ATC201203: Report of the Portfolio Committee on Mineral Resources and Energy on the Oversight Visit to PetroSA, Mossel Bay dated 02 December 2020

Mineral Resources and Energy

Report of the Portfolio Committee on Mineral Resources and Energy on the Oversight Visit to PetroSA, Mossel Bay dated 02 December 2020                   

 

The Portfolio Committee on Mineral Resources and Energy (PCMRE), having conducted the oversight, reports as follows:

 

1. INTRODUCTION

 

The true test of democracy is the extent to which Parliament can ensure that government remains answerable to the people. This is done by maintaining constant oversight (monitoring) of government’s actions. It is for that reason that the Portfolio Committee on Mineral Resources and Energy (hereinafter, “PCMRE or the Committee”) took a resolution that it should visit PetroSA – a State Owned Entity (SOE) reporting to the Department of Mineral Resources and Energy (DMRE). The decision to visit PetroSA was informed by a number of challenges the entity is confronted with that had been presented to the Committee. The key challenges confronting the entity includes the following:

 

• The state oil and gas company lost R14.6 billion during the 2014/15 financial year, mainly because of a write-down on its offshore Project Ikhwezi natural gas project, and a further R1.1 billion impairment was reported in the 2016/17 financial year. Project Ikhwezi formed part of the national oil company’s plan to secure additional reserves to sustain its Mossel Bay gas-to-liquids (GTL) refinery, its main revenue earner. Project Ikhwezi was meant to drill five wells and the five wells earmarked for development were to be 1.5 kilometre long. Essentially, PetroSA did not derive the anticipated return from its investment in the drilling of five wells. Three out of the five drilling wells yielded a modest 25 billion cubic feet of gas out of an expected 242 billion cubic feet. Consequently, the GTL refinery is running out of supplies, with projections that the offshore gas would be exhausted by December 2020.
• Moreover, PetroSA has rehabilitation and abandonment obligations of R9.8 billion, but has set aside only R2.4 billion for these costs. The company is required to have covered this liability shortfall by February 2024. Coupled with this, year-on-year, the company incurred financial losses.

 

It is against this background that the PCMRE conducted an oversight visit to PetroSA GTL refinery on 13 – 14 November 2020. The oversight included a visit to the Mossel Bay Municipality, as well as the Solar Water Heater storage facilities within the Municipality.

 

1. COMPOSITION OF DELEGATION

 

1. Members of Parliament

 

Name of Member	Political Party
Hon. S Luzipo	African National Congress (ANC)
Hon. MG Mahlaule	African National Congress (ANC)
Hon. M Wolmarans	African National Congress (ANC)
Hon. JH Bilankulu	African National Congress (ANC)
Hon. VT Malinga	African National Congress (ANC)
Hon. SM Kula	African National Congress (ANC)
Hon. K Mileham	Democratic Alliance (DA)
Hon. C Phillips	Democratic Alliance (DA)
Hon. TM Langa	Economic Freedom Fighters (EFF)
Hon. NM Nxumalo	Inkatha Freedom Party (IFP

 

1. Parliamentary Staff

 

Name	Designation
Ms. A Boss	Committee Secretary
Mr. S Maboda	Committee Researcher
Mr. M Dodo	Committee Assistant
Mr. J Molafo	Communications Officer.

 

1. REPORT ON THE VISITS BY THE COMMITTEEE

 

This section of the report provides a summary of the oversight visit. On 13 November 2020, the Committee visited the GTL Refinery, it was briefed by PetroSA on its Corporate Strategy and later by organised labour within PetroSA. On 14 November 2020, the Committee visited the Solar Water Facilities in Mossel Bay, KwaNonqaba. Thereafter, the Committee visited the Mossel Bay Municipality to evaluate the impact of possible closure of the GTL Refinery on the Municipality and the Garden Route District (GRD) at large. The report is structured as per the sequence of the visits as specified above. 

 

1. PetroSA GTL Refinery

 

3.1.1 Tour of the Refinery

 

The GTL plant, previously known as the Mossgas plant is located in Mossel Bay and has a crude oil capacity of 45 000 bbl/d. The principal process is the conversion of natural gas produced offshore to synthetic liquid fuels via the Fischer Tropsch GTL process. The natural gas production platform is situated 80 km offshore from Mossel Bay. The refinery uses unique GTL technology, part of it is under license from Sasol. The GTL is a refinery process that converts natural gas or other gaseous hydrocarbons into longer-chain hydrocarbons such as gasoline or diesel fuel. The process converts methane-rich gases into liquid synthetic fuels by direct conversion or, in PetroSA's case, by using synthetic gas (syngas) as an intermediate through the Fisher Tropsch process. This series of conversions starts with the reforming of methane (natural gas) to carbon dioxide, carbon monoxide, hydrogen and water. The carbon monoxide to hydrogen (H2) ratio is adjusted using the water gas shift reaction and the removal of excess carbon dioxide in an aqueous solution of alkanolamine. The synthesis gas (syngas) is then chemically reacted over an iron or cobalt catalyst to produce liquid hydrocarbons and other by-products.

