Central Energy Fund & Council for Geoscience 2020/21 Annual Performance Plans

Meeting report

Council for Geoscience (CGS) 2020/21 Annual Performance Plan
Mr Musa Mabuza, CGS CEO, and Dr Humphrey Mathe, CGS Board Chairperson, led the presentation.

The CGS had established a Covid-19 Task Team to fully maintain its National Key Point status, safeguard its business continuity, develop implementation plans to curb Covid-19 spread in the workplace and provide tools of trade for staff to work from home. The CGS had been included in the National Disaster Management Act Regulations published on 16 April 2020. The regulation called on the CGS to monitor and compile an impact assessment of seismicity.

CGS spoke to its focus areas in its APP. The Geoscience Technical Programme was geared to high priority mineral assessments targeted for drilling. The minerals included renewable energy minerals such as rare earth metals, base metals, fluorspar deposits, phosphates and precious metals.

Another focus area had been the Just Transition that referred to the Molteno-Indwe Coalfield Project. The project assessed the quality and quantity of the coal resources in the Molteno-Indwe Coalfields. The project had the potential to add generate about R122 billion in revenue.

CGS was mindful of South Africa’s responsibilities towards the Paris Agreement and thus focused on the Carbon Capture, Utilization and Storage (CCUS) project designed to capture carbon. South Africa had partnered with the World Bank on this project.

CGS was in good financial health and an additional baseline grant of R348 million had been allocated for geological mapping for exploration of mining. R66,6 million had been reallocated for Derelict and Ownerless mines research. It had recorded a steady balance position that had been maintained over the last ten years and total assets have increased by an average of 7% over the period.

On human resource matters, CGS reported that about 49% of its staff complement were women.

Discussion
Mr S Kula (ANC) welcomed the thorough presentation by CGS and applauded its women empowerment. He cited the economic potential of the Molteno-Indwe exploration and asked when the project would start.

Ms C Phillips (DA) asked if there had been new seismic data since 2019.

Mr D Mthenjane (EFF) said CGS was an example of good governance to other state entities. It was clear that CGS knew its work. He commended CGS’s role in fighting the Covid-19 pandemic.

He asked what the CGS focus would be with its available resources for the remainder of 2020/21. He commended CGS for its commitment to towards women’s empowerment.

Mr Mthenjane turned his attention to the vast sums spent on property rentals. He asked why CGS had buildings in Cape Town and other cities. He proposed that these rental contracts be cancelled. CGS should have only one building that housed all its staff.

Mr N Wolmarans (ANC) welcomed the presentation and CGS’s commitment to women empowerment. According to slide 37 the CGS financials were in good health. He requested details on the effects that Covid-19 has had and will continue to have on operations.

Ms V Malinga (ANC) commended CGS on a job well done, especially in the fight against Covid-19.

Mr K Mileham (DA) noted the Molteno project and requested clarity on the CGS role in clean coal capture.

He recently learned of a  R42 billion expenditure on the installation of clean coal technology at Medupi. He asked why South Africa had been so hell bent on pushing coal based energy resources given its huge carbon footprint.

On slide 40, CGS indicated that core staff had been reduced whereas there had been considerable growth in support staff appointments over the past three years. He asked why CGS “bled” so many core staff and what it had done to retain core staff.

CGS responses
Mr Mabuza (CGS CEO) replied that thus far CGS had quantified, assessed and looked at the quality of coal to be explored. This information had been handed over to the Department of Mineral Resources and Energy (DMRE) as the custodian of all minerals in South Africa whereas CGS was the custodian of geoscience information. There are a lot of opportunities and potential for coal exploration. South Africa still had vast amounts of coal reserves and when it came to carbon capture technology, the role of CGS had been to look at the characteristics of coal in light of this. The World Bank was funding this particular venture.

Mr Mabuza stated that nothing stopped South Africa from coal exploration and the usage of coal, provided that South Africa employed the necessary technology to mitigate the effects on the climate.
 
For any country to make a success of coal exploration three attributes had to be in place: a sound regulatory framework, up to date geological information and access to financing. CGS was currently looking at other avenues to increase investment in exploration.

Mr Mabuza replied that South Africa had 122 seismic stations and these are consistently monitored. CGS collaborated with mine safety units to report any seismic activity. Recently, CGS had particularly focused on the analysis of seismic data in mining areas. Every decision that had been taken by CGS had been underpinned by science.

