Oil Industry briefings on Transformation and Compliance with the Liquid Fuels Charter

MINERALS AND ENERGY PORTFOLIO COMMITTEE
1 September 2006
OIL INDUSTRY BRIEFINGS ON TRANSFORMATION AND COMPLIANCE WITH THE LIQUID FUELS CHARTER

Chairperson: Mr E N Mthethwa (ANC)

Documents Handed Out:
Total South Africa (TSA) presentation
SASOL Oil presentation
PetroSA presentation

SUMMARY
Delegations from Total, SASOL Oil and PetroSA presented the Committee with progress reports on transformation and compliance with the liquid fuels empowerment charter. It became apparent that women and disabled people are still very under represented within the industry as a whole, and all three companies expressed their determination to effectively address this problem. As there are virtually no Black Economic Empowerment (BEE) South African crude oil suppliers, crude is imported from primarily Iran, Qatar and Saudi Arabia, and thus crude oil expenditure was been excluded from the percentages of BEE spend illustrated by the companies. Total South Africa showed a 30% BEE spend in 2005 and have a 35% target for 2006; whilst SASOL Oil showed preferential procurement of 34% for 2006. PetroSA has recorded a 40% spend on BEE enterprises during the 2006 financial year. Both SASOL Oil and Total SA have taken on empowerment partners in Tshwarisano and TOSACO respectively, who both have 25% ownership across the value chain.

The Committee queried the sustainability of BEE initiatives and emphasised that ‘fronting’ was not conducive to effective development. The Committee listed its disappointment at the progress of the industry as a whole, and stated that the figures set out in the charter were minimum requirements and should essentially be exceeded. However, it did encourage the industry representatives and praised them for their success and progress thus far.

MINUTES

Total SA (TSA) presentation

Mr Philip Jordan, Chief Executive Officer (CEO) of Total SA, started with an introduction of his colleagues accompanying him: Mr Mkhuseli Faku (Director); Dr Jerry Gule (General Manager: Transformation) and Ms Thuthu Skweyiya (Director). He went through the agenda of his presentation and read a relevant quote from President Thabo Mbeki. Mr Jordan said that Total's mission was to be number one with the consumer and this required a successfully transformed company, which needs to attract and attain the best staff in the business. He went on to describe Total SA's structure, which includes its French parent company with a 50.1% interest and TOSACO with 25%. Remgro rounded out the holding interest with another 25%.

Mr Faku gave an update on their Black Economic Empowerment (BEE) compliance and progress. He was a non-executive director of Total SA from the South African company, TOSACO. He was also chairperson of AMEF (African Minerals and Energy Forum). He explained that after May 2003 TOSACO had signed an agreement with Total for 25% of BEE equity. He
affirmed that TOSACO participates in the decision-making process of Total SA. He told the Committee that 2013 was the set date for the total repayment related to the 2003 agreement between Total and TOSACO. After having another look at the agreement, and to better comply with the Liquid Fuels Charter, both parties came to an agreement to retire the debt by 2010. Mr Faku said that Total Commercial Services (TCS) was an important component of the TOSACO-Total deal, which speaks of empowerment to increase market share. He stated that BEE partners add growth and value through their participation. He added that through TCS, TOSACO could repay its 25% debt. The management and control of the TSA Board was 45% Black and they had full voting rights.

Ms Thuthu Skweyiya said she chairs Total's transformation committee which is responsible for BEE compliance. She added that the committee met four times per year and has four males and two females.

Dr Jerry Gule presented the section titled “Employment Equity.” He said that Total's ACI or African, Coloured and Indian target for all grades was 70% of their total staff profile by the end 2006. He told the Committee that Total had also met this target and present trends indicate that they would continue to improve through 2007. He said that their internal targets are set and driven by internal managers and that they have a robust plan to do this. With regards to Total's female staff profile, he said that this was very important for Total. He acknowledged that Total had some work to do in this area, but said that their restructuring had caused problems and many female employees were not willing to re-locate and this decreased female equity in offices country-wide.

