Central Energy Fund (CEF) on its Strategic Plan and Annual Performance Plan 2012/13

Meeting report

Ms Busi Mabuza, Board Chairperson and Acting CEO, CEF, said that CEF was working to make the Group structure much leaner over the next year. This involved the merger of iGas and PetroSA. Additionally, Solar Park, CCE, SWH, Carbon Desk (CEF Carbon & CSA) and other Clean Energy projects would be included under the EDC. This would help CEF to increase productivity in the future.

The CEF had reviewed strategic and mandate issues during a number of strategic workshops. CEF had reaffirmed its strategic intent to provide energy resources for national energy security while minimising environmental impact.

CEF had conducted a review and rationalisation of the Group structure and the CEF organisational structure. CEF was working to re-build the management team. CEF was close to completing a review of past project activities and lessons learned. It was necessary to balance social and sustainability issues in project selection and portfolio mix.

Energy projects required high capital investment, which posed a major challenge. Interactions between CEF and its subsidiaries had been strengthened to support the sustainability of CEF. Urgent action was being taken to attract skilled staff for a number of positions.

As for challenges, CEF projected high costs for projects over the next two years, which would stress its cash balances. CEF would focus on sustainable renewable projects going forward. The Solar Water Heater (SHW) pilot rollout had not achieved the desired results, but there were efforts to enhance the system and sharpen the project’s financial viability. The project had been projected to roll out 500 high-pressure solar water geysers within a short time, but only 258 were actually rolled out within the allotted time, and only to paying customers. However, management believed that the model had been refined and tested enough to step up the rollout to other regions.

A number of senior and skilled staff had departed in the last year. This included the former CEO, CFO, senior staff members, and other managers. This situation was being addressed urgently to bring stability to CEF’s administration. Additionally, it was necessary to establish a pragmatic balance between CEF’s developmental and commercial dual mandate.

CEF did not perform as well as expected in 2011/12. The CEF mandate had been revised but CEF continued to work to reposition itself in terms of its revised mandate. CEF aimed to identify new opportunities, some of which had been identified but had not yet materialised. CEF was looking to proactively engage with the Department of Energy (DOE) to advance its goals. Human capital base was becoming an urgent issue. Lastly, it was necessary to strengthen CEF’s internal processes.

CEF was being sustained by investment income. Cash balances amounted to R3 billion. The interest income – or investment income – from those cash balances represented a large bulk of CEF’s income. A large portion of the operating income actually came from fees charged to subsidiaries for services that CEF provided to them.

Operating costs in 2011 amounted to R101 million, and the increase to R106 million for 2012 was due to inflation. CEF had budgeted R168 million for project development. The current situation was unsustainable given the financial loss in 2011 and the even bigger loss in 2012. CEF projected a dire financial situation for the next couple of years until the projects began to generate revenue. It was critical to invest in the current projects, but this was eating CEF’s cash reserves. CEF’s board was aware and uneasy about this situation. A large portion of the loss was due to the impairment of investments. In some cases projects had failed. In others, accounting prudence had required CEF to invest in projects that were not generating income yet. African Exploration (AE) represented a large portion of the loss but becoming profitable this year from one of its mines.

Mr Chris Cooper, Corporate Planner, CEF, said the objectives and Key Performance Indicators (KPI) included ensuring internal systems and processes were sufficiently agile and robust to move into the future and lay foundation for future projects. CEF’s objectives included, first, to develop portfolio projects, primarily in the clean energy and renewable energy space. The second objective was to ensure CEF’s business processes were robust. Third, CEF needed to establish a long-term plan to facilitate its long-term financial sustainability.

Cognisant that the Select Committee was concerned about job creation, CEF strongly emphasised that the energy sector itself would not create a massive number of jobs. However, energy was vital for the functioning and growth of an economy. Without adequate energy infrastructure, the economy would be unable to create jobs.

CEF recognised that clean energy was the future of energy, so CEF was working with the Department of Energy’s clean energy division.

CEF presented a Google earth map indicating several South African regions that were key in the energy sector. CEF had two operations in the Mpumalanga area. First, there was an exploration site at a mine managed by African Exploration Mining and Finance Corporation (AE). Second, the Strategic Fuel Fund (SFF) had old crude oil storage facilities for which Oil Pollution Control SA (OPC) managed the environmental liability. Additionally, PetroSA had a Gas To Liquids (GTL) refinery at Mossel Bay. There were also plans to build a Solar Park in the Northern Cape, which had one of the best solar radiation regimes in the world. CEF suspected the Northern Cape would be where the solar energy industry would likely be operating in the future. Further, the map showed a large rectangular area covering large portions of the Northern, Eastern and Western Cape regions delineating the estimated location of shale gas deposits (see presentation for detail). Mr Cooper stressed that CEF was not pronouncing itself for or against shale gas extraction.

