Central Energy Fund (PetroSA; AEMFC; SFF, iGas, PASA) on their 2014/15 Annual Report; NECSA appearance

Meeting report

Chairperson’s opening remarks
The Chairperson commented that a substantial number of senior leadership within the Central Energy Fund (CEF) Group were in an “acting” capacity; this was a matter which was extremely concerning. He asked that in the course of the presentation the Group provide some explanation on the matter. Secondly there needed to be balance as some State Owned Companies (SOCs) operated in competitive environments. Parliament had a responsibility to exercise oversight over these entities by means of the provision of information. However, from time to time, some information could not be made public for commercial competitive reasons. Parliament needed to figure out a way of handling these tensions in future. SOCs were competing with other companies who were not required to put their information into the public domain. Government entities should not hide behind this point, yet the Committee needed to be sensitive about how information was dealt with.

Central Energy Fund (CEF) briefing on its Integrated Results for 2014/15
Mr Reggy Boqo, interim CEF Chairperson, said he would provide the Committee with an overview of the CEF Group of Companies Annual Performance for 2014/15, against a backdrop of a challenging global economy fueled by low commodity prices and weak growth. The overview would cover financial and non financial performance together with insight in individual subsidiary performance. The presentation would give some context into the Group’s strategic challenges that threatened its long term sustainability and provide insight into the decisions taken to address these challenges, with a strong focus on PetroSA.

Mr Siphamandla Mthethwa, interim Chief Executive of the CEF Group, indicated that some of the current challenges to the sustainability of the CEF Group were: a collapse in the oil price coupled with declining feedstock at PetroSA, as a single income source PetroSA was at a huge sustainability risk, funding of strategic Group projects was becoming a major challenge due to a weak balance sheet, inverse relationship between costs and revenue, large impairment at PetroSA for the financial year under discussion, Group leadership uncertainty and ineffective governance, uncertainty of hiving-off finalization impacting future of AEMFC and PASA and the uncertainties around MPRDA and the reduced drilling interest and activity. The CEF Group was however committed to stabilizing the business through conserving cash in the short-term through deep cost-cutting exercises, capacitating board members with industry knowledge for effective governance and decision making, aligning the Group to reduce inefficiencies and duplications, implementing a robust long-term funding plan for projects across the Group and de-risking the Group through multiple sources of income and through limiting the Group to exposure. To achieve all this, the CEF Group needed to enhance its structural monitoring and evaluation capabilities.

As a Group of companies CEF needed to deliver on its mandate and improve shareholder confidence, the Group will therefore focus on the following key priority areas, in an effort to improve business performance and build a solid foundation for commercial viability which is its licence to operate under the Stabilize phase in the next financial year:
•Preserve cash and defer certain projects while fast tracking those that would improve the Group’s bottom line
•Deliver on Project Apollo for the success of PetroSA’s sustainability and the integration of initiatives to stabilize the business
•Cost and revenue optimization
•Support viable clean energy projects as a source of diversifying the Groups revenue
•Aligning CEF’s initiatives
•Capacitate and induct boards to strengthen governance and efficient decision making

Mr Mthethwa said that CEF has initiated Project Apollo which was aimed at developing a turnaround strategy for PetroSA. The project has been approved by the PetroSA Board and it was intended to be a six month long process which started on 1 September 2015, divided into five stages. The intervention entailed developing a strategic turnaround plan for PetroSA and creating a foundation for long-term sustainability and commerciality. Exco and the PetroSA Board supported the initiative and a Joint Turnaround Steering Committee has been set up to facilitate all project governance matters and to help speed up decision-making. Work-streams made up of PetroSA management have also been set up and a team of industry experts, with extensive oil and gas experience would form the core of the Joint Turnaround Project Team.

PetroSA
Rev Kholly Zono, Vice-President: Operations, PetroSA said some of the highlights at PetroSA in the last financial year were that the company was able to identify R1 billion worth of savings due to cost optimization and revenue enhancement initiatives, the $150 million bridge loan facility raised for the acquisition of PetroSA Ghana was fully paid in February 2015 and the company achieved a cash profit before non-cash items of R2, 5 billion. However, the challenges faced by PetroSA were mainly due to the underperformance of Project Ikhwezi and the low oil price environment, overall net operating loss for the year of R14.6 billion, the poor performance of upstream activities, the downstream entry initiatives which did not materialize and the delays in the importation of Liquefied Natural Gas (LNG).

