Petroleum Agency SA 2011 Annual Report & 2012 plans; Alexkor Development Foundation report from Department Public Enterprises

Meeting report

Petroleum Agency South Africa: Annual Report 2011/12, Strategic Plan 2012
Mr Thibedi Ramontje, Acting Chairperson, Petroleum Agency South Africa, noted that the mandate of the Petroleum Agency (PASA) was to contribute to the energy resources of the country by promoting and regulating the exploration and production of the country’s natural oil and gas resources. This mandate was derived from section 71 of the Mineral Resources and Petroleum Development Act (MPRDA). The MPRDA mandated PASA to regulate and promote the upstream petroleum industry. The regulation and promotion activities were undertaken in respect of both onshore and offshore areas of the country.

Mr Mthozami Xiphu, Chief Executive Officer, PASA, firstly dealt with the 2011/12 annual report. He stated that there were extensive promotional activities in this year, including strengthening existing markets in Europe and the United States of America (USA), broadening PASA’s focus to include the Far East, and raising PASA’s profile with local stakeholders and associated organisations through targeted advertising and a successful open day.

The technical progress made by PASA included reduced availability of acreage due to a successful marketing strategy, an increased focus on resource evaluation, and a better technical understanding of basin evolution, especially in respect of the Orange Basin, Southern Central Karoo Basin and Springbok Flats. There was increased interest in unconventional oil and gas onshore which had led to focussed capacity building.

During the year, presentations were made, and well received, in respect of the Shelf Claim Project, to the  plenary session of the UN Commission on the Limits of the Continental Shelf. In respect of South Africa, a partial submission was made for the South Africa mainland, and a joint submission was made with France, in respect of the Prince Edward Islands and Crozet Archipelago.

All licensing and regulation applications received were processed within the prescribed time frames, and PASA continued to monitor and enforce compliance with legislation, particularly environmental compliance.

Mr Xiphu noted that there was continued interest in Shale gas and a moratorium had been signed on 1 February 2011, to allow for a structured process rather than an open door. PASA had stressed its determination to remain objective in order to carry out its mandate successfully.

Mr Xiphu stressed that PASA was not only the promoter and regulator of oil and gas exploration but PASA was also the data management centre for oil and gas activities. He reported a threefold increase in demand for the provision of data to external parties, mainly in the offshore Orange Basin and onshore Karoo Basin areas. Substantial progress had been made in sourcing and digitising onshore reports and seismic data. There had been onshore data review, in conjunction with coal and gas exploration companies,  to identify gaps in the data held by PASA and data had also been supplied within agreed timeframes.

He reported on the corporate social responsibility initiatives of PASA. At all times, PASA tried to maintain five internships in order to nurture capacity in the engineering, geology, and geophysics field, to build up a pool of experts in South Africa and reduce the need to import these skills. Efforts were being made to ensure training to produce professionals with scarce skills, and PASA organised the Upstream Training Trust to give  bursaries to encourage students to study in the natural sciences, with a particular focus on geology and engineering fields. PASA was involved in a number of projects with the University of Fort Hare Petroleum Studies Unit. Other projects included Habitat for Humanity, Learners Focus Week and providing science kits for schools.

Ms Olivia Mans, Chief Financial Officer, PASA, presented the financial statements. She noted that the income was less than anticipated. PASA had operating expenditure of R84.5 million, and investment income of R16.4 million. Its profit was R7 million. The financial position of PASA had improved during, resulting in a stronger balance sheet in 2011/12 than in the previous financial year. The statement of cash flows had reduced over the financial year, due to an error in the calculation of the income late in the financial year. PASA had achieved an unqualified audit report and the year had turned out to be much better than originally anticipated. PASA was now using its reserves for funding of its operations and would be able to continue doing so for the next three financial years.

Mr Xiphu then moved on to present the strategic plan of PASA for 2012/13. He noted that the stakeholders of PASA included government, explorers, and the populace. PASA’s main objective was to evaluate resources and promote opportunities, to regulate the upstream petroleum industry, ensure preservation of and access to geotechnical upstream petroleum information, ensure optimal human resource provision, ensure optimal financial management, and contribute to a shale gas exploitation strategy.