Regarding CEF’s projects, the Solar Park feasibility study was currently behind schedule, but CEF hoped to finish it this year. This project had a budget of R20 million. CEF had budgeted R5 million for its carbon and climate change activities. The Basa njengo Magogo demonstrations, with a budget of R4 million, aimed to burn coal more efficiently while producing less pollution. Analyses showed a significant decrease in emissions. Also, CEF was conducting special projects to assist the Department of Energy for a budgeted R30 million. Lastly, R70 million had been budgeted for renewable energy projects.

SFF, with its head office in Milnerton and main operations in Saldanha was managing strategic infrastructure and strategic crude oil stock. SFF’s total of 76 employees was projected to increase to 93 in 2013/14 and remain at that number for the foreseeable future. OPC, which was providing some support and managing some of SFF’s operations, had 45 employees, and this was projected to increase to 51 in 2013/14.

PetroSA, with its head office in Parow, had a GTL facility at Mossel Bay and had recently begun iGas operations. PetroSA also had international activities in Ghana and Nigeria. PetroSA was involved in three significant projects. First, the recently started F-O gas field would provide stock for the Mossel Bay facilities for a number of years. Second, Project Mthombo was still under consideration. Third, there was a possible project to import Liquid Natural Gas (LNG).

Port Elisabeth could potentially serve as the location for building Project Mthombo’s refinery and facilities. This area could potentially become an energy hub serving the Coega Industrial Development Zone (IDZ). Mr Cooper emphasised that this was only a possibility, as he did not want to create undue expectations. Once again he stressed that the energy sector would not create masses of jobs. However, if an energy hub were built in this area, around 100 000 jobs could be generated from industries that required energy. This insight should help to develop policies and put plans in place for energy development.

Petroleum Agency South Africa (PASA) managed the licensing for oil and gas exploration in South Africa. PASA also generated and maintained specific geological data. PASA had been involved in extended continental shelf claims under the United Nations. PASA would also be responsible for overseeing the licencing for shale gas once a final decision was taken. If shale gas exploration moved forward, this number would increase but CEF could not estimate by how much. An American geological survey had estimated that South Africa’s shale gas deposits contained around 485 trillion cubic feet (tcf), but there was a lot of work to be done to verify whether this estimate was accurate. Even if the actual number was just 10% of that figure, 48 tcf represented a significant gas resource. Also, having the resource did not mean that it could be extracted.

AE had commenced mining coal at Vlakfontein and was conducing feasibility studies on the T-Project coal mine. It would also begin resource evaluations in a number of areas.

The Darling Demonstration Wind Power Project (DWP) was facing challenges, though these were currently being addressed. The main challenge was that the wind did not blow as hard as initially expected, and there was nothing that could be done in this regard. Out of four wind turbines, only two seemed to be operating.

The Solar Park feasibility study was underway. CEF was unsure as to what the study’s results would reveal regarding the suitability of the ground, the amount of dust that would be created, the water situation, etc. The Square Kilometre Array (SKA) would need energy, so solar panels could prove useful. The project should be a combination of concentrated solar power and thin film solar cells. The Northern Cape had the potential to create around 5 gigawatts of solar energy. The unavailability of sunlight during the night raised questions about whether to store the energy for electricity use at night or to use photovoltaic lighting (PV), which would not produce electricity at night. 

In addressing the problem of energy poverty, Mr Cooper presented the possible option of a solar torch flashlight. Charged during the day, this device could be used instead of candles at night in poor rural areas unconnected to the electricity grid. Such devices could alleviate energy poverty in some areas.

In conclusion, Ms Mabuza said CEF was in the process of restructuring for growth. She said the board had been more robust in interrogating and evaluating projects, especially due to capital commitment required by those projects and the potential impact of CEF’s financial health on the Group’s sustainability. There was a process underway to identify new renewable and clean energy projects. Lastly, the board was urgently addressing the staff vacancies to ensure stability in CEF’s administration.

Discussion
Mr A Nyambi (ANC) asked what link was between the current shortage of senior staff at CEF and CEF’s request in its 2011 Annual Report for an investigation into allegations of irregular appointments of service providers. He asked how, if at all, the current shortage of skills and senior management impacted CEF’s efforts to robustly scrutinise its subsidiaries’ proposed projects. How much did CEF engage the Department of Environmental Affairs (DEA) and the Department of Tourism (DoT) for collaboration or exchange of information? Regarding energy exploration and the financing, promotion, and acquisition of research, how often did CEF meet with the Department of Science and Technology (DST)? Lastly, he requested the Committee Chairperson to hold a joint meeting with the CEF Board and the National Energy Regulator of South Africa (NERSA) to clarify the division of labour between the two entities and identify common challenges.

