Central Energy Fund (CEF) on their Annual Performance Plan 2013/14 Financial Year

Meeting report

Introduction by the Chairperson

The Chairperson welcomed the Committee Members, the delegation from PetroSA and the Central Energy Fund (CEF). The Committee did not meet these organisations often so it was good that full delegations from both companies were present.

Presentation from the Central Energy Fund

The Chief Executive Officer of the CEF, Mr Sizwe Mncwango said that the objective of the presentation as per the request of the Committee was to share the Corporate Plan of the CEF Group for 2013/14 and beyond. The CEF Group was now made up of only six entities or subsidiaries. The CEF over the past 24 months had come a long way and the CEF had taken very bold and radical steps in restructuring itself during the period under review. It had gone ahead to consolidate some of its smaller entities into larger subsidiaries. For instance, iGas was going into PetroSA in the foreseeable future and the Oil Pollution Control of South Africa was on its way to fully incorporated into the Strategic Fuel Fund. Some of the entities had also been given more autonomy and more space to deliver on their own mandates. An example was SANEDI which was now on its own and reported directly to the Department of Energy. So in the next year or two, through these efforts and initiatives, there was going to be a much leaner and a more focused CEF Group.

The presentation was going to point towards the direction that the CEF Group wanted to be a more focused and leaner group with special focus on execution. The collective efforts moving to the new structure of CEF was becoming more and more harmonised.  The holding Company was going to provide the enabling support for the entities to deliver.

It was also important to note that the new CEF structure was empowering the holding Company even more in giving assurance to the Department of Energy and the broader stakeholders. The presentations were going to come from the CEF, which was the holding company, the Clean Energy Division, the Petroleum Oil and Gas Corporation of South Africa (PetroSA); the Strategic Fuel Fund and the Petroleum Agency of South Africa. Presentations were also going to cover the African Exploration and the Supplier Development Agency of South Africa.

The Committee had been provided with a lot of material and numerous slides primarily to enhance the understanding of the Members. The CEO said that the presenters were not going to speak on each and every slide.

In outlining why the CEF exists, Mr Mncwango stated the mandate, strategic statement, vision, mission and objectives of the CEF. The CEF group structure as at April 2013 comprised of seven entities that included CEF, CED, PetroSA, SFF, PASA, AEMFC and SADA. These seven entities operating in the following arenas: renewables, oil and gas, strategic oil, licensing, mining, coal and supplier development. The CEF had reviewed strategic and mandate issues at a number of strategic workshops. The strategic intent of the CEF group as well as an assessment of critical supporting pillars was defined.

Group Objectives

The CEF had a single primary purpose, which was to contribute to national security of energy supply. Mr Mncwango outlined and provided details relating to the various objectives of the CEF Group which included:

 

-          To contribute to national security of energy supply;

-          To ensure SHEQ is a priority for the group;

-          To build financial sustainability;

-          To build and maintain appropriate human capital; and

-          To ensure effective Group oversight and coordinated planning. 

 

Strategic Risks

The strategic risks that the CEF group was facing centred on human resources and skills shortage, project risks, financial sustainability risks, leadership risks, inefficient systems and processes, oversights risks and reputational risks.

2013-14 Corporate Plans for the various subsidiaries

The corporate plans for CED, PetroSA, SFF, PASA, AEMFC and SADA were presented to the Committee. These generally consisted of an overview, mission, objectives, cost containment, major projects and statements of comprehensive income.

The rolling out and key building blocks of Vision 2020 was covered in the presentation with emphasis on sustainability, growth, transformation and funding. The Committee was told that the Project Mthombo was making progress.

The CEF was in the process of restructuring for growth. Energy infrastructure projects and energy supply initiatives underpinned the National Development Plan and the CEF played an important role in that arena. Challenges remained in the funding and the future of large projects. CEF was to take greater control of the Group as the holding company through broad sub-committees and executive management actions. Projects proposed by subsidiaries and requiring CEF funding were to be more robustly scrutinized by CEF specifically for their impact on group sustainability.

A process was underway to identify new projects in the renewable and clean energy space and staff vacancies were being urgently filled to provide the skills needed for the new activities.

Discussion

The Chairperson asked if there were any officials from the Department of Energy or Eskom who wanted to make a comment or a contribution. After confirmation that there was no additional comment or contribution, the Chairperson opened the floor for questions from the Committee Members.

