UCT Department of Commerce on Regulatory Issues in Gas Bill; Central Energy Fund: briefing

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Mineral Resources and Energy

30 May 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

30 May 2001

Mr D Nkosi

Relevant Documents:
Regulatory Design Issues: Gas Regulation Bill (See Appendix 1)
Report to the Portfolio Committee on Minerals and Energy: Central Energy Fund
Group (See Appendix 2)
Gas Bill [B 18-2001]

The Gas Bill [B 18-2001] has recently been tabled before the National Assembly. The bill deals with attempts to create regulation for the budding South African piped gas industry.

The University of Cape Town's Economics Department, discussed regulatory issues within the Gas Bill and attempted to establish a procedure for creating a National Gas Regulator to assist in the oversight process. Members of the Committee expressed concern over the possible problems that could arise in having one centralized regulatory power.

The Central Energy Fund highlighted its progress as it entered a transformation period aimed at fulfilling the objectives set out by the White Paper on Energy from 1998. It gave a general report on all of its subsidiary projects and ventures.

Chairperson D Nkosi (ANC) opened the meeting by introducing Professor James Hodge from UCT, a Public Utilities Regulation Specialist from their School of Commerce. His past focus had been in telecommunications.

Regulation Designs within the Gas Bill
Mr Hodge spoke on issues pertaining to the regulation of the gas industry as per the guidelines of the Gas Bill. There had to be a delicate balance of the consumer protection with the corporation protection, while keeping the interests of the state in mind as well.

He commented on the structure of the gas industry in South Africa. Gas is a clean energy source for energy generation and could end up rivaling electricity in customers. Like electricity, the transmission and distribution networks in the gas industry are a natural corporate monopoly and will remain so for many years to come. Therefore, there must be regulation so that competition can be created for fair business practices.

There are truly only four domestic gas industries today: Sasol, Petronet, eGoli Gas and Easigas. However, many more opportunities exist between Mozambique and Gauteng, as well as between Namibia and Western Cape.

He foretold the grim result of what could happen when non-regulation of energy industries runs rampant. Such was the case during the recent electricity crisis in California, United States. He hopes that South Africa will eventually no longer need a regulatory body, but will instead work toward creating a Competition Commission that only listens to corporate complaints and plays less of a role in actual regulation.

He broke up the implementation of regulations standards into three phases. The first includes managing the monopoly by controlling market contracts and prices and by allowing third party access to markets. The second is the injection of a company into the market network Finally, the Regulator must be focused on exiting from economic regulation so that the Competition Commission can gain oversight ability.

The best way to structure the leadership of the regulator would be to have one independent, sole Regulator that covered both the gas and electricity industries. The Regulator must be well resourced in order to provide a decent service to both the consumer and the company. Also, the Regulator must have the ability to make rapid decisions so that issues do not get tied up in red tape or in legal battles. He gave an example of ICASA, which is very under-resourced and slow to complete matters.

In the example of California, there was a shortage of capacity on behalf of the industry to generate electricity, mainly because it had been unchecked for recent years. The World Bank recommended that California find one regulator to take over the oversight process.

If the regulating agency adheres to its standards, it will not have to play such a major role in the gas market as regular competition will take over. This seems to be the international trend concerning energy industries.

Hodge concluded by noting some possible issues that may arise with having one sole Regulator. Particularly, that the scope of the Minister already seems overbroad (sections 20 and 34 of the Bill). Also, there must be adequate funding supplied to the Regulator. Finally, Hodge questioned whether the Mozambique Pipeline Agreement would be in accordance with the regulatory principles of the Bill (section 21).

Mr E Lucas (IFP) commented that "he who pays the piper plays the tune." He asked how it would be possible for the funder (the government) not to have an unfair advantage in the industry.

Hodge replied that the alternative would be to have an under-funded gas industry that would succumb to the pressure of the more powerful electricity industry.

Mr I Davidson (DP) was concerned with the possibility that the Regulator may manipulate the industry and actually stifle competition between the gas and electricity industries.

Hodge answered that the Regulator would be encouraged to favour the more fledgling gas industry at this point until natural competition forces took over. They must have the initial advantage in order to be on the same playing field.

Mr S Louw (ANC) asked if poaching of funds by corrupt officials would be a problematic area under the one-regulator scheme. Such actions could paralyze the industry and put the consumer in jeopardy.