In relation to the requirement to evaluate resources and promote opportunities, he noted that PASA aimed to document geology and petroleum prospectivity of five basins. Documented milestones had been set up, which PASA would use to assess its performance. There would also be an effort to update the petroleum resource inventory and to promote the South African prospectivity through relevant media and events. Preparations would also be made for the defence of the continental shelf claim.

With regard to regulation of the upstream petroleum industry, PASA would ensure timeous processing of applications, compliance with terms and conditions of permits and rights and transformation in the upstream industry. PASA would also ensure the preservation of and access to geotechnical upstream petroleum information, in order to provide quality geotechnical information within agreed time frames, as well as to provide access to metadata via the internet. PASA would ensure optimal human resource provision by coordinating a skills needs assessment and it would develop a human resources plan. Efforts would be made to manage finances efficiently and effectively, and funding models would be proposed, within the regulatory boundaries. PASA would also contribute to a shale exploitation strategy.
 
Discussion
Ms N Ngele (ANC) referred to the corporate social responsibility plans, and asked from where the students were sourced, and what happened to them once they had qualified. She wondered if media advertisements were placed, and whether those students came from rural or urban areas.

Mr Xiphu responded that PASA had limited funds and therefore it was not possible to place advertisements in the media, as PASA would be overwhelmed with thousands of applications. PASA instead interacted with the universities, especially visiting career fairs, in order to identify and further educate students who had an interest in science subjects. The main focus of the Agency was on the rural and disadvantaged areas, and quite a number of students had been attracted in this manner. The bursaries offered amounted to R45 000. A number of the students were offered employment after graduating, but unfortunately many of them were enticed away to work for the larger corporations. PASA did not keep a record of the progress of the students but its aim was to train the students to become professionals.

Mr Xiphu further referred to a project undertaken by PASA with the University of Fort Hare, in which students were encouraged to take up studies in geophysics. He also noted that one of the managers in PASA gave regular lectures in geology.

Mr J Lorimer (DA) asked if PASA had sufficient capacity to monitor environmental compliance, particularly as the gas extraction advanced. He asked if PASA was confident that the current legislation would provide adequate safeguards for new processes in the exploitation of shale gas.

Mr Xiphu stated that the Agency worked in cooperation with the Department of Environmental Affairs, Department of Science and Technology and Department of Water Affairs, to monitor matters.

Mr Lorimer asked about the potential of cobalt methane, the possible time within which production could commence, and how much could be produced.

Mrs Jennifer Marot, Frontier Geology Manager, PASA, replied that the estimate for cobalt methane was 1 TCF of reserves. There was also an estimate of 5 TCF in the Springbok Flats basin.

Mr Lorimer asked if PASA was able to keep up with demands for evaluation of the gas resources. He queried if PASA had specific information in relation to the estimates of the Shale gas resources, and whether it was PASA or the exploration companies who had responsibility for assessing the potential of the resources.

Mr Ramontje replied that the evaluation of shale gas resources were done by both the private sector and PASA, with each party having a role to play. He noted that PASA could not do the work alone and so other bodies would contribute to the efforts.

Mrs F Bikani (ANC) referred to the finances of the Agency, and was worried that the finances might be taking a downturn if PASA was using its reserves. She also commented that if PASA was presently relying on its reserves, she was worried about its ability to handle a very big project if it was presently relying on its reserves.

Mr Xiphu responded that in fact this “downward trend” should in fact more properly be referred to as a zero slope. The change in the finances was not due to any failure or lack or success by PASA, but resulted from the operation of the law. PASA was not supposed to receive any funding from the operators, because from 1 March 2010 the Royalties Act determined that royalties would be payable to the National Treasury, and no longer to PASA. The fact that the Agency was still able to get some funds from the operators was “more of a windfall” than anything else. However, PASA was able to continue funding itself, because the establishment directives of the Agency had foreseen that there would be a time when royalties of the Agency would dry up, and so provisions had been made for reserves to enable PASA to continue to work without disturbance.

Mr Xiphu added that PASA was engaging with the National Treasury to resolve all pending issues so that PASA would not get to the point of exhausting its reserves. It was stated that PASA would get its funding as soon as the issues were resolved.