Questions

Mr B Mnguni (Free State, ANC) thanked the CEF for the presentation but said that there was no use praising a fish for swimming because it was created to swim anyway. On the CEF’s vision 2020 which summarized most of the issues, he was concerned that the CEF was just at 5% in terms of supply and output and had not yet reached the local market demand. What was the hold-up, which was preventing the CEF from performing at its maximum? There were a couple of refineries but were not producing at maximum because of the nature in which they were built and there was a lot of importation of refined oil. What was the hold-up on the Mthombo project? He could see that there was a project management plan but yet could not understand the reasons for the postponement of the commissioning of Mthombo for the supply of energy. On the issue of the CEF getting revenue, there was the green block that was basically to generate revenue; he was concerned about the governance of the petroleum industry. In countries like Nigeria and Angola, there was a lot of domestic fighting because of oil revenue. In countries such as Malaysia and Norway, there was the state that set policy, a regulator, which was in charge of regulation and oversight, and there were the other commercial elements. Looking at South Africa, what model was being taken in terms of the governance of the petroleum industry? The choice of a model had to be informed by the need for political stability, the capacity and expertise in the country. On further exploration, there was Shell Gas, which was still a contentious issue with certain groups and people holding the view that Shell Gas in the Karoo was destroying the water and natural resources of the country. Had any proper feasibility studies been done on the environmental and economic impact? How was the exploration along the West Coast featured in the CEF’s plan? On transformation, there were about 20 companies that CEF was sponsoring. How far was the transformation agenda in terms of the hydrocarbons industry? How did CEF actually select entrepreneurs who got into the industry? The Minister of Public Enterprises in his budget speech mentioned that he was thinking of supporting small entrepreneurs who wanted to venture into mining. How was that going to work and be coordinated? What was going to be the synergy between the Departments of Energy, Minerals and Public Enterprises?

Ms M Dikgale (Limpopo, ANC) said that it was a good presentation but she noticed that there was no woman in the entire team. She said that the CEF should explain why they did not have a woman in the team that made the presentation. She said that with relation to Mr Nguni’s comment, if there was no water, then fish could not swim. On the distribution of solar powered light in schools, in the rural areas there was a serious problem of the stealing of the solar power devices and there was no security in this regard. How was such a situation going to be taken care of after installation? It was a very bad situation because the school pupils and students could neither read at home nor at schools because of lack of electricity.

On building financial sustainability, the CEF was planning to manage finances but failed to discuss on how this was going to be done though it was generally agreed that there was a great risk of keeping the finances sustainable. There was need to ensure this financial sustainability and the meeting of the financial and government requirements.

Mr A Nyambi (Mpumalanga, ANC) said that in relation to the strategic risks, the Committee was not interested in generalisations. Though much information had been presented, it had not gone through the details of what was required. In terms of vacancies, it was important for CEF to clearly explain what the problem was, what was being done and what had been achieved so far. The handling of strategic risks had to be directly linked to timeframes. How was the National Development Plan impacting on the programme structure of the group and was it not a challenge to the current budget? He said that he wanted the details of the Vision 2020 to be clearly explained.

Ms B Abrahams (Gauteng, DA) asked that with regards to solar heating projects, how effective and sustainable was the programme and who was going to monitor the programme. Who was responsible for the maintenance and what was the life span of the project? On the development projects, it was stated that 20% was dedicated to women. Was there any chance that people with disability were going to be included in these development projects?

Ms E Van Lingen (Eastern Cape, DA) said that the document and the slides presented to the Committee were very valuable. She requested the contact details of the relevant officials for further follow up and understanding. She asked what PetroSA was doing about the money, which it was losing in the rest of the African continent. Was it not better for exploration to be done here in South Africa and for South Africans that would bring direct revenue for the country? 

What was being done about sewer combustion gas projects as many municipalities had a lot of it? The CEF had to look at these kinds of projects. On thermal energy, what research had been done to harness the thermal energy potential in South Africa and the steam for the generation of electricity? On the Mthombo project, she had recently read that China was in on the deal and it was very exciting but there was not a good supply and demand situation in South Africa. What were the plans for supply and exportation?