Hodge answered that funding accountability would be a crucial issue to examine no matter which method of regulation they chose.

Prof I Mohamed (ANC) asked if there would be a conflict of interest as the government would be controlling a private industry that included the government as a player. He gave the example of the nuclear industry where the government also has a hand in private industry. He also wanted to know if licenses such as the one proposed in Section 34 of the Bill are necessary to be included in legislation or if they only make it more complex than necessary.

Hodge replied that all the stipulations needed to be set early so that the playing field could be designed as quickly as possible. Without the stipulations, there would be overall chaos within the competitive industry.

Ms D Motubatse (ANC) asked if the industry should be built up first before being regulated so strictly.

Hodge noted that the Regulator would not be developing the industry on his/her own but would be developing alongside the industry's progress. The role of the Regulator would be fleshed out as the industry became more prominent.

Davidson asked if the rates of return on the gas industry made it necessary to have a Regulator.

Hodge replied that it was not appropriate to approach the regulation issue by examining rates of return. He specified that making the decision would take many difficult judgment calls from the members of the portfolio committee.

As Hodge concluded his remarks, Chairperson Nkosi thanked him and noted that this would only be an opening to much more extensive discussion on the issue of appointing a regulator or regulators.

Central Energy Fund Group (CEF)
Dr Renosi Mokate of CEF stated that it has been undergoing a significant transformation in order to fulfill the objectives set forth in the White Paper on Energy (1998). The Paper ordered CEF to separate their commercial components from their strategic ones and return portions of their commercial components back to the private sector.

Also, CEF was charged by Minister of Minerals and Energy, Ms P Ngcuka, to increase its role as a state agent in promoting sustainable energy utilisation by working towards universal access to energy. This major goal could be accomplished by diversifying energy resources, developing the South African gas market and increasing the usage of renewable energy forms in rural areas.

One major result of the many changes incorporated by CEF in the past fiscal year was the start of a major merger between Mossgas and Soekor, two significant companies within the energy industry market. They are now being managed by one board and are independent from relying on CEF financial support.

Also, CEF has established two new companies in the energy market, Enerkom Products and i-Gas. Enerkom will manufacture and market Oxicoal Products, which are medicinal and nutritional supplements like Oxihumate-K, an immunomodulatory anti-inflammitant that has had positive effects on HIV infected patients. i-Gas will promote the introduction and usage of natural gas in South Africa through its involvement in the gas pipeline development project between Mozambique and South Africa.

CEF has also started the Strategic Fuel Fund (SFF) to increase the sale of strategic crude oil stocks held at various South African companies such as Ogies and Saldanha. SFF also engages in the marketing of excess storage facilities and trades them to companies like Soekor and Energy Africa.

Mossgas, one of CEF's larger subsidiaries, has produced a record quantity of natural gas during the 2000 fiscal year. The company produced 110% of its initial expected capacity and has improved its efficiency over the past three years. Mossgas has also successfully created export niches for its environmentally friendly liquid fuels. Export revenues have increased by almost 90% over the past five years and have contributed steadily to the balance of payments.

Mossgas is looking at expanding and enhancing its product scope. With increasing costs of oil worldwide, gas-to-liquid ventures like Mossgas will have more opportunities to participate in technology development and international marketing.

Mossgas has also complied with the set Human Resources guidelines like the Employment Equity Act and the Skills Development Act. It has retained an excellent safety record.

Soeker, like Mossgas has also seen increasingly strong performance over the past fiscal year, mainly due to increased oil prices and the better than expected performance of two of its main oilfields.

Soekor has set up international trade agreements with the Akori block in Gabon as well as exploration agreements with Libya. Such international ventures will greatly diversify Soekor's portfolio. Soekor will also continue its exploration and appraisal of boreholes in Block 9, an area just offshore from Mossel Bay.

Soekor also has complied with all Labour Department regulations and will be fully implementing the Skills Development and Employment Equity Plans in the coming year.

Petroleum Agency of South Africa (PASA)
PASA is in charge of promoting and regulating upstream oil and gas industries and has also enjoyed a successful fiscal year. It has continued exploration of blocks 11B/12B in the deep water of the South Coast and has written agreements with both Global Energy and Sasol over blocks 3B/4B and 3A/4A in the deep water of the West Coast.