Dr Gule went on to elucidate that capacity-building is a priority at Total. He stated that 5% of the payroll is spent on training. Of that 5%, he said that 77% was spent on Black employee training. He also said that Total internships were 100% Black with 12 females participants. He added that almost all those who complete their internships stay on at Total. He also said that TOSACO had 11 women enrolled in an oil trading programme so that they could learn about the heart of the process of procurement. He went on to explain that they would focus more on women at Total. He also summarised their employment wellness initiatives, mentioning Total's HIV/AIDS programme.

Dr Gule also spoke of Total's enterprise development and mentioned two projects that he was particularly excited about. The first was Ezethu Logisitics which had the best health and safety records in the region. The other was Inkwali Engineering which was black-owned and partnered with Total for work in engineering. He said that this group showed sustainability and growth. He went on to say that enterprise development would keep on training people for petrol station ownership and that right now 38% of stations were operated by historically-disadvantaged South Africans (HDSAs), but they intended to get that as high as 85%. He also added that Total believes in corporate social investment and would continue to invest in it.

Dr Gule concluded the briefing by outlining the challenges that Total would take on in the future. He said that the scarcity of skilled workers was something that all companies faced in South Africa. He said that Total would strive to ensure that there would be better knowledge transfer and that symmetry was their aim. He further mentioned retention as another important aspiration. Many young people at Total often relocated to another company which causes problems for their drive to transform the company. However, they do not stand in the way of their employees if they want to leave and often have “exit interviews” with those wanting to leave.
Mr Faku re-affirmed TOSACO's aim of paying back their 25% debt by 2010. He continued that TOSACO had made possible the entry into the industry of many people who would have never had the chance. He added that they were the first to begin with a programme to teach crude trade. Mr Faku also mentioned that Total was taking steps to address the lack of access to fuel in the rural communities and that he was confident that Total would meet charter compliance and the Code of Conduct expectations.

Discussion

Mr J J Combrinck (ANC) said that Total spent R375 million on BEE last year; however he wanted to know what percentage of total income was spent on BEE. Also, he asked to what degree is TOSACO involved in the entire value-chain, from crude oil procurement to storage and garages. In addition, he asked who is Remgro. Lastly, he wanted to know how many retail outlets are really in BEE hands.

Mr Jordan answered that TOSACO has 25% involvement throughout the value-chain process. He added that TOSACO had 36% involvement in Natref. TOSACO also had a 25% stake in anything owned by Total including projects in Lesotho, Namibia and Botswana.

Mr Faku said that crude oil supply was the sore point. He said that there are delays when it comes to the acquisition of crude from certain suppliers. He went on to add that any crude that Total processes and refines at Natref comes from TOSACO suppliers which are given a 10% better deal than other brokers.

Mr Combrinck asked what percentage of Blacks, Coloureds and Indians are involved in the retail/value-chain.

Mr Jordan answered that from procurement onwards; he did not have the exact percentage. He said that the numbers could be made available to the Committee. He added that every manager has a different target. He invited the Committee to Total to look at the specific numbers.

Mr Faku said that a certain number of companies on their procurement list have to be BEE. He said that it was not even considered if that was not correct.

The Chair asked to what extent the charter is viable. He wanted to know if Total could meet total BEE procurement of 70% by 2010, as they are only at 30%.

Mr Jordan said that Total is on the path to meet the 70% requirement and that the Empowerdex questionnaire showed that Total had met and also exceeded requirements.

Mr Combrinck said that Total SA must become a South African company and was not because of the 50.1% shareholding interest of the parent company.

Mr Jordan said that unanimity is required on certain decisions, so there must be full agreement by all three partners before a decision can be made. He also said that Remgro is a Stellenbosch investment company within the Rembrandt group of companies.

Mr C D Kekana (ANC) said that not enough was being done with regards to women and the disabled. He said that Total also only spoke of two HDSA youth or disabled people in their briefing. He also wanted to see a complete breakdown of the value-chain and BEE involvement and the level of BEE expenditure.