Mr K Sinclair (Northern Cape, COPE) said that the CEF was instrumental in the future developmental issues in South Africa. In debating the issues, it was necessary to look at the broader picture of what was happening around the world. It seemed that for many reasons, the country was going into an abundance of energy instead of a shortage of energy. He said that it was important that for future reasons South Africa should position itself in the global debate around energy. He was concerned about SASOL’s approach on many of these issues because they seemed to be very keen to invest in other parts of the world but not in South Africa. This raises very specific question in terms of what their objectives are and did they know anything which government did not know. The mandate of the CEF primarily centred on the energy mix and he did not see anything regarding the approach in terms of nuclear energy and this was crucial to the whole debate around nuclear security. He said that in terms of the activities of Shell in the Karoo, there was only one Karoo in the world and he was pleading that for future and sustainability purposes, only very strategic and wise decisions should be taken on the matter. With the current situation, there were other options also including renewables. This was related to the issue of the long overdue solar park. It seemed as though the capacity of government and its departments to deal with the project was of great concern. It looked as if a lot of consultants were going to be used in the feasibility of the solar park in the Northern Cape.

On more specific issues, none of the presenters raised the issue about the matter, which had been on the front page of the Mail and Guardian for about three weeks relating to the Ghana deal. Could the Committee get some feedback from PetroSA about the Ghana deal and what was happening there? The Minister of Energy had indicated that she was driven to get to the bottom of the investigation.

The Chairperson said that because of the time factor considering that there was going to be a plenary session that afternoon in Parliament, he appealed that the responses should be direct and not very lengthy. He asked what the CEF was doing about the Integrated Energy Centers (IECs). He said that there was nothing said in the presentation about the CSI programmes. What was the CSI footprint of the CEF in the various provinces and what were they contributing to the communities where they were operating.

The Chairperson said that in the interest of time, he was going to send other questions to the CEO of the CEF for written replies. He asked the other members to give other questions to the Committee Secretary for forwarding to the CEF that will respond in writing.

Responses

In his response, Mr Mncwango said that the CEF’s contribution to national supply was actually less than 5% and there was a need to grow it to over 25% by 2020. The CEFs capacity in even coal production was going to be less than 40 000 barrels per day. So even at full capacity, it was still a small percentage, which could be produced. The reality was that the current production was less that the potential capacity and this was because of the declining indigenous fuel stock from the off shore fields for the last few years. Due to the small accumulations, they could only last a few years so the CEF continued to invest and was continuing in that process. The Ikwezi project was a continuation of what the CEF had been doing in the past and the objective was to reverse the declining production. The CEFR was now saying that a different approach was necessary and it was important to have a facility to import LNG, which was going to redeem the disconnection. There was an opportunity for South Africa to get this connection and that was why the CEF was pursuing the LNG project. However, the CEF was saying that even the LNG project was not going to give full production as there was need for other ventures which were going to beef up production.

Mr Godwin Sweto, Vice President: Corporate Strategy at PetroSA, said that relating to whether there is a role that the state could play as compared with other countries, it was important to note that in many countries what happened was that the market was allowed to take care of the market. The CEF believed that there was a very great role, which the state could play provided that such a role was clearly defined, and efforts were made to reduce the cost of doing business. This was going to reduce the ultimate cost which the customers and users were going to bear. The state had to thus play its role in a very efficient and cost effective manner. However, there was the regulatory role, which had to be separated from that of implementation, and the good thing was that in South Africa, these roles were currently separated.

On the Issue of the Mthombo project, the message from the Member was that it was important to expedite the process but there was clear realisation that the operations were below par and the existing refineries on average were actually inefficient. This meant that there was a need to increase the level of production and local production. Project Mthombo was one of the projects recognised as a strategic project. The project was going to be benefiting from coordination by the Presidential Infrastructure Coordination Committee.

In terms of the clean fuels legislation, there was very good progress taking place and the technical investigations and configurations were basically finalised. The CEF now knew exactly what needed to be produced and what the optimum capacity should be. This optimum capacity was 300 000 barrels per day taking into account the projected demand within the country and the sub-region and the global market trends.

On the shale gas, the fact that the timeframe was put around 2023 was a clear realisation that there was need for a lot of investigations to be carried out to find out what had worked in other countries especially in the USA. Currently within PetroSA there was a lot of work which was going on to ensure that best practices could be used to prevent environmental contamination and the linking of production levels and market demand and infrastructure. The CEF was seeking to know what could be done within the South African context and there was a lot of work that had to be done in terms of the realisation of the shale gas potential.

Mr Mncwango said that on the question relating to PetroSA spending money around the African continent and not in South Africa, the group remained extremely exposed and supportive of the South African economy but were mindful of the fact that South Africa could not live large and luxuriously without sharing with its neighbours. So a view had been taken that the group would always be supportive of other African countries so as to uplift the entire continent.

