly due to the losses that PetroSA was suffering due to the erratic or spot nature of the nominations of product volumes from Eskom,” it said.

By getting a forecast, PetroSA said it would have been able to get better product prices, saving Eskom and the South African economy money. However, the group said it was forced to get a spot demand for Eskom when it ran out of diesel in November 2022, which resulted in the group having to buy two spot cargos not linked to M-1 pricing.

“The published BFP pricing in November 2022 was based on the preceding month, which resulted in the pricing exposure,” it said.

In December 2022, PetroSA took a position in November 2022 and bought a cargo priced in November 2022 which would be aligned with the December 2022 published BFP.

However, Eskom did not purchase any volumes in December 2022 from PetroSA, and only requested volumes in January 2023, it said.

“This meant that PetroSA was now exposed to a flat price with a huge price exposure to a January 2023 published BFP. The January 2023 BFP dropped by 140 cents per litre and this drastic drop exposed PetroSA to heavy losses – hence the price of volumes sold to Eskom was not aligned to the January 2023 published BFP,” it said.

PetroSA said that the point is that without at least a three-month forecast, it cannot buy and supply Eskom with diesel at the most favourable terms and pricing.

“There is no substitute for planning demand to produce a forecast when it comes to the demand side in the product market, otherwise, spot prices will prevail. It is for this reason that PetroSA advises its clients that forecasting and planning are critical to ensure that cargo prices can be locked at favourable terms,” it said.

“We reiterate that we are under no obligation to share commercial terms entered into between PetroSA and its customers. It is also important to state that PetroSA and Eskom will continue working together to find amicable ways to reduce load shedding which is caused by high levels of breakdowns and limited emergency generation reserves.”

Read: Diesel sharks smell blood at Eskom

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