Central Energy Fund (CEF) on its Annual Report for 2015/16

Energy

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

Annual Reports 2015/16 

The CEF reported that CEF Group had an asset value of R35 billion and currently employed about 2 100 people. Major achievements for the group included an unqualified audit opinion by the Auditor-General. The group of companies had a R16.2 billion cash balance and reported that it was highly liquid with a liquidity ratio of 3.4:1. The CEF Group generated revenue of R20.7 billion during 2015/16 which was a R2.2 billion increase from the previous year.

The key findings in the audit report included:
• Investments in subsidiaries were impaired by R49.4 million as well as loans to subsidiaries and associates that were impaired by R81.7 million and R24.4 million respectively. 

• The R60.4 million crude oil loan to a service provider by the Strategic Fuel Fund (SFF) that had not been authorised by National Treasury. A legal review had been called for and currently was under way. The review was being conducted by a UK based firm Allen and Overy which according to contract terms was expected to produce an interim report by the second week of December..
• The Group had unauthorised, irregular, fruitless and wasteful expenditure of R82.6 million as a result of the Preferential Procurement Framework Act (PPPFA) not being followed for diesel purchased for export sale at SFF to the value of R80 million. Appropriate action will be taken to recover any losses and address areas where weakness in the system has been identified at SFF.
• Funding of abandonment provision: PetroSA has an obligation to fully fund the provision for rehabilitation of its operations valued at R10.7 billion. NEMA requires this rehabilitation liability to be fully funded within 12 months from year end.
• The National Treasury was not informed of the rotation transaction of 10 million barrels of strategic crude oil reserves as required in terms of section 54 (2)(d) of the PFMA.

CEF identified its strategic challenges as:
- Access to feedstock for the GTL Refinery
- Funding the rehabilitation provision
- As a result of volume drop and low oil prices cash balances at PetroSA are declining
- High turnover and vacancies in key positions
- Oil and Gas industry long lead times and operational risk
- Poor project execution
- Lapses in governance (currently under review).

Members asked the Director General and the Minister when they would address the board member permanent positions since all board members seemed to be interim. This was crucial to ensure specific individuals can be held accountable. They asked how many women were being empowered by CEF and prompted CEF to address the gender imbalance as its current board composition was highly male dominated;  what it was doing to ensure that it retained its interns and did not lose them to the private sector;  
if CEF would have made a profit if it had not been for the sale of fuel stock which was a form of asset stripping and questioned if these profits would be sustainable in the future; why the turnaround plan for CEF and its subsidiaries had not been presented to the Committee; what PetroSA specifically had achieved in its turnaround plan.

Members were discontented that more attention was being given to the PetroSA impairment and not enough to the SFF for losing taxpayers' money. Members referred to SSF as stealing state assets in the form of the strategic stock.

Meeting report

Central Energy Fund (CEF) on its 2015/16 Annual Report
Mr Mojalefa Moagi, Interim CEO, CEF, highlighted that CEF mandate included contributing to security of energy supply, being a strategic partner to the Department of Energy
as well as reducing the country’s over-dependency on multinationals as well as aligning with government’s broad objectives in the NDP.

He explained that CEF (SOC) Ltd was the holding company with subsidiaries, which, when taken together, constitute the CEF Group. These subsidiaries operated in the energy sector with commercial, strategic, regulatory and developmental roles. The CEF Group employed about 2 100 people
and had a group asset value of R35 billion.

He pointed out that in 2015/16, the world had seen sustained low oil prices as a result of supply and demand key drivers. This had been driven by weak global economic growth mainly from China and developing economies. As a result this had various effects on the oil and gas industry including slow recovery and low oil prices which affected the global upstream (exploration and production).

Some of CEFs key achievements in 2015/16 included CEF obtaining an unqualified audit opinion issued by the Auditor-General. The company had a R16.2 billion cash balance and had BBBEE spending of R4.5 billion. R52.4 million had been spent on CSI projects. CEF had invested R600 million in Renewable Projects and had experienced positive growth in the PetroSA Ghana investment. CEF had made contributions to the National Development Plan including the creation of 65 new jobs and 274 sustained jobs.

Mr Lufuno Makhuba, Interim CFO, CEF, reported that for 2015/16, the CEF Group reported a net comprehensive income of R259 million versus a loss of R14.2 billion in the 2014/15 financial year.