Dr Micheal de Pontes, Technical Executive at CEF, said that with regards to bringing all the tanks into play in Milnerton, the CEF was going to be bringing a number of tanks and had budgeted for the refurbishing of many other tanks. The license from NERSA had been received. He could not give a date when all 39 tanks will be finished but certainly in the next two years. There were a number of tanks, which were going to be refurbished in Milnerton. On the exploration along the West Coast, there had been positive indications of gas and more people were looking further off shore into deep water for oil. On the perception of Namibian oil and Mozambican gas, Namibia had been involved with the Department of Energy and the Kudo project had been in progress. It was an 800 megawatts project run for approximately 18 years. It was an evergreen project and the Namibians had assured South Africa that they were finding off-takers in electricity. 800 megawatts was a bit too large for Namibian consumption so it had to be sold off. The power plant was becoming a credible project. On Mozambican gas, deep off-shore gas fields had been found and American and Italian companies were drilling and that had given rise to a very positive future for Mozambique whereby they will be building LNG gas and supplying it around the world. Their first project will be supplying South Korea and Taiwan, China and Japan. It was a huge amount of gas.

The General Manager for Corporate Strategy and Planning of the AEMFC, Mr Sicleo Sikakane said that it was true to say that the resources in Mpumalanga were dwindling but what had happened over the years was that the design of the power stations had technically specified the value that was required from the coal to be on the low side. It had been realized that the days of plenty were gone and therefore power plants such as the Medupi and Kusile were designed to take coal of a lover value.

Mr Mncwango said that on the strategic risk around vacancies and human resources, there was a commitment on the timeframes and 30 September 2013 was the agreed upon date for the filling of four key vacancies at executive level. These vacancies included the General Manager for Clean Energy, the General Manager for Human Resources, The Chief Financial Officer and the Chief Audit Executives.

On the representation of women in the CEF management, two of the four executive positions that had to be filled were going to be filled by female candidates. Even the group that was presenting to the Committee was not well represented as far as the gender issue was concerned. It was unfortunate that some of the female senior business officials had other commitments and could not be present before the Committee. Mr Mncwango listed a number of senior female executives within the CEF Group. He said that the Group subscribed to a 50-50 agenda in terms of gender equality.

Ms Nonhlanhla Dick, the Acting Chief Financial Officer, answered that when the CEF was speaking of financial sustainability, it was broadly addressed under the four key items of group revenue generated; containing the current standing in terms of group overall expenditure; maximising cash reserves; and the management and monitoring risks which could have key financial implications.

Ms Dick said that the CEF Group was dedicated to explore activities and investments that would yield recognizable revenues for the group and that had to be achieved on a continuous basis and not just once off. This was highlighted in the group plans for the next five years. The Group was dedicated to ensure that the improving of control enhanced the achievement of the above commitment and oversight systems over project appraisals and monitoring before approval. Increase in monitoring over investments had been established and many were in the process of being established to ensure full returns on investments. Looking at the bottom line of expenditure, the CEF Group had committed to cost containment and adopting a more aligned group structure which will help eliminate duplication of cost centres.

There had been increase reporting on progress with monthly and quarterly reports being submitted and implementation of the approach will increase transparency within the group and the delivery of the group mandate.

In terms of cash reserves, Ms Dick told the committee that they had continued to monitor the reserves so as to increase the returns and obviously within the legislated limits to obtain maximum returns. This was done through the in-house treasury department housed by PetroSA.

On the increased management strategy, the CEF planned to formulate a group risk oversight function and this was going to manage and monitor key risks affecting the group, which in the nature of the current operating environment could have significant implications if not addressed appropriately at the right levels. This was a very key function and a good initiative from the group in terms of the success in implementation. With messages going around the group, the CEF was continuously re-evaluating with the aim to improve procurement processes to ensure legislative compliance and the securing of the best prices with more focus on quality of goods and services. 

Mr Mncwango said that the CEF was willing to respond to any further questions from the Committee.

The Chairperson said that if there were any questions from the Members they could be forwarded to the Committee Secretary who was going to forward the questions to CEF for written responses.  He said that the meeting was very productive and informative. He said that the Committee could have a follow up meeting, as he was very interested in the transformation within the industry. The entry into the market especially for previously disadvantaged people was of concern. Another meeting with the CEF, the Department of Energy and all energy stakeholders was going to be important.

The meeting was adjourned.