Dr Gule replied that Total makes every effort to procure from BEE companies. He added that with regards to the training of HDSAs and disabled people, he was happy with what the training had accomplished so far, but more must be done. He said that he wished they had more time for it.

The Chair asked about Total's voting rights for BEE entities and the related quorum. What is the use of BEE entities if their voting is restricted?

Mr Jordan replied that Empowerdex had gotten that issue wrong and their presentation corrected it. He said that TOSACO did have voting rights. He added that women directors also had voting rights from day one.

Mr Faku told the Committee that TOSACO was not just Black faces and that they had voting rights. He added that Empowerdex released their report when it was finalised, but their data capturing was incorrect. He said that they should have produced a draft first for corrections.

Ms Skweyiya stated that two years ago Total had no women on their board. She said that Total would be making an announcement about more soon. She also said that with the Joint Initiative for Priority Skills Acquisition (JIPSA), Total is creating 15 new places for graduates in the industry and wanted to use young women from rural areas. She added that Total wants to assist with the country's skills development.

Mr E J Lucas (IFP) articulated his disappointment with Total. He said that Total had had a headstart and that given that, Total was not doing enough. He stated that the LFC is only the minimum required and that much more can be done. He urged Total to do better.

SASOL Oil presentation

Mr Ernst Oberholtzer (Managing Director) introduced the members of the SASOL delegation, and began by outlining SASOL’s progress with regards to ownership, board representation, management and control. He emphasised SASOL’s newest BEE transaction, a R1.45 billion initiative with Tshwarisano, which was effective from the 1^st of July 2006. This company has 25% BEE ownership across the value chain and is broad-based, benefiting hundreds of thousands of historically disadvantaged South Africans, more than half of whom are black women. Tshwarisano exercises full voting rights, and its R1.14 billion senior debt is to be guaranteed by SASOL.

Mr Maurice Radebe (MD: SASOL Fuels and Marketing) admitted that SASOL was the last liquid fuels company to comply with the charter, but then highlighted that extensive progress has subsequently been made.

Mr Oberholtzer outlined the company’s corporate social investment and skills development initiatives, and emphasised the company’s dedication to growth and development in this regard. It was emphasised that SASOL was South Africa’s biggest taxpayer with an effective tax rate of 32%, and was therefore contributing extensively towards the fiscus as well as South Africa’s general economic development. It was estimated that 80% of SASOL’s capital expenditure was invested in South Africa during the last two years. South Africa imports a major portion of its crude oil, and it was highlighted that the security of supply due to weather or war was highly problematic. The reliance on fuel imports in the country is also growing.

Mr Radebe emphasised that the Empowerdex report commissioned by the Department of Minerals and Energy exhibited some inaccuracies and was thus not fully comprehensive.

Discussion

Mr Lucas acknowledged that SASOL was a South African Company, and inquired why the Gas to Liquids (GTL) technology, which is developed in South Africa, is being marketed overseas.

Mr Combrink asked whether Tshwarisano held 25% of the shares in SASOL ‘on the dot’ or whether it was perhaps a 25.1% share. He also asked the delegation what the current level of BEE procurement spending was, and what percentage of black people were on the board. He thanked SASOL for looking after ‘white women’ who had also been a disadvantaged group.

Mr Kekana stated that the lack of representation of women was a challenge that SASOL also needed to address. He asked whether SASOL imported skilled professionals or artisans, and asked that if this was the case, what SASOL was doing in so far as development and training is concerned. He also requested that BEE and representation figures throughout the entire value chain be broken down and explained in greater detail.

Adv H Schmidt (DA) asked, in light of registered patents having a limited lifespan, how this was going to be dealt with in terms of both product and human resource development. He also enquired, with reference to the expected increase in importation of net refined products by 2008, why the curve– depicted in the presentation - would necessarily show a net decrease. He remarked that the refining capacity should stay constant. He also maintained that the issue surrounding BEE compliance with respect to crude imports was important, and asked what measures SASOL was taking with regards to the importation of crude and the crude market in general.

