Central Energy Fund and PetroSA 2005/06 Annual Reports: briefings

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Mineral Resources and Energy

18 October 2006
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

18 October 2006

Mr E Mthethwa (ANC)

Documents handed out:
Central Energy Fund Powerpoint presentation
Petro SA Powerpoint presentation

The Central Energy Fund (CEF) set out its activities and companies in the group. It was concerned with exploration and production of crude oil and natural gas off the coast of South Africa and in other African countries, in synthetic fuel production, holding of stock, pollution control and research. The financial position was good and revenues had risen. Most of the profit arose from the revenues of PetroSA. The total profit for the year was R3 billion. Some of the projects of CEF in the past year were outlined and explained. Particular concerns were around the holding of strategic oil stock for the Government and the attempts to broaden oil pollution control. Future projects included low smoke fuels, biofuels in conjunction with Black Economic Empowerment programmes, the Darling Wind Farm, biomass and landfill, solar technology and gellification of paraffin. Many of the developmental projects would not produce large profits initially, but were necessary to promote health, energy efficiency and consequent savings. CEF submitted that it was the ideal vehicle to promote energy efficiency. CEF would also look to exploit the large coal resources with a coal to liquid refinery. Questions were raised by Members about the oil stockholding, the reasons for financial improvement, time frames for the wind farm, energy efficiency, solar energy projects, carbon credits and the environmental impact of the Mpumulanga coal to liquid project. The activities of oil pollution control, the pipeline through Mozambique, the impact of biofuels on food security and energy labelling and efficiency were also addressed. The salaries of Board members were explained.

PetroSA, the national oil company, briefed the Committee, noting that it operated one of three Gas To Liquid (GTL) plants worldwide, operated the crude oil storage tanks at Saldanha, produced oil and gas in South Africa and Nigeria, and was an international player. It had had a successful financial year, and had benefited from the exchange rate. Future corporate objectives included implementation of the gas projects by 2008, and the Mossel Bay project by 2012, reducing the costs of producing gas to liquid fuel and a new plant. Various projects were outlined and explained. It was important for PetroSA to ensure security of supply. The total capital expenditure over the next 5 years would be R15 billion. There was a need to improve the availability of fuel inland and to budget better for needs. PetroSA had complied with world best practices on safety. It ran successful HIV/Aids programmes. The BEE and equity ratios were good. Staff initiatives ensured good human capital management. PetroSA had invested in supplier development programmes and social corporate awareness programmes. The Imvume dispute was ongoing, and was explained in some detail. It was noted that a Court date was set for November. Challenges included the need to comply with legislation, which reduced the ability to compete effectively with international companies, and conversion of the old to the new order of rights under new legislation. PetroSA presented a summary of the financial statements, noting that net profit had increased by 59%, 18% growth in total assets and a reduction of 27% in debt. There was a cash decrease of 16%, but a R500 million dividend had been paid. There was a tax dispute with the Receiver of Revenue, due to be heard in Court in November. It was reported that there was a planned shutdown, and also that a labour dispute had resulted in certain other shutdowns, which caused a slack of about a week. Discussion by Members centred on the reactivation after shutdown, the reasons for lack of fuel supplies inland, and plans to address both areas. Several questions were raised on the Imvume matter, with some Members believing it should be pursued no further, and others of the view that too soft an approach was taken. Requirements for conversion were explained. The net profits were expanded upon. Questions were raised around the turnaround strategies, corporate social investment, the recent pickets, the possibility of accessing scarce skills from asylum seekers, and competition and cooperation with other oil companies. The possibility of a new refinery was examined.


Central Energy Fund (CEF) presentation


Mr M Damane, Chief Executive Officer, reported that CEF was a state owned entity concerned with the exploration and production of crude oil and natural gas off the coast of South Africa and in other African countries. It also produced a wide range of synthetic fuels and held most of the crude oil stock and storage on behalf of the State. The main group structure consisted of the Strategic Fuel Fund Association (SFF), Petroleum Oil and Gas Corporation (PetroSA), which regulated petroleum products on and off shore, SA Gas Development, which dealt with pollution control, the South African Natural Energy Research Institute (SANERI), and the South African Gas Development Company (iGas). There were no funds actually held by the Central Energy Fund, but instead it ran through two divisions, the Energy Development Corporation (EDC) and the National Energy Efficiency Agency of South Africa.

