Central Energy Fund and subsidiaries on their 2013/14 Annual Reports, with Deputy Minister present

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed Members to the meeting, the Deputy Minister of Energy, Board Members from the various entities and all the representatives from Central Energy Fund (CEF) subsidiaries.

Briefing by the Central Energy Fund, Group of Companies (CEF)

Ms Thembisile Majola, Deputy Minister, Department of Energy (DoE) thanked the Committee for the invitation. She believed that Members had been looking forward to the engagement, and she was pleased that a whole day was allocated for a briefing by the holding company and all its subsidiaries. The presentation would be a very fruitful one. If there were any issues which needed comment, officials from the DoE who were present would answer some of the questions raised by Members. However all the senior management from all the subsidiaries were present to respond to any questions which Members will have, together with the questions which were raised to the DoE the previous week.

Mr Sizwe Mncwango, Chief Executive Officer, CEF, thanked the Deputy Minister for the introductory remarks. He asked that an opportunity be given to the officials to respond to some of the questions which were asked by Members in a meeting the previous week. By way of context, he said the essence of the questions asked by Members were around PetroSA, one of CEF’s strongest entities. The key issues around PetroSA were around feedstock. Essentially the gas from offshore were processed into the plant and petrol-diesel would be produced, and to a small extent, paraffin was also produced.  He said the other material which the presentation would talk to would include the R3.4 billion impairment as a result of feedstock, and the R1.6 billion irregular expenditure at CEF.

He said PetroSA would still have its own opportunity to talk to Members in the afternoon, however because these issues were very significant, they needed to be addressed before the commencement of the presentation. The feedstock at the Mossel Bay GTL plant started operating in 1992 with offshore reserves of 1 trillion cubic feet (tcf) which could have given the plant a life of about 15 years. The life of the plant was estimated to have started in 1992 and come to an end in 2007. However without apportioning blame to those who were charged with the stewardship of PetroSA at the time, the reserves of the plant were not replenished so that the life of the plant could be turned around beyond 2007. There were two significant outcomes to this. The first was that the plant was slowed down to be run at 15% of its capacity, shutting down the plant was not an option. The second consequence was that PetroSA hastily started to explore along the coast with the hope of finding gas as soon as possible. And by their very nature, these explorations were highly risky, and they favored those with a stronger balance sheet. Stock therefore had to be replenished, and the environment was a very risky one to operate in, requiring high capital.

 The R3.4 billion impairment as a result of feedstock was a very serious issue and it could not be underplayed. This matter was directly linked to the risky nature of offshore drilling, which was one of PetroSA’s efforts in trying to replenish stock from 2007. The impairment was quite significant given the size of PetroSA’s balance sheet. The impairment was an investment write down. Finding gas was very risky in nature, and at PetroSA this was done in a very hasty way, in an attempt to replenish the feedstock. It was hoped that the investment would be recovered over the life of the project, but this would not be entirely the case. There would be a shortfall.

The third issue which needed to be disclosed upfront pertaining to PetroSA was around irregular expenditure of R1.6 billion. PetroSA operated on an exemption from National Treasury up until 8 December 2012. The reasons for why National Treasury would give an exemption would be talked to by the Chief Executive Officer. PetroSA did not have an exemption between 8 December 2012 and 4 June 2014. During this period, PetroSA operated without an exemption.

Mr Siphamandla Mthethwa, Chief Financial Officer, PetroSA, said in terms of the Preferential Procurement Policy Framework Act (PPPFA), the CEF Group was fully compliant with all the aspects of the Act except with this specific area of the exemption. PetroSA had to apply for the exemption because of the issues with the feedstock in Mossel Bay. Compliance with the Act therefore did not make sense because PetroSA was procuring from international suppliers. The PPPFA came into effect in 2011, and the Act allowed for the Minister of Finance to give exemptions in certain circumstances. One of the areas where an expansion could be granted was when a company was trading with international suppliers. The exemption PetroSA applied for expired in 2012 and another one which was applied for took a bit of time however, and it was only approved on 4 June 2014. This meant that any expenditure relating to feedstock purchases would not be regarded as irregular expenditure.

