Oil Industry Compliance with Liquid Fuels Charter: briefings

MINERALS AND ENERGY PORTFOLIO COMMITTEE
30 August 2006
OIL INDUSTRY COMPLIANCE WITH LIQUID FUELS CHARTER: BRIEFINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
BPSA’s Transformation Agenda in South Africa
Chevron SA – Progress made in the implementation of the Liquid Fuels Industry Charter
Engen- Black Economic Empowerment
Black Economic Empowerment in Shell

SUMMARY
The privately-owned oil industry briefed the Committee on the status of its Black Economic Empowerment transformation and its compliance with the Liquid Fuels Charter. BPSA, Chevron SA, Engen and Shell SA each gave an account of transformation progress and compliance with the charter targets in this regard. Empowerment partnerships, employment equity, skills development and training, crude oil procurement and corporate social investment were some of the issues that were discussed. There was a feeling amongst Members that greater detail was not forthcoming because the discussions were taking place in an open forum. It was thus suggested that the Committee meet the industry players on an individual basis to discuss matters. Each company could thus feel comfortable that company secrets would not be divulged.

MINUTES
British Petroleum Southern Africa (BPSA) presentation

The delegation comprised of Adv R Ramashia (Chairman), Ms B Oyegun (Transformation Manager) and Mr S Velleman (External Affairs Advisor). Adv Ramashia initiated the briefing by stating that the spirit of the Liquid Fuels Charter was laudable but that it was however subject to various interpretations. He felt that BPSA had interpreted the charter in the most progressive way. Ms Oyegun continued with a layout of BPSA’s approach to transformation and ownership. BPSA took the stance that in any Black Economic Empowerment (BEE) partnership that value must be seen to be delivered and the impact of empowerment must be visible. In addition no third party finance was allowed which had the advantage of eliminating value leakage to financiers. There was thus true BEE partner representation on BPSA’s board with no interference from financiers. BP Plc that was the international holding company owned 75% of BPSA (Pty) Ltd, the Mineworkers Investment Company (MIC) owned 17.5% and the remaining 7.5% was owned by WDB, a women’s group. The latter companies were the BEE component of BPSA.

Ms Oyegun continued with a breakdown of BPSA’s Employment Equity figures and noted that a robust pool of women was being built from middle to top management. Figures for expenditure on skills development were also provided. It came to light that BPSA’s procurement spend through BEE suppliers was at 33.6% for 2005. The point was made that certain procurement partners who were not yet true BEE were constantly monitored in order to ensure that they moved towards true BEE. Ms Oyegun pointed out that BPSA felt strongly about Corporate Social Investment (CSI) and that the priority areas were enterprise development, education to increase awareness of energy use and lastly ensuring access to modern sources of energy. BPSA was also involved in key initiatives in order to address specific empowerment challenges. The offer of preferential payment terms, i.e. immediate, 7 day and 15 day to Small, Medium and Micro Enterprises (SMME) suppliers was one of the measures. The development and training of owners of garages to improve on their management skills was also offered. Training programmemes for employees on career development and educating them on HIV and AIDS were a priority.

Discussion
Mr J Combrinck (ANC) asked whether the BEE deals were in the procurement of crude oil or whether they were in the retail industry. He also asked whether BPSA or BP Plc, its international holding company, undertook the expansion into African markets.

Adv Ramashia said that BPSA was responsible for the expansion into African markets.

Mr C Molefe (ANC) noted that he was unable to get the gist of what BPSA’s interpretation of the charter was. He questioned whether the charter had achieved what it had set out to do. Mr Molefe additionally asked for specific profiles of the BEE partners; MIC and WDB. He remained unconvinced on the issue of the advancement of BEE in procurement and asked what some of the challenges were. Specifics on BPSA’s activities within communities in the various provinces were requested.

Adv Ramashia conceded that BPSA’s compliance with the charter was in fact different from the rest of the industry but said that it would become clearer as comparison was made with the efforts of the rest of the industry.

The Chair felt that the response given was not good enough. Specifics on how BPSA had complied with the charter had been requested.

Mr Molefe was concerned that divergent interpretations of the charter would eventually lead to non-compliance.

Adv Ramashia stated that the MIC had been formed as a basis of providing training to mineworkers who had been retrenched and to develop mining ghost towns. WDB had originated to provide rural women with access to funding. It was emphasised that both empowerment companies were independent and that BPSA did not monitor them.