 

In terms of products, PetroSA’s Mossel Bay Plant was primarily developed to produce fuels for the vehicle transport sector using the Sasol High Temperature Fischer Tropsch Synthesis route as well as the patented Conversion of Olefins to Distillates (COD) process adding some flexibility to the product slate. The following are the products of the refinery:

 

 

• GTL Diesel – The GTL plant has for the past 13 years been producing ultra-clean diesel and naphtha products servicing up to 15 per cent of the South Africa’s Transport fuels market.
• Gases – Propane and Liquefied Petroleum Gas (LPG) are sold into the industrial heating fuel markets while Liquid Nitrogen and Liquid Oxygen as produced by the air separation plant are sold to the local gas industry.
• Naphtha – The GTL naphtha is once hydro treated, highly paraffinic and makes an ideal ethylene cracker feed. Conventional refinery units upgrade naphtha into high octane components, which are further blended to produce either leaded or unleaded gasoline for the local fuels market. This naphtha’s have alternative applications as performance fluids in the paint and printing industries.
• Mosspar’s – The PetroSA Mosspar and SloPar ranges comprise a variety of zero aromatic performance fluids that are marketed into the performance fluid market e.g. pesticide spray, spray oils, indoor heating fluids etc.
• Drilling fluids – Selected Mosspar’s and SloPar’s are uniquely blended for use as base material for synthetic drilling fluids.
• Alcohols – Uses include de-icing agents, windscreen washes, printing and fountain ink, paint solvents etc.
• Waxes – Wax is the primary product of the Low Temperature Fischer Tropsch process and comprises a homologous series of long chain normal paraffin. Waxes are in high demand for use as adhesives, cosmetics, inks and coating in specialty markets.

 

The Committee toured the GTL plant, the above production process or how the plant operates was explained in detail. Thereafter, the Committee visited the PetroSA Centre of Excellence. 

 

3.1.2 The PetroSA Centre of Excellence

 

The PetroSA Centre of Excellence in Mossel Bay is responsible for recruiting and training people entering the petrochemical sector. Established in 2002, the Centre was the first learning establishment dedicated to teaching the essential skills demanded by South Africa’s petrochemical sector. Accredited by the Chemical Industries Education and Training Authority (CHIETA), it provides learnerships, NQF Levels 2-4, and qualifications for chemical electricians, instrument mechanics, fitters, riggers, welders and boilermakers. In addition, it is the only nationally accredited trade test centre in the Southern Cape.

 

The Centre has trained over 3000 candidates since its inception. This is a combination of skills programmes and learnerships/ apprenticeships.  On completion of this course, the learner is qualified as an artisan in at least one of the following skills:

 

• Fabrication – Boilermaker. They shape and fabricate parts, such as stacks, uptakes and chutes, heat exchangers, and piping to premises, using heavy-metalworking machines such as brakes, rolls, and drill presses.
• Riggers – riggers are the people who expertly use ropes, pulleys, cables, chains and other gear to move heavy load from one place to another.
•  Instrumentation – instrumentation is about the Measurement and Control of the various process parameters in an industry. An Instrument Technician is responsible for the daily defects and maintenance of the control systems in the Industry.
• Fitting – Fitters perform maintenance work and day-to-day repairs on various mechanical components like pumps, compressors, valves and gearboxes.
• Electrical – the tasks of electricians are to inspect electrical systems, equipment and components to identify hazards, defects and the need for repair, among other things.
• Welding – there are several different types of welding processes that a welder can use, the most common is arc welding. Those that are skilled in arc welding generally learn tungsten inert gas (TIG) and metal inert gas (MIG) welding. Undergoing welder training at the Centre, a learner would be taught both processes of welding.

 

The Centre currently has about 147 learners and of the 147 learners, PetroSA sponsors 82 and the remainder is from Portnet, PG Bison and South TVET College. The criteria for the selection of the leaners is grade 12 Mathematics and Science, and the leaners should be between 18 and 40 years old. It was reported that the Centre has a capacity of more than 300 learners. However, due to financial challenges, it had to reduce the capacity. Due to collaboration with Sector Education and Training Authorities (SETAs), it is anticipated that the Centre would ramp up to its previous capacity of more than 300 learners.

 

3.1.3 Briefing by PetroSA

 

The Group Chief Executive Officer (GCEO), Mr. Pragasen Naidoo of PetroSA presented the company’s Strategy and Corporate Turnaround Plan. It is important to note that the strategy and the plan was approved but the Central Energy Fund (CEF) Board, and the Shareholder, the DMRE, are yet to engage with the strategy and the plan.