Mr Mncwango continued and said the objectives of the presentation would be to give the Committee a holistic view of the CEF Group of Companies and to talk about the CEF Group restructuring as a foundation on which the company was being re-built towards working on its vision. The Group’s performance during the 2013/14 financial year would also be discussed; what was delivered and what was not delivered, including the audit findings as they refer to the work which was done by the Auditor-General. All CEF subsidiaries would be presenting, lead by the Group Chief Executive Officers. CEF’s strategic vision would be given and key milestones would be shared with the Committee. The Committee would also be indulged on the Group’s sustainability and how the Group would be taken forward in the long term. The challenges face by the Group would also be highlighted during the presentation, and a way forward would be provided.

The CEF had improved quite significantly, primarily through the restructuring of the Group. Oversight had been improved, Board structures and other sub-Committees had been set up and CEF as a holding company had a better view of what the underlying operations are about, compared to about three years ago. This was a process which started as a result of some Board break-away sessions and three resolutions that were passed. The CEF had done well in crafting its 2025 vision was confident that it would deliver. The Saber Investment in Ghana had also been producing positive results. The CEF had a better view of its mandate and what it was expected to do and CEF was ready to execute its 2025 vision. Certain issues of misconduct had been dealt with, and these investigations would form part of the PetroSA report.

He gave an overview of the CEF Groups of Companies and said CEF (SOC) Ltd was a Schedule 2 public enterprise which was established under the Central Energy Fund Act. The CEF operated in the energy sector and was governed by the Public Finance Management Act (PFMA) in terms of its dealings and various undertakings. The CEF was involved in the research for appropriate energy solutions to meet the future needs of South Africa, the Southern African Development Community (SADC) and the sub-Saharan African region, including oil, gas, electrical power, solar energy, low-smoke fuels, biomass, wind and renewable energy sources. The CEF’s primary role was to contribute to security of energy supply. The Group also played a pivotal role in reducing the country’s over-reliance on petroleum multinationals and other oil majors. The CEF was therefore a holding company for the following subsidiaries which constituted the CEF Group; CEF, Clean Energy Division, PetroSA, Strategic Fuel Fund (SFF), Petroleum Agency of South Africa (PASA), African Exploration Mining and Finance Corporation (AEMFC) and iGas.

He explained that the CEF Group’s industrial value chain was made up of these four pillars; upstream, trading, midstream and downstream. He gave a summary of the CEF Group restructuring process. He explained that in 2010, the CEF Board through a series of strategic workshops, recognised many strategic challenges that were facing the CEF Group and preventing it from performing optimally. These strategic workshops were held between 2010 and 2013 with a focus on understanding the underlying strategic challenges and identifying interventions required to change the critical sustainability situation that was beginning to emerge. Some of the strategic challenges which were identified were as follows:

•Poor project execution

•Lack of leadership

•Missed deadlines

•Lack of financial sustainability considerations

•Potential skills shortages

•Diminishing cash reserves

As a result of identifying key strategic challenges that would affect Group sustainability, three critical resolutions emerged; streamlining the Group by reducing the number of subsidiaries, position the CEF to act as a Holding Company which provided oversight and assurance and returning the Group to commercial viability and sustainability. These resolutions were intertwined to ensure the long term success of the business. The benefits of streamlining the Group structure would be those of improved oversight, improved execution of large and complex projects, better resource allocation and improved management of scale, materiality and focus. CEF would therefore, upon completing the restructuring, be a lean structure that reflected the Group’s strategic focus with clear roles and accountabilities. Leadership would also be better aligned for improved effectiveness.

Mr Mncwango explained that the strategic intent of the CEF was aligned to the mandate given by the Shareholder. The mandate of the CEF was therefore to finance and promote the acquisition, exploration, manufacture and marketing of energy with a primary purpose to contribute to the national security of energy supply. The CEF had therefore formulated a Vision 2025 Strategy that would create a financially strong state owned enterprise with the capability to support the Department of Energy to implement some of its new programmes.

CEF Group Performance

Mr Mthethwa said he was pleased to inform the Committee that there were zero fatalities and no oil spills under the CEF Group. One of the Group’s major highlights was that profit was at R 2.1 billion; this was before the once-off impairment. All companies in the Group received an unqualified audit. Some of the performance concerns however were that of the R3.4 billion impairment as previously stated, the delays on the Ikhwezi project as a result of the impairment, the disability rate which was higher than 1.44, coal production being below the 1.5 million tons target and the R 1.6 billion irregular expenditure among others. With regards to the Group financial summary as at 31 March 2014, he said the Group had generated over R 21.8 billion in 2014, a 10.8% increase from the R 19.4 billion generated in 2013. He explained that some of the Group’s financial priorities for sustainability were:

•Cost optimization

•Improved oversight

•Investment selection and monitoring

•Shareholder compacts with subsidiaries

•Review of the incentive schemes

•Culture change across the group

Mr Reggie Boqo, Chairperson, Audit and Risk Committee, CEF, explained that the Audit Committee was guided by a detailed charter that was reviewed annually by the Board.  The Audit Committee had a workplan that was based on this charter. The CEF group has been functioning with disparate risk management processes across the group. As previously stated, in February 2014, the CEF Board had approved the consolidated CEF Group Enterprise wide Risk Management Policy which served as a base for the consolidated risk approach across the group. The AGSA in their 2013/14 Audit Report has commended Management on the general improvement of the Internal Controls which is marked by the general reduction in audit findings.

Discussion

Mr L Greyling (DA) asked about the R1.6 billion irregular expenditure. He hoped that PetroSA would thoroughly deal with the matter during their presentation. He also asked about the R3.4 billion impairment. This was extremely concerning. Could the CEF unpack this a bit more, in an attempt to provide more clarity to the Committee? According to the presentation Ikhwezi had been delayed in the exploration of gas; going forward, what was the plan for securing feedstock? The Committee was still waiting for the Gas Utilization Master Plan (GUMP) for the DoE. There were massive prospects for LNG within the region and these should be accessed, but this required some kind of concerted strategy from the DoE. How was the CEF feeding into this strategy? Was CEF trying to secure gas from other alternative sources, seeing that the Liquid Nitrogen Gas (LNG) facility was no longer feasible? He asked about the Engine deal; was CEF still looking at buying a second engine.

Ms Z Faku (ANC) asked about the status of the Mthombo project, and what were some of the challenges faced in this regard? He further asked if the African Exploration, Mining and Finance Corporation (AEMFC) subsidiary would be transferred to the Department of Mineral Resources (DMR). If this was the case, what would be the implications?

Mr M Mackay (DA) said upon taking a closer look at the Auditor-General’s report, there were in fact 2996 instances of irregular expenditure across the Group during the last financial year. This totalled over R 21 million, and this was a lot of money. He argued that such irregular expenditure spoke to the culture of impunity within government. Someone was not doing their job. He asked about the reach role of PetroSA in terms of its exploration of feedstock; the R3.4 billion loss was a lot of money. Was there not something that the private sector could be doing to assist with exploration; could this risk not be passed on to the private sector? He said the MPRDA was already looking at this, in an attempt to manage the costs of exploration. The R3.4 billion could have been redirected into other government priorities such as building houses, building school, and providing internships to young graduates. The question he had to the Minister was “when do we turn off the taps?”? R3.4 billion was an excessive amount of money.

Ms N Louw (EFF) said the presentation was torturous. She asked about the “Acting” senior management posts; when would these positions be permanently filled? She asked for clarity about the skills lacking within the Group. What kind of skills were these? When would the not achieved targets be achieved? What were the timelines for these?

Mr J Esterhuizen (IFP) said according to the presentation, the Group’s profit was at R2.1 billion before the once-off impairment. This needed further clarity.

Ms Louw asked about the nine environmental incidents, out of a target of 12, which occurred during the financial year, could the CEF provide more information on these.

Mr Greyling asked about the current investigations against the previous Chief Executive Officer of PetroSA, where charges were instigated against him. He asked the CEF provide the Committee with more details about what these charges were about.

The Chairperson thanked Members for the questions.

Mr Mncwango thanked Members for the questions. He reiterated that CEF’s sentiments around the R3.4 billion were that this was a serious concern, and this was why the matter was introduced upfront during the opening remarks. The Chief Financial Officer spoke a little bit about the timing of the project; the Ikhwezi project was initially supposed to produce around March 2013, but would now be producing around December 2015. Production would begin by using indigenous gas, which was highly profitable in comparison to sourcing imported products. Some of the profits from the project were going to be used in developing other projects; therefore the time delay of money meant that a lot would be lost. The CEF had modeled its cash flows to start in March 2013, therefore money invested in the project would not be recovered as quickly as anticipated, and this resulted in the write-down of the project.

On the LNG feedstock, he said the CEF had investigated this and the LNG 2 floating storage along the coast of Mossl Bay would not be of much assistance because of the very rough seas. The CEF was therefore continuing to explore around the shores of South Africa to see where best feedstock could be positioned, however this would need to be as close as possible to Mossel Bay to reduce costs of infrastructure. The CEF was not only looking at feedstock as LNG but there were other possible alternatives which were being looked at. There were many contributions by a number of various entities, and CEF was contributing towards GUMP. GUMP would be a game-changer for South Africa. The development of gas in other countries such as in Japan and the United States had proven that gas was a game-changer in terms of supporting the generation of power. The CEF was willing to be a partner with the DoE in this regard. The CEF supported the National Development Plan (NDP)’s development agenda, and the entity was making serious contributions towards this.