The financial position was good and revenues had increased. SFF had shown a profit due to unexpected oil sales. Some concerns were expressed about SFF the previous year as it was mandated by Government to hold stocks of fuel with no guaranteed income to maintain the costs of holding the stock. iGas was concerned with development and it was anticipated that it would become a very important player in the energy sector. It was concerned with developing gas, particularly for household use. SA Gas Development dealt with oil pollution control, which remained a challenge. Most of the profit arose from the revenues of PetroSA. PetroSA was the only company involved in generating revenues from exploration in the sea. The total profit for the year was R3 billion.

Some of the projects of CEF in the past year were outlined and explained. iGas was involved in investment in Rompco’s 900-kilometre pipeline transmitting gas from Mozambique to Secunda. Rompco owned the pipeline and earned significant rental from Sasol who used it to transmit. It was also involved at a gas development project at Coega in Eastern Cape. It was hoped that outside investors could be drawn into this project. The LSF Project dealt with the separation of taconite from coal, which produced volatiles similar to light crude oil, but smokeless and low burning. Some delays had been experienced in obtaining permits but the project was on track. The Johanna Solar Project was a South African invention in which CEF had managed to buy a stake and CEF was now leading the consortium to develop the processes into a commercial plant and venture. Better production of solar water heaters, through the use of a specialist rig to test and standardise quality, was another project in which CEF were working with the Bureau of Standards.


CEF had not invested in research for some time but now felt it needed to do so. The South African Agency for Promotion of Petroleum Exploration and Exploitation (Pty) Ltd (PASA) was a CEF Agency mandated by the State to undertake offshore development. It was involved in a project to extend the continental shelf to find more acreage of reserves of oil and gas. SFF was mandated to be the custodian of strategic stock for the Government. It was required to keep 14.5 million barrels in stock but currently only had 10 million barrels. It had applied for a directive to the Minister of Minerals and Energy, but did not have the funds to buy additional stock. Oil Pollution Control South Africa (OPCSA) was based in Saldanha and was frequently called upon by salvage companies. It was currently in discussions with the Port Authority and SA Maritime Authority to extend its activities to all harbours, which it was hoped would turn its position around to greater profitability.

CEF listed its dormant companies, noting that Mosshold and Soekor were in liquidation, Enerkom and Enerkom Products were in the process of being deregistered and others were not functioning but still existed for the purposes of holding patents or for other strategic reasons.

Future projects of CEF included low smoke fuels, in which R26 billion revenue was expected, and it was the leader in biofuels. Black Economic Empowerment (BEE) companies had been utilised and were on track in sourcing biofuel sources. CEF had partnered with Sasol who were keen to develop biofuels. Construction would start shortly at the Darling Wind Farm. CEF was also concentrating on biomass and landfill, solar technology and gellification of paraffin, after previous tests had shown ethanol gellification to be less viable. It had developed clean development mechanisms (CDMs) and would gain carbon credits to use in Europe. Many of the developmental projects would not produce large profits initially, but were necessary to promote health, energy efficiency and consequent savings. CEF submitted that it was the ideal vehicle to promote energy efficiency as Eskom clearly had a conflict of interest.

Currently the oil refineries in South Africa were operating at full capacity but none of the oil companies had planned new refineries, instead intending to ask for permission to import fuels. In the past the companies had been assisted by the State. CEF believed that it had a responsibility to look to the future and exploit the large coal resources in Mpumulanga to create a Coal To Liquid (CTL) refinery. By combining with Sasol it would be possible to create the largest refinery complex in the southern hemisphere.

Adv H Schmidt (DA) noted the directive to keep oil in stock and asked if CEF had not raised this matter with the Minister to request a reduction in the stock, particularly in view of the funding difficulty. He asked if any undertakings had been made.

