PetroSA R14.5 billion impairment forensic report: Department of Energy & PetroSA Board briefing

Energy

01 November 2016
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Energy Portfolio Committee met to receive a briefing on the forensic investigation of PetroSA with regard to the R14.5 billion impairment of its assets. However, PetroSA indicated that the report contained confidential information that could not be provided to the public, and it therefore could not provide the full comprehensive report at the meeting. The Chairperson then suggested that a closed meeting should be scheduled for 15 November, at which the Members would be provided with the full report. He requested that PetroSA still brief the Committee on the summary report they had brought to the meeting.

Some Members argued that a closed meeting was not necessary, as they represented the public who had a right to know how their taxpayer funds were used. However, others agreed to the closed meeting, stating that PetroSA had obtained a legal opinion and therefore had a legal right to confidentiality.

PetroSA presented its summary briefing, giving the Committee an overview of what had caused the R14.5 billion impairment. In 2011, the company had been facing closure as its gas fields had been depleted. To ensure the survival of the company, the board of directors had initiated the Ikwezi development which they had forecast would provide a volume of 242 billion cubic feet (Bcf) of gas. However, the current forecast for gas reserves was 46 Bcf, which was an 80% reduction. This lower forecast was the cause of the R14.5 billion impairment, which was an accounting adjustment.

Petro SA acknowledged that the failure of Ikwezi could be attributed to poor appraisal and was largely an oversight issue. It gave an assurance that it would comprehensively answer any questions that Committee had at the next meeting

The Committee questioned PetroSA if sufficient investigations had been conducted by the management of the time to ensure that the company was not put into prejudicial circumstances. They enquired what the shareholders’ role in such a big project was. Members asked what the current CEO had done to deal with the issue of the impairment, and if PetroSA was currently involved in any drilling projects. 

Meeting report

The Chairperson brought to the attention of the Committee that at its last meeting with PetroSA, it had reported on the executive summary relating to the entity’s impairment. The Committee had requested that at the next meeting, PetroSA was to give a full presentation on the forensic investigation about the impairment that had been commissioned by the Minister. However, the board of PetroSA had informed him that the report contained confidential information and therefore could not be made public. The Chairperson argued that no information in the hands of the Department of Energy (DOE) or any of its entities was to be deemed private to Parliament. Once Parliament requested it, this information had to be made readily available. He said that since PetroSA could not present the forensic investigation at the meeting, a closed meeting would be scheduled for 15 November 2016. He had requested that PetroSA present all 11 reports that they had informed him accompanied the forensic investigation. However, he suggested that PetroSA should still brief the Committee on the report which they had compiled for the current meeting.

Discussion

Mr P Van Dalen (DA) said that he represented communities who had a right to know how their taxpayer funds were used, and therefore he did not see the need for a closed meeting. When PetroSA had been questioned about the report, they had stated that it was with the Minister. However, when the Minister was asked, she had said that she had not received it. He questioned why there had been such an inconsistency. If the report contained sensitive information, these were the only parts that should be excluded from the meeting, but the rest of the report should be presented.

Ms T Mahambehlala (ANC) supported the proposal for a closed meeting, saying that PetroSA had obtained a legal opinion that allowed it to keep the report confidential. It was therefore the responsibility of the Committee and every individual to uphold the law.

Mr J Esterhuizen (IFP) requested that information be provided as to why the chief executive officer (CEO) had been sitting for on the report for five months. The Committee should be allowed to view the legal opinion. He expressed his discontent that PetroSA was coming up with excuses not to provide the report and warned that they should not celebrate that they had evaded providing it.

The Chairperson called PetroSA to present the briefing.

Impairment Report: Petrosa briefing

Mr Wilfred Ngubane, Interim Chairperson : PetroSA, assured the Committee that the new board wanted to ensure transparency and therefore did not object to making the legal opinion available to Members.

As background information, he said that PetroSA had been formed by merging two companies, Soekor (an exploration company) and Mossgas (a refinery company). PetroSA had built a fixed structure 100 km into the Indian ocean, to which staff were shuttled and returned every two weeks.

In 2010, it was estimated that the available gas would be depleted by 2013, thus implying the closure of the gas to liquid (GTL) refinery which was at the heart of the Mossel Bay economy, and employed over 1 800 people at the time. The company was faced with a difficult decision, as they it two options: either to go to the field and find alternative gas fields to prolong the life of the company, or to close down. The company decided to use “crowd funding” to fund a project to find alternative gas fields. Investigative studies were carried out, and recommendations were made to get to an area with sufficient gas. PetroSA built a pipeline 40kms away from the shore, and had therefore incurred high costs.

He explained that according to accounting principles, assets had to be measured at the present value of future returns, and not at cost. Because of this, the asset had to be written down because it was not going to have the returns that had been previously expected.

