PetroSA impairment & turnaround strategy, with Minister

Energy

14 March 2017
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The purpose of the meeting was to get closure on the enormous impairment suffered by PetroSA in the 2014/2015 financial year. The Committee requested information about what led to the loss, who was responsible for it and how those people were held accountable. The Chairperson emphasised the importance of establishing whether or not there is a still a future for PetroSA and emphasised the need for a comprehensive turnaround strategy.

PetroSA briefed the Committee on the R14.5 billion impairment suffered in 2014/15 due to the failed Project Ikhwezi and noted that an additional impairment of R1.1.billion was suffered in the 2016/17 financial year. PetroSA explained that there was no pre planned negligence involved and that they did everything they could to hold individuals accountable but that there was difficulty in finding charges that were watertight and would stick.

The Committee was not satisfied with the lack of accountability of those involved in Project Ikhwezi and were not impressed that bonuses were still paid out despite the staggering loss suffered by the company and the retrenchment of workers. PetroSA explained that the payment of bonuses was not performance related; that they were contractually bound to pay them and therefore had no other choice.

The Committee took further issue with the very brief and vague turnaround strategy presented by PetroSA. They described the presentation as more of a wish than a plan and demanded a more detailed and comprehensive strategy. It was agreed that both PetroSA and Central Energy Fund (CEF) would return and present proper turnaround strategies to the Committee at a later date.
 

Meeting report

Opening remarks
The Chairperson noted that the last time the Committee had met with PetroSA, there was some controversy about the report. He hoped the controversy had passed and that today they would get the full report they had initially expected. He explained that it was important for the report to be presented so that the loss suffered by the company could be addressed. The Committee wanted to know what happened leading up to the loss and what turnaround strategy the company had in place now. His main concern was establishing whether there is a future for the company and what the turnaround strategy is. He handed over to the Minister.

Minister of Energy, Ms Tina Joemat-Pettersson, said that she did not intend to make any long opening remarks because the presentation speaks for itself. She assured the Committee that she and the other delegates understood the need for and importance of transparency and accountability in this situation. She then handed over to the PetroSA delegation to present.

PetroSA briefing on the impairment
PetroSA interim board chairman of, Bhekabantu Ngubane, thanked the Committee for the opportunity to clarify the issues at hand. He explained that there would be three or four presenters and said that it was important to remember that the board members do not own PetroSA. They are essentially the custodians of the company, they cannot achieve the company’s goals alone and they need support. He explained that Project Ikhwezi involved mining for gas and that such exploration is very time consuming and expensive. He noted that overall 80% of the impairment charge at company level was due to lower than expected hydrocarbon reserves and 20% due to the weak crude oil price. Due to the loss, the board commissioned a forensic report and he handed over to Mr Tobias to explain the investigation.

PetroSA board member, Mr Cedric Tobias, said that at the time of the Board approval of the 2014/15 financial report, the Board instituted a forensic investigation into the financial performance of the company for that year. The findings of the investigation noted that problems and delays with equipment and extracting less gas than was anticipated, were key factors for the loss suffered. Regarding the project itself, it was found that there was inadequate project risk management, overruns and expenditures unapproved by the board and bad communication and a lack of transparency from management with the board. In light of the findings it was recommended that PetroSA take action against the Group Chief Executive Officer, Group Chief Financial Officer and the Vice President New Ventures. In consultation with their legal team the Board decided not to pursue any disciplinary action against the Vice President and settled with the other two executives.

Discussion
The Chairperson said that everyone was shocked by the large amount lost by the company and that such a large loss could not go unexplained or unpunished. The two main points conveyed by the presentation were that the gas anticipated was not found and that there was poor project management. He understood that the first point could not necessarily be punished but he was concerned about the second point. He wanted to know to what extent people were negligent in managing the project and asked the PetroSA board if they were satisfied that they had done everything in their power to hold those people accountable.

Mr Ngubane replied that there was no evidence of pre-planned negligence and that they are satisfied that they did everything they could in the circumstances to hold people accountable, noting that it became clear the charges would not stick.

Mr J Esterhuizen (IFP) said that PetroSA only got 10% of the gas they estimated and pointed out that if the company was doing such expensive exploration surely there should have been better planning and risk management before they even started the actual drilling. The company could not merely act on someone thinking there might be gas somewhere. PetroSA was an excellent example of everything that is wrong with South Africa’s economy, especially the lack of accountability and transparency. Billions of rands were lost and employees were retrenched but those responsible for the loss were awarded bonuses of up to R2.4 million for their incompetency. It was absolutely ridiculous and the Committee cannot allow bad decisions to be rewarded with bonuses especially when it negatively affects employees who then had to be retrenched.

Mr G Mackay (DA) said that in terms of accountability the report boiled down to two people getting golden handshakes, one being demoted and a flippant admission that the project management was not great. It was ridiculous and he asked why the legal team was not present to explain their legal basis for saying charges against the executives would not stick. He found it hard to believe that our law would allow such action to go unpunished. On the claim that the board was misled by the executives, he noted that the board members are meant to be experts of the industry and that they had an oversight role so they did not do their jobs. Money cannot continue to be wasted on PetroSA when there are many other needs for that money. He claimed that the report presented was watered down and that he wanted the real facts because this report was insufficient. He asked if the board members were properly qualified for the type of exploration undertaken. If they were not, it was an improper constitution and appointment of the board. He also asked whether Block 9 had been sold.