Mr Damane noted that CEF had spoken to the Minister. The Department of Minerals and Energy had a Strategic Stock Policy Subgroup, and CEF now participated in the subgroup, although it had not done so before. The Department of Minerals and Energy had also asked for a ruling on the stockpiles.

Adv Schmidt commented that the CEF group financial results looked better than the previous year. He asked whether the improvement could be attributed in part, at least, to the price of oil in the international markets, and what other factors had contributed to the bottom line profits.

Mr Damane said that CEF was pleased with the improved results. The oil price had contributed to the increase, but so had greater efficiency in operations.

Ms N Mathibela (ANC) asked whether there were any specific time frames for the Darling Wind Farm.

Mr I Mohamed (ANC) said that this project appeared to still be in the test stages and asked whether CEF was considering harnessing wind for production of electricity on a large scale. He asked whether more windmills would be erected.

Mr Damane stated that there were indeed specific timeframes, which had been set by the project managers. The agreements had all been signed and the Development Bank of South Africa was to fund some of the BEE structures involved. On the question of the number of windmills, he noted that it had been estimated that over a hundred thousand windmills would be needed. Denmark had set up large wind farms, but this was a much smaller country and the wind power had been backed up with electricity generators. Windmills alone were not the solution to the problems of energy in the country.

Mr E Lucas (IFP) asked for an indication of plans for the future on stockpiles and commented that there was insufficient funding to purchase further stocks.

Mr Damane said that there was insufficient cash to buy in more oil to stockpile. The future of the stockpiles was not in the hands of CEF who acted only in a custodial function, and in fact would have preferred not to manage the stockpiles at all. Government would make the decisions and control the future.

Mr Lucas considered that the issue of new refineries was one of great importance, particularly if they could be built economically.

Mr Damane noted again that new refineries were planned, as it was unlikely that oil companies would build new ones unless backed up by government.

Mr Lucas and Prof Mohamed asked for greater clarity on the statements about energy efficiency and why CEF would challenge Eskom.

Mr Lucas commented that he was pleased with the research and developments on solar energy.

Prof Mohamed asked how efficient the solar energy programme was proving to be as he noted that during the late 1980s the Atomic Energy Corporation had done some research on transmission of new energy systems and handed the project over to UWC to produce on an economic basis, but apparently nothing had been done as it was not efficient enough.

Mr Damane replied that there were direct savings to be made from solar power for heating water. The solar work was not directly linked to the Johanna Solar project as they used different technologies. The Johanna project replaced silicone with other materials, which were less likely to be stolen for the computer industry and was more efficient.

Prof Mohamed queried whether carbon credits were already available in Europe and whether they were being traded and exchanged.

Mr Damane replied that carbon credits were available already and were currently being sold for about Euros12. Carbon savings were generated by CEF in the landfill gas sites. Although CEF did not wish to set up a trading facility, it had investigated how this was being done in Norway and other countries to understand how the traders were making their money. CEF was using this primarily to generate savings.

Prof Mohamed asked whether the CTL projects in Mpumulanga were environmentally friendly, or if any health hazards had been identified.

Mr Damane replied that the full impact was not yet known but the necessary environmental impact assessments would be done.

Mr J Combrinck (ANC) asked whether the multiplicity of companies within CEF was really necessary. He asked how far the closure process had proceeded.

Mr Damane said that it was not necessary to have so many companies, which was why CEF was closing down a number. The decision to close had in some instances been taken a few years ago but the processes were rather slow.

Mr Combrinck noted a misquotation of the end of the financial year and hoped this would be corrected.

Mr Combrinck asked for an indication whether OPCSA was working with other institutions.

Mr Damane noted that OPCSA operated out of Saldanha and all vessels entering that port would be strictly controlled in their loading operations. Oil companies also offloaded in Durban but were unwilling to go through the full processes of checks. This was the reason why OPCSA wanted the Port Authority to assist and insist upon OPCSA presence in all harbours.