Mr Mthethwa said PetroSA continued to play a pivotal role in advancing transformation. The company has performed well on BBBEE levels by achieving 90.65% on the score card. PetroSA was also assisting in unlocking the potential of South Africa’s economy through participating in work streams such as offshore exploration, gas infrastructure development, logistics base services and local content.

Mr Dumisa Hlatshwayo, Chairperson of the CEF Audit Committee, indicated that PetroSA received an unqualified audit opinion. An emphasis of matter, which did not modify the audit opinion raised the following: significant uncertainties, material impairments and funding of abandonment provision.

Mr Mthethwa said PetroSA has established an internal Sustainability and Integration Team was tasked with delivering an integrated sustainability solution for the business and it would focus on gas to power, refinery options, asset optimization and upstream.

The Committee Chairperson commented that there were many important concerns such as skills development and transformation, however when there was a significant threat to the very life of the company, survival became the critical thing and everything else became secondary.

African Exploration and Mining Finance Corporation (AEMFC)
Mr Sizwe Madondo, AEMFC Chief Executive Officer, indicated the highlights for 2014/15 which were the company was profitable, it had an excellent safety record, it received an unqualified audit opinion, it signed a new contract with Eskom for bigger volumes and it worked with local communities and schools towards development. Challenges faced by the company were low orders from Eskom, funding to commission priority projects, funding acquisitions and finalizing of Hiving Off as per Cabinet decision in 2010. The following feasibility studies were not completed: Klippoortjie Mine, Vlakfontein Mine and T Project feasibility studies.

Ms Batandwa Mdyesha, AEMFC Chief Financial Officer, said in 2014/15 the company made revenue amounting to R235.3 million, a 2% increase from 2013/14. Of this, R78.6 million was profit and operating expenses were R100.4 million. Revenue was driven by the low off-take by Eskom, income from royalties earned for five months in 2015, cost sales were high due to a higher strip ratio and the gross profit margin was lower at 33% as a result of a sales mix to other customers. An exploration expenditure of R9 million was incurred. There was a downward audit trend over the period under review, however the company has put in place more stringent internal controls to prevent unauthorized, irregular, fruitless and wasteful expenditure.

Strategic Fuel Fund (SFF)
Mr Mfano Nkutha, SFF Chief Operating Officer, said highlights for 2014/15 were: zero work related fatalities and zero reportable oil spill incidents, revenue went up by 116%, earnings were up by 308% and the company was ready to respond to crude oil supply emergencies. Challenges faced by SFF were around positioning the oil pollution control business, increased stock reserves, earning a return on the line fill investment and securing a government to government oil sharing agreement for security of supply purposes.

Mr Sivuyile Ngqongwa, General Manager: Corporate Services, SFF indicated that the company made revenue of around R198 644 million in 2014/15, a 116% increase from the previous financial year, of this R198 644 was profit, R297 895 was operating expenses. The company’s balance sheet was strong. A lack of documentation to prove to AGSA that the company complied with the Preferential Procurement Policy Framework Act (PPPFA) resulted in R8 million of irregular expenditure in 2013/14. As a corrective measure, in 2014/15 SFF management embedded internal controls that conform to PFMA and PPPFA in the procurement and payment process of the company resulting in a more than 20 times reduction in the amount of irregular expenditure and the five transactions that make up the R380 000 occurred in the first three months whilst processes were being implemented.

iGas
Dr Michael de Pontes, iGas CEO, indicated highlights to be the construction, completion and commencement of an operation with Rompco in Mozambique as part of the gas transmission pipeline, the company prepared the CEF Group Master Plan and interacted with CEF Group Companies to finalise the CEF Board approved plan, the repayment of bank loans, iGas was also relaying the CEF shareholder loan and reviewed new options for gas transmission pipelines. Challenges faced by iGas was the refinancing of Rompco which has slipped by nine months from December 2014 to September 2015. Also infrastructure development was awaiting developed gas resources. iGas achieved all its performance objectives. With regard to finances, revenue was at R0, operating expenses were at R12 461 million, and the company operated at a loss.