Mr Siphomandla Mthethwa, CEO: PetroSA, said that impairments in the energy field came mainly as a result of a decrease in the oil prices or decreases in reserves, and in the case of project Ikwezi it was due a decrease in the reserves. When Ikwezi was initiated, the expected volumes of gas were 242 billion cubic feet (Bcf).The gas from Ikwezi was anticipated to run out in the first quarter of 2019. The estimated cost of Ikwezi from development in 2010 was $1.29 million, but this had been was revised upwards to $1.34million.

He reported on some of the key contracts in Ikwezi whose actual contract values far exceeded the projected values. These included the Harkand project, whose projected value was $42 million and actual value was $ 77.8 million, and the Kentz contract, with projected value of R38.9 million and actual value R146.9 million.

PetroSA’s group impairments for 2015 included R2.7 billion on its Ghana operations, which were due to a decrease in oil prices, and R11.4 billion due to a decline in anticipated reserve volumes.

Mr Neil Robertson, Vice President: New Ventures Upstream, PetroSA presented a technical review to the committee on Ikwezi. He highlighted that the company had had a number of gas producing fields since 1990 and the proposed development was to drill five wells. The new field was different from the others, as it was significantly deeper and more pressurised and was also affected by significantly high temperatures.

He then addressed the findings of the technical investigation, which had included weak project management and governance, and a lack of proper risk mitigation. The project was not resourced adequately and no walk away trigger points were in place to ensure the minimisation of exposure.

In terms of cost management, the approved budget had been $1 344 million, but only $1 220 million was spent. Out of the five wells that were proposed to be drilled, four were actually drilled and only three were producing gas.

He said that in the future there was need for better appraisal before any development was done. Projects should not be fast tracked, but rather front end loading should be done appropriately. There should be a partnership strategy approach for future investment decisions to ensure that the organization was de-risked and the balance sheet cushioned.

The main failure of the Ikwezi project was as a result of low gas volumes compared to the predicted volumes. This was attributed to a lack of understanding of the reservoir risk involved in drilling the F-O field. The estimated gas volumes reserves had been 242 Bcf, but to date the forecast was 46Bcf, which was an 80% reduction.

Discussion

The Chairperson said that PetroSA had mentioned that there were historical drilling projects, and asked it to provide details about them so that the Committee could compare the past and present projects. He questioned if sufficient investigations had been conducted by the management of the time to ensure that the company was not put into prejudicial circumstances. He asked if PetroSA had any plans for the future.

Mr Esterhuizen commented that all the billions that had been lost in the impairment were a waste of taxpayers’ money.

Mr Van Dalen said that a legal opinion was not a binding document, and therefore the Committee was not necessarily bound by it. He asked who had advised the estimated figures of the available gas reserves that had been provided, and how much this opinion had cost.

He asked what the role of suspended PetroSA CEO, Lindiwe Bakoro, had been in the R14.5 billion loss. He asked if the R5.6 billion for Project Irene had been eroded by the procurement of the pipes, and wanted to know what the total cancellation cost for the project was.

He asked if PetroSA was involved in any drilling projects, and for the status of the offshore drilling. He asked what impairments the Committee was to expect in the future.

Ms G Nobanda (ANC) asked what the shareholders role in such a big project was, as it could not have happened without shareholder support.

Mr M Matlala (ANC) said the fact that the board was constantly changing was a challenge. It meant that each time a new board was appointed it would not have enough time to do any significant work. He asked the Director General (DG) and the Minister when PetroSA would have a full time board. He asked if a due diligence study had been done for project Ikwezi.

Ms Mahambehlala asked the CEO what he had done about the R14.5 billion impairment since he had come into office, and also if the amount of the impairment had not actually increased.

She asked what Soekor and Mossgas were.

PetroSA response

Mr Mthethwa replied that PetroSA was facing challenges, but the board was working tirelessly to prevent closure. Its 2015/16 results were better than those for 2014/15,  although the company had still made a loss of about R200 million in the current year. 

He described Soekor as the company that did exploration in the sea, while Mossgas was the refinery company that refined the gas discovered by Soekor.

He said that Ms Bakoro was a previous PetroSA chief financial officer (CFO) who was no longer employed at PetroSA. Her suspension was due to the Ikwezi project.

There were no penalties for Project Irene, as the target client was the party who had pulled out of the negotiations.

He said that there were currently no drilling campaigns. The insurance referred to in the report was a claim that PetroSA had made to the underwriter for a pipe that had failed. The underwriter to date had paid only R5 million of the R17 million for the entire claim.

The Chairperson asked for PetroSA to address the question about the shareholders.

Mr Mthetwa replied that a formal report about the shareholder would be presented at the next meeting.

The meeting was adjourned.

 

 

 

 

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