They have already discovered two successful wells and are continuing their appraisals into this year. Block 9 has been particularly fruitful for discovering new natural gas sources.

PASA has also complied with all Labour Department regulations and has continued their programme of funding students and special projects connected to the natural fuels industry. They will also continue to support government objectives in regards to the Minerals Development Bill and will offer assistance with its oil and gas exploration goals.

Ms D Motubatse (ANC) requested information on CEF's other internal groups in regards to their governance and transition progress. How was the new Financial Management Act affecting CEF?

Mokate replied that the merger of Mossgas and Soeker was completely in line with all stipulations and was creating a brand new company. CEF had several internal checks and balances to ensure that all components of regulatory legislation were met. Human resources development across the board was particularly consistent in its compliance with the Skills Development and Employment Equity Acts.

Mr I Davidson (DP) asked how the Trifigura Scandal has affected CEF taking into account that there were members of the Department of Minerals and Energy involved.

Mokate replied that the Strategic Fuel Fund's board had been involved in criminal activities. The court case was currently being challenged in arbitration.

Davidson also asked what the current stockpile level of South Africa was in regards to crude oil.

Mokate informed him that it was at 1 million barrels, well below the necessary requirements.

Davidson also asked Mokate if CEF was still actively involved in Black Empowerment programmes and she assured him that they still were quite dedicated to this goal.

The CEO of Mossgas then spoke briefly on some of their specific projects. He noted that they have poured over R250 million into offshore exploration. Blocks 1 through 3 have already produced excellent sources of oil. Blocks 4 through 6 were currently in deliberation stages. This exploration had furthered South Africa's fuels frontier and had bettered technology and information over South Africa's natural fuel potential.

The Chairperson concluded the meeting by noting that much further discussion and updating would come on CEF's status and future outlook. He also reminded the committee members of an upcoming trip to Mozambique to study the proposed fuel line. He requested feedback from the MPs on whether or not they would be able to join the trip.

The meeting was then adjourned.

Appendix 1
Regulatory Design Issues
Gas Regulation Bill


Gas Bill

  • aim to develop the gas market in SA
  • facilitate investment by firms (including historically disadvantaged South Africans)
  • protect consumers (mainly by developing a competitive market)
  • protecting the environment and safety of operations
  • establishes a regulator to fulfil these objectives


The structure of the gas industry

  • Gas is a clean energy source for electricity generation and for final users
  • Gas is a network industry like electricity
  • the transmission network is a natural monopoly (i.e. one firm supplying is economically optimal).
  • Competition is possible but only in extraction and supply.
  • Investments are long-term, sunk and depend on each other (i.e. will only extract gas if a transmission pipeline is available at reasonable cost)
  • Promoting investment requires providing certainty - market conditions, regulatory behaviour
  • SA Gas industry currently limited to Sasol, Petronet, eGoli Gas and Easigas. Major opportunities exist in Mozambique-Gauteng and Namibia-W.Cape


What does regulation of the gas industry involve?

  • Technical regulation
  • setting standards to ensure safety, computability, reliability of transmission and storage
  • standards to ensure environmental protection
  • ensuring rights of way for transmission network
  • Economic regulation
  • Granting and policing licences
  • Controlling price of monopoly components (transmission network) or components where there is significant market power
  • Ensuring non-discriminatory access to essential facilities (transmission network)
  • Developing competition
  • Preventing anticompetitive agreements amongst firms
  • Preventing anticompetitive mergers
  • Influencing the structure of the market to limit market power and so end economic regulation




Phases of regulation

  • Managing monopoly
  • negotiating exclusive pipeline provision by area to get industry moving
  • technical regulation
  • Managing contracts and prices of monopoly players
  • Managing third party access to distribution networks
  • Injecting competition
  • Encouraging entry by new firms in supply, storage
  • Exiting from economic regulation
  • Exiting from competitive components to give to Competition Commission