Mr C Gololo (ANC) asked what minerals could be found at the Prince Edward islands.

Ms Marot noted that at the moment no minerals had been found on Prince Edward islands. However, the current interest, in respect of this area, was pharmaceutical research. She stated that there was a release of rich and hot thermal waters in the area around the island, which were associated with condensation accumulation, and this was what currently was the focus area of study. It was likely that there was gold in the area, but whether it could be exploited commercially was another issue, in view of the fact that it was found at great depth.

The Chairperson referred to the recent increase in petrol prices. He asked about the prospects of getting any appreciable amount of crude oil from the exploration activities of PASA, in order to mitigate the reliance and dependence of South Africa on the importation of crude oil.

Ms Marot responded that there was more gas prospectivity than oil prospectivity in the area close to the coast and there were prospects of oil in the deeper areas. She noted that it was not possible to get an estimate of the oil reserves until several wells had been drilled, but there was the potential of billions of barrels of oil in the deep shore.

The Chairperson observed that the fees charged by PASA for licenses were low, and asked why this was so.

Mr Xiphu replied that the license fees were low in order to attract foreign investors into the exploration sector, and were used as an incentive to persuade investors to invest in exploration activities.

Mr Gololo also referred to the issue of licence fees, and asked if it was possible to benchmark the licence fees to be on the same scale with those of other countries.

Mr Xiphu replied that every country was unique and that there were requirements that other countries may have, although South Africa did not. He reiterated that South Africa wanted to keep its licence fees low in order to attract investors. 

The Chairperson wondered if stringent conditions to prevent or mitigate environmental degradation were attached to licences issued to operators.

Mr Xiphu replied that there were strict conditions attached to the licences. For instance, it was compulsory for any operator to put security upfront before the licence was issued, in order to ensure that even if the operator was to abandon the exploration operations, there would be money to rehabilitate areas where there had been degradation. He noted that South Africa was one of the few countries in the world who required that, as well as an environmental management plan, before any licence could be issued.

Members adopted the Reports of PASA.

Alexkor Development Foundation: Department of Public Enterprises briefing
Before the Department of Public Enterprises (DPE) gave its briefing on the Alexkor Development Foundation, the Chairperson noted that this Committee had been dealing with a number of trusts, particularly from Northern Cape. The Committee had invited a number of trusts to present to it in the last year, so the Committee could determine if they were meeting their objectives. These presentations brought to light problems, differing from one Trust to another, and also made it clear that all trust funds were linked to public entities. For this reason, the Department of Public Enterprises had been asked to clarify some of the matters, so that the Committee could move on, although it would want to deal with the issues thoroughly.

Ms Matsietsi Mokholo, Deputy Director General, Department of Public Enterprises, confirmed that she would discuss the Alexkor Development Foundation (ADF), the establishment of the trust, its obligations, challenges in Alexkor and within the trust, what interventions would need to be made.  She observed that there had been a number of irregularities in the management of the trust.

Ms Mokholo stated that ADF was established in 1993 under the Trust Property Act 57 of 1988. Although Alexkor was the founder, the trust was a separate juristic entity. The trustees were to be appointed from community members, and Alexkor was entitled to appoint four trustees, but had not made any appointments. The purpose of the trust was to develop Namaqualand and its people.

One of the main provisions of the trust, as set out in Clause 16 of the trust deed, was that Alexkor must fund the trust by paying 30% of its profit after tax to ADF. This obligation to fund the trust arose in 1993, at a time when Alexkor was still making a profit, and the payments made to the trust, by Alexkor, between 1993 and 1996 amounted to R18.257 million. In 2002, an attempt was made to introduce a Strategic Equity partner (SEP) in Alexkor, but this was difficult, because of the 30% funding obligation, and consequently a proposal was made to waive this 30% profit of tax, instead giving the Namaqualand communities a 10% stake in Alexkor as a quid pro quo. This arrangement, however, never transpired, because it was conditional upon the SEP being introduced. When there was a successful land claim by Richtersveld communities, the SEP was reluctant to proceed with the deal, which fell away. This meant that Alexkor’s obligation to pay 30% of profits still stood.