 

Mr. Naidoo presented the factors that contributed to current status which are:

 

• Upstream: Limited, inefficient and ineffective exploration and production activity resulting in minimal discovery and production
• Midstream: Primarily dependence on sole source feedstock and operational model resulting in no long term diversified solution
• Downstream: Constrained market growth due to limited supply and infrastructure  

 

With regards to markets it was reported that there had been significant disruption factors; such as climate change, technology, supply dynamics, price volatility, and the COVID-19 pandemic.

 

Other factors that have changed are depleted indigenous feedstock that will reach a technical limit by December 2020. Mid-stream operations are sub-optimal and inefficient are operating at less than 18000 bpd.

 

The above factors have resulted in unsustainable financial and operating conditions for PetroSA at strategic and operational levels:

 

Strategic impact:

 

• Disconnection from changing market drivers and value;
• Declining profitability and cash flow challenges;
• Lack of trust and support in the market for Petro SA;
• Abandonment liability (provision) became unaffordable; and
• Leadership instability.

 

Operational impact:

 

• Unviable gas-to-liquid operating model;
• High cash fixed costs and diminishing cash flow; and
• Low efficiency and sub-optimal plant utilisation.

 

It was reported that GTL Refinery initially anticipated to operate for 20 years (1992-2012).

 

• First gas was discovered in April 1992.
• Achieved 210 MM scf/day (design capacity) February 1993.
• E-M field: September 2000.
• Last design capacity throughput August 2006.
• South Coast Gas fields: September 2007 – Stable at 2x2 throughput (~140MMscf/c).
• 2012-2014 – throughput limited to 2x1 to prolong life.
• F-O (Ikhwezi): December 2014 Three month back to 2x2; drop to 1x1 April 2015.

 

Factors that contributed to the turnaround of the Liquid fuel market are that South African Refineries require circa USD 4 billion to upgrade local capacity and ensure continuity of associated economic activity and jobs. PetroSA can play a market-leading role through the upgrade of Mossel Bay and at relatively low cost (Enhance Condensate Processing (ECP) Project).

 

Furthermore, South Africa Liquid Bulk import and trading facilities are inefficient and inadequate to meet future economic needs, which is why significant investment is required. PetroSA is well positioned to play a strong commercial role and leverage private partnerships.

 

South Africa product import facilities are insufficient and largely not located in major demand nodes. Only new capacity created is in Cape Town, and in Port Elizabeth. 

 

The Gas Market Factors that contribute to the turnaround are as follows:

 

• Global LNG Industry facing headwinds under “Corona Virus”; Oil Price crash and Global LNG over-supply. According to the GCEO, with regards to market opportunities, Global LNG over-supply and low pricing will continue in the short-med term. International suppliers are more keen than ever to open new market demand and timing is excellent to attract new investment in terminals and gas supply.

 

South Africa is ideally positioned to expedite LNG market entry and fast-track supply of low-cost natural gas into the SA economy. This will have immediate benefits towards lower power costs, industrialisation and mitigate risk of Mozambique supply cliff. The CEO reported that Mozambique Natural Gas supply is projected to taper from 2023. Sasol has delayed FID on further exploration to mitigate this supply risk. Alternate supply through a Maputo LNG import terminal is less strategically and commercially attractive than a first SA terminal and direct imports.

 

PetroSA will lead State role in LNG development. This can be done by collaboration between SOE’s and coordination with State functions, fast-track implementation of policy, protect state interests and ensure fair commercial value and encourage and leverage private sector partnerships

 

According to PetroSA the following critical interventions to launch the turn-around strategy are needed:

 

• Financial support package to bridge short-term liquidity challenges;
• Operating model change from integrated Gas-to-Liquids Operator to diversified Gas & Liquids energy company supporting the power and liquid fuels security of supply; and 
• Critical capital projects required for upstream, midstream and downstream repositioning.

 

The CEO outlined the way forward on key interventions to ensure a commercially positive entity. The way forward is envisaged as follows:

 

