Central Energy Fund on PetroSA and Strategic Fuel Fund turnaround plan

Meeting report

Election of Acting Chairperson
Mr E Makue (ANC, Gauteng) was elected as Acting Chairperson of the Committee.

Central Energy Fund (CEF) turnaround plan to deal with governance issues affecting the performance of PetroSA
Mr Luvo Makasi, CEF Board Chairperson, provided the Committee with some insight into the CEF’s Strategy Review. In the past the CEF successfully implemented SA’s energy strategies. PetroSA was however currently in a challenging financial position. The CEF had low relevance and its market share in refining was around 6%. It had an unbalanced portfolio and complex governance. Sustainability of PetroSA was a huge issue. PetroSA was the CEF’s largest subsidiary. PetroSA in the past had contributed 90% of the CEF’s group revenue. There was now depletion of cash revenues. When PetroSA was formed it had no cost for gas but now there was a cost involved.  The cost of gas had to be factored in. On the CEF’s new strategy, the short term focus was on PetroSA’s turnaround. In the mid-term, energy diversification was the focus. The long term focus was on economic transformation, having significant impact on SA’s energy sector, financial sustainability and social impact. Mr Makasi did feel that the CEF’s debt equity ratio was still balanced. PetroSA was a gas to liquid refinery. In the past there had been enough natural gas for PetroSA to use but now there was depletion of gas feedstock. PetroSA’s cash reserves were shrinking fast. By early 2022 PetroSA would have run out of cash and gas reserves.

Exploration was attempted in 2014 with Project Ikhwezi but losses of R20 billion were made. Environmental liability to the tune of R9.6 billion was triggered. Luckily the Department of Environmental Affairs deferred liability for five years. There was thus some breathing space. Work needed to be done on a comprehensive decommissioning liability plan. There was a sense that things at PetroSA was improving. There was no intention to borrow funds to ensure PetroSA’s sustainability. The CEF undertook a group strategy review. this included some of the matters to be grappled with and discussion on whether SA needed to still store strategic stocks or whether SA needed refined product. Policy pronouncements would be made. Mr Makasi was excited about the policy certainty. Most of the mistakes of the past were in part due to the operating model of the CEF being cumbersome. There was either a need to restructure or to relook at its operating model. Thus far the CEF had looked at market trends and what its strategic options were. It was currently looking at its operating model.

Discussion
The Acting Chairperson asked the CEF what timeframes it gave itself.

Mr Makasi said that processing was completed and that the operating model review was sitting with its stakeholder the Department of Energy.

The Acting Chairperson noted that the CEF said a review was done which was sitting with its stakeholder, i.e. the Department of Energy, for consideration. This meant that the Committee would not have insight into the review. It was therefore up to the Committee to contact the Department of Energy to request a presentation on the review be given to the Committee. Once this was done the Committee would be able to engage intelligently on the matter. The CEF expected the Committee to support it but the Committee could only give such support if the Committee did not have all necessary information before it. He pointed out that civil society raised concerns about exploration of shale gas. SA was looking at increasing trade with its Southern African Development Community (SADC) neighbours. There was also the possibility of SA getting oil from Mozambique.

Mr Makasi, on trading with African countries, stated that the Minister of Energy, Mr Jeff Radebe, would be visiting SADC countries and would be looking at their role and on how SA was leveraging them. Perhaps some of the challenges the CEF had could be leveraged. He noted that a proper debate on shale gas was needed. Shale gas was a possibility that should be considered but he was aware there might be environmental concerns. He said that when the Department of Energy got back to the Committee on what was being done to turnaround things, the Committee would then get a better picture. One of the lessons learnt was that the fiscus should not be used to fund exploration. He was confident that in the short term the CEF would mitigate losses. He felt that thus far the CEF was doing a great job.