Mr C Molefe (ANC) asked what the likelihood was of SASOL exceeding the minimum BEE compliance quota of 25%.

The Chair added that the 25% BEE threshold agreed upon 5 years ago is the bare minimum. He emphasised that the entire industry must unite to ensure BEE and charter compliance within the liquid fuels sector. He also enquired whether the tax-paying bracket was in proportion to that imposed on similar companies.

Mr Oberholtzer stated that South Africa did not have large gas resources and in order to implement the GTL technology effectively, large reserves of gas are needed. This is the reason for marketing the products overseas. South Africa has large coal reserves, and is in a key position to expand these facilities. SASOL is focusing on other countries in an attempt to access these opportunities for expansion. He asked that the Committee bear in mind that all revenue from these ventures flows back to South Africa. He added that patents are not foolproof, and that it was difficult to protect Intellectual Property (IP). This was a problem currently being addressed by the company.

With regards to BEE spending, of the R8.7 billion income last year, R1.7 billion was spent on BEE initiatives.

Mr Radebe stated that, with regards to the breakdown of the value chain, Tshwarisano owned a full 25 % of all ventures. In so far as maintenance and distribution of stations and products are concerned, he said that SASOL was doing its level best to implement BEE effectively. He also stated that SASOL is dedicated to the upliftment and incorporation of women into their company.

Mr Oberholtzer emphasised that the oil price spike was inevitable, but that we must not ‘jump the gun’ in this regard. He also maintained that large scale importing is necessary for South Africa’s security of supply and cannot be avoided. He also stated that perhaps SASOL would consider staggering the refinery turnarounds and expansions. Lack of skilled professionals, however, is a huge problem and the import of these professionals cannot be avoided. He added that this was a global phenomenon. He also added that these individuals are in demand and therefore highly mobile.

Mr Oberholtzer concluded by ensuring the Committee that SASOL was 100% committed to BEE and charter compliance.

PetroSA presentation

The Chair said that there were time constraints and asked whether PetroSA should proceed with their presentation.

Adv Schmidt said that PetroSA should report to the Committee to be fair as the other companies had to share their sensitive information.

Mr Lucas agreed and said that they should present.

Mr Sipho Mkhize, the President and CEO of PetroSA, introduced himself and his team: Mr Shadrack Ramosa, Vice-President: Corporate Services; Dr Nonpumelelo Siswana; Tumelo Tsutsube; Comfort Bunting; Matshidiso Mogashoa; Mr Bongani Phillip (General Manager: Mossel Bay) and Keabetswe Mpuru. Mr Mkhize began the briefing by stating PetroSA's BEE strategy which worked closely with the Broad Based Black Economic Empowerment Act, 2003. He said that PetroSA's five BEE objectives were to achieve 25% Black ownership (including women) of operations, increase BEE ownership and control of enterprise, to focus on skills development, to increase BEE participation in the supply chain and to ensure Corporate Social Investment (CSI) spend on sustainable projects and programmes.

Mr Mkhize stated that the CSI spending would be discretionary and would take the form of sponsorships and donations for sustainable investment. He further said that meeting the needs of community development, education and training, HIV and AIDS and poverty alleviation were self-explanatory. He said that to address poverty alleviation, payments were being made to specific communities. He gave an example that R13.8 million had been spent on a school in Mossel Bay to equip them with a full maths and science laboratory.

With regards to skills development, Mr Mkhize explained that PetroSA had given ten scholarships to five male and five female participants for study at Texas Tech and Houston University. He added that other individuals were being trained for supervisory, management, technical and other requirements. He further stated that the R60 million loan from the Department of Labour is also helping skills development and that it would be paid back in full. He said that their Vukani Training Institute had recruited 35 matriculants who were previously unemployed, but now were enrolled in degree courses. He said that PetroSA would do more with JIPSA to train people in basic process control.