Petroleum Agency South Africa (PASA)
Ms Lindiwe Mekwe, PASA Acting CEO, said highlights for 2014/15 were the company received a clean audit opinion, it tabled the Extended Continental Shelf Claim Project at the United Nations Sub-Commission, it contributed to the draft Technical Regulations, also the first ever deep-water well was attempted in South Africa and students were up-skilled through the Upstream Training Trust. Challenges were around funding of the Agency and funding of the Extended Continental Shelf Claim Project. PASA achieved all its performance objectives.

Ms Olivia Mans, Chief Financial Officer, PASA said the company made R29 756 million in revenue, a 20.3% decline from the previous financial year and the company experienced an operating loss of R39 988 million. Revenue has been declining steadily due to a different financial regime where royalties were paid directly to the fiscus. PASA continued to utilise its cash reserves to fund operations. PASA’s balance sheet worsened due to the writing off of bad debt. The company received an unqualified audit report. Irregular and fruitless expenditure for 2014/15 was at R67 000.

Ms Mekwe indicated that PASA continued to focus on the following:
•Regulating the Upstream Petroleum Industry to ensure equitable and sustainable development of upstream resources
•Contributing to South Africa’s security of energy supply through the evaluation of petroleum resources and the preparation of an inventory to attract upstream investment
•Ensuring accessible and well managed geotechnical petroleum information for South Africa
•Evaluating shale gas
•Contributing to the formulation of the petroleum regulatory framework
•Participating in Operation Phakisa projects
•Managing the transitional period
•Efficient management of finances
•Sustainability of PASA.

Mr Mthethwa said the challenges facing the CEF Group were very important and CEF acknowledged these; a plan was in place to address these. One of the main initiatives the Group is driving is that of preserving cash and putting all the Group’s effort into ensuring that Project Apollo is delivered as soon as possible. CEF was also building up a clean energy portfolio in support of DoE initiatives to diversify the country’s energy sources. The Board has made significant investments which would be executed in the current year and in the years to come. The Board was also committed to streamlining the Group and to bring about efficiencies and to look at the Group’s governance model. Project Genesis has been completed.

Discussion
Mr P van Dalen (DA) said there were serious problems within CEF. It was however unfortunate that with all the other entities who presented, most of the attention would be on PetroSA. Members needed to hear more about Project Apollo so that Members could monitor its implementation. What were the outcome dates, what did the plan entail and what were the timelines? How did the September resignation of CEF chairwoman Sankie Mthembi-Mahanyele affect the Group and how has it affected the operations at PetroSA? Was the country receiving fuel from the new wells built in 2014 already? Altogether three wells were drilled. There was about R21 billion which the country needed to make provision for, for the rehabilitation and the downgrading of the stocks found in Project Ikwhezi. On the pipeline and the gas loop, he asked why gas coming from Mozambique was not being run into Mosgas so that fuel could be run from it. How was that fuel line servicing everybody and why was Mozambique not being given more fuel by PetroSA? Why was the CEF Board not advising PetroSA? On the Mthombo Refinery, he said there was a shortage of fuel and capacity within the refinery to produce fuel within the country, as a result South Africa imported 62 billion litres of fuel; why was the country not supporting local companies which were doing well such as Sasol?

Ms T Mahambehlala (ANC) welcomed the report by CEF. She indicated that the Auditor General report raised a concern that the drivers of internal controls at CEF were not satisfactory and Information Technology systems governance and control were a cause for concern. How would these concerns be addressed? The Committee needed to be firm on PetroSA by taking decisive decisions. The impairments at PetroSA have become worse than ever. She suggested that a forensic investigation be commissioned with immediate effect. It was unacceptable that the PetroSA chairperson was justifying the impairments. How could PASA conclude that they would not get a clean audit? That was unacceptable. The Auditor General said the impairments were as a result of irregular expenditure of R14.5 billion. Had proper measures been in place, the impairment could have been avoided or picked up earlier.