Mr W Faber (DA, Northern Cape) was displeased with the absence of Minister Radebe. There were some questions that required answers from the Minister. He asked what was happening on the matter of the illegal sale of SA’s strategic oil stock. He added that former Minister of Energy, Ms Tina Joemat-Pettersson, lied about the matter and had said it was rotating stock that had been sold. He asked if Minister Radebe would make a criminal case against Joemat-Pettersson if it was found to be an illegal sale. He was concerned about volatility of fuel prices and weakening Rand. Fuel increases hit the poor the hardest. SA used to have huge reserves of excess stock of crude – why could this not be used to supplement SA’s fuel supply? What was the price paid for petrol? He pointed out that in some provinces, like Mpumalanga, zama zamas transported steel and platinum to Mozambique and prefered to fill up on fuel in Mozambique because it was cheaper. He observed that SA exported fuel at a cheaper price than what it was in SA. He asked how far the Ibhubesi Gas Project was. If PetroSA was running out of gas, he understood the West Coast to have gas reserves. SA sourced most of its fuel from Saudi Arabia, Angola and Nigeria. He asked why cheaper fuel could not be sourced from its African counterparts. Had the CEF considered best practises from countries like Singapore and Malaysia? These countries had even implemented alternative transport measures.

Mr Makasi, on the stock rotations vs. stock disposals, said that the CEF had filed court papers. The CEF’s position was clear on the matter - the stock had been disposed and not rotated. He could not comment on a criminal case instituted against Joemat-Pettersson. The process was ongoing with law enforcement agencies. He also did not wish to speak on the petrol price as it fell within the Department of Energy. He confirmed the West Coast was looked at for gas including Mossel Bay and the Southern Cape area. Farm outs were also considered.  He was aware of the Ibhubesi Project. He appreciated the point made about best practises in the world.

Mr L Magwebu (DA, Eastern Cape) stated that PetroSA was in a dire financial position. It had lost 34% of revenue compared to 2014/15. According to the briefing the main reasons for PetroSA finding itself in its current predicament was because of change in market trends and the CEF being confined by statute. He felt the problems of PetroSA were self-inflicted. The Ikhwezi Project was ill-conceived. In 2014 when it was undertaken, due diligence was not done. No proper research was done. There was an R9.6 billion decommissioning liability. He was concerned about a total of R17.3 million paid in bonuses to executives who were involved in the project - how could persons who failed in the Ikhwezi Project be paid bonuses? There was reckless spending of funds from the fiscus. The CEF should blame itself for the current position. On the CEF’s turnaround strategy, a statement was made that no bailouts was needed as the CEF preferred to work on its cash flow challenges. Manifested problems had not happened overnight. He was not convinced by the briefing given. He felt that the CEF Board was incompetent and perhaps needed to resign.

Mr Makasi responded that the current CEF Board had only taken office in February 2017. Interventions made were to mitigate what happened previously. He agreed things could have been done differently on Project Ikhwezi. Cash reserves should not have been used for exploration. A better option would have been to bring partners on board. He further conceded that no evaluation was done on the wells explored on the Project. The situation was desperate at the time, hence things were done the way they were. He perused the reports over the Project. He did not say that the statute by which the CEF functioned was an impediment. The position the CEF found itself in did not allow for the market to be captured. The CEF was merely a spectator. Hence the CEF was reviewing its operations model. The CEF was aware that it had inefficiencies. Its operating model needed to change. The CEF was definitely not pleased with its current financial position, especially its cash position. PetroSA was, so to say, pulled out of the Intensive Care Unit (ICU). PetroSA’s production, refining capacity, efficiencies etc was being looked at. The CEF was not yet where it wished to be but it was making strides. The CEF was making operational changes as it was even difficult for it to enter into Memoranda of Understanding (MOUs), say within 30 days. It took much longer and was a complex process.

The Acting Chairperson asked when the CEF would be having its next board meeting. Depending on the answer given he would ask a follow up question.

Mr Abdul Haffejee, CEF Company Secretary, answered that the next board meeting was scheduled in July 2018 but a special board meeting was scheduled within the next two weeks.

