2017/18 Annual Report
CEF Group financial sustainability has declined in recent years. The CEF Group is faced with strategic sustainability challenges due to the operational performance of the biggest subsidiary, PetroSA. PetroSA was running out of cheap indigenous feedstock and was in a precarious financial situation. PetroSA continued to lose its market share. Investment in renewable energy had been delayed. A weak project pipeline and ineffective project execution hampered the growth of the Group. New capital projects would require significant financial investments and had long lead times. The gas condensate find by Total in SA would assist the country, but the first gas / oil yield was seven to 10 years away. The CEF group lodged an application in the Western Cape High Court to set aside the disposal of strategic crude oil stock by the subsidiary Strategic Fuel Fund (SFF), on the grounds that the disposal was unlawful, invalid and unconstitutional. The Group’s gross profit margin increased from 5% to 10%, due to an improved gross profit margin for PetroSA Ghana and the GTL refinery.
In discussion, CEF had to face up to forthright criticism from the Chairperson about the lack of improvement in operational and business performance, and the lack of restructuring over the past year. The DoE Director General was asked to convey a call to the Minister for exploring possibilities of restructuring the CEF board. The Chairperson told the CEF in no uncertain terms that it was in a crisis comparable to the one Eskom was in, and that it did not realise the urgency of the need for improvement. Members were mostly concerned with PetroSA losses and the impact that Total gas condensate finds would have on it, and the investigation and pending court action about the SFF disposal of crude oil. There was concern about PetroSA’s ability to deal with its onshore and offshore obligations, the funding of rehabilitation, and gas shortages. Lack of leadership stability in the CEF Group was commented, on as well as financial sustainability. There were remarks and questions about proceeds from the disposal of crude oil by SFF; the solar water heater programme, and the CEF Vision 2040+.
The Chairperson noted apologies from the Minister of Energy. The Minister had undertaken to be present, but he had to attend the reburial of Ben Langa, brother of the former Chief Justice, as he had been one of the last people who had been with the deceased.
Central Energy Fund on its performance and that of its subsidiaries for 2017/18
Mr Sakhiwo Makhanya, acting Group CEO, and Mr Lufuno Makhuba, Group CFO, presented. The CEF Group financial sustainability has declined in recent years. The CEF Group financial sustainability has declined in recent years. The CEF Group is faced with strategic sustainability challenges due to the operational performance of the biggest subsidiary, PetroSA. PetroSA was running out of cheap indigenous feedstock and was in a precarious financial situation. PetroSA continued to lose its market share. Investment in renewable energy had been delayed. A weak project pipeline and ineffective project execution hampered the growth of the Group. New capital projects would require significant financial investments and had long lead times. The gas condensate find by Total in SA would assist the country, but the first gas / oil yield was seven to 10 years away. The CEF group lodged an application in the Western Cape High Court to set aside the disposal of strategic crude oil stock by the subsidiary Strategic Fuel Fund (SFF), on the grounds that the disposal was unlawful, invalid and unconstitutional. The Group’s gross profit margin increased from 5% to 10%, due to an improved gross profit margin for PetroSA Ghana and the GTL refinery.