Table 1: PetroSA Key Interventions

Upstream	Midstream	Downstream	Corporate Services
Disposal of non-core assets Provide Upstream Logistics service to TOTAL drilling Proceed with upstream Farm-out Position to support State carry Progress the deferment and funding of Decommissioning Financial provision.	Disposal of non-core assets Decouple Gasloop from Liquid Refinery and increase capacity to 25kbpd Obtain binding ECP execution & LNG supply offer through market engagement to enable long term solution Obtain external support to improve refinery performance Obtain binding offer to purchase “remaining indigenous gas”, through market engagement, post no gas to power Obtain PPA to secure gas to power supply from “remaining indigenous gas” Stop FA operations, subject to no gas sales and no gas to power	Capacitate Trading & Marketing Secure depot bonding to enable increase in sales Operationalize fuel supply to SOEs Complete transactional due diligence for the identified storage acquisition Secure condensate for processing Secure finished product through parent company guarantee Operationalize Gov. Depart Agric. Supply Pursue downstream opportunities, specifically reseller and lubricants	Implement Cost Savings and enable capex spend that is limited to agreed interventions Organizational restructuring approach Reposition PetroSA offices, potentially upstream and downstream based in Jhb and midstream based in Mossel Bay  Utilize Ghana as security to support funding Secure dividends from Ghana and Euro BV Support the implementation of the NPC

 

 

The CEO emphasized that operational and organizational changes are required to ensure a commercially positive entity.

 

The Acting CFO, Ms Nombulelo Tyandela presented the Auditor General’s audit outcomes and status of findings.

 

In 2018/19, the Auditor General found out that Senior Management, the accounting authority, internal audit and the audit committee collectively failed to ensure the reliability and accuracy of financial records and compliance with respect to risk management was inadequate, there was also inadequate development and monitoring action plans to address control deficiencies and inadequate governance oversight.

 

The acting CFO further presented the 2019/20 overall control environment assessed by the Auditor General Pre and Post CEF interventions. Pre CEF intervention, the root causes that needed to be addressed were:

• Leadership did not exercise responsibility regarding compliance with Treasury Regulation 29.2.1.
• Management did not monitor compliance with applicable laws and regulations.
• Management did not prepare accurate and complete financial reports resulting in adequate reviews causing material misstatement in the financial statement submitted for auditing.
• Management did not implement proper record keeping in a timely manner to ensure that compete, relevant and accurate information is accessible and available to support financial and performance reporting.

 

Post CEF Interventions, the root causes that needed to be addressed were that:

• Leadership did not exercise oversight responsibility regarding compliance with Treasury Regulation 29.2.1 resulting in non-compliance and a limitation being imposed on the audit of performance information.
• Management did not monitor compliance with applicable laws and regulations. Furthermore, management did not prepare regular, accurate and complete financial and performance reports resulting inadequate reviews causing material misstatements in the financial statements submitted for auditing.

 

These are the summary of interventions per going concern note that changed Audit Opinion 

 

Table 2: Summary of Interventions

Short Term Initiatives	Medium – Long Term Initiatives
•Disposal of non-core assets •Cost optimisation •Provision of Upstream Logistics service to TEPSA drilling campaign •Existing facility •PetroSA Ghana Limited (PGL) Dividend Income Stream •PetroSA Europe B.V •Right sizing of the business	•Cabinet approval of the merger •PetroSA Ghana securitisation •Purchase feedstock through SFF •Capex deferment •Increased refinery throughput •ECP / LNG for future

 

PetroSA has identified material misstatement in the consolidated and separate financial statements during the audit. These material misstatements also constituted non-compliance with section 55 (1) (b) of the Public Finance Management Act (PFMA).

 

Table 3: Audit Findings

Material misstatement			Impact R current year	Impact R prior year
Financial statement item	Finding	Occurred  in prior year (Yes/No)
Material misstatement corrected
Going Concern	COMAF- 18 going concern assessment limitation of the disclosure relating to the material uncertainty	Yes	Additional disclosure/support on material uncertainty	Additional disclosure/support on material uncertainty
Subsequent Events	COMAF 16- Non- disclosure of event after period reporting	No	(R 186 940 000)	-
Contingencies	COMAF 30 – Contingent liability incorrectly disclosed	No	R 123 000 000	-
Deferred tax	Deferred tax disclosure misstated	No	(R 500 000 000)	-
Related party	COMAF 32 – Related parties not accurately an completely disclosed	No	Qualitative material	-
Inventory	Cumulative misstatements of inventory	No	R 141 584 000	R93 052 538
Financial instrument	COMAF 34 – Financial instruments disclosure	No	The non-disclosure based on the monetary value attributable to the financial instruments at company level is material in amount	-

 

3.1.4 Briefing Organised Labour

 

The three unions, namely the National Union of Metalworkers of South Africa (NUMSA), Chemical, Paper Printing, Energy, Wood and Allied Workers Union (CEPPWAWU) and Solidarity briefed the Committee on PetroSA challenges and possible solutions to the challenges. Below is a synopsis of the challenges and solutions as presented by the Unions.

 

3.1.4.1 NUMSA

 

In its submission to the Committee, NUMSA raised the following key challenges and solutions to the PetroSA challenges.

