South Africa: When Different Treatment Is The Most Fair – Inland And Coastal Refineries And The Cost Of Transporting Oil

Last Updated: 27 October 2016
Article by Lloyd Christie and Ricardo Pillay

Most Read Contributor in South Africa, July 2017

The recent Supreme Court of Appeal ("SCA") case of Transnet v Total is important not only for those in the petroleum industry, but also, more generally, when it comes to aspects of competition and discrimination, as well as the impact of changes in the law on existing contracts and vested rights.

In this case, the SCA had to determine whether a contract between the State and Total South Africa ("Total") continued to bind Transnet SOC Limited ("Transnet") despite a change in the legislative regime that governs the transport of petroleum products in South Africa.

The SCA reaffirmed the principle that when enacting new, or effecting changes to, legislation, it is presumed that the legislature does not intend to interfere with existing law and, more so, not to deprive parties of existing remedies for wrongs done to them.

The facts of the Transnet case

In 1996, the Administration for the control and management of petroleum pipelines approached Transnet to participate in a proposed inland refinery at Sasolburg. At the time, all refineries in South Africa were situated at the coast. Total was initially reluctant to participate due to the cost of transporting crude oil from the coast inland via pipeline. Therefore, as a precondition to participating, Total required an undertaking from the Administration that it would not be placed in a position worse than a coastal refinery as regards transportation costs, which the State provided. This became known as the "neutrality principle" – it being neutral whether a refinery was at the coast or inland – and it was honoured for many years by the Administration (and later by its successor, the South African Transport Services ("SATS")).

When Transnet succeeded SATS, it refused to recognise the neutrality principle. However, in 1991, Total and Sasol (the shareholders in the Sasolburg refinery) concluded a variation agreement with Transnet in which Transnet agreed that the percentage increase in the crude oil tariff that would be levied to Sasol and Total would not exceed the weighted average percentage increase of any adjustments of petrol, diesel and avtur tariffs. This agreement embodied the neutrality principle.

However, when the regulatory regime governing the supply of petroleum products changed in 2005, Transnet refused to recognise the variation agreement embodying the neutrality principle. The change was introduced when the National Energy Regulator Act, 2004 and the Petroleum Pipelines Act, 2003 ("PPA") came into force in September and November 2005, respectively. The PPA gave the Petroleum Pipelines Regulatory Authority (the "Authority") the power to issue licences for the construction and conversion of petroleum pipelines, loading facilities and storage facilities, as well as for the operation of these. Importantly, it also gave the Authority the power to set or approve tariffs and charges in the manner prescribed by regulation. The National Energy Regulator Act created a regulator, the National Energy Regulator of South Africa ("NERSA"), to carry out the functions of the Authority.

In 2010/2011, NERSA issued its first tariff determination. Transnet maintained that the principle of neutrality and the variation agreement could not prevail over that decision and that the variation agreement was effectively terminated by the regulatory regime introduced by the NERSA Act and the PPA.

Total then approached the High Court, seeking a court order declaring that the variation agreement remained binding and directing Transnet to implement its terms by ensuring that the percentage increase in the crude oil tariff did not exceed the weighted average percentage of petrol, diesel and avtur tariffs.

Before court, Transnet argued that the variation agreement had been "abolished" by the PPA and that NERSA was the only body that could set the relevant tariffs. As the PPA did not authorise discrimination between customers and prohibited any agreement contrary to its provisions, the variation agreement was void. Total's only available remedy was the review of NERSA's decision. However, the court held that the neutrality principle was not inconsistent with the new regulatory regime, leading to Transnet approaching the SCA.

On appeal before the SCA, Transnet argued that the neutrality principle was inconsistent with the PPA's provision that only NERSA may set the relevant tariff, with no deviations permitted, and that the previous basis for determining the tariff could not co-exist with NERSA's determination. Transnet argued that the former basis for determining the tariff was completely different to the new method by NERSA.

Total, on the other hand, maintained that the neutrality principle was entirely consistent with the PPA. It argued that the provision in the PPA that the tariff must be non-discriminatory would be contravened if the neutrality principle was not invoked – if the tariff was not reduced for inland refinery suppliers, they would be discriminated against. Total did not, however, contend that the old method should be applied.

The SCA decision

The SCA noted that if the tariff was not reduced, suppliers at inland refineries would be discriminated against. Further, such discrimination is precluded by the PPA, which provides that licensees (such as Transnet) may not discriminate between customers or classes of customers regarding access, tariffs, conditions or services, except on objectively justifiable and identifiable grounds approved by NERSA.

The SCA relied on the well-established principle that "differentiation based on sound reason does not amount to discrimination". In this case, if the neutrality principle was not applied, there would be no differentiation despite different circumstances between shareholders of coastal and inland refineries. Sasol and Total would be treated unfairly and discriminated against if they could not recover the cost of piping crude oil – if the refinery was situated at the coast, its shareholders would not have incurred such transportation costs. This is exactly what the neutrality principle was designed to avoid, and the position was no different now that NERSA set the tariff instead of Transnet, the SCA held.

Transnet, as a licensee, was not only entitled to discount the cost of transporting crude oil to inland refineries, but, in terms of the neutrality principle, it was obliged to do so. The variation agreement was thus in keeping with the general principle that new legislation was presumed not to interfere with vested rights, and Transnet's appeal was dismissed.

This decision achieves competition in the construction and operation of petroleum pipelines and associated facilities, and honours one of the key objectives of the PPA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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