Mr K Mileham (DA) noted a discrepancy in that the Annual Report stated there was a shareholder compact between the CEO and the Minister, but the Auditor-General was saying that it was not concluded. PetroSA comprised a huge portion of 70%. His concern was that it had run at a loss for the preceding two years. The loss was redeemed by positive taxation figures. It stated on slide 23 that profit was due to a decrease in deferred tax liability. He asked for that to be unpacked. The SFF had made a controversial sale that was currently before the court. He asked about timeframes of the court process, and whether investigation reports could be tabled before the Committee. It mentioned on slide 26 that proceeds from the sale was R3.38 billion, and on slide 35 that it was R3.7 billion. $218 million was paid into the SFF account, at the prevailing exchange rate at the time – that would translate to R4.3 billion. It did not add up correctly. Where did the money go, how much was paid and how was the money held? Was it reflected in Rand or Dollar terms? It was supposed to be held in a ring-fenced account. If it was held in Rand, the value of the Rand to the Dollar fluctuated. Enhanced condensate processing at PetroSA was supposed to be completed in July 2017. Was a feasibility study completed? He asked about PetroSA rehabilitation of offshore and onshore obligations. It was valued at R8.1 billion, and only R2.5 billion was set aside for it. There was a shortfall of R5.7 in funding and the entity was running at a loss. How would the rehabilitation be funded? How would the Total gas find at the coast impact on PetroSA in terms of revenue and the business model? It was alleged that there was disagreement among the board structure at PetroSA, and that some members had written to the Minister. Stability was a challenge to CEF, and also PetroSA. What was being done to stabilise the board? There were management challenges in PetroSA and CEF, with acting CEOs in both. The Minister had to account for the fact that there were no permanent appointments. The level of assurance was referred to in slide 9. There could be no assurance without stability and an effective leadership culture. He suggested that there were too many delegates in the room. Why were there delegates that represented health and safety? To bring 22 people to a meeting in which only a handful of people would take part in discussion, was extravagant.
Ms M Mabebehlala (ANC) asked what informed Vision 2040+ and what it was derived from. It seemed contradictory to standards set by the country through the NDP. It was projected that PetroSA would run out of gas by 2020. That projection was not addressed by Vision 2040+. The impairment of PetroSA had been on the table ever since she arrived in Parliament in 2014. It seemed to have become a permanent fixture. What was to be done about it? The Auditor-General stated that the SFF shareholder compact was not carried out in consultation with the Minister. That was inconsistent with the laws of the country. How did PetroSA intend to raise funds to deal with the R9.6 billion rehabilitation liability? The turnaround strategy did not speak to restructuring. It had to be decided whether gas was to be part of the energy mix in SA or not, as the PetroSA gas reserves were declining. How far were investigations into the matter of SFF stock rotation? The problem seemed to have been there forever.
Mr Matlala remarked that Ms Mabebehlala anticipated his questions. There were questions that Mr Esterhuizen had been asking since 2014, some of which were also asked by Mr Mileham. He referred to those in acting positions as “Hollywood actors”. The DoE was not taking the matter seriously enough. Those in acting positions were not sure where their next meal was going to come from, and they lived under constant fear of being replaced. Could PetroSA challenges be dealt with in a programme of only seven months? He would have thought that three years would be needed. What was the relation with agencies that supplied Eskom with coal? He referred to the strategy review. What did the strategy entail? There was post-commencement funding to the tune of R1 billion. It seemed that it was simply awarded. It had to be unpacked.
Mr R Mavunda (ANC) remarked that the presentation was too long, and he got lost. The Committee had asked before about irregular expenditure on storage in the solar water heater programme. The presentation referred to distribution of blankets, building of houses and assisting the needy with clothing articles. What were the criteria used to identify beneficiaries? It stated on slide 33 that irregular expenditure of R17 million was an improvement. He felt it was nothing to be proud of. Slide 31 referred to a 40% risk rate. Financial sustainability had to be elaborated upon. The same issues were brought to the table each year, without adequate explanation. It stated that gas was discovered in SADC but that is a region. In which part of the region was it discovered? He agreed with Ms Mahambehlala that it had to be asked what the role of gas was supposed to be. Would the discovery of gas in SADC assist SA to deal with the gas shortage?
The Chairperson remarked that he had wanted to speak to the Minister, but would later on make a suggestion that the DoE Director General had to convey to the Minister. Slide 39 referred to the internal context. Financial sustainability had declined in recent years. The biggest entity, PetroSA, was running out of cheap indigenous feedstock and was in a financial precarious situation, and continued to lose its market share. There was no investment in renewable energy, and ineffective project execution. What informed the claim that it was a good story? Net profit was small. Ms Mahambehlala had asked about CEF restructuring. The report was silent on that. What was happening with the hiving off of the Petroleum Agency SA (PASA) and African Exploration Mining Finance (AE)?