Adv Ramashia explained that the charter made specific provision for procurement in BEE. He noted that it was a difficult area and that discussions had been ongoing with the Minister of Minerals and Energy and her two predecessors. The decision had been taken by the Ministry to discuss the issue with oil companies on an individual basis due to the sensitivity of the discussion material. The process was currently in limbo.

Mr E Lucas (IFP) commented that divergent interpretations of the charter by oil companies were not helpful in the least. He felt that individuals at grassroots level did not share in the positive picture painted by BPSA. It was asked that if no external sources of finance were allowed where individuals were supposed to go to for finance. Mr Lucas requested figures on the number of service stations that were owned by whites and those that were owned by blacks. He also asked for a breakdown of BPSA’ s supposed 33.6 % procurement spend on BEE.

Adv Ramashia conceded that people at grassroots level were unaware of BPSA’s activities and agreed that a more aggressive marketing campaign was needed. It was explained that external financing had been avoided in order to prevent the dilution of value.

Ms N Mathibela (ANC) asked why there were so many BP service stations standing empty. She asked what the reason was for them closing down.

Adv Ramashia said that he was not aware of any empty BP service stations and that if he were given details he would look into the matter.

The Chair asked what had been done along the value chain of crude oil in respect of BEE.

Adv Ramashia said that companies in the industry had different ways of sourcing crude. He reiterated his previous comments about having one-on-one discussions with the Minister on the issue of procurement of crude. Companies were not prepared to divulge their trade secrets to each other. In the end it boiled down to economics and the profits to be made. Adv Ramashia did add that the charter was broad enough to allow companies to achieve the same goal in different ways.

Chevron SA presentation
Mr J Seutloadi (Chairman) presented Chevron’s BEE Strategic Model. The aim of the model was to integrate Chevron’s empowerment initiatives with its corporate culture and functional strategies. The model ensured that alignment was achieved with shareholders, management and staff across the organisation. Mr Seutloadi continued with a racial breakdown between male and female employees on employment equity. It was apparent that as one moved higher up within Chevron the percentage of blacks, coloureds and Indians decreased. Mr Seutloadi emphasised that strategies were in place to address the issue. He noted that Chevron engaged a great deal in retail partnering and that in the Eastern Cape a total of 67 previously Caltex-owned service stations had become self-owned by retailers. Caltex assisted with the financing of these ventures.

Mr Seutloadi said that Caltex was also involved in the taxi re-capitalisation process and had a service station HIV/AIDS policy. Key interventions in wholesale partnering, i.e. developing marketing strategies for distributors were also touched on. Mr Seutloadi continued with an explanation of Chevron’s BEE procurement policy and stated that there was a commitment towards creating a supplier development plan for selected SMME’s, BEE and women-owned businesses. It was pointed out that BEE procurement had increased from 5% in 2001 to 34% in 2006. At July 2006 Chevron’s total BEE procurement spend accounted for 34% of its total procurement spend. The Committee was given a breakdown of Chevron’s corporate social investment in education, communities and rural investment etc. A list of Chevron’s ownership equity partners was also given. Amongst those mentioned were African Legends Investment Limited and Lithemba Investments. It was explained that the vesting of BEE shares was on schedule to reach its 25% equity target. BEE shareholders had a 25% share in the dividends from Chevron and had 25%+1 voting rights as well.

Discussion
Ms Mathibela asked where Lithemba Investments were based and asked what role Chevron played in the taxi re-capitalisation programme.

Mr Seutloadi said that Lithemba Investments was based in East London but had Members throughout the country. He stated that Chevron provided skills and support to taxi drivers.

Mr Lucas felt that Chevron’s figures on employment equity for white and black women as against the demographics for white and black women as a whole did not achieve balance. He asked whether Chevron had bought Caltex. It was also asked whether Chevron imported or bought its crude locally.

Mr Seutloadi conceded that employment equity was a concern in the upper rungs. It was being addressed. He said that a decision had been taken to develop individuals within the organisation as it was felt that the outside employment market was too unreliable. It was explained that in the past Texaco and Chevron had each owned 50% of Caltex. However in 2001 the two companies merged to form Chevron. Chevron continued to trade as Caltex in SA. He responded that even though the charter required BEE in crude procurement it was not as easy to comply with it as it seemed. Reliability of supply was one of the issues to be grappled with. It was felt that however difficult it might be it was not an impossible task either.

The Chair asked for clarity on Chevron’s value chain. He also asked what Chevron had in place to address problems of fronting.

Mr Seutloadi said that all areas within the organisation were included in the value chain. He reacted that fronting in the industry would always remain an issue. Chevron had procedures in place to try to combat the problem.