She indicated that in previous engagements with CEF, the CEF CEO recommended housing PASA under DoE at some point because the DoE was the most appropriate; how far was the process in implementing this recommendation? She argued that there was deliberate sabotage within some SOCs and there needed to be proper investigations, not just at PetroSA. It was unacceptable that some of the entities within the Group were not functioning. The Auditor-General indicated that PetroSA required a fully funded rehabilitation liability within the year-end; was this achievable and where was the money going to come from? Why was Project Apollo only focusing on PetroSA and not on the CEF Group as a whole? Where was the Chief Executive Officer of the Strategic Fuel Fund? There were three projects running at PetroSA; Ikhwezi, Mthombo and Irene, what was the progress on these other two and what were their targets? Were these projects also be looked at by Project Apollo? The number of “acting” executives needed to be addressed as a matter of urgency. This was a matter the Committee has been raising for a very long time and it had not been addressed.

Ms Z Faku (ANC) thanked the CEF Group for the report and for the executive acknowledging their shortcomings and devising means to address them. She asked who should be held liable for the R14.5 billion loss, there could not be such a huge loss with no one being held accountable for it. She agreed with Ms Mahambehlala that a thorough investigation should be commissioned into PetroSA.

Mr G Mackay (DA) said according to the report, PetroSA liabilities outweighed assets by R1.4 billion, the company had a single source of income, the Board was non-functioning, there was a record of poor decision making, there was R15 billion impairment, an operational loss of R1 billion and the company owed R9 billion for rehabilitation required in terms of NEMA. On top of all that there was perceived political interference at PetroSA. The company was faced with declining cash reserves, declining feedstock which would probably run out by 2017, there was a declining asset base and PetroSA did not have a balance which was strong enough to fund a turnaround strategy. With all that, how could the existence of PetroSA be justified when the company was a national disaster? Everything was not OK at PetroSA and the company was not going to survive.

Mr Mackay said the Annual Report referred to the potential sale of assets at PetroSA; what status was this in and what assets would be sold? The Minister had instituted an investigation into the performance of the company, has this investigation been completed and when would the findings be made available to the Committee and to the public? With regard to the headcount reduction, how many jobs were on the line? What was the total remuneration for the Board and senior management at PetroSA in the last financial year? He noted that a PetroSA employee fell to his death at one of the plants recently, could the Committee receive an update on this? What investigation has been conducted into the matter? How did CEF plan to cover the deficit at PetroSA considering that the Group itself was facing its own challenges? He said the Democratic Alliance welcomed the Gas Strategy developed by CEF, however considering that the DoE has yet to finalise the Gas Utilisation Master Plan (GUMP), was it wise that CEF finalised the Group’s own gas strategy without knowing what the GUMP would entail? Could CEF highlight what its gas strategy entailed? CEF has also mentioned that it was going through a cost cutting exercise; how would this being achieved, did it have any impact on jobs? He asked the SFF to provide detail on the deal signed with Drains Street.

Ms Thembisile Majola, Deputy Minister, of Energy, said the report from CEF has been a sobering one, especially around its operations, financials and the challenges faced by the Group. These issues were compounded by the fact that there were so many vacant positions both at management and at board level. As a department, the DoE needed to be upfront and indicate that the board appointments and operations have been of major concern to the department. As part of stabilizing the CEF Group, the DoE had appointed a Director General and this was a very important step in trying to stabilize the DoE and its subsidiaries.

She said the departure of Mthembi-Mahanyele has had a negative impact on PetroSA because a number of CEF subsidiaries did not even have the requisite number of board members. The DoE has been trying to get more board members appointed however this was proving to be a challenge because the sector was highly technical and these challenges somehow contributed to the impairments. A forensic investigation was underway. She was unsure how deep Project Apollo would go into some of the areas at PetroSA; there have been a number of investigations at PetroSA in the last few years and she was not sure whether they have added any value or whether they have just compounded some of the problems. The DoE was however looking into these to see how they could be dealt with systematically and decisively. With regard to the allegation of political interference at PetroSA, she asked how this might have been the case so that the DoE could deal with the matter. She said it would be difficult to pinpoint the accounting officer who needed to be held accountable for the impairment because there have been so many changes in management and the board. The DoE however was committed to getting to the bottom of this.

