Central Energy Fund Group and PetroSA on their Annual Reports 2010/11

Energy

24 October 2011
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Central Energy Fund reported on its group of seven subsidiaries, divided into two clusters, the Fossil Fuel cluster and the Renewable Energy cluster: PetroSA; iGas; Petroleum Agency SA; OPCSA; South African National Energy Research Institute (Saneri), now SANEDI; the National Energy Efficiency Agency (NEEA); and the Strategic Fuel Fund Association (SFF). Highlights, lowlights and challenges moving forward were noted, before its financial statement were presented.

Members voiced concerns surrounding the progress of many of the projects that CEF was involved in as well as the removal of subsidiaries from the group.

PetroSA
posted a net profit of R831 million compared to a R356 million net loss in 2009/10. An overview of its performance was provided, a staff analysis, its annual financial statements and the emphasis of matters contained in its audit report about significant uncertainties, material impairments and fruitless and wasteful expenditure.

The Committee voiced concern about the shortage of gas in the country and reducing the carbon footprint.


Meeting report

Central Energy Fund Annual Report 2010/11 briefing
Ms Adila Osman, the Acting Chief Executive Officer of the Central Energy Fund (CEF) group of companies, presented an overview of the Annual Report for 2010/2011. The Central Energy Act of 1977 gave CEF a broad mandate to pursue interests in fossil fuels, including coals and oil. The Renewable Energy Ministerial Directive of 2003 gave CEF another broad mandate to pursue projects in renewable energy including: hydro; bio energy; solar; wind energy; low smoke fuels and energy efficiency. The group was divided into two clusters, the Fossil Fuel cluster and the Renewable Energy cluster, each comprising various companies.

Ms Osman then addressed some of the highlights of the group for the past financial year (see document). The group recovered from R74 million loss the previous year to a R1.2 billion profit in the year under review, thanks to the performance of the fossil fuel cluster, and specifically from the Strategic Fuel Fund (SFF) and PetroSA. SFF stored 10 million barrels of strategic stocks for Government in Saldanha reduced from the 150 million during the days of sanctions and the oil embargo. In the 30 years of its operation, SFF had not experienced any major environmental incidents. On the
Solar Water heater pilot project, ETA Energy was continuing its pilot project in Nelson Mandela Bay and Ekurhuleni Metro though many customers did not qualify in terms of the National Credit Act. The group had other subsidiaries that were involved in various other activities; African Exploration (AE) producing coal and iGas being involved in a tripartite arrangement with Sasol and the Government of Mozambique to operate the trans-border pipeline which delivers natural gas from Mozambique to South Africa. Other more notable highlights have been the development of the feasibility studies for the 5000 MW Solar Park project in the Northern Cape.


On a less positive note, Ms Osman noted the adverse effects that the change in the Government strategic approach had had on the Renewable Energy Cluster, listing various projects that were affected:
▪ The Cradock Sugarbeet Project which was to develop a 90 million litre per annum fuel grade bio-ethanol plant in the Eastern Cape. CEF’s participation required R800 million, but Section 54 approval was not received.
▪ Hoedspruit Bio Ethanol Project, which involved the conversion of sugarcane to ethanol which would be blended with fuel
▪ Landfill Gas projects in Buffalo City, Emfuleni, Tshwane, Alton and Cape Town
▪ Lesedi Bio Gas project
▪ CEF/IDC Biofuels Study
▪ Methcap Project
▪ Torbanite Project.

The carbon business was affected by the withdrawal of the Renewable Energy Feed-in Tariff (REFIT) programme and uncertainty over a post-Kyoto Protocol regime.
The company had secured international partners and was well-positioned to take advantage of the carbon credits which would flow from its renewable energy project portfolio. CEF was
 now looking to COP 17 for a new international roadmap which would inform future strategy of the business.


As for the challenges moving forward, the group was to experience a dismembering where African Exploration was to join the Department of Mineral Resources and Saneri and Energy Efficiency Agency was to form SANEDI which would be a standalone entity. She then presented the financial statements of the group (see document).