On rentals, CGS had satellite offices in Bellville, Cape Town and other towns in the Western Cape. CGS was cognizant that it had to tighten its belt. He said that the DMRE Director General is best placed to address office rentals as CGS could not make such a call.

The Covid-19 pandemic had resulted in CGS staff working from home with all the required resources to conduct their work. CGS had deep cleaned its buildings, provided sanitisers and personal protective equipment (PPE) that ensured that safety had been guaranteed.

On Medupi, Mr Mabuza replied that he had no idea what Mr Mileham was talking about. He thus could not respond to the question.

On personnel matters, when he started his tenure at CGS he found that most general workers such as landscapers had been outsourced. A decision was taken to absorb these workers into the CGS staff component. CGS benchmarked itself against other geoscience institutions on a regular basis and CGS was on par with the rest of the world.

On the decrease in spending on slide 32, he replied that the decreased spending was in line with the allocation. Some projects had to be slowed down as a result. CGS wanted to map and scale the entire country, however this would not materialise anymore.

Members were informed that CGS would focus on rare earth metals, base metals such as copper and zinc as well as precious metals.

Central Energy Fund (CEF) 2020/21 Annual Performance Plan
Adv Thabo Mokoena, Director-General: Department of Mineral Resources and Energy, opened the briefing informing the Committee that plans were afoot to amalgamate all CEF subsidiaries. The draft report on the feasibility of amalgamation was not yet completed. This process required political support as the necessary legislative amendments would have to be introduced. He said CEF envisaged appointing a new CEO by 1 June 2020.

Mr Monde Mnyande (CEF Board Chairperson) and Mr Lufuno Makhuba (Acting CEF CEO) briefed the Committee on the CEF 2020/21 Annual Performance Plan.

The Committee was informed that in line with National Treasury’s assessment, CEF had been grouped with a number of commercially struggling entities that required serious attention. The following challenges had been raised by National Treasury:
• Group financial stability
• Ineffective operating model
• Decommissioning liability
• Growth
• Execution and goverance

Major banks had raised their concerns about CEF and these concerns pertained to a lack of stable leadership; the need for a turnaround strategy for PetroSA; poor governance; the strategic stock challenge; and irregular expenditure. CEF admitted that over time the CEF Group had been beset by project failures; poor project execution and below par business performance.

The key challenges faced by the CEF Group centred on commercial sustainability that pertained to the negative cash flows of PetroSA. PetroSA had been unable to fund any long-term plans.

CEF lacked strategic direction. By the CEF Group’s own admission, there had been a lack of clarity on the CEF mandate and mission. CEF did not have a clear parenting strategy. This led to subsidiaries competing with each other.

The governance structures of the CEF Group was a cause for concern. Each subsidiary had its own board and this multi-layered leadership impacted on decision-making.

The CEF Group struggled with complex project execution that shed light on its inability to deliver on these projects. The leadership vacuum had been acutely felt.

CEF was focused on dealing with the challenges at PetroSA. It was faced with three scenarios for PetroSA. CEF could either maintain the status quo at a price tag of R25 million. Should this option be chosen it would lead to the total collapse of the CEF Group. The second option was to close down PetroSA. This would cost about R13 billion and would impact the Southern Cape economy and jobs. The third option entailed the restructure of PetroSA. Expected costs are about R15 billion to preserve jobs and would position PetroSA for long term growth.

To support the CEF Group's turnaround plans, CEF wanted 25% of the fuel levy to be directed from National Treasury to fund infrastructure and growth projects as well as a share of the carbon tax raised to fund new energy initiatives such as biofuels.

The Transnet pipeline should be transferred to the CEF Group and it wanted the sole rights to execute liquefied natural gas projects.

Discussion
Mr M Mahlaule (ANC) welcomed the CEF presentation. He stated that he was not even going to touch on PetroSA and its woes.

He expressed his concern with slide 22 of the CEF presentation. This slide stated that CEF was unsure of its strategic direction. This meant that CEF had no idea who it was and what its aims were. He questioned if CEF would be able to implement a sound business strategy if it did not even understand its mandate. The CEF Board Chair thus have a big responsibility to ensure that all the challenges were addressed.

Mr Mileham noted slide 6 dealt with the Petroleum Agency of South Africa (PASA). PASA had a regulatory function and he asked if plans were afoot to move PASA out of the CEF domain.