Mr Combrinck asked for an indication of the shares held by Sasol and by CEF in the iGas pipeline schemes and whether there was a formal agreement with Sasol.

Mr Damane noted iGas was self-owned but that the pipeline company Rompco was 75% Sasol and 35% CEF owned. 25% of the Sasol share was due to be transferred to a Mozambique government company, but it was as yet unable to pay and therefore the transfer had not taken place. Despite this, the Mozambican company already sat on the Board and was involved in decisions as this was important for the security of the pipeline.

Mr Combrinck noted the move to biofuels but asked how the production of fuel from food sources would affect the availability of food and food security.

Mr Damane stated that food security was not the responsibility of CEF. Although CEF was one of the leaders in the biofuel industry and research, it was involved from the energy point of view. Soya beans were being used as the source and these would be imported until such time that acreage was obtained to plant and harvest its own crop.

Mr G Morgan (DA) welcomed the remarks on energy saving. He asked whether CEF was involved in any way with energy labelling. He asked whether any work was being done on electricity savings in standby time of differing appliances and noted that the European Union had moved to a policy of one-watt stand by time for appliances. He asked whether CEF had any similar recommendations and whether voluntary labelling would be suitable.

Mr Damane replied that energy labelling was not the responsibility of CEF, but of Eskom, although CEF believed that Eskom was not the right organisation to be handling this. Significant savings could no doubt be made but Eskom, being the provider, was unlikely to have a neutral approach to saving.

Mr Morgan noted that CDM projects in Brazil, India and China had been signed up exceptionally fast, though South Africa seemed to have only a few in the pipeline. He asked whether there were particular barriers, noting that such projects could only result in a win/win situation if cleaner technology were implemented.

Mr Damane stated that CEF was enthusiastic about the CDM projects that would give carbon credits. He noted that the carbon credits would no doubt generate sufficient money to support other projects

Mr S Vundisa (ANC) asked for a further explanation of the project at Coega.

Mr Vundisa also asked for further comments on the statement that energy efficiency should be taken away from Eskom and placed in the hands of CEF.

Mr Damane noted that Eskom received a tariff levy in terms of demand site management and energy efficiency. Although there was an idea that the levy should be paid to CEF who should then undertake the work, Eskom had decided not to pay it over but to handle the work itself. The National Electricity Regulator (NERSA) was also in favour of giving the task to CEF, but so far it seemed that Eskom was “bullying” the other two. There were ongoing discussions to try to sort out the issue, and there was little doubt that CEF would in time take over this function.

Mr Combrinck stated that PetroSA was reported to have a planned shutdown and wondered how this would affect petrol supplies if there were only 10 million barrels of oil held. He asked if other sources could be used.

The Chairperson also asked for comment on the stockpile.

Mr Damane stated that these questions would be addressed during the PetroSA briefing.

Mr Combrinck referred to the discrepancies in the Annual Report in respect of salaries paid to Board members as against the number of meetings they had attended and asked for an explanation.

Ms O Mans, General Manager: Finance, commented that the remuneration reflected in the Annual Report included all remuneration for all committees. The discrepancies were also due to the fact that government employees were not receiving remuneration for their Board work.

The Chairperson asked for comments on the strategic approaches to advancing technologies, and for comment on the affordability and sustainability of biofuel projects.

Mr Damane noted that CEF had its own project evaluation but were also taking advantage of the industrial policy to be announced by government. CEF would try to generate as much as possible from subsidies. It was not anticipated that biofuels would be used fully, but there was certainly good potential to use them in a blend, and current projects were already doing so.

Mr S Louw (ANC) noted that the Johanna Solar was initially a South African project but appeared to have been taken over by a German company, so that CEF had to buy back a share. He asked how this was allowed to happen as surely South African products must be fully supported locally. He asked if a tender process had been followed before the German company had bought the project.

Mr Damane noted that CEF were not proactive in economic matters. He noted that the technology was developed at the University of Johannesburg and was funded by the Department of Science and Technology, not Minerals and Energy. CEF had no responsibility to go and search for new products, although it did buy into the project once it was brought to CEF’s attention. The technologies were not in fact put out to tender. The Germans already had a well-developed market and its population were incentivised to buy such products, which is why the University had sold the rights to Germany. Although CEF held only a small share it was pleased to lead the consortium on development.