With regards to the status of the national oil company, he said the CEF remained committed to building the company, however different challenges would be encountered time and again. The Group could not disclose who it was working with but the CEF was working with different people to explore various mechanisms in terms of assisting PetroSA in making it a successful national oil company. The CEF needed 25 – 30% security of energy supply from this port to reduce South Africa’s over reliance on multinational oil companies. Oil was a very strategic commodity. Despite the challenges, CEF was committed and resilient in the pursuit of the PetroSA and national vision around oil. Some of CEF’s Board members were involved with the investigations.

He responded to Ms Faku’s question and said the CEF had done all the mechanics to hive AEMFC off and the implications would not be material. AE’s capital expansion programme was very robust and it went beyond 2017. CEF had been very instrumental in showing that AE had enough funding to sustain its capital expansion programmes. The long term sustainability of the entity however was still a serious concern, particularly relating to funding. On Mthombo, he said CEF was still at the initial pre-feasibility stage with a properly constituted team working on the project. Good progress was being made in this regard. The project was reviewed from time to time through the Assessment and Monitoring Committee, which was one of the structures which looked at investment within the Group.

Mr Mthethwa agreed that the amounts spent on irregular expenditure were a matter of concern. However the 2996 which Mr Mackay spoke to was not in any of CEF’s records. He clarified that irregular expenditure however did not translate to wasteful money. It simply meant that in the process of procuring the service, there was no full compliance either with the PPPFA or other regulations. The root cause of the R21 million irregular expenditure was explained during the presentation, and the reason for the irregular expenditure was that some documentation was missing for the service received.

Mr Mncwango responded to the question on the role of the private sector in exportation. This was something which the CEF was continually looking at with regard to de-risking projects. However, the flipside of this issue was that over 15 years the gas which had been found proved to be very rewarding, and this risk needed to be understood as being significant. He argued that had no risk ever been taken, PetroSA would not be in existence with all the work it has done, especially in improving the lives of the people around the shores of Mossel bay. The unfortunate situation needed to be contextualized against the past which brought in a lot of benefits. The future of the entity was also very bold. He said he did not take Mr Mackay’s comments lightly; they were quite profound, as they were at the core of the strategic entity and issue of mitigating around risk.

He concurred with Ms Louw that the presentation was “tortuous”. He said the Acting Chief Executive Officer of PASA was subject to a lot of issues being taken into consideration around the MPRDA. Project Phakisa was beginning to address the issues of the entity, and when the Chairperson on PASA made a presentation to the Committee in the afternoon, these would be some of the matters he would talk to. He said the position of the Acting General Manger for Corporate Services was a newly established position; a permanent replacement was being looked at. On the question on skills shortages, he said the Group had moved over the last two to three years, and it had gone through a lot of change management processes. The CEF was mindful that it may have to renew its skills base so it could better cope with the change which it was currently embarking on. CEF was committed to delivering a long term and commercially viable and sustainable Group of companies. With regard to the targets he said they were from the previous year and after the year end they were closed. The CEF was now operating on a new dispensation, on a new set of objectives for the 2014/15 financial year, with a stronger focus on delivery on these new targets. He said the responses to the question on environmental incidents would be sent to the Committee in writing.

The Chairperson asked whether the question on Engine was responded to.

Ms Mncwango said the CEF had not responded to that question because the Group was bound to issues of confidentiality. He did however speak about the downstream acquisition in assisting private sector entities to acquire a significant portion of these entities. The CEF would continue to look at the best possible means to ensure that PetroSA attained its rightful status of 25 – 35% of the market share. These processes were ongoing. However the country would be at risk if CEF disclosed who they were engaging with in this regard.

Ms T Mahambehlala (ANC) suggested the question on the investigations not be responded to because the matter had not yet been concluded. The matter was sub judice.

The said he agreed with Ms Mahambehlala that the matter not be discussed at the meeting, depending on where the investigations were with regard to process.