The increase in net comprehensive income of R14.4 billion was due to an increase in revenue of R2.2 billion, decrease in costs of R11.4 billion and an increase in income from associates of R45 million. The group generated a comprehensive income of R259 million that was made up of income from associates (Rompco) of R305 million (48%), R82 million profit from AE, R54 million profit from CEF and combined losses from SFF, PASA and PetroSA of R189 million. Despite the comprehensive loss of R764 000, PetroSA generated R2.5 billion cash from operations.

The CEF Group generated revenue of R20.7 billion during 2015/16 which was a R2.2 billion increase from the previous period. The increase in revenue was due to rotation of strategic stock, increase in tank rental income and coal sales. 


The group had assets worth R35.5 billion, which were made up of non-current assets of R14.8 billion and current assets of R20.7 billion of which
45.5% of the group assets was cash. The Group non-current assets decreased by R306 million due to rotation of strategic stock and the write down of line fill, from R1 billion to R716 million. Production Assets were impaired by R255 million during the year. The Group’s current assets increased by R4.4 billion due to increase in cash, which came from the rotation of strategic stock. He highlighted that the group had a liquidity ratio of 3:4:1  - meaning the current assets could settle the short-term debt three times.

The Auditor-General gave the Group an unqualified audit opinion with emphasis of matter for significant uncertainties (PetroSA Ghana’s tax and PetroSA restructuring), restatement of corresponding figures, material impairments and funding of abandonment provision. Additional matters were reported about a review of SFF’s contracts. Compliance matters and internal control deficiencies were outlined.

The key findings in the audit report included:
• Investments in subsidiaries were impaired by R49.4 million as well as loans to subsidiaries and associates that were impaired by R81.7 million and R24.4 million respectively. 

• The R60.4 million crude oil loan to a service provider by SFF. A legal review was underway.
• The Group had unauthorised, irregular, fruitless and wasteful expenditure of R82.6 million as a result of the Preferential Procurement Framework Act (PPPFA) not being followed for diesel purchased for export sale at SFF to the value of R80 million. Appropriate action will be taken to recover any losses and address areas where weakness in the system has been identified at SFF.
• Funding of abandonment provision: PetroSA has an obligation to fully fund the provision for rehabilitation of its operations valued at R10.7 billion. NEMA requires this rehabilitation liability to be fully funded within 12 months from year end.
• The National Treasury was not informed of the rotation transaction of 10 million barrels of strategic crude oil reserves as required in terms of section 54 (2)(d) of the PFMA.

CEF identified its strategic challenges as:
- Access to feedstock for the GTL Refinery
- Funding the rehabilitation provision
- As a result of volume drop and low oil prices cash balances at PetroSA are declining
- High turnover and vacancies in key positions
- Oil and Gas industry long lead times and operational risk
- Poor project execution
- Lapses in governance (currently under review).

PetroSA briefing
Mr Webster Fanadzo, CFO: Petro SA briefed the Committee on the PetroSA‘s financial report. The company had experienced a decrease in revenue due to a decrease in oil prices from $85 to $47. PetroSA had lower cash balances as compared to the previous year. Despite the diminished reserves outlook, PetroSA remained a going concern. As such it would continue to deliver on its mandate, as the national oil company, by operating as a commercial entity and creating value for the shareholder.

Srategic Fuel Fund (SFF) briefing
Mr Sivuyile Ngqongwa, CFO of SFF, reported on the findings of the Auditor-General. SFF had disposed major assets without informing National Treasury. In dealing with this a ministerial contract review was to be conducted and corrective action was to be implemented.

Mr Moagi reported on the CEFs renewable energy projects. The 100 MW Redstone Project (in which CEF is a 15% shareholder) was awaiting signing of the Power Purchase Agreement by Eskom in order to progress to a financial close. Ministerial approvals for the 150 MW Solis and 150MW KGS projects, which were submitted in Bid Window 4.5 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), had been received and were awaiting adjudication by the Department of Energy (DoE).

Discussion
Mr M Matlala (ANC) asked the DG and the Minister when they would address the board's permanent positions since all members of the board seemed to be interim. It was particularly important for the CFO to have a permanent position so that he could be held accountable. Other job vacancies in the companies needed to be filled.



He asked how many women and young people had been empowered by CEF. He asked if CEF had a strategic program to ensure that it retained its interns and did not lose them to the private sector. He asked what CEF was doing with the issue of race and ensuring that people who were historically disadvantaged were empowered.