Briefing by PetroSA
Mr Sipho Mkhize, Chief Executive Officer, stated that PetroSA was fully government owned as the national oil company. It operated one of three Gas To Liquid (GTL) plants worldwide. This was a huge priority for the future. It operated the crude oil storage tanks at Saldanha, which had a storage capacity of 42 million barrels. Only some of the storage was used by CEF and PetroSA; the remainder was leased by Chevron and other international traders. Although the tanks had a huge capacity, average shipments were only around two to three million barrels, and more business could be attracted if it was possible to provide smaller tanks. PetroSA produced oil and gas in South Africa and Nigeria and was an international player.

PetroSA had had a successful financial year, and had benefited from the exchange rate. Corporate objectives included implementation of the gas projects by 2008, and a project at Mossel Bay due for completion in 2012. It also looked at ways of reducing the costs of producing GTL. It would continue to explore offshore opportunities. It would comply with the new fuel specifications, despite some problems, and a Memorandum of Understanding covered the building of the new plant.

Mr Mkhize set out the objectives for exploration activities, development of gas infrastructures and engineering stakeholders. He noted that there were some alternatives to using piped gas from Mozambique and stated that PetroSA was discussing issues with other potential partners and continuing to do studies so that some fall-back options were available. PetroSA was also looking to developing additional fields in South Coast Development and this was on track for May 2007.The Low Temperature Fischer Tropsch (LTFT) technology had established a plant in Mossel Bay to develop and market the technology and aimed to conduct tests and studies. A major change globally lay in GTL technologies. PetroSA partnered with Shell, Exxon, Mobil and Sasol. The Algerian Government had invited PetroSA to bid for a project and there was a consortium with Statoil and BHP Billiton.

It was important for PetroSA to ensure security of supply, achieved through West/East coast pipelines, storage at Coega, participation in new refinery studies and exploration and drilling operations in coastal waters. The total capex over the next 5 years would be R15 billion. Last year there had been a shortage of fuel, which in fact arose not by reason of the fact that the storage was inadequate, but because the infrastructure of rail and road transport to get the fuel inland could not cope with demand. Some proposed aggregator models were set out.

PetroSA had complied with world best practices on safety. It ran successful HIV/Aids awareness and treatment strategies and 64% of employees had been voluntarily tested. The BEE track record was good, with employment equity of 70:30. Skills development, skills transfer, preferential procurement and other initiatives were taken and 89% of management and control staff were black. A supplier development programme was running, and about R10 million had been invested in this while R50 million had been spent over the last 3 years on corporate social investment. A course in petroleum studies had been set up at the University of Cape Town (UCT) through the University of Houston and the graduates of that course were also of use to other allied industries.

Mr Mkhize spent some time explaining the Imvume matter. Two public investigations had been done by the Standing Committee on Public Accounts (SCOPA) on this transaction, amounting to some R18 million. The SCOPA investigations had resulted in recommendations that the risk assessment procedures be strengthened, that there be regular report back and risk management functions be separately dealt with. Court action had commenced but a settlement was made an Order of Court in August 2005. Imvume was to repay amounts and R9.5 million had been repaid. It had then defaulted and a second Execution Order had been issued against the guarantor company. It was hoped that the matter would be fully settled by the end of the financial year.

Challenges faced by PetroSA included the need to undergo the lengthy processes of the Public Finance Management Act (PFMA), National Treasury and Exchange controls. PetroSA competed with international companies who could often capture business opportunities faster, due to their greater flexibility. PetroSA had done some studies on the procedures in other countries’ national oil and gas companies and believed that the South African government must make more flexible arrangements in regard to support if it wished to ensure security of supply. The conversion of the old to the new order of rights under new legislation was quite complex and challenging and PetroSA had sought assistance from the Department of Minerals and Energy.

