PetroSA on its Annual Report for 2012/13

Energy

09 October 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

PetroSA presented its Integrated Annual Report  which outlined a fully integrated view of the PetroSA business, its performance in the 2012/13 financial year, and its efforts to contribute to economic, social, environmental and organisational change. A brief update and explanation was given on the labour unrest on 9 October, emphasising that this involved contractor staff. An update was given on the latest developments of issues raised previously by this committee around the feedstock challenges at Mossel Bay, the Ikhwezi offshore project, Brass Exploration (Nigeria) sales, some outstanding environmental management matters in Mossel Bay, and finalisation of the Ghana Sabre transaction. Overall, PetroSA continued to operate safely and profitably, in the face of severe challenges around declining indigenous feedstock and rising feedstock costs. Its revenue had risen by 36%, but net profit had fallen 54%. Sustainability of the Mossel Bay refinery remained a key focus area. The project to import liquefied natural gas had progressed. The company was obviously affected by volatility in the global petroleum industry, and an overview of the operational environment was given, summarising the effect of high crude prices, low production rates, the cost of business, exchange rate and South Africa’s low growth rate, high unemployment and high levels of inequality and poverty. Ghana acquisitions had been completed in this year, and the assets were performing. In regard to transformation, PetroSA had built an Integrated Energy Centre at Mbizana and was looking into others. It invested R21 million in community projects and trained 71% of the workforce. Some of the black economic empowerment transactions were summarised, and it was noted that it had applied for a further exemption in terms of the Preferential Procurement Policy Framework Act. It had completed 54 transactions of which only three did not comply with this Act.

Members said that they had been expecting more information on other matters that had attracted media attention. They commented that it would have been useful to get the Audit Committee to give its own independent presentation, and commented that although the Committee was aware that many of the irregularities were in existence before the new Chief Executive Officer took over, and although it was heartening that irregularities were being uncovered internally, they were compromising growth and the Committee wanted full explanations on why some were still persisting. A Member questioned the intention for PetroSA to have 25% of the energy market, questioned the value of the investment in Sabre and felt that there should be more focus on Southern African countries. He also questioned what type of infrastructure and funding were being considered, and cautioned against government guarantees. More information was requested on the future role in the light of amendments to the Mineral and Petroleum legislation. Reporting lines and vacancies were questioned, as well as female recruitment targets and staff morale. The irregular expenditure and condonation were further questioned, as well as litigation costs, the low figures for enterprise development, and non-achievement of certain targets. Work on the international front was described. PetroSA was asked to provide summaries of advantages and disadvantages around growth, in writing.
 

Meeting report

Petro SA Integrated report on 2012/13 Annual Report
Ms Nosizwe Nokwe, Chief Executive Officer, PetroSA, introduced her team and tabled an integrated report on the 2012/13 Annual Report of PetroSA.

She wanted firstly to give feedback on labour unrest which took place on 9 October 2013 and said that on this day, 2 000 external contract employees embarked on a strike, around concerns on waste. She emphasised that these employees were contract employees and not PetroSA employees. PetroSA had , a labour agreement with contractors and the contractors had not yet adhered to it, but there were ongoing negotiations to try to sort out the issue. She emphasised that Petro SA prioritized safety of the employees and sought to ensure that the equipment, the plant and safety of employees were not compromised.

She then proceeded to give some feedback on certain issues that were discussed in the previous year, and the solutions proposed on those issues. Progress had been made on the feedstock challenges at Mossel Bay of last year. PetroSA had just started the Ikhwezi offshore project. However, feedstock challenges remained. The litigation around the sale of Brass Exploration in Nigeria was still proceeding. There were some outstanding Environmental Management matters in Mossel Bay, but all recommendations were being implemented. The Ghana Sabre Acquisition had not yet been finalised although the transaction had been finalised and was contributing to PetroSA’s growth .Investigations into procurement irregularities were under way. Investigation into certain Board matters had been completed.

She gave a general overview of the 2012/13 financial year. PetroSA remained committed to South Africa’s quest for security of supply and socio-economic growth and transformation. It continued to operate safely and profitably, in the face of severe challenges around declining indigenous feedstock and rising feedstock costs.