Discussion
Mr S Radebe (ANC) sought clarity about the ETA Energy
Solar Water Heater pilot project, in terms of percentage, how far was CEF with its work. When was CEF intending on completing this project as it seemed to be repeatedly in a pilot phase? He also sought clarity on the issue of making Saneri a dormant company, what was this to entail?

With regard to the ETA project, Ms Osman said it was still progressing. This was still in its R10 million pilot phase but there had been setbacks as CEF had experienced certain challenges, namely the fact that the project had lost key staff members, there was the slump in the economy and it had also experienced a poor uptake due to the reluctance of people to pay the amount required for the use of the geysers. The payment involved an initial lease of the SWH which they paid off in monthly instalments. CEF was to conclude a viability study within this financial year to ascertain whether they should enter into phase two of the project, which would be a full rollout of the geysers. She noted that some people would not qualify for the SWH due to the National Credit Act.

She explained that Saneri would be dormant (not operational) in the sense that all its assets and liabilities would be transferred to SANEDI. They could either leave it as a sleeping company or close it down.

Mr S Motau (DA) asked CEF’s current position as to the progress with the Solar Park. On the issue of gas, he stated that the country was in turmoil in this regard and wanted to know when iGas was intending on getting the gas industry going in SA.

On the issue of the Solar Park project, Ms Osman conceded that this was still at the feasibility study phase. There had been challenges in securing the site in Upington. They were appointing those responsible for the Environmental Impact Assessment. They were expecting a feasibility study report by 31 March 2012, when action would then be taken.

Mr D Ross (DA) sought clarity on the feasibility study and wondered if Solar Park should not be decentralized to the areas of need. With regard to the Cradock Sugar-Beet project, he asked for some clarity on this issue. He then noted that Cradock was very remote form the market and the cost of production and transportation was very high. Perhaps the project needed to be revisited.

Ms Osman responded to the Cradock Sugar-Beet question, stating that CEF’s involvement in this project had been withdrawn due to the high buy-in and the high risks involved.

Mr E Lucas (IFP) sought clarity as to how the R1.2 profit occurred. He asked about the lifespan of the gas fields in Mozambique. He requested clarity on the issue of empowerment as well as explorations.

On the issue of gas, Mr M De Pontes, Chief Operating Officer of iGas, one had to differentiate between LPG and natural gas. The LPG problem related to refineries. There had been a coincidence of problems in refineries that had created the imbalance. One refinery had a fire, another two had shutdowns. Thus they had had to suddenly import as there was no stock. To avoid such a problem, one would have to keep a strategic stock but that was costly. A request was made that a more complete answer would be given during the PetroSA presentation.

Ms N Mathibela (ANC) asked why there was a reduction in the number of barrels stored, down from 150 million to 10 million. She also sought clarity on the issue of BEEE non-compliance on the part of the oil companies.

On the issue of non-compliance by the oil companies, Mr A Mjekula, CEO of SADSA (SA Supplier Development Agency) said the legislation had a loop-hole in it which required a very low standard of compliance, which the companies adhered to. This was contrary to the spirit of redress that was envisaged by the
Broad-Based Black Economic Empowerment Act. There had been an audit of the Liquid Fuels Charter performance of oil companies. There had to be redress in procurement to answer the redress imperative. On balance the oil companies had not come to the party. The picture was mixed. Some had given no cooperation. As long as they had 35% empowered entities, they believed they had complied with the prescripts of the BEEE legislation. However, this was not acting in the sprit of redress intended by the Liquid Fuels Charter and they paid no attention to procurement redress for small and medium enterprises. There were some projects on the go but it was a painfully slow process. An empowerment framework was needed as here was a minimalist approach where companies did the least to comply. And to what extent had each entity in the CEF Group performed? CEF had a responsibility over its subsidiaries and each year it tried and committed the subsidiaries to develop 10 new BEE suppliers. Of these seven companies, they had had no success with three of them and success with four of them, which was 65% success. In working towards reliable supplier contracts, enterprise development for all oil refineries in the amount of R72m was aimed to be placed in the hands of this target market (exclusively black owned, women and people with disabilities). All refineries were participating. He gauged a 62% instead of 100% success with the  Liquid Fuels Charter.