 

 

 

 

3.1.4.1.1 Challenges

 

• The role of government as the shareholder is not clearly defined (No clear mandate/objectives).
• The parent company CEF as the current shareholder hampers the company’s future plan because the interests of CEF and PetroSA are not aligned.
• No clear strategic intent from PetroSA; it is unclear whether the company should remain as the gas business or converted to liquid feed.
• PetroSA’s depleting indigenous gas feedstock.
• Decommissioning liability of the historical wells from the Nationalist Government. 
• Lack of national footprint in the downstream business.
• Almost all the executive members and managers are in an acting capacity and this confines the decision making process. PetroSA currently have more than 90 acting positions.
• Lack of maintenance of the plant causes numerous unplanned downtime (trips).

 

3.1.4.1.2 Proposed Solutions

 

• PetroSA needs to invest heavily in exploration; exploration is what is going to sustain the company beyond its lifespan. Without investment in exploration, PetroSA is effectively suffocating itself; other competitors are not going to make it easy for PetroSA without this crucial investment.
• PetroSA needs to work very hard, in this instance with the Union support to ensure that the government through the DMRE designate the PetroSA as a state carry for the proposed 20% as per the Draft Upstream Petroleum Resources Development Bill (2019).
• PetroSA needs to reengineer the decommissioning liability to reduce its cost or the shareholder can shoulder the decommissioning liability, with conditions to secure the temporal relief of the PetroSA balance sheet.
• PetroSA urgently needs stability, appointment of permanent executive staff is paramount to the stability of PetroSA and this should be done through an approved structure.
• PetroSA has committed itself into very expensive contracts which erode its balance sheet; a drastic review of all existing contracts is necessary to evaluate their relevance and if they benefit PetroSA instead of suppliers.
• The biggest portion of the purchased product is the condensate purchase, and the question why so much condensate. PetroSA is a Gas to Liquid (GTL) refinery, however due to depleting gas, PetroSA purchases condensate to compensate for the volumes required to run the refinery. To reduce these high and expensive volumes of condensate required to run the refinery, twelve (12) wells were identified for intervention. About R160 million was budgeted and set aside for this activity. Two wells through this intervention produced 7% of gas into the PetroSA’s much needed feedstock. Subsequently, this activity was halted without any reasonable reasons. To resolve the current feedstock challenges and bridge the current gap in the strategy and corporate plan, which will keep the gas loop running, PetroSA must continue the well intervention activity on the rest of the remaining ten (10) wells.
• TOTAL South Africa is currently in South African waters, drilling for gas where a drilling rig is being utilized. To further increase the gas feedstock into the refinery, PetroSA must negotiate with T0L for assistance in the utilization of their drilling for well workovers of the wells that require a rig for potentially more feedstock, such as EMO8, FO9.  This project can be capitalised by using the R476 million held by CEF on behalf of PetroSA. The cost of mobilizing a rig would be greatly reduced.
• Prioritize Gas to liquid business as this will defer abandonment liability further.
• PetroSA must fast track the LNG supply to the refinery as to allow for continued operation of the Gas Loop at 2x2 train, while the negotiations with TOTAL to supply gas to PetroSA and drilling or blocks is in progress.

 

 

3.1.4.2 CEPPWAWU

 

3.1.4.2.1 Challenges

 

• Declining indigenous gas – Upstream
• Long term sustainable operating model and operational efficiency – Midstream and Operations departments
• Dwindling / declining commercial customers and high costs of imported feedstock
• Diminishing cash flow
• Abandonment liability
• Over Ninety-(90) positions are in an acting capacity, at Executive level.
• Non-existent Human Capital (HC) division, or has no personnel in HC leadership in all critical areas such Head, Employee Relations, Wellness, Training and Development, Recruitment and selection, remuneration. According to CEPPWAWU, this allegation is premised on the ills that exist in the Human Capital division.

 

3.1.4.3.2 Proposed Solutions

 

• PetroSA needs a knowledgeable and honest CEO to take it forward.
• Despite a relatively stronger than previous board in terms of diverse skills set, the current Board has provided no direction. It has failed to act on serious concerns around matters of gross negligence and dishonesty by the current CEO. It has not produced a bankable strategy and is toothless before CEF. The taking over of strategy formulation by the Director General (DG) of DMRE Adv. Mokoena was a testament to its incompetency.
• Suspend sale of assets especially PetroSA blocks until the merger.
• Publish the forensic reports on feedstock purchases, plant cannibalisation, irregularities at HC.
• To improve its balance sheet, De-commissioning liability to be deferred for 5 years.
• Execute well intervention to extend Life of Field. This restores gasloop and FA platform, protecting approximately 600 jobs.
• Gas-to-power should not be encouraged as it unnecessarily attacks jobs.
• Proceed with plans to drill EBK, in the medium term.
• Engage with TOTAL on the gas opportunity, however, the engagement must be led by DG of DMRE. PetroSA Management is too slow and too junior to deal with TOTAL.
• Expedite LNG soliciting to support the Gas-to-liquids plant
• Plant has been cannibalised (broken up). Funds be set aside to improve its integrity (3X3) – Estimated at R1,3 billion. CEF is conflicted in the merger, hence CEPPWAWU request for the Minister to drive the project internally in the office of the DG.