Ms T Mahambehlala (ANC) noted that it was difficult to get closure and answers they needed because the board appearing before them were not those who made the errors. She asked about the involvement of the Strategic Fuel Fund and wanted to understand why no charges were brought against those executives responsible for this loss. She asked where the Companies Act prohibited such charges and whether the impairment still stood at 14.5 billion.

Mr M Matlala (ANC) called for the entire board to be fired and said that those responsible for the loss must be criminally charged and put in jail. The money paid to them must be recovered.

Mr Esterhuizen reiterated that the fact that those executives were suspended with pay and then given bonuses and golden handshakes is unacceptable.

Ms Z Faku (ANC) said she was surprised and disappointed with the briefing. She noted that people and the Committee expected serious consequences for those responsible for the loss of billions but that is not what has happened. She asked what the turnaround strategy was and what it would cost.

The Chairperson noted that the critical question is whether or not there is a future for PetroSA. He wanted to move on to discussing the turnaround strategy.

Mr Ngubane said that he wanted to clarify a few things. He said that it would be unfair to fire the current board for the impairment or the payment of bonuses because they were not to blame for those things. The bonus contracts were signed before the current board was in place and they were forced to honour those contracts and pay the bonuses. The board sought two legal opinions to try and get out of paying the bonuses but they were told that they could not refuse to pay. He noted that the current board members were not there when the project was started. The Committee could call for them to be fired anyway but they were not guilty of anything. He said that Block 9 was not up for sale, they were merely looking for partners to help with exploration.

PetroSA board member, Mr William Steenkamp, pointed out that PetroSA did not embark on a retrenchment campaign. The Board initiated a plan to save a billion rand to curtail the losses and part of that initiative was to move PetroSA away from non-core aspects of the business and to focus on its core business. He pointed out that the shareholder was informed at all times.

Ms Faku asked if the retrenchment would definitely continue.

Mr Steenkamp replied that it would and that it would be discussed in the turnaround strategy presentation.

Minister Joemat-Pettersson explained that CEF, which is the holding company of PetroSA, has five subsidiaries but that it does not have the same power over its subsidiaries as a normal commercial company. She pointed out that the governance disjuncture needs to be addressed. The shareholder company has a different board and the two boards act along different pathways which leads to certain incongruities. She noted that PetroSA is a subsidiary but functions as an independent company.

PetroSA Acting CFO, Webster Fanadzo, explained that there is an additional impairment of 1.1.billion that was added to the initial impairment of 14.5 billion.

The Chairperson asked if CEF was aware of PetroSA's turnaround strategy and if it is anyway linked to the restructuring CEF intends to undertake.

Mr Mackay said that the turnaround presentation document was sent to the Committee members at 10pm the night before which was very short notice and the document is incredibly short and vague. It was not something to be rushed through and he proposed dealing with it in another meeting where PetroSA should present a more detailed plan.

Ms Mahambehlala said that she thought the Committee should hear the presentation and that it was very short so it would not take too much time.

The Chairperson said that he wanted to leave the meeting with some sense of PetroSA's turnaround strategy. He knew it could not be handled entirely in this meeting but that they could be called again to present a more comprehensive plan.

PetroSA strategic turnaround
The Strategic Turnaround Plan for 2017-2020 entailed the following steps:
• Appointment of permanent CEO and Executive Leadership Team to drive the Turnaround
• Adopting a new business model and restructuring, leveraging Gas To Liquid (GTL) refinery asset to pncrease liquid processing, develop trading and marketing business unit and focus on strategic partnerships
• Driving efficiency, reducing fixed and variable costs, aligning with the industry benchmark.
• Focusing on core business and exiting non-core business
• Implementing downstream acquisition to diversify income
• Ensuring Long Term Sustainability by securing feedstock for Mossel Refinery (Gas / Liquid)
• Implementing strategic partnership strategy to sustain and grow PetroSA
• Improving operational excellence through focused Changed Management and improve Safety Record.

Highlighting the Turnaround change journey thus far, PetroSA has made significant progress in converting GTL Refinery for liquid feedstock, there has been a revision of the business processes and non-core business has been identified. The desired end state was described as moving towards full utilization of the existing GTL Refinery design capacity and exploring opportunities for expansion; a standalone upstream business to supply gas and oil markets; significant footprint in marketing and distribution; position as State partner of choice in oil and gas; and a sound financial position.

Discussion
The Chairperson thanked PetroSA for the presentation but noted that the Committee is not interested in the bare survival of the company; it must make a profit and be sustainable. The Committee needed more information and detail, where the money would come from, which partners you need and so on. He asked PetroSA and CEF to return at a later date to present more comprehensive plans. The Committee wanted PetroSA to be a success but needed more information. They needed a plan not a wish.

Ms Mahambehlala agreed with the Chair, reiterating that the Committee did not want a wish but a plan and that the presentations should be very clear and detailed at the next meeting.

Mr Mackay said that when PetroSA returns to present again they need to substantiate their points with actual data. He was completely unsatisfied with the current turnaround strategy presentation calling it vague and unsubstantiated.

The Chairperson said that a new date would be agreed on and adjourned the meeting.

 

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