Mr Mthethwa responded to the questions on Project Apollo, agreeing that it was necessary to provide Members with more information. The CEF Group together with PetroSA was open to coming back to provide the Committee with more details on the specifics of the Project. On how the abandonment liability would be funded by CEF, he said there was a R2 billion shortfall currently, the shortfall did not require cash immediately. There were various ways of making the financial provision available, such as insurance and financial guarantees from institutions. The critical issue in resolving the liability was the turnaround strategy which contained long term options for Mossel Bay. On the findings raised by the Auditor General, he clarified that the accounting authority referred to would be the board of a company. The statements found in most audit reports was that fruitless and wasteful expenditure needed to be dealt with by the accounting authority. However over the years the Group has reduced its fruitless and wasteful expenditure and the Group was working very hard to strengthen the capacity within supply chain management to prevent this occurrence from happening again in future. With regard to internal controls and IT governance, he said year on year the internal controls environment has improved. In 2014 CEF went through Project Genesis which was to strengthen the holding companies and there were a couple of movements within the entities. There were some challenges but currently there was a fully capacitated CEF from a skills perspective and the control environment should improve significantly going forward.

With regard to executive remuneration, Mr Mthethwa said the CEF integrated report highlighted the executive remuneration for CEF, the PetroSA financial statements also disclosed those amounts. On cost cutting, the Group had welcomed the Minister of Finance’s Treasury Guidelines on Cost Containment and areas such as consultants were cut significantly. Also there were issues around the inefficiency of the plant from an energy perspective. The Group was also committed to negotiating tighter contracts around supply chain and getting value for money wherever possible.

On the pipeline and the loop line, Dr de Pontes replied that economic activity between South Africa and Mozambique took the gas in Mozambique through a 840 kilometre pipeline into Secunda. This gas fed the industrial and commercial hub in Gauteng. What has been happening the last couple of years to increase the gas to South Africa, was a compressor was put in, called a loop line, this was an extra bit of line to transport more gas. It was a 1220 kilometre pipeline which was parallel to the present pipeline. The issue however was that South Africa was taking a lot of gas from Mozambique and the country needed to take into account the needs of the Mozambique government to grow its economy. The Mozambique government strategy was very clear; they would build an LNG terminal and sell the gas to the highest buyer. The terminal would be built by 2021 earliest. However that did not mean that South Africa needed to stop interacting with Mozambique. With regard to whether PetroSA could get gas into the Mossel Bay refinery he said economics were not always favorable, however in the last two to three years shale gas was starting to change this pricing. On the question around the gas strategy he indicated that the CEF Group has been deeply involved in gas in many ways, and the company had an understanding of how gas fed the economy. The Group has therefore developed a way to tackle some of the problems around gas. He agreed that the Group’s strategy needed to be governed by GUMP and the company would wait to incorporate it. The CEF Group was very active in the gas to electricity area, and they have taken part in the Eskom War Room.

Chairperson Majola said gas was going to become quite important and the Committee needed to return to a discussion around it.

Mr Mthethwa appreciated the proposal to return to a discussion on gas. CEF was looking to importing LNG to generate some of the Group’s power plants.

Mr Boqo responded to the question about the acting positions. From a Group perspective that was something the company has been working very hard to resolve, together with the DoE. Currently at the subsidiary level, all board positions have been filled and recently the composition of PetroSA board has been addressed. The Group was looking into the recent vacancies at SFF and CEF, the recruitment process was underway and the company was hoping to make appointments by the end of the calendar year to restore stability at the holding company level. The Group was committed to ensuring that all leadership positions were filled.

Mr Smunda Mokoena, PetroSA Chairperson, replied that the forensic investigation has been completed and it was being handled; if the Committee wanted access to it they would have to approach the board to find out whether the recommendations have been implemented. On the role of the PetroSA board in monitoring the situation at the company, he said the duty of the board was to find alternative means to make the company sustainable. PetroSA was an asset and the company had the technical know-how on how to produce a great product. PetroSA was the third largest asset producing company in the world in products such as petrol and other fuel energies. All the refineries in the country had their own crude oil wells. PetroSA was looking at the potential of long term sustainable production through alternative oil sources.