 

3.1.4.3 Solidarity

 

Solidarity raised the following challenges or concerns and opportunities:

 

3.1.4.3.1 Challenges/Concerns

 

• The Merger is underway (PetroSA, SFF and iGas) and section 126 of the Company’s Act (2008) precludes the sale of assets (including Parow building, farm-outs, etc.), including selling of the exploration block. PetroSA is in the process of selling government assets and is restructuring without due processes.
• Decoupling of the Gasloop will leave several hundred employees unemployed, note Gasloop includes FA platform. The irresponsible action closing gas loop is undermining collective on the ongoing engagements.
• The recklessness in stopping the diving vessel Manisha contract without considering and assessing the cost and risk. The cost is more than to keep contract. The safety of community and employees is at risk when incident happen subsea.

 

 

3.1.4.3.2 Proposed Solutions

 

• Get Funding in the form of a loan to do exploration
• Gas-to-power to be considered but not at the expense of the GTL Refinery. DMRE through the cash injection from CEF should support well interventions.
• Government-to-Government interventions may increase better relations with TOTAL especially while PetroSA is the 10% ‘owner’ carrier;
• Execute well intervention to extend the Life of Field so that Gasloop operation continue. Indigenous gas must not be diverted to Gas to Power at the expense of current operations. PetroSA core business is Gas to Liquid therefore drilling must be undertaken to increase gas reserve (i.e. EBK drilling).
• Management must prioritise plant modifications to process 21 000 bbl/day heavy condensate optimally (i.e. create value). The aim is to increase own production and reduce import product business.
• Push hard for access to Total discoveries in Block 11B/12, South Coast (Brulpadda and Luiperd).
• Push for non-stoppage of offshore operations planned for December 2020.
• Push for state to fund decommissioning liability through CEF levy.
• Push for acquisition of downstream infrastructure, fuel terminals and filling stations for us to increase commercial customers and capture the retail margin.
• Push for more aggressive exploration in the Blocks that PetroSA hold (Block 9 and 11A) and on the West Coast.

 

1. Solar Water Heater Storage Facilities

 

On 14 October 2020, DMRE briefed the Committee on the status of the installation of the 87 000 solar water geysers. At the time, it was projected that 33 000 systems would be installed by the end of December 2020 as part of Phase 1. It was reported that 9 (nine) Installation Service Providers had been appointed to install the 33 000 systems in all the 18 participating municipalities, and that in order to move with speed, the Department had allocated more than one service provider in some of participating municipalities. According to the DMRE, training of leaners who would be part of the programme was underway and was expected to be completed by 30 November 2020.

This programme has faced a number of challenges. As stated above, the Department had procured 87 000 geyser units under the National Solar Water Heater (NSWH) Programme from various suppliers. In trying to reduce expenditure related to storage, the Department took delivery of some of the units for storage in other government premises. During the 2018/19 financial year, the Department took delivery of 6 828 units valued at R61.7 million to its custody thereby transferring the risk and reward to the Department. In addition to the delivery of the 6 828 units that took place after 31 March 2019, it also came to the attention of the Department that one supplier confirmed the loss of some units due to theft at its premises. The loss was estimated at plus-minus R4 million. However, a full investigation was planned to determine the fair value of the losses. According to the Auditor General of South Africa’s Report on the performance of the Department of Energy (DoE) for the 2019/20 financial year, the majority of the disclosed fruitless and wasteful expenditure to the tune of R90.1 million was caused by storage costs for geyser units to various suppliers by the DoE.

 

The Committee visited storage facilities in KwaNonqaba, Barcelona Community Hall, and one at Mossel Bay Regional Waste Treatment Plant. Ms, Elizabeth Marabwa, Chief Director: Programmes and Projects briefed the Committee and stated that there are about 2000 solar water geysers stored in the Mossel Bay Municipality (MBM), 1800 stored in Barcelona Community Hall and 200 in the Regional Waste Treatment Plant. Ms Marabwa indicated that the installation of the 1800 solar geysers would be complete by the end of January 2021. According to her, the solar water geysers were stored in the MBM since April 2019.

 

1. Briefing by the Mossel Bay Municipality

 

The Committee was briefed by the MBM on the impact of the closure of PetroSA on Mossel Bay. The Integrated Development Plan (IDP) Manager, Ms. G Harding, delivered a presentation, which is summarised below.