Mr Greyling said Members were not looking for huge details around the investigations. Members simply wanted to find out what the matter pertained to; was it a particular issue with the Ghana acquisition? On the impairments relating to Ikhwezi he asked that CEF unpack what these delays were actually about. Who was responsible for this R 3.4 billion write-down? Why did these delays take place, what was the cause, and who was being held accountable? He argued that once again major costs were made to the South African taxpayer as a result of major delays in government; this was evident across the board. The problem here was around the question of accountability, he therefore hoped that PetroSA would answer this question during their presentation. These 2-3 year delays on major capital expenditure projects were unacceptable because they jeopardized the country’s energy security.

Mr Mackay said when companies reorganised and refocused they went back to their key strengths, in an attempt to be the best in what they did. The fundamental question that the Committee needed to ask itself was “should the state be trying to be playing in the petro-chemical spaces? Do we need a national petrol company and why did the state need this?” He argued that the state’s strengths did not lie in building a national petrol company. The state’s job was to invest in human and social capital of the country, and that was the job which policy makers needed to support. He suggested that the Committee Researcher provide the Committee with some kind of overview of how other countries dealt with securing the strategic resource of oil. Considering the constraining environment which oil operated in, there should be other policy options available for how oil could be secured more broadly, and policy makers needed to be informed about what those other options were. PetroSA’a role was to self-perpetuate itself, PetroSA was simply vested in maintaining its existence, and policy makers needed to make sober assessments. The role which the private sector could play in this regard needed to be taken into consideration.

On the investigations, he said the sub judice rule was abused all the time by various politicians, mainly in the governing party to prevent transparency. The sub judice role applied to cases before a court of law, and these investigations were not there yet. It was not unfair for Members to ask for clarity on where in the process these investigations were and what they relayed to. Members had an oversight role to play, and Members had a job to interrogate such matters. Hiding behind the sub judice rule was therefore cowardous. Members could not exercise their oversight role of they did not know what was going on.

Mr Esterhuizen said above the already stated amount around irregular expenditure there was R 866 million carried over from the previous year. The primary function of the CEF was to look at and to secure sustainable energy supply to the country. The feedstock issues at Saldanah Bay were a serious concern and the two companies operating there were continually at loggerheads and no progress was being made. What plan did PetroSA and the CEF have for dealing these gas supply issues? The South African Gas Development Company was incorporated into PetroSA; what benefits would this have on both these companies?

Mr R Mavunda (ANC) said Members should not reduce themselves into becoming a commission of enquiry. Investigations belonged to a certain body of delegated powers, and these were no Committee Members who were part of this investigation team.

The Chairperson said the Deputy Minister should be allowed to comment on the matter. He said if the investigations were still underway Members should not interfere.

Mr Mncwango replied that the team from PetroSA would deal with the issues relating to Ikhwezi during their presentation in the afternoon. He responded to the issues raised by Mr Mackay on the strategic nature of the work CEF does and whether the some responsibilities could not be shifted to the state and said those matters would be guided by the shareholders. The question was a profound one which needed to be considered all the time without being complacent. On the issue of R1.6 billion and the R 866 million from the previous year he said the R 866 million was between the period of 8 December 2012 and 31 March 2013 where the exemption had expired. On the iGas incorporation, he said the programme had not yet commenced; both iGas and AE management still needed to submit comment as to how best iGas should be positioned so that it can grow. Whether or not is should go to PetroSA was one of the questions. However authorities still needed to apply their minds.

The Deputy Minister said there were quite a number of issues which the presentation brought to the floor, most of which were questions around policy and policy development. On the issue of GUMP she said there were statements on a status but there was no master plan as such. The development of the master plan would take time; various processes need to be developed. Discussions were ongoing. On the investigations at PetroSA, she said one was instituted by PetroSA and the other by CEF; both of them were complete. The information has been shared with the DoE and they were then handed to the prosecuting authority. The Chairperson of PetroSA would be able to provide better insight as to how far the process was currently, if she had any updates. On the issue of impairment, she agreed that the figures were alarming; however this was the nature of exploration. Exploration was a risky business. On the concern raised about the two companies at loggerheads in Saldanha Bay, she said the process would be better managed. The DoE has published the Draft Petroleum Products Act, which would deal with some of these issues. She said the DoE was faced with a problem of competencies which were sitting at different places. For instance, Nersa issued licenses but so did the National Ports Authority. And these were some of the issues which needed to be better aligned.

Presentation: Performance Overview by Subsidiary: African Exploration, Mining and Finance Corporation (AEMFC)

Mr Sizwe Madondo, Chief Financial Officer, AEFMC thanked the Committee for the invitation.