Ms Mapula Modipa, acting PetroSA CEO, said some of the questions asked by Members spoke to historic events. She asked that PetroSA come back at a later date to respond to some questions. On the question on job losses, she indicated that around March 2015 PetroSA issued a contestation letter contemplating the need to downscale staff, the estimation at the time was that it would be around 40% of the staff component. However the figure kept changing as the projects and structures changes. She said it was regrettable that the Mossel Bay plant suffered a loss of a life, the reason the accident was not mentioned was that it took place during the current financial year, the incident happened a couple of weeks ago. Multiple investigations were underway.

Rev Zono repeated that it was regrettable that a life was lost on 26 September 2015 when the employee fell while working during a planned maintenance operation at the refinery. An internal investigation was underway and the South African Police Service was also conducting its own investigation together with the Department of Labour. The mine inspector was investigating and the matter would be made public one these investigations have been concluded. On Project Ikhwezi, he indicated that there were five wells. On 31 December 2014 one of the wells was connected and production started. Two wells were suspended.

Deputy Minister Majola said what was impacting negatively on the entities was that the entities could not get into the details of the discussions which have taken place because of policy constraints. With PASA for example, from a DoE perspective, the department has been arguing that PASA was an entity which has been built over a number of years and it had a massive database of information. The department was concerned about how all that was being managed. The discussion was around where the entity would be moved to in order to allow it to carry out its function, and how would it be resourced. She indicated that the DoE has been engaging the DMR, exploring what was required in that process. Investors were also a little hesitant to participate when there were still a number of issues which were unresolved at a policy level.

A PASA official said when the MPRDA and the Mineral and Petroleum Resources Royalty Act came into place; the royalties which PASA used to receive were now to be paid directly to the fiscus. PASA was also trying to resolve funding issues with National Treasury because the MPRDA made provision for PASA to be funded from the fiscus. However the process became a problem when the amendment came into place. Luckily over the years that PASA was able to collect royalties, the company has been able to fund its operations from those reserves despite the fact that the income it used to receive before went directly to the state. All of these uncertainties meant that the funding which PASA currently had would not sustain the company another full two years, and the reason the company would not get a clean audit was that there would be a growing concern about the future.

Mr Mthethwa asked that the CEF Group come back to the Committee at a later stage to address some of the issues. There also needed to be focused discussions on Project Apollo and on gas.

Mr Mackay asked about the details of the sale of assets at PetroSA. He asked the SFF on the agreements signed between SFF and the company James Street Capital Partners.

Mr Mokoena replied that PetroSA was not selling any of its assets; the strategy was to leverage the assets to create value for the country. PetroSA had no intentions to privatize.

Mr Nkutha replied that SFF had no agreements with the company mentioned by Mr Mackay.

Chairperson Majola said the structure of CEF needed to be addressed, especially the relationship between the CEF board and the other boards. The acting positions should be addressed as a matter of urgency. However there an impression should not be created that there was a plethora of crises when most of the issues were easy to address. The challenges were primarily within PetroSA and they had an impact of CEF. He supported the proposal that there be a thorough investigation into PetroSA. He acknowledged that PetroSA operated in a globally challenging environment but there was also problematic conduct in general. If PetroSA was being treated as a cash cow instead of a national oil company, there would definitely be a problem of interference and with governance. PetroSA must be properly strengthened and positioned so that it could play the role it needed to play in fulfilling its mandate well. It was unacceptable that R14.5 billion was lost and no one is held accountable. Investigations needed to be conducted to help the Committee and the Group in understanding what happened at PetroSA so there could be corrective measures, and to ensure that the problems were not repeated. The Committee would not be walking away from the impairment as if nothing has happened. The three high impact projects at PetroSA have all failed. Alternatives and issues of funding gas would be discussed, together with the strategy which the DoE was working on for gas. It was important that other players also be invited to participate in the discussions on the gas industry. The Committee was still waiting for the GUMP from the DoE. In previous discussions there was agreement that the entire value chain industry needed to be addressed, including strategic stocks. He thanked the Deputy Minister for always trying to attend the meetings. Some of these issues would need to be raised by the DoE.

NECSA Annual Report presentation
The Chairperson told the Committee that the Committee Secretary had just informed him that the NECSA Annual Report presentation had not been submitted though the delegation was present at the meeting. He asked the leadership of NECSA to confirm whether there was a presentation or not.