Revenue in this year had risen by 36%, from R14.4 billion to R19.6 billion, and that net profit was down 54% from R1.28 billion to R593 million. The sustainability of the Mossel Bay refinery had remained a key focus area for PetroSA .Secondly, the offshore drilling project off the South coast, Project Ikhwezi, was in progress. Thirdly, the project to import liquefied natural gas (LNG) had progressed, with public consultations starting early in 2013. Lastly, she wanted to emphasise that the global petroleum industry had remained volatile and highly competitive.

An overview was given of the operational environment. The crude prices averaged $110.10/bbl, down from $114.67/bbl 2011/12.This had a negative impact on production. She reminded Members that, firstly, the high crude prices increased the cost of imported inputs, though there was a positive impact on revenues. Secondly, low production rates reduced the benefit from high prices. Thirdly, high prices also increased hydrocarbon asset prices and the general cost of doing business.

The average exchange rate was R8.53 to the US$, seen against R7.45 to the US$ for 2011/12. This increased capital costs and the cost of imported items like condensate (which was used at the Mossel Bay refinery). South Africa’s  low growth rate, high unemployment and high levels of inequality and poverty remained a concern for the company.

She noted that the acquisition of oil reserves in Ghana was completed during the year and the asset was performing well.

Ms Nokwe reported on the transformation progress in PetroSA. PetroSA’s first Integrated Energy Centre, in Mbizana, Eastern Cape, was built. PetroSA invested R21 million on community projects. As part of its transformation initiative PetroSA trained 1 300 of its employees, which represented 71% of workforce.  Training costs amounted to 2.4% of the total wage bill.

PetroSA sold 287 million litres to Black Economic Empowerment (BEE) companies and 52.7% of total discretionary procurement spend went to BEEs. In relation to the Preferential Procurement Policy Framework Act (PPPFA), she noted that regulations stipulated that an organ of State must determine and stipulate the preference point system to be utilised in the evaluation and adjudication of tenders. They stipulated that where a local entity had tendered, points must be awarded to the tenderer, recognising their BBBEE status, up to a maximum of 10 points. Procurement of hydrocarbons was done through the tender process, governed by the PPPFA, and this required 90:10 preferential point scoring method, where 90% was price based; and 10% on BBBEE status.

PetroSA operated in a regulated pricing environment, characterised by low margins, which could be further compounded by the payment of premiums. In 2011, PetroSA granted an exemption from complying for one year. This exemption expired in December 2012. Discussions were currently under way with the Ministry of Finance for a further exemption.

Ms Nokwe noted that in this financial year, hydrocarbon purchases valued at R4.1 billion were made, of which R 1.7 billion was made from BBBEE entities. In total, 54 transactions were concluded, of which three, at a total value of R605 million, were non-compliant to the PPPFA.

Discussion
The Chairperson thanked the PetroSA delegation but commented that he had in fact expected the presentation to have a lot more information on the unfortunate events reported over the last year. He asked that the team should report separately, in writing, on some of the issues that were not addressed.

He emphasised the importance of having audit committees giving their own independent presentations. He said that the internal audit was one of the tools that any Audit Committee would use to engage with management of a company. He reminded the presenters of the need for transparency. The Committee here expected that more would have been said about the work of the Audit Committee. Whilst the Committee appreciated the work of PetroSA, under the leadership of the Chief Executive Officer, to try to remedy the irregularities discovered, the Audit Committee had to be very robust. It was, however, a positive that irregularities were uncovered through existing systems, and not by a whistleblower. Whilst efforts were recognised, there was still more to be done, and although irregularities were being uncovered, the fact that they existed in the first place was compromising the growth of the company. The  company should rather have been focused on improving its operational strategy, negotiating better wages, and other aspects.

Mr L Greyling (ID) commented that it was good that PetroSA had ambitions but it was important to step back and look at the interests of the country. He wondered if PetroSA could really take 25% of the energy market in the country, and if that was in fact an advisable approach for a South African company. Already, some of its international investments had not been the best, such as the Egypt deal. He thought that PetroSA should be focusing on the gas and the technological advancements needed, and how to maximise its gas usage.

Mr Greyling found it very surprising that the focus was on West African countries instead of the Southern African countries. He repeated that in his view PetroSA needed to secure gas and focus on formulating contracts with countries in Southern Africa, especially in Mozambique and Tanzania.

