PetroSA & Black Economic Empowerment and Transformation

MINERALS AND ENERGY PORTFOLIO COMMITTEE
18 May 2007
PETROSA & BLACK ECONOMIC EMPOWERMENT AND TRANSFORMATION

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
PetroSA presentation

Audio Recording of the Meeting

SUMMARY
The Committee held a meeting at the PetroSA premises in Parow. In the briefing, PetroSA said that it was looking to position itself as a leading company, and was already a world leader in certain aspects of the coal and gas to liquid fuel industry. Their responsibilities included ensuring the supply of fuel. They were continually exploring for more gas deposits, but would have to consider importing certain fuels in order to comply with their mandate. It outlined its efforts in terms of Black Economic Empowerment, particularly skills development, where they were committed to fostering scarce skills.

Members asked several questions relating to Black Employment Empowerment. It was stated that high costs hampered the entry of these companies into the market. Approximately 40% of discretionary funding was channelled towards BEE companies, but this figure was significantly less compared to their total expenditure. The percentage of women in PetroSA’s employ was also low.

MINUTES
Mr Sipho Mkhize (Chief Executive Officer, PetroSA) welcomed the Committee to the premises of PetroSA. The presentation highlighted the role of PetroSA as the national oil company. The security of supply of petroleum products was key. This security included the ensuring of daily requirements and the averting of crisis situations. They were also concerned with the access to feedstocks and the storage of fuel. There should be a diverse portfolio, covering the use of either crude oil or gas to produce petrol, diesel, paraffin, kerosene, jet fuel and others. They would look at other sustainable fuels such as biofuels, but this was not their core business at present.

As a national company, PetroSA needed to assume a leadership role. The international oil companies were huge. To play a meaningful role, his organisation would have to move towards that kind of operation. Lots of capital would have to be injected to achieve that. They were already operating up and downstream. PetroSA’s in-house technologies in terms of gas and COD were of an international standard. There was a sound relationship between the company and the country.

However, he said, there was not much domestic structure at present. It was difficult to access sites and retail facilities. He asked the Committee to reserve some sites for PetroSA. The current Memorandum of Understanding (MoU) would expire in February 2008.

Mr Mkhize listed the key strategic focus areas. First was the continued search for feedstock and non-feedstock deposits. Secondly, there was a focus on ensuring gas supplies until at least 2010, where more exploration would be needed. If they could not find more gas deposits, they might approach other countries without the ability to convert gas to fuel themselves. Infrastructure upgrades were necessary, especially in order to increase refining capability. However, these were very expensive to build.

He continued that synthetic fuel could not be used for aviation fuel, but it might be possible to use a blend. Allowance was being made for the sustainability of biodiesel. Ocean exploration was continuing, and a south west coastal pipeline was being laid, which would extend as far as Coega. Storage facilities at Saldanha Bay and Milnerton were in place. There were occasional shortages of Liquid Petroleum Gas (LPG). However, more Liquid Nitrogen Gas (LNG) would be sourced. The key suppliers for this were in the Middle East. The requirement was three to four tons per annum. Ships would be needed to transport this gas. All in all, PetroSA was looking at R 45 billion to service its initiatives. A full financial model would be completed by the end of 2007. He would be in a position by July to say which of these initiatives the country could afford. PetroSA should be able to afford a reasonable portion of the R45 billion, and the rest would have to be financed. The first priority was for a commercial basis from which to launch these strategies.

Discussion
Mr S Louw (ANC) said that as of that morning, there was no prospect of a lower petrol price in June. Given this state of affairs, PetroSA should investigate the security of the price. This would be in the interests of the country in the light of global plans. He asked if they would have any difficulties in achieving their goals. The design and configuration of PetroSA was based on the use of natural gas and the conversion of coal to liquid fuels. It was estimated that the reserves would run dry by 2011. He asked if there were any plans to secure feedstock elsewhere. Turning to the strategies on the security of supply, he asked if PetroSA had thought of how to sustain natural gas supplies; how far they were undertaking their search for alternate sources; their plans to import gas with Mossgas as a customer; and the Saldanha Bay gas turbine project power station envisaged by Eskom.

Mr Louw said that PetroSA was also involved in gas pipelines, such as the one from Oranjemund to Coega. Supply for this would come from a variety of fields. There were three basic alternate energy sources. A program had been approved by the Minister. Facilities should be provided for the basic energy needs for non-electrified housing. Both LPG and LNG should be part of the strategy. He asked what steps would be taken to ensure that LPG would stay affordable for indigent people. PetroSA would have to ensure an uninterrupted supply, and would have to look to storage and importation requirements.