Mr Phumzile Tshelane, NECSA CEO, said there were no audited financial statements available for NECSA as AGSA was still busy with the process. Consequently there was no Annual Report.

Discussion
Mr Matlala said that seeing as there was neither a presentation nor an Annual Report it would be futile to discuss a non-existent document. He requested NECSA vacate the Committee room until such time it had something to present.

Mr van Dalen said that legislatively there were processes and deadlines that had to be adhered to. If there were valid reasons as to why that had not happened, then those reasons needed to be heard, so that NECSA could also explain what contribution it had made in making the report unavailable for the Committee to interrogate. It was not succinct to simply blame AGSA for the unavailability of the report unless the blame was to be apportioned to it entirely but the reasons for that had to be heard as well.

Mr Mavunda seconded Mr Matlala’s proposal because whether NECSA could tell the Committee of its challenges, that made no difference.

Mr Mackay said that the Chairperson would recall that he had asked AGSA if within a closed meeting it could address the Committee on the audit outcomes for NECSA. At that time AGSA confirmed that the financial statements of NECSA had been submitted on time and that there were findings and it could have shared that information in confidence. The situation of NECSA being in Parliament without an Annual Report with audited financial statements was unprecedented and it was deeply concerning.

Mr Mackay said that the Committee would recall that in February 2015 it had been published in the public domain that NECSA was in financial trouble and would be unable to pay staff. NECSA had aggressively dismissed those reports as malicious lies by media and Members of Parliament but there they were without an Annual Report. He was opposed to NECSA merely leaving without explaining what was going on.

The Chairperson asked Mr Mackay to repeat his statements about what had occurred during AGSA’s briefing as he had missed some of his comments.

Mr Mackay reiterated his comments saying that the only individuals who knew what was going on at NECSA were AGSA and NECSA itself.

Ms Faku noted that if there was no Annual Report, the Committee would be generalising, making effective oversight impossible, which was why she also supported Mr Matlala’s proposal.

Ms Mahambehlala also supported the proposal to release NECSA, noting that emotions and general opinions would not assist the Committee in performing its oversight role. She recalled that AGSA had said that NECSA had not submitted information on its annual performance and therefore NECSA had not fulfilled it legislative obligation. She proposed that the Committee should stipulate that NECSA had to present that Annual Report before the end of October 2015.

The Chairperson said that AGSA had said that the NECSA audited statements had not yet been finalised and a subsequent request at that briefing had been to find out why the NECSA audited Annual Report had not been completed. Indeed as the Chairperson he had told the Committee that AGSA could not answer that as NECSA was better placed to do so. The fact that that Annual Report was not ready because of incomplete audited financial statements by AGSA, it was a waste that the leadership of that entity had come to Parliament. The Committee would have to write in its BRRR that NECSA had not submitted its 2014/15 Annual Report. His ruling was to release NECSA.

Mr van Dalen reiterated his earlier sentiment that there possibly were reasons behind why the Annual Report was not available and that it was not fair to simply crucify NECSA without allowing the entity the opportunity to at least respond.

Mr Mackay said that he was confused by the Chairperson’s account of events regarding NECSA’s appearance before the Committee as he had informed the Committee that the Minister of Energy had written to the Speaker of the House stating that NECSA would not be submitting an Annual Report since its financial statements had not been finalised. Therefore since that information was already in the public domain and the Committee knew that NECSA had nothing to speak about; why was it that the Committee had gone through an expensive pageantry of inviting NECSA so that the ANC could say that NECSA would not be allowed to speak? Surely there were a number of limited questions that the Committee could ask the entity. If not, then he hoped that the trip would go into the Committee’s BRRR as fruitless and wasteful expenditure.

The Chairperson agreed that the wasteful expenditure reflection be included in the Committee's BRRR.

The Deputy Minister said that what made the situation more unfortunate were the unnecessary insinuations which were not called for in that situation, as NECSA had a board which it accounted to and the Ministry did not micro manage the entity on a daily basis. If the Committee were really already aware of the present challenge, it would have been prudent for that meeting to have been cancelled. Whatever NECSA would be allowed to say if that were to happen would be an opinion and she had reservations about that.

The Chairperson said that the difference was that he could not determine a way forward based on the facts before him which was why he had wanted confirmation from NECSA about the current state of affairs.