Mr Nkosemntu Nika, Chief Financial Officer, presented a summary of the financial statements of PetroSA. He noted that there had been a steady growth in the price of crude oil and this had impacted favourably upon the results. The net profit had risen from the 2004 to the 2005 financial year. The exchange rate favoured PetroSA. There was an increase of 59% net profit, growth of 18% in total assets and a reduction of 27% in debt. The current debt stood at only R310 million. There was a 24% increase in net asset value. There was a cash decrease of 16% due to the agreement to pay a R500 million dividend. Margins had improved. The liquidity figures were reflected with the exclusion of cash. Mr Nkosemntu noted that PetroSA was engaged in a tax dispute with the Receiver of Revenue, and a Court date had been set for finalisation of the matter for November 2006. The matter arose in 2002 from the liquidation of Soekor and Mossgas. Loans of R7, 9 million had been granted. The Companies Act stated that the assessed loss of the company could be reduced by loans that were related to business. In this case the loans related to construction so the dispute was whether the construction was a cost of business.

Mr Mkhize reported on a shutdown at PetroSA which had started on 6 October. PetroSA had been faced with some labour disputes when contractors alleged there was disparity in rates. Some riggers had picketed, calling for rates of pay similar to other artisans. A final ultimatum had been given on Monday and matters were currently on line. A further shutdown was scheduled but PetroSA had already discovered that some equipment could be put back on line more quickly. The labour problems had caused a slack of about a week, but had not affected PetroSA badly.

Mr W Spies (FF+) noted that the shutdowns often caused problems not at shutdown but at reactivation points. PetroSA apparently provided 60% of fuel to the Western Cape and he asked for comment on the problems the previous December and for an indication of whether the reactivation would likely happen on time. Mr Lucas raised similar concerns.

Mr Mkhize replied that in fact PetroSA had not provided this substantial supply to the Western Cape in 2005. The memorandum of understanding made it difficult for PetroSA to supply directly. The retailers were supposed to come and fetch their product from the refineries. The trucks were sent but the rate of loading was limited to normal operations and could not meet the abnormal demand. The fuel was certainly available at the coast but there were logistical problems moving it inland. Power failures had also resulted in inability to operate the refineries for a period. Around R200 million loss had been suffered when Eskom had a shutdown. A logistics and supply team were now working with the Department to assess the demand and supply issues. There was no shortage at all in Mossel Bay and George but only in the inland areas. Mr Mkhize stated that when the most recent shutdown was planned PetroSA had an undertaking from the Department that it could import to cover the needs and the needs would be assessed and met at the appropriate times. Not all inland constraints would be solved immediately but it was working on the problem. It was not possible simply to hire in more trucks and drivers. The transporters were specially designed and the drivers had undergone specialist training in safety measures, disaster management and so forth.

Shutdown for maintenance and reactivation did pose problems worldwide. It was a stressful environment with a high concentration of people and very intensive work. After shutdown it was necessary to draw up plans for coordination for start up. Communication was vital. PetroSA would simulate a trial run. There had recently been insurance upgrade on the systems, and it was hoped that start up would not be problematic. PetroSA had allocated sufficient time for start up and monitoring.

Mr Spies raised the Imvume matter, stating that there was a perception that PetroSA had treated Imvume with “kid gloves” and had not enforced its rights strongly enough. The settlement order specified time limits and also stated that PetroSA would be obliged to give Imvume seven days notice to correct any breach. The default had occurred in May and he enquired why it had taken so long for the result. Imvume Resources had stood surety and co-principal debtor and it was not necessary to wait for an unsuccessful writ against Imvume Management before seeking to recover from Imvume Resources.

Adv Schmidt also touched on this matter. He noted that the settlement gave PetroSA the right, on default by Imvume, to call up the full amount still owing, and asked if this had been done. He asked what the November court matter was to deliberate upon. He asked if Imvume had any other contracts pending with PetroSA as he noted that the recovery process might well result in the liquidation of Imvume.