Ms B Tinto (ANC) asked what had been done on employment equity for women since the inception of the charter in 2000. She also asked how BEE was applied in refining.

Mr Seutloadi reiterated his previous comments that employment equity was a concern that was being addressed by Chevron. Women were being trained and developed in-house.

Mr Lucas asked if Chevron had any supply agreements with SASOL.

Mr Seutloadi responded that in SA, Chevron regarded SASOL as a competitor but in other parts of the world they did business together.

Mr Molefe asked whether the transportation of fuel was subcontracted or was done in-house.

Mr Seutloadi stated that transport was done in-house. There was no outsourcing of transport.

The Chair asked for how much of the value chain did crude account for. He asked whether it was as high as billions of rands. It was additionally asked how far BEE companies were benefitting from this.

Mr Seutloadi agreed to forward the figures to the Committee. He said that the benefit to BEE companies was return on investment and participation at various levels of the organisation.

Engen presentation
The delegation comprised of Mr R Yusof (Chief Executive Officer (CEO) and Managing Director), Mr E Asmal (BEE Strategy Manager), Mr K Ashen (General Manager: Human Capital Division), Ms K Balfour (Corporate Social Investment Manager) and Ms B Dyantyi (Human Resource Development Manager). Mr Yusof gave the Committee a brief introduction to BEE in Engen. It was followed by a detailed presentation on focus areas within Engen. BEE ownership and control was 20% across the entire value chain. A former Engen female employee was the CEO of Engen’s BEE shareholder company. The Committee was given a breakdown of black involvement in management control. From the figures it would seem that Engen was surpassing its targets. Employment equity figures in Engen were lagging a bit in relation to its targeted figures. Skills development figures were roughly on par with targets and the increase in expenditure reflected it as such. Detailed information was imparted on BEE procurement. Its current status, some of the challenges being faced, the key initiatives that had been instituted, assistance to participants in bridging finance and capacity building were elaborated upon. Engen’s BEE procurement spend had almost quadrupled by 2006 from what it had been in 2002. Engen had also engaged in BEE enterprise development. Thirty seven percent of its service station sites were black owned and operated. 100% of its oil centres were black owned and operated as well. Engen had spent a total of R30 million on corporate social investment. The expenditure was focused on education, safety, the environment /community and sports development.

The Chair proposed that questions should be delayed until after Shell had made its presentation in order to save time.

Shell presentation
The delegation comprised of Mr P Milner (Country Chairman), Mr V Khanyile (CEO Thebe Investment Corporation (BEE partner)), Mr V De Vries (External Affairs Manager), Mr I Collair (Regulatory Environment Advisor) and Ms G Munian (BEE Advisor). Mr Milner gave the Committee a brief introduction on Shell’s policy as it relates to BEE and empowerment. Mr Khanyile continued with a comprehensive presentation on Shell’s equity deals. It was explained that Shell’s business was primarily divided into 50% refining and 50% marketing. The BEE deal with Thebe Investment Corporation was done on the marketing side of Shell. It was regarded as phase 1 of Shell’s equity deals and phase 2 on the refining side was already in the pipeline.

Thebe Investment Corporation held 25% ordinary shares in Shell Marketing which allowed them 25% voting rights as well as 25% representation on the board. The deal was built on the premise that there would be community benefits, checks and balances to balance operational control against minority control, and economic sustainability in the long term. Shell thus believed that it had fulfilled the charter requirements on its marketing side of its business. Ms Munian proceeded to give the Committee an overview of Shell’s assessment of its progress to date. It was felt that black representation on Shell’s board and top management had exceeded charter targets. Ms Munian noted that collectively, female representation in Shell was above industry average but conceded that representation of black women could be improved upon. It also came to light that 1% of Shell’s payroll was spent on black skills development. Shell was proud of the fact that its local preferential procurement figures had exceeded the charter target of 25%. Shell held the view that it would purchase crude locally where availability and the economics were attractive. It however felt that crude trading (as opposed to purchasing) needed to be a global activity and that the reality was that no BEE house consistently offered crude on the global market.

Ms Munian pointed out that Shell’s enterprise development activities were aligned with the charter. Emphasis was placed on the fact that Shell’s corporate social investment aims were in line with the charter and that approximately 2% of its net profit after tax was invested in it. Some of the investment activities include education, job creation, health etc. Shell felt strongly about the stability and sustainability of its retail network and noted that 41% of it was black owned and operated.