The meeting was adjourned.

Appendix 1:
PetroSA Media release
PetroSA FORGES AHEAD DESPITE DISAPPOINTING 2014/15 PERFORMANCE

CAPE TOWN, 15 October 2015 – PetroSA, the Petroleum, Oil and Gas Corporation of South Africa (SOC) Ltd., has recorded a disappointing net operating loss of R14, 6billion (2014: R1, 6billion) for 2014/15, driven by the sharp drop in oil prices and the weak performance of its gas drilling programme.

The larger than anticipated loss was mainly due to a R14, 5billion impairment charge on the company’s operating assets. An R11, 7billion impairment charge related to the company’s Mossel Bay Gas-to-Liquids Refinery, and arose mainly from the non-performance of Project Ikhwezi, the five-well gas drilling programme designed to augment dwindling hydrocarbon reserves feedstock. When approved, Project Ikhwezi was expected to deliver 242 Billion Cubic Feet (BCF) of commercial gas reserves. At year end, the project had only delivered 25 BCF of commercial gas reserves from three wells.

The 21% year-on-year fall in international crude oil prices also contributed a further impairment charge of R2, 8billion, which mainly affected PetroSA’s flagship Jubilee and TEN oilfield assets in Ghana. The cash profit before non-cash items was R2, 5billion (2014: R3, 3billion).

An impairment charge arises when the value of the entity’s operating assets is eroded due to external circumstances such as, in PetroSA’s case, the non-realisation of expected reserves and the fall in crude oil prices. Concerning Project Ikhwezi, the R11, 7 billion impairment charge arose following the Project Ikhwezi drilling programme that spanned a four-year period. Essentially, PetroSA did not derive the anticipated return from its investment in the drilling programme, hence the non-cash impairment charge.

“We are generally not happy with the performance but are confident that we have put in place stringent safeguards to mitigate against the recurrence of the scenario,” Mapula Modipa, PetroSA’s Acting Group CEO said.

These safeguards include the establishment of a project management office to ensure all such initiatives are executed employing best-mechanisms for success.  The PetroSA Board and Central Energy Fund, the shareholder company, have also embarked on an initiative, called Project Apollo, to develop a turnaround strategy that will secure the company’s long-term viability and financial sustainability.

A team consisting of industry experts has been given a six month mandate to develop a turnaround strategy for PetroSA. The team is exploring different options that include, among others, the maximisation of a number of upstream initiatives, the utilisation of tail gas and how the GTL Refinery can be optimised, under the current feedstock-constrained circumstances. The team has been at work for two months and significant progress has already been achieved.

The year ended 31 March 2015 was challenging for PetroSA with production and sales volumes 30% and 17%, respectively, below expectations. Gross revenue decreased by 15% to R18 billion (2014: R21, 2billion). The group’s financial position has also weakened with total assets now valued at R19, 8billion (2014: R34billion) and an available cash balance of R4, 1billion (2014: R5, 1billion).

“The fall in the crude oil price affected the group negatively across all operational units, necessitating the suspension of the Oribi/Oryx crude oil section. The weakness of the rand against all major currencies, normally a positive influence on revenue, could not offset the impact of the reduction in crude oil prices,” said Webster Fanadzo, the Acting Group CFO.

Despite the gloomy scenario, PetroSA was able to repay and refinance an interest bearing debt of R1, 5 billion in the year under review. The company also saw cash generated by operations increase to R3, 5billion (2014: R2, 2billion). 

PetroSA also forged ahead with its stated goal of advancing transformation in the oil and gas industry. In the year under review the company recorded total procurement spend of R8, 7billion on Broad-Based Black Economic Empowerment companies, which equates to 103, 1% of discretionary spend.  The company also spent R10, 3million on Corporate Social Investment initiatives to uplift historically disadvantaged individuals and communities.

Since 2002, PetroSA has spent R348million on community development initiatives.

In an effort to sustain itself PetroSA embarked on a drive, dubbed BillionPlus, to contain and optimise operating costs. The company set itself a target to save R1, 25billion in recurring costs. At year-end savings of R1, 1billion were achieved. 

“Despite the results, the PetroSA Group is a going concern,” Ms Modipa, PetroSA’s Acting Group CEO, said.