Ms Ms Batandwa Mdyesha, Chief Financial Officer, AEFMC explained that the AEFMC was a subsidiary of the CEF, and it operated an open cast mine in Ogies supplying Eskom Kendal power station which was opened in 2012. With regard to performance highlights she said the entity’s profitability had improved and the entity was in a positive cash position. A credible safety record was achieved and an unqualified audit opinion was received from the Auditor-General. Some of the performance challenges however were around the low volumes produced by Eskom, the lack of stable funding for the project pipeline and the lower profitability in comparison to the previous year.

With regards to the financial summary, she said AEMFC’s revenue for the 2013/14 financial year was at R 230 million, a 22% decrease from the R 295 million generated during the previous financial year. AEMFC incurred R 475 000 in irregular expenditure and R 753 000 in fruitless and wasteful expenditure. On AEMFC’s social responsibility she said three laptops were donated to local farm school teachers for use, Christmas hampers, winter blankets and coal were donated to farm dwellers for the winter season, road and social infrastructure was upgraded in the Phola township and 50% of the staff was from the local community.

Presentation: iGas

Dr Mike de Pontes, Chief Operating Officer, iGas, thanked the Committee for the invitation. He said the presentation would be giving a quick overview of the work of the company, which would include its strategic importance, highlights and challenges faced, among other things. iGas was a national South African gas development company (iGas) whose mandate was to invest in hydrocarbon gas development in Southern Africa including gas infrastructure and storage. Currently, iGas was a 25% shareholder in the Republic of Mozambique Pipeline Investment Company (Rompco) which owned the 865km gas pipeline from Mozambique to South Africa. This pipeline annually imported from Mozambique 167 Million Giga Joules of gas into South Africa, the equivalent of  2,2 Mossel Bay refineries. The majority of gas used in Mozambique went to small industrial development and a power plant that sold electricity into South Africa.

He explained that iGas was specifically empowered to:

•Own, invest in, construct and/or operate hydrocarbon gas transmission pipelines and hydrocarbon gas storage facilities.

•Conduct research into and finance or participate in projects with a view to the diversification of energy usage to include hydrocarbon gas

Key projects for the 2013/14 financial year included the expansion and maintenance of gas infrastructure in Southern Africa, the development of options for new gas infrastructure, planning for electricity generation from natural gas and the effective management of the Rompco dividend. With regard to finances, iGas received dividends amounting to R 115 million for the 2013/14 financial year, a 15% increase from the R 100 million received during the previous financial year. Net profit after tax was at R 86.79 million, a 9.6% increase from the R 79.21 million received during the previous financial year. Liquidity remained healthy with strong cash flows generated. Free cash flow for the period was R100 million.

Presentation: Strategic Fuel Fund (SFF)

Mr Sivuyile Ngqongwa, Acting General Manager: Corporate Services, SFF said the mandate of the SFF was to manage strategic crude oil on behalf of the South African Government. The strategic stock of crude oil and the land and buildings used to hold the stock are the property of the State. SFF acts as the agent of the State in managing these assets under the guidance of Ministerial Directives issued in terms of the CEF Act. The primary function of the storage facilities is the cost-effective and safe receipt, storage and distribution of strategic and commercial crude oil stocks.

With regards to performance highlights he said there were no lost time accidents reported, and these were zero environmental incidents. Good progress had also been made on the Major Hazard Installation application for Milnerton and Saldanah. However one of the main challenges faced was that the demand for storage still remained weak. He was pleased to inform the Committee that SFF had achieved all its planned performance targets for the financial year. With regards to the financials, the SFF had generated revenue of R 97.034 million for the 2013/14 financial year, a 57% decline from the R 227.17 million generated during the previous financial year. Net profit after tax was at R 19.236 million, a 87% decline from the R 153.864 million from the previous financial year. Irregular expenditure was at R 8.5 million, fruitless expenditure was at R 292 00. He explained that irregular expenditure related to lack of proper document keeping and we could not prove that PPPFA was adhered to on supplier selection. Fruitless expenditure related to a SARS penalty on late payment of employee taxes by our service provider (CEF SOC).

Discussion

Mr Greyling thanked CEF for the diverse number of presentations. He asked about AEMFC’s drop in revenue as a result of the drop in coal supply to Eskom; what kind of contracts did it have with Eskom, where these short term contracts? What price did Eskom pay for the coal, was the AEMFC’s price significantly higher than what other mines charged for long term contracts? Was the AEMFC looking into entering into long term contracts with Eskom? Was the coal from AEMFC of a lower grade that was suitable for the power station? Were there any prospects for mining higher grade coal and where there any prospects for exporting this coal? Where within the SADC region was the AEMFC also looking to mine?