Mr Nkosemntu Nika (Chief Financial Officer, PetroSA) said that under the current circumstances a decrease in the petrol price was unlikely, but no-one could predict this. In the bigger scheme of things, South Africa was not a huge player with just 7% of the market. There was still motivation for investment, and PetroSA needed to grow. This would mitigate the issue of the oil price. PetroSA would be of benefit to the country if it could grow substantially, but at present, fluctuations in the oil price were beyond their control.

Mr Mkhize added that a higher price would make more money for the country. The life of the Mossel Bay project had been set at 22 years. A portion of it had been sold to Genco, who had reassessed the matter. They found that they could pump more oil than the original capacity, but this had reduced the project’s life to twelve years. They had made enough money, and now the country was short of gas.

He said that PetroSA was continuing to explore South Africa’s continental waters. There were deposits off the West Coast, but there was still a need to estimate their commercial viability. Approaches had been made to Oman, who had substantial LNG deposits. This would be ideal fuel for the proposed closed cycle gas turbine being developed by Eskom. If they were using international pricing, then this project would be affordable. A minimum baseband was needed. They would negotiate with Eskom to set a reasonable price. Some equipment might have to be changed. There would be an undertaking with Eskom. LNG was also being sourced in Algeria.

Mr Mkhize said that a pipeline would be constructed from Namibia if sufficient gas was found off the West Coast. This might only go as far as the plant at Saldanha Bay. A financial analysis was done on the Kudu field, but this had shown that exploitation of this field would be more expensive than importing LNG because of the small pockets found so far. The pipeline would cost more than US $ 2 billion just to reach the shore. The cost would be more than US $ 6 per kilojoule, and it was therefore more cost efficient to import.

He said that PetroSA had looked at three areas for integrated energy centres. Two projects would be started by the end of the year. One of these would be an LPG receiving terminal, but he feared that the refineries might not be able to cope with the increased demand. The importation of LNG would be into the major harbours. Once the study had been completed the venues would be announced, and then the distribution network would be considered. There would be a different price for LPG and fuel. The Department of Mineral and Energy Affairs (DME) was looking at the current pricing structure. It might prove cheaper to buy refined products overseas.

Mr S Mukthithi (Parliamentary Researcher) said that Black Economic Empowerment (BEE) was at the heart of the mandate given to PetroSA. Targets had been set. There had been some progress, but he asked how far matters had gone. He also asked what efforts had been made to see the mandate achieved when PetroSA dealt with the business.

Ms N Mathibela (ANC) said that PetroSA was essentially a BEE company. She asked if there was any strategy for PetroSA to play a transformation role, using BEE and black suppliers. The MoU stated that PetroSA was the current marketer for the oil companies. Supplies were uplifted from PetroSA. She asked what the expiry of the MoU would mean for PetroSA. What plans did they have going forward, and what plans were there to combat the possibility of PetroSA losing its market share? She also asked if there were any plans to increase productivity, and how this would affect the balance of the supply.

Mr Mkhize answered that the MoU provided for a downstream entry strategy. Imports were financial productive. Industries wanted to buy at discounted rates, and wanted products at certain prices. The industry was negotiating from a weak position. There was currently an international shutdown, and they were selling at a good price. PetroSA had moved into the BEE arena, and these companies were selling the finished products. The current MoU prevented PetroSA from selling to the public. At present they had to rely on their structure. There was a price for access. If there was a deadlock, they would ask the Committee to help.

In the past, the system had allowed for the recovery of interest. PetroSA would always be able to sell to retailers. The environment was friendly for them. They would sell to BEE companies where possible. There was a constraint in the capacity of the refineries. It would make BEE complete if one of the companies could enter this sector. There were also complications in the acquisition of feedstock. If five tenders had to be called for, then this could skew the market.

Mr Mkhize said that the finances in question were enormous. A single shipment of condensate could cost between $15 and $20 million. BEE companies might also struggle to afford the shipping fees, which could be anything from R2 million for a single shipment. This was a huge constraint, and back to back guarantees were required for these enormous sums. He did not feel that any BEE company could afford those prices. Products that were selling well could be moved to BEE companies. Sharing of costs was a possibility, but that might mean that PetroSA would have to discount to BEE customers. There would always be a price differential. Every shipment by road tanker cost approximately R 200 000, and payment for this would be needed. The Board was working on these questions. The level of costs had to be attained. With assistance, BEE companies could have the biggest market share from PetroSA production. However, shipping costs could nullify discounts. The principles of capitalism could make the situation difficult. The reality of the situation did not match the strategy.

He continued that the management of funds was the subject of internal debate. Special skills were needed, and a lot of money could be made if one understood the price differential. There was a need to develop and work in the environment. Training opportunities were needed. Payment should be made while the trainees were still at school. There was a need to develop an in-house capability.