The Acting Chairperson emphasised the Committee had a constitutional responsibility to do oversight. It compromised Members when timeframes were not provided. He suggested that the CEF firstly put its interventions to paper, secondly, set timeframes and, thirdly, state what results were expected. In keeping with good governance practises, what the Committee had just requested of the CEF should firstly be put before its board and only thereafter present it to the Committee. Information requested was after all operational in nature. He urged the CEF to have its special meeting within two weeks. The Committee would be expecting the requested report by 15 July 2018.

Ms B Mathevula (EFF, Limpopo) said the CEF, on its turnaround strategy, said it was sitting with its stakeholder i.e. the Department of Energy.

Ms M Dikgale (ANC, Limpopo) felt that the presentation had not said much. It simply did not provide Members with enough information and detail. It was clear that PetroSA was in big trouble but Members got no sense of what was being done to turn things around. She was aware Minister Radebe was looking towards SA’s African counterparts on the matter of oil/gas. She suggested the CEF consider how things were done by Petronas in Malaysia. She felt the problem sat with management. There was a need to change things.

Mr Makasi said that the CEF could look at how things were regulated in Malaysia. Perhaps lessons could be learnt.

The Acting Chairperson stated the CEF made it difficult for Members to do their jobs. On review of strategies, there was talk about cost centres but no figures were provided to the Committee. The Committee needed to be provided with audited financial reports for 2017/18. The CEF was asked to provide it. The Committee visited PetroSA in Mossel Bay during an oversight. He asked whether there was anyone from PetroSA amongst the delegation from the CEF. He asked for greater detail on what the CEF’s plans on social impact would be in its new strategy. The Committee also needed greater information on where exploration was being planned. The Committee furthermore needed to be convinced that PetroSA was needed as an entity - was it contributing to SA’s economy and to growth? The Committee appreciated the fact that the work of the CEF overlapped with Operation Phakisa and with the work of the Department of Mineral Resources. The Department of Trade and Industry was also looking at electrical vehicles. The Committee could facilitate dialogue with other departments. The Committee was not convinced about the prospect of discovering natural gas. Has work on it already been done?

Mr Makasi thanked the Committee for guidance given to the CEF. He responded that the reason why PetroSA was not present was because the Committee invited the CEF to speak to the PetroSA issue. He could respond to matters raised by the Acting Chairperson in five minutes but that there were matters which the CEF debated with other departments. Energy needed to have a human element to it. The CEF was cooperating with the Department of Energy on the Solar Water Geyser Programme. The human element had to be ramped up as there were things that impacted upon people. PetroSA was needed -investment that SA had made in PetroSA was huge and it had a vital role to play in the Southern Cape. PetroSA could also play a role in Africa. He believed there was still a market for gas to liquid fuels. The transition to gas was an important debate. Minister Radebe was very consistent. In order for the CEF to find partners, certainty was needed. The CEF had to look at its farm out strategies. Policy certainty was needed. There were processes to be followed regarding exploration. For one, an advertisement had to run for 21 days. Bid evaluations were needed and there should be no court action. Regulatory processes had to be followed. He did not wish to speak to policy issues.    
 
Mr Magwebu asked what impediments the CEF had if they were not statutory. The CEF was changing its operations as it, for one, found it difficult to enter into partnerships as there were challenges. Now that challenges were identified, what was the CEF was doing about them? In order for the Committee to assist the CEF, it had to give the Committee an idea of possible solutions it had. Why could MOUs not be concluded within 30 days? What was the impediment?

Mr Makasi said that the CEF wished for oil and gas to be regulated separately from mining. As long as matters were clubbed together the situation would not be ideal. He emphasised the Mineral and Petroleum Resources Development Act (MPRDA) process had to be expedited. The separation brought on by the MPRDA process was important.

The Acting Chairperson pointed out that the Committee did oversight over 31entities and in all likelihood the CEF would not be meeting with the Committee anytime soon. Mechanisms needed to be found for the Committee to regularly engage with entities, especially the CEF. He asked Members to come up with proposals. Constant contiguous engagement was needed. The Committee was concerned about what was happening at PetroSA. 

Adoption of Draft Committee Minutes dated 5 June 2018
Draft Committee Minutes dated 5 June 2018 was adopted without amendments.  

 The meeting was adjourned.