Mr P Van Dalen (DA) stated that CEF as a parent company had the responsibility to put reins on its subsidiaries Petro SA and SFF. He asked if the failure to reach the 10.3 billion barrels was the biggest risk to the company .He asked if the 10.3 billion barrels of oil were still in the tanks or if they had disappeared and emphasised that he would continue asking this until answers were provided. He asked how many days of strategic stock was currently available and how CEF planned to increase this to the optimum 42 days. He asked for the current progress of the Chevron deal as information had been provided that this deal was in progress. He enquired what penalty Engen had paid for backing out of Project Irene when it was so close to the final closure of the deal as they had to be. He asked what Project Irene had cost from beginning to end. He asked how far the ministerial review was about the non-compliance and when the results from the review would be made available. He asked if he was right in saying that had CEF not made sales of the fuel stock they would not have made a profit. He referred to this as asset stripping, that is, selling assets to show a profit at year end and asked what they would sell next year just to maintain a profit.



He asked the presenters to not use jargon and put in perspective the various units of measurements that CEF and its subsidiaries had used in their presentation. He asked for specific explanation of the 7.8 million gigajoules and asked for it to be put in perspective. He commented that perhaps CEF was meant to not have 100% shareholding in some of its companies since its five associates with non controlling interests were bringing in 48% of its revenue. He suggested that since CEF did not have controlling share in these companies this could have been the reason the associate companies were perfuming better.

Mr R Mavhunda (ANC) welcomed the presentation and commented that it was not clear where the human capital element contributed as he believed that people and workers were assets in generating money, as he believed that people were vital in contributing to the financial well being. He stated that this was important as people were only included when things go wrong but nothing about them being assets.

He asked if a case study was available to measure the impact of the internships that were had. He questioned the practical impact of the internships and asked if the internships had any economic or household benefit.



Mr G Mackay (DA) commented that there was a lot of backslapping from a company that did not have any permanent staff and made no profit outside the stripping of assets and sale of strategic stocks. He stated that CEF was endowed with assets however it was failing to utilise them effectively to create profits. Any sizeable company with the assets of CEF should have been able to perform competitively in the energy sector. He pointed out the extremely high turnover of staff particularly within the executive which was an area of concern and needed to be addressed. It was an indication that CEF was a sinking ship and no one wanted to be associated with it. He stated that this was indicative of issues with governance.



He was deeply concerned that in the entire meeting no reference had been made to the turnaround strategy. No indication had been made of the plans that the CEF Group of companies had to ensure they become more profitable. He asked why the SA government was being a player in the oil and gas industry given that it was a high- risk industry that required strong balance sheets.

Mr Mackay said that the issue of governance needed to be escalated all the way to the Minister. He asked why CEF was not ensuring that that it reined in it subsidiaries and kept tight control over them. He stated that there was a need to deal harshly with CEF, PetroSA and SFF.

He expressed concern that the presentation was mainly financial and that stated that when entities presented reports that were highly numerical they were trying to hide things. He asked that the Committee be provided with a breakdown of the bonuses that the SFF board were paid. He stressed again that the turnaround strategy had not been provided in the report.



He asked who mandated the CEF to play a role in renewable energy and if this was in accordance with the CEF Act.



The Chairperson asked that Mr Mackay clarify why he thought that the South African government should not get involved in the oil and gas industry.



Ms T Mahambehlala (ANC) welcomed the CEF presentation and commended the CEF for a job well done as they had presented the presentation as per requirement of the Committee. She asked CEF to elaborate on the two crucial indicators that they had reported as not been met. He asked the team to elaborate why the strategic levels of stock had declined .She asked if the Group generated income made from the associates was in line with the rotation stocks.



She commented on the increase in tanks that had been reported by CEF and asked if the tanks had content or were empty as previously CEF had been accused of having several empty tanks. She asked for an understanding of how they had achieved. She applauded CEF on the improvement in their liquidity ratio stating that it was the responsibility of the Committee to applaud and encourage the entities when they did well. She commented that more attention was being placed on PetroSA yet SSF was stealing state assets in the form of the strategic stock. She asked why the turnaround plan had not been presented to the Committee. She then asked PetroSA specifically what they had achieved in their turnaround plan. She commented that there was need for transformation in CEF and its subsidiaries, as more women were needed to fill senior positions. She stressed that this was a vital issue that required immediate attention, as there were several competent women who could take on these roles. She asked if the draft review report would really be ready by the second week of December and requested that only achievable time frames be given for this.