Institutional Design Issues

Desirable Features of a Regulator

  • Independence
  • Independent means impartial when making decision that has scope to make - not captured by firms, politicians or consumers
  • Not democratically elected so not in position to make policy - this is role of Ministry and sub-committee
  • Independence comes from financial independence - difficult with gas alone as no significant industry to levy
  • Independence important to give consumers protection from powerful firms, investors protection from political interference
  • Well resourced
  • quality of market outcome depends on quality of regulator - capture by paralysis (e.g. ICASA)
  • require skilled people with good salaries to prevent personnel loss
  • require resources for independent research for decision-making
  • Rapid decision processing
  • Rapid decision process is important to create certainty and facilitate investment
  • Delays can be caused by appealing regulator decisions in courts - technical nature of regulation mean judges may not grasp issues or take time to understand them
  • Legal tactics can paralyse regulator (e.g. ICASA)
  • Can avoid this by having a specialist appeal court (e.g. Competition Tribunal)


Division of Powers

  • Players: Ministry, Regulator, Competition Commission (Sect 21 (h) forces them to negotiate memorandum of understanding with regulators on areas of joint interest)
  • Some general principles:
  • Is decision based on technical or political criteria
  • Does the co-location of functions create conflicts of interest or economies of scale
  • Where does expertise lie
  • What is the investor/consumer confidence in the agency
  • Usual practice would dictate the following:
  • Ministry
  • Broad policy incl. public investments
  • Ability to decide on technical and procedural issues lowers regulator independence and exposes investors to political risk - also risk of capture indirectly by powerful firms
  • Regulator
  • Technical regulation a core competence that is not shared
  • Economic regulation - managing prices of monopoly not shared, rest can be shared with Commission
  • Competition Commission
  • Concurrent or sole jurisdiction on mergers, abuse of dominance and anticompetitive agreements
  • Useful to provide input on regulation design that impacts market structure and deciding when to exit regulation


One Energy Regulator or not?

  • Potential advantages of a single energy regulator
  • economies of scale and efficient resource use
    • electricity and gas face similar technical and economic regulation issues allowing lower total cost of regulation
    • one agency allows shared resources and shared learning
    • major regulatory effort for electricity is now, for gas in the future
  • improved coordination on energy issues
    • one agency improves information flows and coordination on energy issues
    • coordination necessary as industries are converging - increasingly compete with each other, plus gas an input into electricity generation
    • World Bank assessment of California crisis - one agency for gas and electricity as gas is becoming an important fuel in generation
  • Lower risk of capture
    • Lower capture risks from industry - dealing with more firms and can rotate staff
    • Lower capture risks from politicians - report to different masters?
  • Easier exit from regulation
    • More likely to develop competition and exit regulation as still have other parts of the industry to regulate
  • Potential disadvantages of a single energy regulator
  • gas agenda may be swallowed by much larger electricity agenda
  • more serious impact of regulatory failure
  • World practice
  • Many started with separate regulators - partly seen as very different industries or because no gas to regulate
  • Industry direction towards convergence and so trend to combine regulators into a single energy regulator


The Gas Bill - some issues

  • A separate gas regulator seems unnecessary - rather combine with the NER
  • Scope for Ministerial intervention seems too broad (Sects 20 and 34) - raises political risk faced by investors
  • No inclusion of some specialist appeals procedure to prevent legal hold-up
  • Is the Mozambique Pipeline Agreement in accordance with the regulatory principles of the Act?
  • Is funding to be adequate?


Appendix 2
30 MAY 2001

The Central Energy Fund is in the midst of a significant transformation aimed at fulfilling the objectives of the White Paper on Energy (1998). This process began in earnest with the separation of the Petroleum Licensing Unit from Soekor (Pty) Ltd., and was followed by the announcement, by the Minister of Minerals and Energy, Ms Phumzile Mlambo Ngcuka, that the commercial and strategic components of the CEF would be separated. In addition to that, she indicated that CEF would be expected to play a significant role as the state's agent in the promotion of sustainable energy utilisation and achieving universal access to energy. The key elements of this process are the diversification of energy sources, particularly the development of a gas market in South Africa, increasing the utilisation of renewable energy forms and rural energisation.

During the year 2000/2001, CEF focused on fulfilling the mandate set out above. In many respects important progress has been made towards the goal of transforming and repositioning the CEF, and it is anticipated that in the coming financial year the remaining key components of this transformation will be achieved.