He turned to financial performance. There was R17 billion in revenue, a net profit of R354 million, and a net loss of R61 million. It looked good at face value, but the question was where the money was coming from. It had to be shown if it came from improved operational performance. If it was due to improvement of the GTL refinery, figures had to be shown. Breakdown of loss in the past, and improvement in the current year, had to be provided. It was not as a result of improved business performance. There was reference to economic performance and technical recession. It might be the other way round, with technical recession and low performance causing bad economic performance. The CEF had too much on its plate to tell the Committee about blankets distributed. It was failing where it mattered most. Increased profit margins due to PetroSA Ghana and the GTL refinery had to be elaborated upon. What were the production assets acquired? He asked about deployment of staff to Sasol. He would assume that it was IGas. The working relation with Sasol had to be explained. Recommendations of the forensic report were said to be implemented. Which one? He asked when the seven month PetroSA programme would commence and end. Why could Total find gas and oil when PetroSA could not? Where was the national oil company? It seemed that CEF did not understand the urgency of the situation. It was granted time since the previous year for restructuring, but it seemed that CEF was marking time. Something urgent had to be done. CEF was not like Eskom, where challenges became evident through load-shedding. CEF was marking time. It was state-owned, and was under obligation to be frank with Parliament about challenges, so that it could be assisted.
Mr Thabani Zulu, Department of Energy Director General, responded that because the finalisation of group strategy was not concluded, vacancies were affected, and it impacted on all the entities. Finalisation of group strategy would deal with all issues. The finalisation was taking too long.
Mr Tseliso Maqubela, DDG: Petroleum and Petroleum Products Regulation in the DoE, and CEF board member, replied that leadership stability was important. The group operated in the context of a changing executive authority. It impacted on consequence management and conclusion of processes. The SFF crude oil disposal investigations were being managed well. There would be consequences. Law enforcement agencies were assisting, and the investigation had passed to them. The court process had to be given time. Strategic errors were made with decisions about drilling for gas and oil. There were processes in place; no-one in PetroSA could determine a trajectory for all. Drilling exercises were expensive and risky. The planned reorganisation of the state could impact on the hiving off of AE and PASA. The fact that there were four executive authorities involved, contributed to the fact that the shareholder compact was not approved by the Minister. Executive authorities had to be briefed. The Accounting Officer was seconded out of the organisation at the time. The SFF oil disposal matter was close to an end. The last thing needed was for someone to get off on technicalities.
The Chairperson remarked that the nation had to be addressed about the fact that gas drilling was risky. Examples had to be shown that other companies had taken longer. PetroSA had to be convincing about the fact that it did its best, but the nature of exploration was risky.
Mr Makhanya responded about the group strategy review. Phase 1 comprised of Group analysis in terms of finance, business and risk, where the Group was to play, and core capabilities needed. The Committee had asked how the CEF as the centre, could be strengthened. The project pipeline was weak, and business development was needed. For SFF, benchmarking was done by looking at storage entities on the continent. Developments in the renewable energy space were looked at, and a high level group operative model was developed. Phase 2 was devoted to operationalise phase 1 objectives. The focus was on configuration. Some entities had different job grading systems.
On the NDP, he answered that the NDP went up to 2030 and that it was incorporated into the 2040+ Vision. Good progress was being made with the solar water heater programme. Service providers would be appointed by the end of the month. A technical team would determine where installment could take place.
Mr Abdul Haffajee, CEF Company Secretary, affirmed that finalisation of the shareholder compact was impacted upon by the number of executive authorities. There was communication with the Department to finalise matters. The finalisation of group strategy also impacted. Leadership was unstable in the group.
Mr Makhuba replied about the decrease in deferred tax liability. In a normal situation tax is reckoned as an expense. In the case of CEF an impairment was done with PetroSA, which meant that the deferred tax was reckoned as an asset. Tax paid and tax deferred were presented as a single figure, although the figures differed on the income statement and the cash flow statement.