He said the space which iGas played in was quite interesting. There seemed to be no proper directions about how to fully exploit gas. He argued that the penetration of gas in the South African market was far too small. What was iGas doing to ensure that higher levels of gas penetration into the South African market actually took place? Could a copy of the feasibility study conducted on the LNG terminal be circulated to the Members? However he said there was a need for more guidance in this area, especially around investment. When can the public expect some decisions on gas? On the SFF, he said revenue was down largely because people were not looking to store oil at the moment because the price of oil was quite low. Did SFF expect this to change? What was the rationale for people storing oil on a commercial basis? He asked about Ogies; what was the progress at the plant?

Mr Esterhuizen spoke to the revenue which had gone down at the AEMFC through Eskom cutbacks; the AEMFC would be transferred to the Department of Mineral Resources (DMR), how would this affect CEF’s balance sheet and the people it employed? What was iGas doing to reserves sufficient feedstock, seeing the procurement stock was already depleted? He said the ongoing contraction of the Rompco loop line has been of major discussion throughout the year; the loop line was targeted to be completed in November 2014. How would this affect the hospitals in Gauteng which will benefit from this?  He said the Auditor-General’s report on the SFF mentioned that management had not exercised adequate oversight responsibility regarding the compliance related internal controls. He said there were some whistle blowers who came forward around instances of irregular expenditure and this was commendable.

Ms Louw referred to the AEMFC’s presentation; out of the 10 performance targets planned; only four were achieved and said this was worrisome. She asked the SFF whether it was not better to buy property than to rent it. What actions were taken against the people who failed to submit documents in time, resulting in fruitless expenditure; what punitive measures were taken against these people? Could iGas provide the Committee with their organogram? 

Ms L Makhubele-Mashele (ANC) apologised for arriving late to the meeting. She also asked about the quality of coal at the AEMFC; was the cut of supply by Eskom related to the quality of oil supplied? On the iGas pipeline from the Mozambique channel, was this the only source or were there other sources being explored? To the SFF she spoke to the income versus the expenses; expenses were very high, they were nearly 100% of what the SFF was collecting in revenue. This meant that the entity was operating on an over-draft. In addition, the income for 2012/13 in comparison to 2013/14 was also very worrisome. The income was reduced but the expenses have increased. How is the SFF still operational given the huge deficit? How was this deficit being serviced, what was the plan?

The Chairperson thanked Members for their questions.

Mr Madondo responded to the question on the coal contracts with Eskom. He said the contracts were on a short term basis. The contract AEMFC had with Eskom started this year (2014) and would expire in 2015. This meant that AEMFC needed to start having discussions around the next contract, which would potentially be a long term contract once Kusile came on board during the first quarter of 2016. The current contract was 65 000 tons a month, which equated to 780 000 per annum. AEMFC had to produce 1.6 million tons per annum according to its capacity. AEMFC also had a project which produced about 3.5 million tons per annum. Going forward, AEMFC would have the capacity to supply Eskom about 6 million tons per annum once Kusile came on stream. With this, the cash flows which would be generated from the operations would be enough to ensure that the AEMFC stood on its own feet. These therefore spoke to the questions raised around AEFMC’s revenues which were declining as a result of the declining volumes. But the anticipation was that in the future, there would be enough volumes to sustain these. He said the prices for coal were negotiated prices.

He said the reason why Eskom cut back on volumes was because they went to Nersa looking for a 16% increase but they only got 8%. This meant that Eskom began to reduce stockpiles they would normally carry for about 35 days of stock. The decrease in volume sales had nothing to do with AEMFC’s coal quality. He responded to the concerns around AEMFC staff which might move to the DMR and said this was not a matter of concern because the company was still profitable. As at the end of September 2014, the company had made over R 22.5 million in net profit.

Ms Mdyesha responded to the question on performance against the set objectives, she explained that some of the targets were partly achieved, and these did not affect staff in any way. Overall, the company had an overall achievement.