On the issue of barrels stored, Ms Osman stated that this reduction was due to a directive from the Department of Energy. The new mandate broadened CEF’s scope in terms of participation in projects. The Acting CEO was then followed by the CEOs of OPC and Petroleum Agency South Africa (Mr Pieter Coetzee and Mr
Mthozami Xiphu respectively) providing a breakdown on the business that they undertake. 

Mr Mjekula noted that there had been interaction with the seven companies about this, and had experienced success in only four of these companies, amounting to a 62% success rate. 

Mr J Selau (ANC) sought clarity on the need for CEF to simplify their presentation. He sought advice on the impact of the new mandate given in 2003 to the group. He asked why some companies had been omitted from the respective clusters. He wanted to know what successes had been enjoyed by each company. He pointed out that the Solar Park project was now in its third year of discussion and sought clarity as to the current position with regard to this project. He noted that projects had been targeting the transport sector only and wondered why there was no research presented in other areas for the purpose of “greening” the country. He asked what the future of CEF was in light of the removals of some subsidiaries and the writing off of projects, and the impact that this was likely to have.

Mr S Radebe (ANC) wanted to know why the expenditure on the World Cup tickets was not audited.

The Chairperson is a very complex body. He was uneasy as the CEF had been rather economic about the extent to which each entity had been able to achieve its mandate from government of being a pioneer in renewable energy and in maintaining the fight for security of stock for fossil fuels. The Committee
intended to conduct a detailed oversight of all activities of the CEF, its divisions, subsidiaries, associations and all its projects in the months to come.

Mr K Nassiep, CEO of SANEDI, took the opportunity to bring clarity on the mandate of SANEDI as a subsidiary. He noted that the intention was to broaden the capacity of the country to effect R&D and developing technologies that would ensure greener initiatives. He noted the various activities that were performed by the company in this regard. On the issue of transport and targeting transport, he noted that the transport sector accounted for 20% of the total energy use in South Africa. The focus was on this sector as it required the most attention. He noted that there was no regulation on second-hand cars, leading to the emissions issue.

PetroSA (
Petroleum Oil and Gas Corporation of South Africa) Annual Report 2010/11 briefing
Mr Benny Mokaba, Chairman of state-owned oil company PetroSA, presented his overview of the Annual Report which showed a turnaround with a 31% increase in revenue, stating that PetroSA arose out of the need for South Africa to be self-sustaining with regard to oil and gas, for the purposes of resource security. The company was in the big league with Shell and Sasol in the work that it did. The company had entered into exploration endeavours in Equatorial Guinea and Namibia, as well as a trading office in Rotterdam and had a net asset value of R16 billion. This figure made the company quite small in comparison to other companies in this field.

As part of the company’s mandate, PetroSA had been tasked with exploring and producing oil and natural gas. Part of fulfilling this mandate was participating in exploration endeavours that sometimes yielded no findings, but cost a lot of money. There was a 5% chance of drilling and not finding anything. However, the nett effect of the company’s exploration was positive. PetroSA was also required to market and trade oil and petroleum chemicals.

With regard to the gas shortage, the chairperson tabled Vision 2020, noting that the current gas availability would start to dwindle by 2012, but PetroSA had been working on extending the lifespan of these gasses. This meant that the company would go back to old wells to produce gasses that would ensure that gasses were available at least until 2019. When these dwindled, the company was now looking at the possibility of importation.

PetroSA recorded a nett profit of R831 million as opposed to the R356 million loss in the previous financial year. The company had commenced the development of the Ikhwezi project and it continued its efforts with the Mthombo Project. It continued to support BBBEE, showing volume increases of 14% over the past financial year. The l
iquefied petroleum gas (LPG) shortage was not just a national problem, but really a regional problem where it was also being experienced in Mozambique, even though they had natural gas. When the need occurred, there must be refineries. South Africa was in an import situation with liquid fuels and refineries were now reliable. Additional refining capacity would be needed in the future to maintain a positive record.