On the profit from the sale of strategic stock, he replied that 218 million US Dollars were received, and kept in a ring-fenced account as Dollars. At year end it converted to R3.38 billion, because the 1.2 million barrels of unpumpable oil could not be reckoned as revenue, as the product could not be delivered. There were large figures in the SFF financial statements that dealt with foreign exchange gains and losses. R725 million dealt with the unpumpable oil. Some of it sat in revenue and some in liabilities.
The Chairperson noted that crude oil was at the time sold as if pumpable, but currently it was said that it was unpumpable. 10.3 million barrels were sold. 1.2 million barrels of unpumpable oil were sold as pumpable. Surely when SFF wanted its money back it had to recognise that a certain portion was unpumpable. It would be untrue to say that SFF did not know that at the time.
Mr Maqubela replied that it was the result of people acting illegally and in haste.
The Chairperson asked if people were aware of what was being done.
Mr Neville Mompati, SFF Board Chairperson, replied that SFF acted in haste and oversold. It sold what it could not deliver. The 10.3 million did not allow for the fact that whatever was in the pipeline had to be maintained so that the oil could be pumpable. There were 1.2 million barrels in the vacuum between the tanks and the pipeline, which could not be pumped out, but it was sold. It formed part of the investigation.
Mr Makhuba replied that funding for rehabilitation would be deferred until 2024. Different methodologies could be used to calculate the figures. The UK methodology would yield a different figure to another. SA did not have a methodology to do decommissioning. Numbers fluctuated. In the past the figure had been close to R10 billion, and currently it was R8.8 billion. He referred to slide 20, noting that the Gross Profit margin had improved. There had been a 5% profit margin in the past, and currently it was 10%. The oil price moved in CEF’s favour. PetroSA sales in 2017 and 2018 were the same. SFF performance did not improve. 93% of tanks were rented out in 2017, and 71% in 2018. PetroSA had costs related to overheads.
Mr Mompati replied about forensic reports, that the SFF and the CEF were instructed to conduct a forensic audit. However, the two boards sitting jointly referred the report back, as it rejected the reason given for not interviewing three central individuals. The reason cited was that they could not be found, whereas everybody knew where they were. Currently the report was 90% completed. Law enforcement agencies were hard at work, and some of the board members had delivered affidavits. He himself was supposed to have been interviewed by law enforcement agencies the day before, but it was deferred until 15 March. The shareholder was not yet favoured with the report. Although there were some delays with the court case process, it would go to court soon. The criminal aspect would be before the court. It would not be for purposes of settlement.
The Chairperson asked if it was true that drilling for gas was abandoned and given to others.
Ms Lindiwe Mokwe, Acting CEO, Petroleum Agency of SA, replied that there was the risk of not finding gas through drilling, which resulted in loss of revenue. Total committed was 400 million US Dollars. If there had not been a find, Total would have been in the same position as PASA.
The Chairperson remarked that such facts had to be in the public domain. It had to be explained that not only PetroSA lost, but that it happened to other companies too. There had to be sufficient information available. The public had to know that it was not just a function of error, but also due to the risky nature of exploration. It had to be possible to distinguish between objective difficulties and subjective error. Answers to remaining questions could be forwarded in writing to the Committee. He asked the DoE Director General to convey to the Minister that a case could be made for a chief restructuring officer. If the CEF Board continued in its current form, the Sixth Parliament would have to look at the same challenges that the Fifth Parliament was faced with. The Minister had to be asked what was possible in terms of the mandate, to restructure the CEF Board. The CEF was a holding company only in name. CEF was in an emergency situation comparable to that of Eskom. It would not work to do the same things and expect different results.
Mr Mileham proposed that the entities be met with separately and individually in future.
The Chairperson replied that he accepted that. The CEF had to submit in writing about the unanswered questions. He asked the DoE Director General if he had any comments.
Mr Zulu thanked the Committee for its leadership and guidance. Outstanding issues would be attended to.
The Chairperson adjourned the meeting.