According to CEF’s calculations, there will be a 20% drop in income as a result of Covid-19. He asked if these figures were accurate and took into account a worst case scenario. Most experts agreed that there would be revenue losses of between 40 to 60%.

He requested an update on the Gas Utilisation Master Plan and what would happen if CEF did not obtain the R13 billion to restructure PetroSA.

Ms N Hlonyana (EFF) asked when the proposed restructuring of the CEF Group would be finalised. She asked CEF to explain what type of support was needed from the Committee.

Ms Malinga voiced her concern about CEF’s ability to deliver on its mandate. She called on CEF to urgently address all challenges that hamstrung its performance.

Mr Wolmarans noted that CEF had admitted that the challenges it faced were historical. He wanted to be briefed on CEF’s achievements during the past few months. The proposed strategy looked good on paper. It was up to CEF to explain how it would bring this strategy to life.

Mr Mthenjane stated that the meeting had had gone from the best performing entity to the worst. He thanked CEF for its forthrightness about the inherent challenges it faced. According to Mr Mthenjane, CEF had been established during the Apartheid years to support SASOL. He thus saw no use for CEF in a democratic South Africa. He agreed that it would be prudent for all CEF subsidiaries to merge and for CEF to be made redundant. The CEF budget could be utilised towards the CEF subsidiaries. He decried the many buildings that CEF rented across the country. These cost the company a lot of money.

Ms Phillips recalled that CEF owned one filling petrol station in the Eastern Cape. She asked if CEF intended building its own petrol stations or would it take over existing petrol stations from other vendors.

She asked what CEF had done or planned to do to mitigate the impact of Covid-19 on oil prices and what had been done generate increased income.

Mr Kula stated that the turnaround strategy for PetroSA had to be fast tracked. The country could ill afford a situation where subsidiary companies competed with one another. He asked CEF to explain how obtainable its goals were and what would happen if the restructuring did not take place.

Mr Kula asked CEF to explain what it had done to address the concern of National Treasury.

Mr Luzipo noted that it was regrettable that CEF subsidiaries fought amongst each other. He asked how CEF could expect help from Treasury, when CEF was awash with rivalries. He requested CEF to clarify if it was asking for a bailout from government.

CEF responses
Mr Monde Mnyande (CEF Board Chairperson) informed Members that the CEF was not in the business of “bailouts”. He apologised to Members if it came across as if CEF was asking for a bailout. CEF only wanted the Committee’s support in the restructuring process.

He added that when the new Board took office six months ago, it discovered several instances of duplicate work done by subsidiaries. A meeting was then called with all subsidiaries to clear the air and to chart the way forward.

He touched on PetroSA’s woes and mentioned that the company lost about R24 billion in revenue and to date no one had explained how this came about. He vowed that CEF and its subsidiaries would be turned around and that all historical challenges would be dealt with.

He said that CEF had come to value the importance of partnerships that included public private partnerships. CEF was in discussions with SASOL to acquire some of its assets such as petrol stations. CEF did not intend to build new petrol stations.

CEF was currently busy reducing operational costs. He agreed with Mr Mthenjane that CEF offices needed to be streamlined. There was no use for certain buildings and it was envisaged that the restructure would attend to this. He was adamant that CEF would be successful in restructuring and would ensure that duplication was a thing of the past. CEF subsidiaries should complement one another and not compete.

Mr Lufuno Makhuba (CEF CEO) replied that a diagnosis of operations had been conducted and that was how it had been established that CEF had a lack of clarity. CEF under his leadership wanted to be a strategic guide. He believed that once CEF understood the strategic role it could play, it would be able to add more value.

He said that most oil companies had been severely hit by Covid-19, including PetroSA which had seen a marked decline in the value of its assets.

He promised to furnish the Committee with a progress report on the restructuring process. According to him, a restructured CEF should be able to assist companies in the sector to develop and to raise capital.

Thus far, CEF had done well in addressing some pertinent challenges. A new Board had been appointed and all subsidiaries, with the exception of PetroSA, had met their respective targets.

CEF management agreed that there was a need to scale down on rentals.

Due to time constraints, the Chairperson interjected and thanked CEF. He requested CEF furnish the remainder of its replies in writing.

He informed the Committee that it would meet with Mintek at a later date and only then would the Committee Report be compiled on the 2020/21 Departments and its entities APP and budgets.

The meeting was adjourned.