Corporate Governance
The initial steps toward the merger of Mossgas and Soekor have already begun. The two companies are now managed by a single board, which has been instrumental in overseeing that there is an integrated approach in the running of the two businesses and that new activities that are being undertaken by the respective companies do not undermine the possibility of a merger. In addition, the two companies are self-sufficient and do not require the CEF to provide them with funds. A report has been submitted to the Minister of Minerals and Energy by the Task Team established to review the merger of Mossgas and Soekor. CEF will revert back to the Portfolio Committee following the Ministers' response.

An important feature of 2000/2001 has been the establishment of two new companies Enerkom Products and i-Gas. Enerkom Products will manufacture and market Oxicoal products under the license of Enerkom (Pty) Ltd. i-Gas will promote the introduction and use of natural gas in South Africa through its involvement in the gas pipeline development project between Mozambique and South Africa.

In addition, CEF continues to work towards the sale of its remaining 30% share in Syncat in Süd-Chemie AG.

Human Resource Development
As at March 2001, CEF/SFF's staff complement was 255 people of whom 81% are from designated groups. Within CEF/SFF's management strata 59% are from designated groups and 41% non-designated groups, whilst 22% of the total workforce comprises women.
The transformation process at SFF is driven by a jointly developed and formalised employee participation system, the Main Forum, where provision is made for participation by management, unions and staff in general.

The Skills Development and Employment Equity Plans have been formulated and submitted to the relevant authorities.

Group Financial Performance
The unaudited profit of the company before taxation for 31 March 2000 was R1,26 billion. Dividends paid by Mossgas for the past two years amounted to R457 million on which secondary tax on companies of R38,8 million is due.

The main focus of the SFF has been on the project for the sale of the strategic crude oil stocks held at Ogies and the replacement thereof in Saldanha. SFF is currently holding paper positions to the equivalent of the crude oil stocks sold (9.5 million barrels) and is planning to replace these by about December 2001 should market conditions remain favourable.

In addition to the crude oil replacement project, SFF continues to engage in the marketing of excess storage facilities with a view of obtaining rental from the Killarney, Milnerton and Saldanha tank farms, and trading of the Oribi/Oryx crude oil produced by Soekor and Energy Africa.

The contract between Highbeam Trading International/Trafigura, which was entered into to execute the project for the sale of the Ogies crude oil and the replacement thereof in Saldanha was canceled on December 22, 2000.
This was following the findings of an investigation instituted by the Minister of Minerals and Energy into the awarding of the contract, and subsequent forensic and legal investigations. The National Directorate of Public Prosecutions continues its investigation into the allegations of criminal misconduct associated with the awarding of the contract. Simultaneously, the SFF is currently engaged in legal proceedings with HBTI/Trafigura regarding the cancellation of the contract, the outcome of which is still to be determined.

CEF has registered a subsidiary known as i-Gas, which will take up a stake in the joint venture company between Sasol and the South African and Mozambican governments. The joint venture company will build a pipeline from the Pande/Temane gas fields to South Africa. The main focus in 2001/2002 will be on the negotiations of appropriate commercial terms and conditions for the company with Sasol. These terms and conditions include, inter alia, the shareholders agreement, the gas tariff structure and the appropriate structure for the pipeline company.

Mossgas continues to achieve outstanding operating results. During the 2000 financial year, a record quantity of gas was processed amounting to 110% of the original design capacity. The yields of products per unit of gas processed and plant availability, which together reflect operating efficiency, have improved steadily over the past three years.

Although the offshore gas production platform and the refinery have been in operation for eight years, all equipment is in excellent condition. This is due to a very high standard of maintenance and continuous improvements keeping abreast of technological advances.

Financial Results
Revenue increased from R1 208 million in 1999 to R1 979 million for the financial year ended 31 March 2000. Operating profit before working capital changes rose from R579 million to a record R1 039 million. Unaudited profits after interest and taxes was R850 million in 2000 and a similar result is expected this year. The year 2002 is not budgeted to be as high because of lower fuel prices, purchases of condensate and higher interest charges following completion of the EM project.

The prospects for the 2000/2001 financial year are good. Owing mainly to higher than expected international fuel prices and stable operations, revenue for the current year will exceed R3 billion, exceeding the budget by about 30%.

Mossgas continues to make a significant positive contribution to the balance of payments. During the 2000/2001 financial year, import replacements in terms of liquid fuels produced from indigenous raw materials amounted to R1,660 million, while exports of mainly chemical products earned R205 million. Mossgas has not required tariff protection since August 1999.