 

The Mossel Bay municipal area covers 2 001 square kilometres and is situated halfway between the Cape Town Metro area and Port Elizabeth, making it a crucial economic development zone. The PetroSA plant and Mossel Bay Port are important infrastructure nodes in the municipal area. The harbour serves the local fishing, gas and tourism sectors. In terms of the Gross Domestic Product of the Region (GDPR), the top three sectors in the Mossel Bay municipal area are:

 

• Finance, insurance, real estate and business services (28.3%)
• Wholesale and retail trade, catering and accommodation (17.5%) sectors and
• The manufacturing sector 14.7% in the secondary sector

 

Collectively, these three sectors contributed 60.5% of the region’s GDPR in 2018 (Mero, 2020: 457).

 

PetroSA annual results are reflected at National Government level and not included under local contributions to the GDPR, but with an annual turnover of R10.5 billion in 2019 PetroSA accounted for close to 65 per cent of the total Mossel Bay GDP and 25 per cent of the Garden Route GDP (PetroSA Annual Report, 2019).

 

Regarding the closure of PetroSA and its impact, the MBM modelled two scenarios. On the positive side, the Municipality attempted to model a further investment by PetroSA in its plant and in the negative scenario; it modelled a disinvestment by the company within the next four years.

 

The Municipality estimate that an investment by PetroSA pursuant to the introduction of alternative feedstock gas would increase the Gross Value Added (GVA) of Mossel Bay directly as a result of the investment and indirectly through the multiplier effect by more than R500 million and increase employment by 320. The municipality’s expenses would also increase. In the event of a disinvestment, the direct and indirect impact on the local economy is estimated to amount to more than R1 billion per annum and a loss of 1 600 jobs. According to Ms Harding, the municipality would however be able to realise some savings due to rationalisation of its expenses. The indirect and direct impact of the closure of PetroSA refinery on Mossel Bay was reported as follows:

 

Direct Impact

• An estimate of 1130 people works for PetroSA Mossel Bay. This represent five (5) per cent of the workforce of Mossel Bay. In terms of salary earned the impact could be big.

• Average salary of R400 000 per person, per annum which equates to R452 million in salaries.
• A third of that is directly spend in local economy to the value of R150 million that could potentially be taken out of the economy.

• To put this into perspective it could lead to the closure of 1 supermarket (Checkers or Pick a Pay), 2 to 3 fuel stations, 3 medical practitioners as examples. Secondary job losses due to the 1130 people not spending in the local economy could result in an additional 1100 jobs being lost.

 

Impact on the Municipal Finances:

 

• Average Municipal Account is R1900 per month as per National Treasury. Estimated number of households owning properties in Mossel Bay that could be influenced by the closure is about 1600 households.
• Possible loss to Municipal income to the tune of R36,5 million per annum over the short to medium term.

 

Indirect Impact

The indirect impact is difficult to determine exactly as no primary survey was done. However, it is foreseen that there would be a:

• Drop in property values since the market would be flooded with a big volume of properties.
• Drop in school going children, one (1) primary school and one (1) secondary school lost.

 

The closure of PetroSA may influence the following and induce a perpetual ripple effect, changing Mossel Bay from a stable to a struggling town:

 

 

Port of Mossel Bay

• PetroSA is its biggest customer at present; therefore, closure would have a significantly adverse impact on the port.
• Upgrade, expansion and investment plans of around R300 million may be postponed or even cancelled, leading to more job losses.
• Lack of infrastructure improvements might influence the TOTAL project, forcing the operations to be managed from Cape Town and even further deepening the crisis.

 

Tourism

• Inability of the Port to upgrade facilities may lead to the loss of passenger ships calling on the Port.
• Eskom Gourikwa and potential of an interrupted power supply
• International Status of TNPA and Airports Company South Africa (ACSA) George may be jeopardised due to lack of infrastructure upgrades and fewer vessels and passengers using the facilities
• Loss of Foreign Income (Fuel sales to international clients)
• Supply of Fuel to the Southern region and Eastern Cape may be interrupted.

 

Impact on downstream businesses and service providers in the value chain:

 

• Trade, with reduced consumer spending, purchases, parts etc.
• Metal, fabrication and engineering services
• Transport services linked to the plant (shipping through the port, flights, trucking)
• Maintenance and cleaning services
• Associated chemical and petroleum services that support the plant
• Closing of the Training Centre of Excellence and decrease in available skills which can result in loss of competitiveness and the pool of skilled workers working on an Internationally renowned facility (50 trainers and apprentices involved)
• Inability to improve skills competitiveness due to the fact that the plant has to comply with international standards.

 

Mossel Bay is not the only municipality that would be impacted negatively, the whole region would be affected and future growth and investment plans might be set back by 10 or more years.