On the issue of performance offset against the company’s objectives, on the issue of employment equity, there was still work to be done. Proposed interventions were believed to be able to augment the situation.

Mr Darrin Arendse, Vice-President of Human Capital, presented a breakdown of the company’s human resources (see document). He made special mention of an Accelerated Development Programme that was specifically targeted at women, as well as other initiatives.

Ms Esther Letlape, chairperson of the Board’s Human Capital Committee, elaborated on some of the innovations alluded to by the Vice-President. She made special mention of the Techno-Girl initiative that encouraged the involvement of young girls in this sphere of work. She noted the need for ongoing initiatives and not just once-off initiatives.

Mr
Nkosemntu Nika, Chief Financial Officer of PetroSA, presented a breakdown of the financials of the company. He made special note of the R1.4 billion turnover. He attributed this to the increase in sales volumes. He also made mention of increasing crude oil prices that contributed to 26% of the turnover. These positive increases were threatened by the strengthening Rand, resulting in a slightly negative effect (see document). He addressed the issue of high levels of cash being carried by PetroSA, suggesting that the company had in place plans through which it intended to handle the cash. Cash earned from operations was said to be in excess of R2 billion, increasing the company’s cash holdings by R1.8 billion. The balance sheet, he suggested, was indicative of a good base for growth. Also noted was the unqualified audit opinion given by the Auditor-General. On the sale of Brass Exploration Unlimited, where the sale of this subsidiary was still being contested, he commented that the cash had been received by PetroSA. The Auditor-General also noted issues of uncertainty around loans granted to subsidiaries of PetroSA in Egypt and Gabon. He made special mention of the issue with SARS, under a discussion of fruitless and wasteful expenditure, which resulted in an apparent loss of R12 million, but that was later recovered (see document).

Mr Mokaba sought to emphasise the large role that exploration played in the business of PetroSA, noting that this aspect was a sine qua non for entities such as this company, and although exploration resulted in large amounts of expenditure, it was however necessary for the company, and without it, the company itself would cease to exist.

Discussion
The Chairperson of the Committee sought clarity about the other products of PetroSA that were separate from the exploration activity that was spoken of.

Mr Mokaba responded, together with Mr J Falbe, Vice President at PetroSA, by noting that other products produced by PetroSA include kerosene, petrol, low sulphur diesel, LPG, lower isometric desolates, candles, liquid nitrogen, oxygen and carbon dioxide, but noted that in these regards, there was still room for improvement.

The Chairperson sought clarity on the percentage that these took in terms of PetroSA’s sales volumes.

Mr Falbe replied that in terms of fuels, PetroSA supplied about 7% of the country’s needs, and these were 5% of the sales volume. He also noted carbon dioxide used in carbonated drinks, nitrogen provided for the farming industry for fertilization, and oxygen for hospitals.

Mr Mokaba provided some clarity as to the issue of Liquefied Petroleum Gas (LPG), stating that this was a by-product of the refining process that produced bitumen used for tarring roads. This meant that additional refining facilities were therefore needed to increase the production of this by-product.

Mr S Motau (DA) asked if there was a chance that the projects undertaken might go pear-shaped and that funds would have to be returned. He sought clarity on the issue of fruitless and wasteful expenditure which showed a profit of R7 million, as well as to the efforts PetroSA was making to reduce its carbon footprint, as efforts seem to be centred around its crude oil refinery, and not gas.

Mr N Nika responded to the issue of fruitless and wasteful expenditure, noting that there was no over-recovery, the R15 million figure had been carried over from previous year, resulting in the residual figure.

Mr Mokaba addressed the issue of reducing the carbon footprint stating that PetroSA had entered into a Memorandum of Understanding with General Electrical (GE) with the aim of finding a way of bringing in efficient equipment into the operations. The hope was that this would take a slice out of the company’s carbon footprint.

Mr S Radebe (ANC) voiced concern that the 14% increase on BBBEE stakeholders may be speculative. What was the actual situation in reality? He also sought clarity on the large numbers of foreign nationals employed by the company and wondered if there was any plan to transfer the skills possessed by this foreign nationals to South Africans. On the issue of skills development, did the study assistance given to students take the form of full or half bursaries? What was the success rate of this programme?