Ms Nosizwe Nokwe, PetroSA responded that PetroSA had the potential to grow and expand its market share. PetroSA was also considering hydrocarbons, but what is lacked was the network for retail as well as secondary redistribution network .The company may not have sufficient capacity to run such a big organisational initially, but it was possible to expand the company in phases .PetroSA would be addressing an integration plan. PetroSA was positioning itself to becoming a gas aggregator, and it hoped to partner with ESKOM, which would be the off-taker of energy.

She added that the fields in Mozambique for 2018 had been sold and the gases in those fields had been committed to the future. PetroSA was trying to establish partnerships with sister companies in those countries and was hoping to add value there. PetroSA could not purchase assets at ANADARKO because the prices were too high. It had, instead, signed an agreement with ESKOM to work jointly on some issues.

Mr Greyling asked for more information on Sabre Oil and the controversies. Although it was quite evident that the deal was starting to produce money, he still questioned if it was a good investment and whether it would produce profitable returns.

Ms Nokwe maintained that the Sabre investment was a good investment because it produced good returns, it had a positive buyback period, and banks were willing to support it.

Mr Webster Fanadzo, Acting Chief Financial Officer, PetroSA said that compared to other investments, this ranked well. It would attract the funding community and there were there are payments which had been made already.

Ms Nokwe added that some of the written criticisms around the investment in fact blurred the fact that it was a good investment. PetroSA had no control on what was written in the papers, but was judging it on the progress seen to date. She asked that the Committee accept that it was a good investment and lend support to it.

She added that some of the transactions were in their early stages and that PetroSA was hoping to invest in other countries. It was important to have regard to some international companies for inspiration.

Mr Greyling wondered what kind of infrastructure development was put in place to achieve the gas economy, and about the fuel investment which was needed. He asked what plans PetroSA had to become a company taking up 25% of the oil market in the country. Mr Greyling wanted to know if the company needed funds from the government, and expressed his concerns about the principle of getting
government guarantees.

Mr Fanadzo said that government guarantees were one of the many different ways in which PetroSA hoped to fund its projects

Mr Greyling asked for more elaboration on the material payments and loans with Egypt and Ghana that were detailed on page 72 of the Annual Report.

Mr Greyling asked for more information on the Minerals and Petroleum Resources Development Act (MRPDA) controversy and what PetroSA’s role in the new structures would be.

Ms Nokwe said that Minerals and Petroleum Resources Development amendment legislation was being discussed at the moment in the country. The necessary infrastructure and legislation were being considered. However it did pose constraints to operations and as a result PetroSA was not able to operate in the manner that it would like, and that would be suitable for it.

Prof S Mayatula (ANC) noted that the Mbizana project was a good initiative.

Ms Nokwe noted that there were other projects like the Mbizana project in the pipeline. PetroSA worked with the Department when looking for places to launch its projects.

Prof Mayatula asked who the Company President was.

Ms Nokwe responded that the Chief Executive Officer reported to the board. The acting Vice President reported to the Chief Operations Officer. The company was  restructuring its management in a way that made for better reporting.

The Chairperson asked if any executives had left.

Ms Nokwe responded that the President for trading and supplies left, and the Vice President had also left. Other positions were occupied. The contract of the Chief Financial Officer had come to an end.

Mr D Hlatshwayo, Chairperson of the Board’s Audit and Risk Committee, PetroSA, added that there had been two resignations from the Audit Committee, of the two Committee Chairs, partially due to work pressure and partially because of the things that had been happening in the Audit Committee.

Prof Mayatula asked how it was possible for fraudulent activities to take place around procurement.

The Chairperson reminded the Committee that some of the irregularities were already happening before Ms Nokwe took over. However, this Committee needed to look into why there had been a repetition of fraudulent activities and why there had been a shift of these irregularities, from one area to another.

Ms N Mathibela (ANC) referred to page 11, noting that the target for women’s recruitment was 30, but the company had actually recruited 39 women. She asked how many women PetroSA wanted to employ. She also urged PetroSA, in view of the high levels of unemployment in the country, to find ways of creating employment.

A representative of PetroSA said that currently, the female representivity was sitting at 29.7% and the target for women was 35% by 2016. The numbers listed on the presentation were yearly targets. PetroSA hoped to meet the target by the use of the bursary programme, which had 44% women, and this meant that by the time the people sponsored by PetroSA had finished their degrees, they would be potential employees. She added that PetroSA had 1.7% employees with disabilities, which was not good progress and so there were active steps to recruit more people with disabilities, including the university programmes with three academic institutions, CPUT, UWC and NMMU. The company was looking for technicians, but this was a little problematic, as there was greater preference of people to move to administrative jobs. The company was hoping to form a partnership with Equatorial Guinea but this too had been a challenge to PetroSA, and it was going out to look for other partners.