The land claim by the Richtersveld community also posed substantial challenges to Alexkor, because this resulted in the transfer of all Alexkor’s land mining rights to the Richtersveld community, together with the transfer of all non-mining activities, in order to fund the payment of the Pool and Sharing Joint Venture (PSJV). Alexkor was to hold 51% of the PSJV. The trust was also entitled to 30% of the 51% share of profits, after tax.

Meantime, the trust also faced challenges, the worst being mismanagement of the trust by the trustees. Those trustees had failed to provide the financial statements of the trust to Alexkor, since the inception of the trust, despite numerous repeated requests. The trustees also failed to recover money owed to the trust. Certain trustees had granted themselves loans from the trust, and were not making repayments. They also failed to account for monies received by the trust. As a result, Alexkor was unable to account to shareholders, beneficiaries and Parliament.

This situation demanded that the DPE must intervene, on the basis of vested interest, even though it was not a founder of the trust. DPE had reported the matter to the Master of the High Court, who was the custodian of all trusts, and was awaiting a response. DPE’s report to the Master was based on sound practices, should hasten the resolution of issues, and force compliance by the trustees. The Master was also better placed to provide guidance on all the issues, including who should be approached if there was found to be wrongdoing on the part of the trustees.

The DPE stated that there were a number of options available to the founder of the trust, but they still needed to be investigated in more depth. One possible option was for the founder to terminate the trust, alternatively the trustees could be removed and replaced, alternatively the trust deed could be amended to reduce the 30% obligation by Alexkor. A meeting had been scheduled with the Master for 31 May, and meetings would also be held with Alexkor to get clarity on other issues.

Discussion
Mr E Marais (DA) stated that Alexkor should be questioned on why it had not appointed trustees to the trust fund. He also commented that it was unacceptable for the trustees to take loans from the trust, and that they must be made to account for their actions.

Ms N Michael (DA) also asked why Alexkor did not appoint its own trustees to the trust fund, so that Alexkor could exercise some form of oversight. She asked why no criminal actions had been brought against the trustees. She further observed that while DPE was seeking the advice of the Master, it was possible that further wrongdoing, including misappropriation, might be going on, and she asked if, pending the discussions with the Master, the existing trustees still had control over the trust’s finances. She opined that it would be better to suspend the trustees until further investigations had been conducted.

Ms Ngele asked what the community had been receiving while the issues had been ongoing.

Mr M Sonto (ANC) asked if the trust fund could be said to be a properly-constituted juristic person if the founder of the fund had not appointed the four trustees whom it should have appointed. He asked why the DPE had allowed the situation to deteriorate to the present state.

Ms Bikani similarly asked why the matter had been allowed to break down to this point, and asked if there was anything that would hold the trustees accountable for their actions.

Mr Sandile Dlamini, Chief Director, DPE, agreed with the comment that it was unacceptable for the trustees to take loans, and said that as soon as DPE became aware of this, it was reported to the Master. At the moment, however, DPE had received allegations only, and would have to investigate them thoroughly before being able to take steps such as laying criminal charges. He confirmed that at the moment, the trustees retained all their powers, although the DPE was considering whether there was sufficient to request their suspension. He confirmed that the trust was indeed a juristic person, despite the non-appointment of some trustees. Mr Dlamini noted that the quorum of trustees required by the Trust Deed, was nine trustees. If there were nine at any given time, this provision would be satisfied, no matter that Alexkor had not appointed its own, and the trustees would be able to take decisions.

The Chairperson informed the DPE that ADF had become dormant two years earlier. A new body, Namdev had been established from ADF, and it now controlled the funds that flowed into ADF. He believed that there was indeed a need to suspend the trustees, if this was legally possible, and urged that any investigation and legal actions be extended also to the Namdev body. He supported other Members’ calls for the trustees to be suspended, and urged the DPE to consider putting the trust under administration, if this was possible, as a matter of urgency, and then to decide on what final actions to take after discussing the matter with the Master.

Ms Mokholo responded that the Master had wide powers to suspend or remove the trustees, so that it made sense to wait for the Master’s decision on the issues.

The Chairperson noted this point, but stated that another meeting would be scheduled after the Master had given his decision, in order to finalise the matter.

The meeting was adjourned.