Mr Arendse responded that there would always be a percentage of foreign nationals employed by the company by virtue of the business that PetroSA was involved in plus the fact that the skills and disciplines required to run the business were so scarce locally. It was unfortunate that the company could not employ long-term incentivised plans (such as share options) as a mechanism for the retention of personnel as such were frowned upon within this organization, making it very hard to keep valuable personnel.

Ms Letlape addressed the issue of skills transfer. She spoke of the Ikhwezi Skills Development Project that was aimed at developing the skills of employees as well as the development of the skills of suppliers. On study assistance, the company did provide full time bursaries with an emphasis on the empowerment of women. She alluded to the need to capture development at High School level and not just at University level.

Ms B Tinto (ANC) asked what Corporate Social Investment had been instituted by PetroSA, especially in the area of KwaNonqaba, as this area was experiencing high levels of HIV/AIDS.

Mr D Ross (DA) wanted to know if PetroSA had started with the fuel-optimization plan and asked how the prospects of getting extra oil and natural gas in future were looking. On the compulsory blending of ethanol into bio-fuels, he sought clarity on the production figures and volumes.

Mr Mokaba noted that PetroSA had started with the research and had now allocated 70% of the tenders, assuring the Committee was on top of the matter.

Ms N Mathibela (ANC) made special mention of the successes of PetroSA. She wanted to know whether future endeavours on the part of the company would result in a drop in prices for the consumer.

Mr J Selau (ANC) asked what the secret was for the 200% turnaround from a deficit to a profit. In terms of profits versus liabilities, he asked if liabilities were being shared with CEF’s liabilities. He also sought clarity on the role that PetroSA was playing in the huge oil discoveries in Namibia and Mozambique in terms of relationships created for the purposes of refining the oil discovered. His last question was on the women issue and when this would be resolved.

Mr Mokaba made an analogy in which he alluded to the fact that the PetroSA team experienced successes but there was always space for growth. The secret of turning around the business lay in the fact that deficits were incurred as a result of the plant not being operational; the price of oil was slightly lower; and the exchange rate had had an effect. These were the key drivers. Profitability was driven by high oil prices, which meant that at that time, the plant had to be running. Cost management was also very important, and programmes had recovered R300 million.

On the issue of the retention of women in the company, Ms Letlape noted that one of the interventions put in place had been ear-marking certain senior positions for women that were to be filled by women developed through specific programmes targeted to this. She spoke of possible initiatives that may be implemented moving forward. Ten bursaries have been set aside at the
Cape Peninsula University of Technology (CPUT) for people living with disabilities.

Mr S Radebe (ANC) asked a follow-up question relating to the Standing Committee on Public Accounts (SCOPA), and the weaknesses identified with regard to internal controls. What had been done to counter the weaknesses of the company’s internal controls? What impact would the sale of Brass Exploration have on the company?

The Chairperson sought clarity on PetroSA’s resources and equipment that would ensure that processes were environmentally friendly. He asked if PetroSA’s listed subsidiaries were the only ones.

Mr Mokaba clarified the rationale behind having subsidiaries, stating that they were special-purpose vehicles that were used to optimise profits, deal with national and international tax issues, as well as to sell shares for the purposes of avoiding imbalances. He asked the Committee to take the assurances of the Auditor-General in their report, as well as those assurances presented by the Board of PetroSA, noting that there was still room for growth. He also made special note of the volatility of the oil-industry figures and asked for patience in this regard as these would continue to provide problems in terms of audit reporting.

Mr K Nyatsumba, Head of Corporate Affairs for PetroSA, spoke to the extent to which the company had a CSI footprint across the country. The four focus areas, he noted, were: education; health; community development; and sustainable development, with an emphasis on interventions around environmental responsibility. A multi-purpose centre had been created in KwaNonqaba, costing R11 million. In this centre, wellness programmes were also run. This was all mindful of the fact that Mossel Bay was where PetroSA was based and community interventions in this regard become more important.

The meeting was adjourned.


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