PetroSA governance fuels NCOP debate!

The Constitution provides Parliament with the power to conduct oversight of all organs of state, including those at provincial and local government level.  The National Council of Provinces (NCOP) conducts oversight over national entities with a focus on provincial interest.  As part of this function, the Central Energy Fund (CEF) briefed the Select Committee on Economic and Business Development on 12 June 2018, on its turnaround plan aimed to clear governance concerns that are affecting the performance of Petroleum Oil and Gas Corporation of South Africa (PetroSA) and the Strategic Fuel Fund (SFF). 

The CEF is a state-owned energy utility with focus on oil, gas, coal and renewable energy.  The Department of Energy is its primary shareholder.  CEF derives its mandate from the Central Energy Fund Act, 1977.  PetroSA and the SFF are subsidiaries wholly owned by CEF.

The governance concerns at PetroSA flowed from R14.5bn financial losses that it incurred in the 2014/15 financial year.  The losses were ascribed to poor management of Project Ikhwezi[1].  Project Ikhwezi entailed high risk investment in the exploration and production of new gas deposits under the sea off Mossel Bay to feed PetroSA’s Mossel Bay gas-to-liquids refinery.  The project was expected to deliver gas in March 2013.  This would have extended the refinery’s lifespan to 2019.  The first deposits however, were only available some 21 months later by December 2014.  A number of top executives were fired due to the failed project.  In addition to the financial losses incurred, PetroSA also incurred environmental liabilities known as decommissioning liabilities which are estimated at about R9,6 billion.

More recently, questions arose as to the legality of the sale of the South Africa’s strategic fuel reserves in December 2016 and January 2016[2].  A report by KMPG indicated that the fuel stock sale was invalid due to non-compliance with regulatory approvals in terms of the Public Finance Management Act and the Companies Act[3].  Investigations are currently underway.

In September 2017, the Auditor-General South Africa told Parliament that PetroSA’s net loss of R1.4bn in the 2016/17 financial year cast doubt on whether it would be able to continue operating.  PetroSA also faces a funding shortfall of R7.4bn relating to a provision in environmental legislation.

In its briefing to the committee, CEF acknowledged that PetroSA is in a challenging financial position because of the R9,6 decommissioning liability.  The Mossel Bay oil refinery could also possibly run out of gas sometime between 2020 and 2022, when its offshore reserves run dry.  CEF pointed out that its short-term focus is to turnaround PetroSA governance issues.  Its longer-term strategy is to focus on economic transformation, having a significant impact on South Africa’s energy sector, financial sustainability and social impact.  Another issue identified was that CEF is a creature of statute and this makes it difficult to finalise partnership agreements.  CEF would have to look at this framework and requested the select committee’s support in its short and long-term strategies.

The select committee emphasised that in order to support CEF, it needed to have all the information before it.  It was highlighted that, even though in terms of the National Development Plan (NDP), energy is identified as a commodity that can drive the economy, the select committee needed to sure that PetroSA is sustainable.

A delegate of the select committee added that it is a concern that the Minister of Energy is not in attendance, as it is not possible for CEF Chairperson to answer all the questions.  The delegate further enquired about the outcomes of investigations - whether there is a finding on the legality of the sale of reserve fuel stock, can the sale be reversed and fuel stock be returned, has the present Minister of Energy laid a charge of fraud against the former Minister?  Another delegate raised the recent fuel price hike which took place on 1 June 2018 and the possibility of a further fuel price increase at the end of the month.  The select committee added that these fuel hikes impact the poor negatively and enquired what role PetroSA can play in this area?

CEF responded that with regard to the sale of reserve fuel stock, court papers have been filed and fraud charges against the former Minister are in the process and ongoing.  He indicated that fuel prices are set and that the Department of Energy has a departmental unit dealing with fuel prices.  The CEF Chairman further added that the board has done its utmost best to mitigate financial losses.  Presently, PetroSA is in a position to pay salaries and can be saved.

PetroSA can still play a significant role in the country’s transformation in the petroleum value chain.  It is therefore important that it continues with the exploration and production of oils and natural gas.  Many multinationals undertake exploration of oil and gas.  These activities are costly and high risk.  South Africa must have an organ of state that undertakes these explorations and in the event an exploration is successful, South Africa and Africa will benefit.

The CEF Board Chairperson and Members were only appointed in late 2017.  This board change was precipitated by the then rumours of maladministration and possible corruption which are presently being investigated.  The new board will have to turn things around without the benefit of fully knowing what the outcomes of the investigations would be.  Members of Parliament (MPs) must arm themselves with necessary information to guide CEF and in particular, PetroSA. 

An issue that was overlooked is the Mineral and Petroleum Resources Development Act, 2002 (MPRDA).  The MPRDA provides the framework legislation within which upstream oil and gas rights are granted and controlled, together with prospecting and mining rights. 

In terms of recent draft amendments to the MPRDA, PetroSA will as the designated National Oil Company of South Africa benefit significantly from becoming the custodian of the State’s mandatory shareholding in all Petroleum Rights issued by the Petroleum Agency of South Africa (PASA) or its successor in title.  MPs and Delegates need to inform themselves and enquire about whether or not such mandatory shareholding will ultimately assist PetroSA’s sustainability?

The CEF Chairman raised an important point about concluding agreements within the present legislative and policy framework.  He may have been referring to potential investors that wants to partner in gas and oil explorations, but are, however, discouraged by the Royalty-based Tax Scheme.  Cost incurred in oil and gas exploration are exorbitant and high risk.  Perhaps a better model to be explored is production sharing.  This could possibly attract potential investors and assist in the sustainability of PetroSA.