Discussion
Mr Molefe said that he had heard on the “grapevine” that one of the oil companies was to shut down one of its refineries and asked if it was true. He reiterated his concerns about the industry’s divergent interpretations of the charter. Mr Molefe referred to the fact that Shell only spent 1% of its payroll on skills development and asked if it was serious about meeting the requirements of the charter. It was felt that the industry wished to maintain the status quo and that it expected Parliament to be patient with them. He remained dissatisfied about the supposed transformation in the industry and felt that it was merely window dressing.

Mr Milner responded that Shell was shutting down a refinery for maintenance purposes but stressed that there would be no disruptions in supply. He conceded that Shell had identified skills development as an area that needed attention but that measures would be put in place to rectify it.

Mr Yusof responded that Engen’s BEE deal had already been in place prior to the charter. He felt that Engen’s efforts were going at a sustainable pace but conceded that greater strides could be made in capacity building and sustainable development.

Mr S Louw (ANC) asked why BEE deals had only been concluded in Shell’s marketing business and not in its core refining business. He also asked if the children of non-employees of Engen could apply for student bursaries. Mr Louw asked Engen where its vendors were located within the provinces. He asked an open-ended question to all the companies about whether SA had security of supply beyond 2010.

Mr Milner reiterated that BEE in marketing was phase 1 and that the phase 2 would be BEE in refining. He emphasised that the marketing part of Shell’s business was in fact the most important; hence the initiation of BEE in it.

Mr Khanyile (Shell) added that the marketing business might seem peripheral when in fact it accounted for more that half of the total business of Shell. It included areas of gas, aviation, marine and lubrication etc. He stated that compliance with BEE on the refining side of Shell’s business was on the books even though at present there was non-compliance.

Mr Ashen (Engen) stated that bursaries were strictly for non-employees’ children whereas employees’ children were given financial assistance.

Mr Asmal (Engen) stated that vendors were located nationally. He added that some were situated in Namibia as well. It was pointed out that Engen tried to include BEE in each opportunity. The entire procurement programme was open to BEE.

Mr Yusof (Engen) said that security of supply was an issue to be dealt with the industry as a whole. It was difficult for a single company to secure security of supply for the entire country.

Mr Milner felt confident that Shell SA could secure security of supply given the fact that Shell Worldwide took care of its supply needs.

Ms Mathibela asked Engen for a breakdown of bursaries that had been awarded in the various provinces and for information on BEE of women within the provinces. She asked what was being done about HIV/AIDS.

Mr Ashen (Engen) said that the bursary scheme was a national one and that figures would be forwarded to the Committee in due course. He pointed out that there were internal HIV/AIDS programmes in place in Engen, i.e. voluntary testing, funding for anti-retrovirals (ARVs) etc. Spending on ARVs was currently at R300 000.

Mr De Vries (Shell) said that Shell had conducted two studies on HIV/AIDS. The latter study was done in conjunction with Metropolitan Life. Staff at Shell was also voluntarily tested and AIDS counseling was being looked into. Shell additionally had also engaged in projects to educate communities on HIV/AIDS.

Mr Lucas proposed that the Committee should interact with the oil companies on an individual basis. He commented that Engen was fortunate to have a Malaysian national as its CEO as Malaysia had successfully transformed its industry. Mr Lucas felt that Shell was indeed making an effort on procurement.

Mr Yusof (Engen) said that he hoped to impart Malaysian good practice to SA.

Adv H Schmidt (DA) felt that the industry was making great strides in transformation and congratulated them. He asked both Shell and Engen what the difference was between controllable spend and total spend. It was furthermore asked why the expenditure figures in the presentations were in percentages and not in rand amounts.

Mr Asmal (Engen) said that controllable spend was everything except crude. He observed that Engen’s total spend on BEE was just under 10%.

Mr Milner (Shell) conceded that percentage figures were only given on procurement spend and not on refining spend.

The Chair asked Engen for clarity on who its BEE partners were. He noted that BEE in Shell was limited to its marketing business and that they had implied that black suppliers of crude were practically impossible. The Chair once again asked for detail on each of the companies’ value chains and for figures on revenue per annum in the upstream sector.

Mr Yusof (Engen) said that Engen’s BEE partner was World Wide Investment Holdings (WWIH).

Mr Asmal added that WWIH was 53% black owned and had a black female as its CEO.

The Chair noted that many things had been opened up in the meeting and that the Committee needed to engage with the companies on an individual basis. He agreed that upstream figures, procurement and the empowerment deals of each company could not be discussed in an open forum.

The meeting was adjourned.