Ms M Dikgale (ANC) asked CEF to explain the reasons behind the senior staff departures. Given CEF’s net loss in its financial draft statements, did CEF have plans to prevent failure in the future?

Mr K Sinclair (COPE) stressed that CEF had a great strategic role to play to ensure South Africa’s energy supply. The CEF seemed to be facing very serious challenges. Cabinet would have to take decisions to end uncertainty regarding South Africa’s energy strategy. For instance, the Cabinet would have to decide whether to build the Mthombo project. Mr Sinclair then expressed concern over the slow progress of the Solar Park project, especially when considering that even CEF could not explain why the project was moving so slowly. Lastly, was CEF involved in any legal actions? And if so, what were the implications of impending decisions?

Mr D Gamede (ANC) first expressed concern over having an “Acting” CEO, saying that “Acting” represented instability. He then asked whether it was possible for CEF to balance the development and the commercial mandates concurrently, since these appeared to be mutually exclusive. He asked whether South Africa was at a point of jobless growth since it seemed like the economy was growing without creating jobs.

Why should people in rural areas be confined to lower quality solutions? In delivering energy, for instance, CEF was suggesting solar torch solutions instead of connecting the rural areas to the electricity grid or providing rural areas with other real energy solutions.

Mr F Adams (ANC) asked, regarding the Solar Water Heater (SWH) rollout, how much did CEF envision would be stored? What were CEF’s targets? And how far was CEF from achieving its targets in Gauteng and the Nelson Mandela Bay municipality? Considering that the New Growth Path included SWH, had the Economic Development Department (EDD) or the Industrial Development Corporation (IDC) received any funds for the SWH rollout?

What impact had the failure of big projects had on South Africa’s economy? On the service delivery to the country? On CEF’s mandate? How would the potential shale gas exploration impact the SKA project? Could the two projects coexist simultaneously or would one affect the sustainability of the other?

Was CEF’s Basa njengo Magogo project the same one that the Deputy Minister of Environmental Affairs had mentioned? Lastly, was it feasible to shift the underperforming Darling Wind Farm project to a different area which had more wind, to increase its productivity?

Ms Mabuza first replied that she had been the Manager Executive Director of CEF until the Board requested she hold the Acting CEO position until a new CEO was appointed. The appointing process was moving as speedily as possible. The Board was just as uncomfortable as the MPs, as this was a source of unnecessary instability in the CEF.

In response to Mr Nyambi’s question on staff departures, she stressed that CEF had and continued to enjoy a very low attrition rate. CEF disclosed these departures to the committee due to the seniority of the positions. In particular, the CEO of OPC left after a 20-year career to pursue other interests within the energy sector. The Tank Rental Manager for SFF had also worked in the CEF Group for a while and left to pursue other interests in the energy sector.

CEF’s former CEO, Mr Mputumi Damane left in September 2011 after six years of employment. His departure was precipitated by investigations into improper decision-making on implemented acquisitions. The CEO was investigated for implementing board-level decisions without Board authorisation. Due to the CEO’s departure, the investigation was never completed.

The CFO left in April 2012 to join an unrelated industry. Although she was a bright young accountant, she was under stress from CEF’s reorganisation and was asked to act as the CEO. She resigned citing too much pressure, and, unfortunately, the Board failed to convince her to stay. The current plan was to ask those valuable employees who had left to return once CEF restored administration stability.

CEF’s interaction with other departments was weak at best, and the CEF was currently addressing this challenge in an effort to leverage its relationship with the government. CEF did collaborate with the Deputy Minister of Environmental Affairs, much to the CEF’s benefit.

CEF’s financial situation did not look positive in the near future. CEF was mainly supported by income from cash balances, which was unsustainable. This explained CEF’s push to implement new projects to generate additional income. A main challenge was that successfully incubated projects were often spun out from the Group before the Group could benefit, so this needed to be addressed.

CEF had been researching the potential for manufacturing opportunities. South Africa had become reliant on China for manufacturing, and there was a need to balance the benefits of cheap manufacturing with the job creation opportunities that the manufacturing sector could produce—as opposed to direct electricity generation, which had a lesser impact on job creation.

That the Solar Park project had been progressing very slowly was a major concern. Part of the challenge was that the Group had faced major difficulties securing land tenure after suitable land was initially identified.