Mr Louw stated that he believed that PetroSA should be adopting an Ubuntu approach. He believed that Imvume was probably an empty shell, and if not, that legal action would render it so, and he did not believe that the matter should be pursued to a bitter conclusion.

Mr C Kekana (ANC) added that Imvume was probably one of the smaller players that was not yet fully able to compete in the market. He agreed that hard business principles were inappropriate and suggested that Imvume might be able to meet its commitments if it were given time.

Mr Mkhize answered that PetroSA had demanded the full amount now owing. Imvume had taken the decision to approach the Court and of course PetroSA had to defend the matter, and would abide by the decision of the Court. There was indeed a delay from May to November, but he pointed out that time was taken in formulating the demand, waiting for response, waiting on procedural time limits, giving consideration to the next step and allocation of the Court date. PetroSA was very aware that it must be procedurally correct. In regard to the attachment of assets, he said that although there might well be other contracts ongoing, these were not with PetroSA. It would be welcomed if future payments from other contracts could be attached in preference to putting the company into liquidation. The first attachment had shown only about R22 000 in available assets, which was when the decision was taken to proceed against Imvume Resources. Imvume was being guided by its legal advisors. It was also conscious of the fact that if PetroSA were to start liquidation proceedings it would be responsible for the costs. At the end of the day, the amount involved was not substantial in terms of PetroSA’s total business, but he would be pleased to see the matter finalised.

Mr Spies noted the difficulties in converting from the old to the new order rights and asked what the Committee could do, and how the Department of Minerals and Energy should be made accountable for the process of conversion.

Mr Mkhize replied that the requirements for conversion were set out but because PetroSA was state owned it had to have other mechanisms in place. During the OP26 procedures there was an understanding that other companies would participate and make 10% available. A stalemate situation had now been reached, with those joint venture partners not having anticipated the changes, and not happy with the effect on their calculated returns, often needing to refer the matter to their Boards and shareholders. There were also delays in holding discussions but it was clear that the law could not be changed to suit some partners. All issues had to be balanced and the matter looked at on a commercial basis.

Mr Spies noted that the net profit was higher than the operating profit and enquired what factors had caused this. He asked whether these were real or book profits.

Mr Nika stated that there was a high level of cash invested and this was not reflected in the operating profit. In addition there had been a large dividend payout. In the year 2005 the level of abandonment costs was raised. The assets figure had made certain estimates on remaining reserves so the rate of abandonment was higher. No plans were approved by the Board in that year and the effecting of changes stood over to the following year. By 2006 the Board had approved the South Coast Gas development and construction had started. Costs had risen due to more exploration than in the previous year.

A Member asked how PetroSA was supporting BEE, how many BEE companies were involved and what were the key areas of social investment.

Mr Mkhize replied that key areas of corporate social development included education, HIV/Aids and health, school medicine, science laboratories, poverty relief and disaster management.

Mr Lucas asked how PetroSA had turned around the operations of Mossgas.

Mr Nika stated that the main problem with Mossgas was that they were given a solid base guaranteed loan and debt to give the company full equity. The debt was then moved, and improvements were possible without the burden of the debt, with favourable exchange rates and with restructuring. Most of the assets had been invested by government and it was necessary to rationalise and to write off some debt. Oil prices had risen also. However, in the main it was the breathing space that had allowed normalisation. PetroSA still owed money to CEF.

Ms Mans noted that there was a small amount in respect of debt still outstanding. This would be settled between 2008 and 2010. Many of the loans were written off in the time period 1999 to 2001 when there were no tax implications.

Mr Lucas noted that Shell and Chevron were competitors in some instances but in others seemed to be in a consortium. He asked how this conflict was possible.

Mr Mkhize stated that the industry had a specific nature that gave rise to these apparent inconsistencies. Projects were huge and this required sharing of risk. In order to ensure competitiveness companies could not invest alone in fixed assets. The government determined fuel prices. Many of the projects were multibillion dollar deals and even conglomerates would often invite others to join them.

Mr Lucas asked for further elaboration on the pipeline from Oranjemund and whether it was not possible to process the oil at source.