She had a concern that in the conclusion of the report, CEF had reported that PetroSA was a going concern and it seemed that CEF was treating it as the only area of concern yet ignoring SFF that was stealing resources of the country in broad daylight and losing tax payers’ money.




Mr Moagi assured the Committee that DoE and the Office of the Minister were working to ensure that the members of the boards of CEF and its subsidiaries got permanent positions. This was a top priority agenda and progress was already being made. Gender balance was being addressed in the designation of seats on the board. CEF was working to ensure that it retained the skills of its interns. Through the internship program CEF had managed to develop four reservoir engineers which was one of the scarce skills in the country. They had lost some of them but continued to work to maintain skills.



On the review of contracts, SFF had appointed a UK based firm law firm Allen and Overy to lead the review. Quite a number of contacts were being reviewed .This firm was chosen as CEF needed to use a company that had never done work with any of its subsidiaries. The firm had expertise in dealing with oil and gas contracts and energy disputes .The company also had experience in dealing with disputes in other parts of the world and therefore would be ideal in dealing with the situation.



The review of contracts report would be available in mid December as these were the contract terms. It would however be an interim report with comprehensive terms of reference. It would check to see if contracts were possible and explore the risks and options. Control witnesses would be used to deal with irregularities and accountability as this is what the company was looking for. The organisation tried to steer clear in order to avoid being held guilty. The Auditor-General report consisted of findings from the AG which could not be altered. The review was to look at who could have been held accountable and was looking to discourage any further lapse and anything that could be used in defence and mitigation. He stated that the ownership of the stock title had been passed and the stock was owned by the state. It was not possible to pump out the stock owned by the state. SFF did not own that stock and had the right of first refusal to loan of the stock.

He replied that currently 90% of the energy supply was done by the private sector and this was an area of concern.CEF had the responsibility to fulfill its mandate and ensure that it supplied oil and gas for the country and in some cases the company also worked with multi nationals to ensure it met its mandate.

He replied that he did not have the numbers of the bonuses that the board received on top of his head and would ask the CFO to answer this if he had the numbers. He appealed to the Committee that he be permitted not get into detail about the stock contract amounts as the contract issues were being dealt with by the AG. All the stock contracts were being looked into to see if anyone was to be held accountable.



Mr Tseliso Maqubela, Interim Chairperson, SFF, replied that SFF continued to be a responsible citizen and could not apply for exemptions. They had however engaged other departments to discuss how there was no clarity on how to rehabilitate. Some of the pipes were legacy pipes and had been in the sea for over 20 years but had not caused any damage to the environment. However the SFF would comply with whatever recommendations would be given.



He replied that it had been made clear to the Minister and the DG that SFF was not participating in the Chevron deal. He replied that in terms of human capital there was need to ensure that the group did not lose valuable skills however they could not deter people from volunteering to take severance packages.

He replied that the turnaround plan had been submitted to the Department for review however the company would continue to work in order to increase efficiency.

He replied that currently 90% of the energy supply was done by the private sector and this was an area of concern. CEF had the responsibility to fulfill its mandate and ensure that it supplied oil and gas for the country and in some cases the company also worked with multi nationals to ensure it met its mandate. He replied that he did not have the numbers of the bonuses that the board received on top of his head and would ask the CFO to answer this if he had the numbers.



The Chairperson emphasised that the turnaround plans were vital and needed to be addressed on a different platform. He stated that the SFF was only scratching the surface in answering the question about the turnaround plan. This issue was vital in identifying the importance of the energy sector in South Africa and the role of the government in it. He could see responses but could not see the actual strategies that the companies had for the future whether it was five or ten year plans. He suggested that the different platform would exclude the public to ensure that the Committee received comprehensive reports from the companies without being restricted to what they could or could not say in public.



Ms Mahambehlala agreed with the Chairperson that a different platform was required to discuss the turnaround plan and added that more time was needed to address this. She insisted on receiving a response as to who had appointed the UK based firm Allen and Overy to do the review and why a South African firm had not been awarded the contract.



Mr Maqubela replied that Allen and Overy was a South African registered firm and was a leading firm in dealing with oil and gas cases. The company had been appointed by CEF and the proper procurement channels had been followed in appointing the firm.



The Chairperson requested that outstanding questions be answered and presented to the Committee in writing as time was running out.



The meeting was adjourned. 







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