When reporting on PetroSA's progress on employment, Mr Mkhize said that getting the women to men ratio correct was still a big challenge. He referred to a table which showed an average ratio of 80 men to 20 women throughout the occupation levels. He pointed to successes in the supply development programme which created 94 shareholders, of which 9% were women from black-owned companies. He also said that the five companies identified created 38 new jobs.

Mr Mkhize said that PetroSA's total procurement from BEE suppliers was R1, 2 billion for 2006, while the total spend on procurement was R3,1 billion. He added that they had a 40% increase on BEE companies in the 2006 financial year. In their operations and trade, supply and logistics, he said that there was R103 million being spent on foreign suppliers in the Exploration and Production (E & P) division. He said that the BEE in E & P was at R90 million and that in the GTL and Research division, BEE entities were faring much better with them receiving R110 million from PetroSA in 2005-2006. He went on to say that all condensate purchased to date was from BEE companies and that BEE companies would do the shipping of two imported cargoes of Mogas and Diesel. He added that the BEE condensate contract until February 2006 would total R1, 2 billion and that it would be the focus this year. He explained that due to global oil shortages, BEE involvement has been experiencing difficulties, but they intend to have more than 50% of crude oil sales go to BEE companies.

Mr Mkhize said that key success factors would be to show greater accommodation for BEE companies and have them do direct pick-ups from Mossel Bay and also any major center in the country. He also identified credit extension to increase BEE participation. He explained that PetroSA has proposed a 30-day extension of credit to reduce BEE exposure to high risk. He further identified challenges for PetroSA to meet the 25% participation of BEE equity, increase the role of women in management and address the “semi-monopoly” of selected services and goods that are sourced overseas and which equate to substantial expenditure. He added that PetroSA would intervene to appoint talented Black women to senior managerial positions.

In conclusion, Mr Mkhize stated that PetroSA performed better than their own internal targets and the overall Petroleum Industry in South Africa. He said that there are still challenges and that complacency would not set in. They intend to address the issues in the Generic Scorecard in the areas of preferential procurement, equity participation and lack of female managers and disabled people.

Discussion

Mr Molefe asked why the PetroSA management was all Black and whether there were any preferential agreements with BEE companies.

Mr Ramosa replied that there are in fact two white males in senior management and there is also a white female as their new operations manager. He said that at the moment there are no preferential arrangements with BEE companies because they lacked the required infrastructure that is already operational overseas.

Adv Schmidt asked where PetroSA sourced their crude. He said that SASOL mentioned Iran and Saudi Arabia. He also commented that PetroSA is mainly in the business of converting gas to liquid fuel, so how does BEE fit into this?

Mr Mkhize answered that PetroSA got their crude from their production in South Africa. He told the Committee that 9, 5 million barrels are stored as strategic reserves in case of sudden emergencies or shocks. He said that they have to create a balance between storage and infrastructure and there is a need to acquire more funds for more purchases from BEE companies. He added that preference is given to BEE firms and that they are paid as soon as possible, usually within 30 days. Mr Mkhize said that they are deliberately dealing with BEE entities for the past two years and that by 2012, PetroSA would be above the minimum target.

Ms B Tinto (ANC) asked what PetroSA was doing about Kwa-Nonqaba [township near Mossel Bay] with particular respect to the HIV problem there.

Mr Ramosa answered that Kwa-Nonqaba had become an extension of PetroSA's CSI. He explained that St Mary's is a hospital and that they want to use it as a base and training ground to assist people through CSI. He said that they wanted to place experts there and see what can be done about. He added that in Mossel Bay they also have ideas about setting up medical facilities because the area only has one hospital.

Mr Bongani Phillips, the GM for PetroSA in Mossel Bay, said that they are already involved in an HIV programme and are addressing the problem.

The Chair thanked PetroSA for their briefing.

The meeting was adjourned.