Mr Mkhize noted that at present gas was being brought through pipelines which were already assets of the company. He pointed out that as technology advanced it would probably be possible to build GTL resources on ships and move from place to place, producing on the spot. Plants, however, were both risky and dangerous. GTL operations would generally try to be placed on top of gas resources and once the pipelines had been put up and were being utilised, PetroSA would look at extending or expanding.

Adv Schmidt asked for confirmation of who had received the dividend of R500 million.

Mr Nika confirmed that it had been paid to CEF (Pty) Ltd.

Adv Schmidt noted that a previous presentation to the Committee had indicated that South Africa was facing fuel shortages and would have to import fuel, which would have an impact on the trading accounts. He asked if PetroSA would be standing in for the deficit and would be installing a refinery. Financial Mail had referred to the number of barrels coming into South Africa, but it seemed that there was a problem in conveying them inland. He asked how inland security of supply would be guaranteed.

Mr Mkhize answered that the licences for the new refinery would have to be issued by the Department of Minerals and Energy. PetroSA would engage with the Department on the question of licences. It would be done on a commercial basis if PetroSA believed that this was a good project. Other companies might still be in competition but it was unlikely that any company other than the existing oil companies would become involved in building a refinery. Studies on logistics had shown it to be a good market.

Ms Mathibela noted the educational support programmes but asked if PetroSA had thought of approaching the relevant Department, probably Home Affairs, to try to tap into the skills of asylum seekers, who were physically already in South Africa as opposed to foreign nationals. Many asylum seekers had probably received training in this field.

Ms Mantuka Maisela, Vice President: Human Capital, noted that many of the skills were in short supply, including geophysicists, specialist engineers and facilities engineers. Many had to be trained at overseas universities. There was a shortage worldwide of these skills. PetroSA had become involved in a Centre of Excellence at Mossel Bay, which drew from several parts of South Africa. She noted the comment about asylum seekers and would look at the asylum programmes of the Department of Labour.

Ms Mathibela asked if PetroSA had been forewarned of the picket actions recently and had been able to take steps to minimise their effect.

Ms Maisela stated that PetroSA had a consultative forum with the employee representatives to discuss issues of concern, precisely to try to pre-empt problems. This forum had already indicated that there was a trend in the industry of threatening industrial action. Many of the people in the industry were contract workers moving from one company to another as needed. A particular group, when working for Sasol, had made similar demands in an attempt to secure additional wages and PetroSA was forewarned that they would probably do the same when they moved to PetroSA. PetroSA had pointed out that a forum existed and had asked the workers to create their own forum. PetroSA was supported in its proposals and demands by its own employee forum, which had partnered with PetroSA management in trying to reach solutions. PetroSA did not fall into the trap of raising the rates, maintaining that the rates had been workshopped with the worker representatives and had been benchmarked against industry standards. The situation had passed and PetroSA was satisfied that it had achieved the requisite shutdown procedures.

Mr Kekana noted that it was probably impossible to establish own fuel supplies in South Africa in the short term, but asked what the long-term strategy was. He urged promotion of local rather than foreign companies and investors.

Mr Mkhize noted that PetroSA was upstream and had a limited range of companies and people supplying services to it. South Africa was not an oil country and therefore had to convince investors to invest. Sometimes guarantees had to be issued as part of the bargaining process, but this was contrary to the PFMA. It was hoped that companies could be persuaded to invest in South Africa, thereby enhancing the local skills. He added that although South Africa was not a primary resource centre many international countries wished to put agents into South Africa because of its strategic position on the continent. PetroSA tried to enter into joint ventures and to ensure skills transfer and training. There had been positive responses. It was useful if such outside companies could train and invest in South Africa to alleviate PetroSA of the financial burden of setting up Centres of Excellence or training institutions at a substantial capital outlay.

The Chairperson thanked the presenters and stated that the Committee felt the Imvume matter must be finalised. The comments made should be taken as practical suggestions. Only after finalisation could proper plans be made for the future. Issues of supply were ongoing and still needed to be addressed further.

The meeting adjourned.



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