CEF’s former CEO had approached the South Gauteng High Court claiming that the Board’s disciplinary measures against him were initiated because he had made protected disclosures. Since the Court ruled in the company’s favour, the former CEO was currently appealing and had been granted leave to appeal, so the case was on-going. CEF was not involved in any other significant litigation.

The SWH programme had focused on high-pressure geysers. Given the slow progress, the programme had been rolled out for consumers that could pay for the units. The challenge was that the current finance model aimed to recover money via municipal bills, so it was important to reach agreements with the municipalities.

Mr Cooper said that Project Mthombo could cost around R100 billion. Neither CEF nor PetroSA had sufficient resources to fund this programme on their own. This project also required certainty to determine the configuration of the project, so policy decisions needed to be made.

As a national policy, it was critical to have a coherent mix of energy sources. South Africa relied primarily on coal, and CEF recognised that a better balance of energy was needed. A Technical Staff team composed of industry players was helping to research what energy mix options were available considering South Africa’s future energy needs.

Mr Sinclair intervened to say that the energy mix issue did not require pitting shale gas against solar power. Instead, there were five or six different energy sources that could satisfy South Africa’s energy needs, and with the right mix it could be possible not to tap into the shale gas deposit. After all, water was the scarcest resource, not energy.

Mr Cooper said that the CEF was not for or against shale gas versus other energy sources. However, South Africa would have to look at all energy options because energy security was, first, absolutely necessary to maintain the nation’s current lifestyle and, second, essential for future economic growth and development.

Regarding the Members’ concerns about jobless economic growth and its link to the energy sector, there was a fundamental philosophical debate about the broader understanding of where South Africa was heading. There were limits to economic growth, and South Africa had hit some of those limits. This would have an impact on the economy. Energy allowed the economy to grow and create jobs, subject to limitations. Without proper energy supply, however, economic activity would cease. Therefore, even though the economy was not creating as many jobs as expected, energy supply remained vital to the prospects of job creation.

In terms of energy poverty in rural areas, rural areas had a much lower demand for energy than urban, more populated areas. It was cheaper to buy solar panels and batteries in the rural areas than connecting remote towns to the national grid. There was no easy answer to energy poverty alleviation, as some solutions seemed to be less acceptable than others. For instance, it was plausible to see developed communities moving away from use of commercial electricity and switching to solar panels in the future. The solar torch was one form of this energy source. Society would potentially need to change its mentality toward energy consumption in the future.

Ms Mabuza said that PetroSA had recently signed an agreement with China’s Sinopec Group to jointly study the feasibility and potential configuration of the Mthombo project. The decision on the Mthombo project was neither for CEF nor for PetroSA to make. However, the current situation in the market was unsustainable.

Mr Cooper said that South Africa currently imported over one billion litres of diesel. South African refineries produced more petroleum than diesel. Whereas diesel had been traditionally used for trucks and petrol for cars, the past 15 years had seen a gradual shift toward diesel, although the optimal mix remained tilted toward petrol. South Africa could not produce diesel and had to look at the entire refining sector. Such an evaluation could reveal whether it made sense to build Project Mthombo.

Regarding the Darling Wind Farm, it was possible to relocate the wind turbines but at a very high cost. There were certainly other locations in the Western Cape with sufficient wind force.

Ms Mabuza intervened to say that a recent study had revealed that even though the wind blew less than 50% of the time, placing additional turbines in the Darling Wind Farm would allow this project to break even.

Mr Gamede asked CEF to comment on the status of South Africa’s security of diesel supply.

Mr Adams asked CEF to comment on the status of the Liquid Petroleum Gas (LPG) supply.

Mr B Mnguni (ANC) asked whether the recently departed CEO had been implicated in the investigation.

Mr Sinclair asked CEF to provide the Committee with a status report on the Solar Park. Also, was it feasible to use storage capacity to import crude oil for refining in South African refineries?

Ms Mabuza said that the Board investigation found that certain decisions were taken without the required Board approval, and this led to the subsequent investigation.

Mr Cooper stressed security of supply could not be guaranteed for finite, non-renewable, depleting resources. This applied to diesel, petrol, and LPG. The net available crude oil for export globally had decreased from 40 million barrels per day in 2005 to 35 million in 2010. South Africa relied on these numbers and the world market, and supply could simply not be guaranteed. It was unclear what direction would be taken regarding the Solar Park. Once the feasibility study was finished, CEF would have a clearer idea of the plan’s direction. As for storage capacity for crude oil, there were two facilities to store for strategic purposes. Two million barrels (a four-day supply) could be stored at a time in each crude carrier, which amounted to a four-day supply in current refineries.

Meeting adjourned.