It would be difficult to make announcements about BEE. There was uncertainty over supplies, with estimates being both over and under the actual figures. The cost of participating in the industry was significant, with a 95% chance of an entrepreneur losing all. There was only a 2% success rate in exploration. Things were even difficult to enter the market as a service provider. Chemical industries had to subscribe to international codes, and only a very few in the industry reached that level. There were also constraints of audit and certification. The set-up costs were huge, but PetroSA was looking at how the gap could be breached. Helicopter costs were also enormous, and a long term contract was necessary to have a hope of recouping these costs. PetroSA would assist any BEE company trying to enter the industry. He saw a huge role for international companies to assist PetroSA in joint ventures. They had already taken on many challenges.

Mr Mukthithi noted that there was much commitment to fostering scarce skills. Various programmes had been launched, and there were even academies in place. In the public service it was common for young blacks to leapfrog from one job to another. Market forces were at work, and companies could not retain these people. He asked what PetroSA’s retention strategy was.

The Chairperson mentioned an empowerment report which he had read. It had said kind things about PetroSA. A weakness that was highlighted was the lack of female representation. This was the case across the board in the industry. Confidentiality clauses were applicable. He asked how much PetroSA imported, including petrol, condensate and other commodities, and what benefit there was to BEE companies. He needed specific details on deals and projects. He asked if BEE deals were at the core areas of the business, or only in the peripheral areas.

Mr Mkhize said that they had set up a professorship in geosciences. As quick as they could train people, being the smartest candidates available, they were snapped up by the big companies despite financial penalties. The skills shortage was desperate. There was an increasing program to identify promising youngsters at high school already. They did not only need scientists, but also lawyers as many agreements had to be negotiated.

He said that the majority of the feedstock was local. The production of gas was the equivalent of 22 to 25 thousand barrels a day. All the condensate and reformate was imported. He saw a possible role for BEE companies with LNG. The contract for this was estimated at R 2.5 billion per annum. But the set-up costs dictated that a long-term contract was needed for a company to recover its investment. Prices also fluctuated. PetroSA had assisted some BEE companies. They had also created BEE opportunities at other companies. Better long term contracts could not be issued at present due to high shipping costs.

Mr Nika presented a table in relation to the new BEE codes. Of PetroSA’s discretionary spending of R 1.2 billion, R 496 had gone to BEE companies. A further R 202 million had been spent with companies having a BEE component of less than 25%. Capital expenditure could not be secured by any South African company. The total expenditure for the Financial Year was more in the region of R 5 billion.

He said that the representation of women was around 24%. The focus was on recruiting more women. The SASTI manager was a former employee of PetroSA. His placement was a BEE imperative. The shareholder mandate had to be specified. His observation at Executive Committee meetings was that a lot of time was spent talking people issues, and how to retain their services. Their plan was based on salary and recognition. There was no window dressing. All their workers were fully employed and enjoyed job satisfaction.

Mr Nika then presented some details on corporate social investment. R 50 million had been committed towards social responsibility programmes. Of this R 31 million had been spent. The company followed a ‘use it or lose it’ approach, but he had managed what was effectively a rollover of R 19 million. R 10 million would go towards education in the Eastern Cape. Donations should not be made to a government department, but the payment had been made to a Trust. Such a system was already in place in the Western Cape.

The Chairperson asked how much of imports were channelled to BEE companies.

Mr Nika said that the discretionary spending was R 1.2 billion. The total expenditure was R 5.3 billion. This included all the payments in cases where there was no opportunity for BEE interests. This was a balance of R 4.1 billion of non-discretionary expenses for items such as electricity, insurance and capital expenditure.

The Chairperson concluded that what Mr Nika was really saying was that much less than half of their spending was non-discretionary.

Mr Nika said that under the new cord, money paid to other government departments and to overseas suppliers was not included as discretionary spending.

Mr Mhkize said that there were no alternatives in some cases, for example to Eskom. Some companies did not find South Africa attractive. There should be some incentive for companies dealing with South Africa. Some were even prepared to pay penalties in order to secure work in the country. BEE companies should also be prepared to take risks. He gave the example of a pipe-laying ship, were the running costs for the ship alone were between 80 and 90% of the total cost. It was a complex situation, especially when dealing with family-owned businesses.

The Chairperson said that the Committee would have to return to this issue. At face value, he concluded that within the total expenditure only a small percentage was discretionary spending. If the total was R 5.3 billion, then the R 496 million should be calculated on that rather than the discretionary component of R 1.2 billion. The Committee was bombarded by companies seeking explanations, and this had nothing to do with costs. More understanding of the situation was needed.

PetroSA was a state-owned enterprise (SOE). There was not more pressure on them than any other player, but not any less either. This was the third SOE that the Committee had visited. After the last they could draw conclusions about the state of affairs with BEE issues. PetroSA was awaiting a response on the MoU. When the scorecard was compiled their weaknesses should not be over or understated. Good things were happening with PetroSA. Thought would have to be given on how to assist the Department of Trade and Industry on legislation regarding fronting.

The meeting was adjourned.