In terms of an agreement with the South African oil industry, Mossgas sells its liquid fuels to local oil companies at in-bond landed cost (IBLC) prices. The area into which most of the petrol and diesel is marketed extends from Swellendam and East London in the south to Beaufort West in the north.

Product sales to the African Minerals and Energy Forum (AMEF) members started in 1995. Total sales up to the end of the 2001 financial year amount to R104 million. Sales for the 2002 financial year are expected to exceed R25 million.

Mossgas has successfully developed niche export markets for its environmentally friendly solvents and fuels. Export revenue has increased from R140 million to R205 million per annum over the past five years and should reach R350 million next year.

In 1996, the FA gas field, which was the sole source of feedstock, had only 15 months of remaining supply. A project to develop three small fields adjacent to FA was completed in 1997. Compressors were installed on the offshore platform in 1998, which enabled additional gas to be recovered from these fields. This extended the life of the gas supply until October 2000.
The first phase of a $387 million project to produce gas from the EM and associated fields has been completed. First gas from the new wells was extracted in September 2000. The EM project was originally expected to extend gas supply to mid 2006. However, optimisation of the reserves has extended the life to March 2009.

Exploration is continuing in the Bredasdorp basin. An appraisal well in the FO prospect will be tested shortly and seismic data from an area off the coast of Plettenberg Bay is being processed. The possible use of gas from fields off Namibia and the West Coast is being evaluated.

The Condensate Top-up project has been completed. This enables Mossgas to process imported gas condensate, supplementing the relatively dry gas from EM. The feasibility of converting the refinery to use other liquid feedstock such as light crude oil is being studied.

New Ventures
Several projects are underway to enhance the value of Mossgas' product range. The development of a process to produce environmentally friendly specialty fuels and solvents was approved during the year and the first product will be produced towards the end of 2002. This project will target export markets.

Spurred by strong oil prices and environmental pressure, world interest in Gas to Liquids (GTL) has heightened considerably in recent years. As the largest and most experienced GTL operator, Mossgas is investigating opportunities of participating in technology development in conjunction with other international companies.

Human Resources
Mossgas currently employs 1103 people of whom some 51% are from designated groups compared to 47% last year. This year the company instituted accelerated development programmes involving 80 selected employees. In addition, the company is sponsoring 123 staff members who are taking degree and diploma courses.

The primary focus of Mossgas' R4,5 million social investment programme is on education and capacity building in the Mossel Bay area.

A committee consisting of representatives of organised labour, employees and senior management drives the Company's transformation programme.

Black Economic Empowerment
Mossgas has an aggressive Commercial Equity policy. In the course of the past 12 months, disbursements to the value of R55 million were awarded to empowerment companies. These represent 13% of BEE operational expenditure and amounts to more than double the previous year.

Safety, Health and Environment
Mossgas company has an excellent safety, health and environmental management programme. It holds the highest status awarded by NOSA, the NOSCAR, and its injury frequency rate is among the best in the world. The refinery has worked 5,8 million man-hours without a serious injury.

An independent external audit in terms of ISO 14001 international standard for environmental control and management confirmed that Mossgas met or exceeded all requirements. It recently received the prestigious Corporate Award from the National Association for Clean Air. The company's claim to be "The Cleanest Refinery in the World" published in the 1999 edition of Earthlife, remains unchallenged.

While Mossgas faces major challenges, particularly in respect of transformation and procurement of long term reserves of feedstock, it makes a significant contribution to the economy. Pending the imminent merger with Soekor, it looks forward to becoming the nucleus of the South African National Petroleum Company.

SOEKOR E and P's operating results have shown continued strong performance over the last year mainly due to the continued high oil prices and better than expected overall performance of the ORIBI and ORYX oilfields. The net operating profit before tax is expected to be R784.4m for the year ending 30 March 2001.

SOEKOR E and P has acquired a 15% equity stake in its first international participation agreement in the Akori block, Gabon. It is also currently part of a bidding group competing in the offering of exploration acreage in Libya. Several other international exploration and production investment initiatives are beginning to come to fruition. It is envisaged that some exciting participation opportunities will be secured during the coming year to increase SOEKOR E and P's reserve base and diversify its reserve portfolio.