The Chairperson pointed out that there was R12.4 million expenditure incurred outside of the levels of authority of one of the staff members, which was irregular, but that this action had later been condoned. It was, however, not clear what that money was spent on. He wanted to know who condoned the conduct and how the matter was being resolved.

Ms Nokwe said that a certain method of authorising procurement was used, but this differed from the way in which the company wanted procurement to be done. This irregularity had now been regularised or corrected. There were systems in place to detect such irregularities. She added, in answer to the general concerns, that there were fraud prevention workshops also, which were also intended to raise awareness about fraud.

The Chairperson also wanted to know about the R263 million expenditure on a number of court cases and enquired about the nature of the claims and the ways in which these claims were resolved, and if there were any preventative steps to minimise and finalise the exposure from these claims.

Mr Hlatshwayo said that work pertaining to litigation had not been finalised and for this reason not everything could be included in the Annual Report. Some matters were ongoing.

The Chairperson also asked that Ms Nokwe expand on the issue of enterprise development. He noted that the figures around this were very low, and wanted to know also how PetroSA would change this. He emphasised that the one of the strengths of enterprise development was that it leads to job creation

A representative of PetroSA responded that indeed enterprise development had been a challenge to PetroSA. The main aim of the initiative was to redress the imbalances of the past in the business sector. This led to the company adopting a limited approach, which resulted in limited beneficiaries. The company was revising its BBBEE codes. It planned to broaden the scope of beneficiaries of PetroSA. PetroSA was negotiating with the procurement department so that it could open certain procedures, which would allow the company to bring in more beneficiaries, including women. PetroSA was also establishing training programmes which would deal with sustainable development of the enterprises. PetroSA was also upgrading its IT systems in order to improve the enterprise development programmes.

The Chairperson also asked the PetroSA team what it has to say regarding the non-achievement of targets around commercial sales, and the industrial gas issue, and the causes of the challenges in this regard.

Ms Nokwe said, in regard to the PPPFA, that although PetroSA had applied for a permanent exemption it only got an exemption for one year. The company applied for the grant of another and was hoping sincerely that it would succeed. PetroSA took the non-achievement reports very seriously. Measures had been put in place in order to address short-achievement. She outlined that the criteria relating to a mine and a petroleum company were different. PetroSA was capital intensive.

The Chairperson asked about staff morale, noting that the restructuring of the company had caused uneasiness.

Ms Nokwe conceded that people were often resistant to change, and that PetroSA had to sell the vision to its people, and encourage them to strive towards the goals. It did communicate with the employees and let them know about the vision.

The Chairperson asked why PetroSA had not given much information on the international relations which it had with other countries.

Ms Nokwe responded by saying that it would inform and invite the Department of Energy with any international invitations. It would work with the Department of International Relations and Cooperation in regard to relations with other international companies. The company also traded with companies that matched its strategies and objectives.

The Chairperson also raised concerns about the decline in income, while taxation had increased. He asked how this was possible.

Mr Webster Fanadzo, Acting Chief Financial Officer, PetroSA, said that the amount shown in the books was a credit, and that meant that it was income, not a liability.

Mr Hlatshwayo also stated that all the issues which had been resolved have been reported to the Special Investigations Unit, and all law enforcement agencies and steps would be taken to recover money which needed to be recovered. Issues requiring internal resolution were being attended to.

Professor S Mayatula made reference to page 19, where the CEO asked for assistance from the Committee. Mr Mayatula asked the CEO to give the Committee a list of the disadvantages and the advantages, and provide more information, as well as what PetroSA stood to gaining from expanding the growth of the business.

The Chairperson acknowledged that the current team was doing all it could, under the leadership of the Department, to resolve issues and to run the company. He encouraged PetroSA to state issues up front. He reminded PetroSA that the country was part of BRICS and the country had signed a couple of agreements; therefore it had to live up to them. The Chairperson also encouraged PetroSA to follow through with the project of establishing a Petroleum Institute, a project of SAPIA, of which PetroSA formed a part.

The Chairperson thanked the PetroSA team for giving the Committee sufficient information to formulate its recommendations and to compile the Budget Review and Recommendation Report.

The meeting was adjourned.
 

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