 

1. COMMITTEE OBSERVATIONS

 

This section provides a synopsis of the key issues observed by the Committee, particularly emanating from the presentations, discussions, and the walkabouts in the GTL refinery. These include:

 

• The Committee was concerned about the status of the PetroSA GTL refinery. Reserves in the refinery are close to depletion and are expected to run out by December 2020. The major contributor to this challenge is the failure of Project Ikhwezi. Project Ikhwezi was meant to drill five wells. The five wells that are earmarked for development were to be 1.5 kilometre long. Essentially, PetroSA did not yield the anticipated return from its investment in the drilling of five wells. For example, three out of the five drilling wells yielded a modest 25 billion cubic feet of gas out of an expected 242 billion cubic feet.
• Although not signed off by the Shareholder (DMRE), PetroSA has developed a Strategy and a Corporate Turnaround Plan. The Committee was concerned about the practicality on the implementation of the turnaround strategy for PetroSA.
• As part of the strategy, PetroSA aims to embark on a number of strategic partnerships in the upstream area as part of the organisation’s efforts for de-risking the upstream operations, getting access to funding and technical skills required to execute large complex upstream projects. This is an effort to avoid the repeat of Project Ikhwezi. Organised labour is also in support of the acceleration of exploration and production.
• The Committee notes that PetroSA aims to be an off-taker of the TOTAL Brulpadda gas discovery.
• As a cost-saving measure, PetroSA plans to dispose its non-core assets, which include excess material of Ikhwezi Project and the Receiving Vessel, to the value of R100 million. Furthermore, the Board took a cut of 30 per cent on their Board fees. Paying of acting allowances has been discontinued as part of cost-saving measures.
• It is apparent that, as part of the Corporate Plan, there would be job losses.
• The Committee noted that, after more than five years, the company has appointed a permanent GCEO. However, the Committee also noted that a considerable number of Executives are still on acting positons.
• The Committee was concerned about the devastating socio-economic impact the closure of PetroSA refinery would have on the economy of Mossel Bay and the Garden Route District. Moreover, the Committee is concerned about the poor relationship between PetroSA and the Mossel Bay Local Municipality.
• The Committee noted the relevance of the Centre of Excellence as a community skilled institution and the contribution to the communities in Mossel Bay.
• The Committee noted with concern the poor relationship between organised labour and PetroSA. The organised labour contends that its proposals on how to rescue PetroSA are often not taken into account. Organised labour is of the view that the sale of assets should be held in abeyance until the merger of Strategic Fuel Fund, IGas and PetroSA is complete.
• The Committee noted that, in its Corporate plan, PetroSA intends to sell its non-core assets.  However, organised labour is of the view that the sale of non-core assets cannot happen at this stage until the merger process is finalised.
• There are three unions active at PetroSA who presented similar submissions on the state of the entity. Hence the Committee requested the Committees Researcher to consolidate all of these.
• The Committee was concerned about progress on the installation of the 87 000 solar water geysers. About 2000 solar water geysers were stored in Mossel Municipal facilities since April 2019.
• To date, only 5 solar water geysers have been installed in the Mossel Bay municipality. To this end, a commitment was made by DMRE that by end of January 2021, 1 995 solar water geysers would be installed.  
• The Committee noted with concern that there were different types of solar geyser products procured and this impacted negatively on the training.

 

1. COMMITTEE RECOMMENDATIONS

 

The Portfolio Committee having conducted the oversight visit recommends that the Minister should:

 

• Ensure that a plan for sourcing feedstock for the PetroSA GTL refinery is presented to the Committee as a matter of urgency.
• Update the Committee on progress made on the installation of the 87 000 solar water geysers by the end of January 2021. Moreover, officials who contributed to the failure of the programme should account to Parliament.
• Ensure that the training of solar water geysers is skilled based and not be product based.
• Submit and present to the Committee the Project Ikhwezi, including details of the officials and the Board Members involved at the time.
•  Encourage the Centre of Excellence to continue with their work and collaborate with other institutions in advancing skills development in the area.
• Submit and present to the Committee all forensic investigations within the CEF group, completed and those in progress by the end of January 2021.
• Actively engage with Total on the Brulppada gas discovery project. The Committee should be updated on progress.
• Ensure that the PetroSA corporate turnaround strategy compliments and strengthens the merger process.
• Urge CEF, PetroSA and DMRE to avoid any potential job looses
• Ensure that the CEO of CEF and the Mayor and Municipal Manager of Mossel Bay Municipality meet and actively engage on the challenges facing PetroSA and its impact on Mossel Bay livelihoods in the region. 
• Ensure the relationship between organised labour and PetroSA be strengthened in order to create a good working relationship.
• Ensure that views and opinions of the organised labour are taken into consideration to assist the process going forward.

 

 

Report to be considered