In the short term domestic developments still dominate SOEKOR E and P's activities with the finalisation of the SABLE field development and participation in several exploration and appraisal boreholes in Block 9, offshore Mossel Bay.

To this end SOEKOR E and P will be entering the new financial year from a platform of strong cash reserves to pursue its main goals of maintaining the current production levels, replacing production with new reserves and expanding its reserve base. A relatively aggressive exploration, appraisal and development programme aimed primarily at identifying new reserves to arrest the decline in production from existing reserves before end 2004/5 is being planned.

The Skills Development and Employment Equity Plans are now in place and have been submitted to the relevant authorities. Full implementation of these plans will be a priority focus for the coming year.

Enerkom (Pty) Ltd is a company in the CEF group that was established to hold the patents and associated intellectual property that had arisen from the previous National Energy Council's various research programmes. Enerkom is nearing the end of its programme for the development of a patented process for the production of high value products from coal. Humic and fulvic acids are naturally occurring substances that are recognised in international literature as having immunomodulatory and anti-inflammatory properties.

Enerkom has patented a technology to produce these substances directly from coal, called oxihumic and oxifulvic acids. Enerkom's oxihumate-K, because of its mineral and trace element content, can be used as a nutritional supplement. Oxihumate-K has been proven to be non-toxic in humans, as well as being effective in the care of HIV infected persons. Oxihumate-K will be released this year as a nutritional supplement with immunomodulatory and anti- inflammatory properties. This will be the first year of trading such a product, and a Task Team has been established to ascertain how the intellectual property should be further exploited

Enerkom Products was registered in 2000/2001 as a subsidiary of CEF. Its purpose is to commercialise patents arising from the work done by Enerkom (Pty) Ltd.

The company will begin operation with a period of market testing oxihumate as a nutritional supplement. In addition, shareholders guidance will be sought regarding restructuring options for the company.

The Petroleum Agency of South Africa (PASA), the promotions and regulations agency for the upstream oil and gas industry has again had a successful year. In addition to the existing exploration leases in operation, it has concluded a sublease with Ranger Oil over blocks 11B/12B offshore the deep water South Coast and has concluded two technical co-operation agreements with Global Energy and Sasol over blocks 3B/4B and 3A/4A on the west coast. The Ranger lease is very significant as it will be the first time that the deep-water oil and gas potential of the South Coast is tested. If successful, this area has the potential of being a new frontier area for exploration.

Exploration progress has been good, with over R250 million being spent on exploration for oil and gas by international companies during the year. Forest Oil has completed two successful wells and is presently continuing with their appraisal programme of the Ibhubesi gas field offshore the West Coast. Pioneer Natural Resources made an encouraging discovery in Block 9 and are evaluating the potential of this discovery especially as far as natural gas is concerned.

The Black Economic Empowerment clauses in the various contracts are bearing fruit with Forest Oil announcing late last year that Mvelapanda Holdings have taken an option to acquire a 10% stake in the Ibhubesi field.

The Upstream Training Trust, which is funded by the industry, has continued to fund students and special projects for the upliftment of our people and to increase the pool of skilled people in the industry.
In the 2001/2002 financial year, the Agency will continue to be at the forefront of attracting investment into South Africa, adding value to the national database and assist with the upliftment of our people in order that the natural heritage of oil and gas is explored and developed for the benefit of our people.

With regards to exploration, both Pioneer and Forest will continue to appraise their respective discoveries while Ranger, Sasol and Global Energy will continue to evaluate the petroleum potential of their respective areas. It must, however, be understood that oil and gas exploration is high risk, highly capital intensive and takes a long time from initial studies to successful development. There are no quick answers in this industry. The Agency and the government have the responsibility to facilitate investment in oil and gas exploration in order that South Africa's potential may be fairly evaluated for the benefit of its people.

The Agency will continue to support government objectives with regards the Minerals Development Bill and has offered assistance with regards the oil and gas exploration side of the bill.

The CEF group of companies is well on its way toward fulfilling the goals set out in the White Paper on Energy (1998). The merger of Mossgas and Soekor will be effected by the end of 2001. CEF's developmental role in the areas of sustainable energy utilisation, rural energisation and renewable energy will also be more clearly defined. The first significant steps towards the development of a natural gas market in South Africa, with the establishment of the Mozambique - South Africa gas pipeline will also be effected.


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