Dr de Pontes responded to the question on the alternatives available for the exploration of gas. He said the bigger CEF group needed to be looked at for how gas could be explored. He said South Africa did not have substantial gas resources, therefore exploring gas in Mozambique was a “big decision”. The estimated costs for a reasonably sized and financially commercial energy import terminal would be at around R1.2 billion dollars, for this to happen, there needed to be long term contracts. Gas could not be switched on and off, therefore there needed to be a power station which had a continual off-take. iGas was working closely with the DoE before any “big” announcement was made. He said iGas was more than willing to sit and talk with the Committee on any given time around issues on gas.

On the reserves stocks within gas, he said it was very difficult to keep reserves stocks. Gas was kept in the ground and LNG storage was expensive for short periods of time. On the Rompco loop line and how it would affect hospitals, he said the loop line presently being put in place was gas for Mozambique, so loop line 2 would allow gas to move into South Africa. He said a copy of the organogram would be sent through to the Committee. He said Rompco was the only source of income for iGas, but the company was looking for other commercially viable infrastructure projects which would bring in a diverse supply of cash.

Mr Ngqongwa responded to the question on the demand for the storage of crude oil and said this was mainly influenced by the price of crude oil. Whenever there was volatility this resulted in a demand for the storage of crude oil because traders always hoped that they would buy the oil cheaper, store it and sell it for profit. He said SFF experienced good times during 2008 and 2010, and the decline started to take place when crude oil prices started to stabilize. Currently the volatility happened again in September when the crude oil price dipped. Currently there was no more space to fill in any oil because there was a high demand. Revenues for the current financial year were therefore expected to rise significantly, however this was not sustainable, hence the question around costs/expenditure. The SFF has therefore started to work with new partners and governments who produced oil, working via the South African government. These oil producing companies also had a need for storage. The SFF was therefore working towards developing a more sustainable business model, irrespective of the market conditions.

On the Ogies facility, he said these did not contain any oil currently, what they contained was residue oil because of the oil which had been stored there previously. There was however the risk that this might slip out and contaminate the environment, however this risk had not taken place because the facility was properly being maintained. He said SFF did not rent any facilities; they were renting out facilities to generate revenue. On the lack of proper documentation which resulted in irregular expenditure and said the procurement manager concerned resigned and left the company. The junior official who was collecting the information also resigned. On the income versus the expenses he said income was declining because of the market structure; however a 70% increase in revenue was expected for the current financial year.

The Chairperson thanked the CEF and its subsidiaries for the presentation, and the Members for their engagements with the presentations. He indicated that after lunch, there would be a briefing by PASA and PetroSA.

The meeting was adjourned to resume after lunch.

Briefing by Petroleum Agency of South Africa (PASA)

Ms Lindiwe Mekwe, Acting Chief Executive Officer, PASA, thanked the Committee for the invitation. She explained that PASA was a private company designated, with effect from 18 June 2004, as an agent of the state in terms of the Minerals and Petroleum Resources Development Act (MPRDA). The main business of PASA was the promotion, licensing and regulatory function for offshore exploration and production of petroleum. PASA also managed the Continental Shelf Claim Project on behalf of the country. The MPRDA Amendment Bill had been passed by Parliament and upon the President of the country signing the bill into an act; PASA would be transferred from the CEF Group to the Department of Mineral Resources.

One of PASA’s performance highlight was the continental shelf claim and opportunity for South Africa. Some of the challenges however were that of funding, uncertainties with the MPRDA Amendment Bill and location of PASA; would it fall under energy or mineral resources. On PASA’s key projects, she said PASA was working on the Shelf Claim Project, the Lodging of addendum to the country’s mainland submission, the sub-commissions established for both claims and the finalization of technical regulations for petroleum exploration. In total, South Africa’s existing territory of claimed area of land was at 1.870 000km squared. With regard to PASA’s financial performance, PASA’s revenue for the 2013/14 financial year was at R 38.2 million, however PASA’s operating loss was at R45.4 million. During the 2012/13 financial year PASA’s revenue was at R 77.3 million, with an operating loss/profit of R1.7 million.

With regard to audit outcomes, she said PASA received an unqualified audit report with no emphasis of matter for the second year running. However, as previously stated, there were ongoing concerns around long-term funding and with the uncertainties created by the MRPDA.

Briefing by PetroSA

Ms Nosizwe Nokwe-Macamo, Chief Executive Officer, PetroSA, thanked the Committee for the invitation and the CEF Chief Executive Officer for his opening remarks regarding PetroSA. She explained that PetroSA’s mandate was to operate as a commercial entity and create value for the shareholder, advance national objectives in the petroleum industry and complement and promote government policy and strategic thrust.

Some of the highlights faced by PetroSa during the 2013/14 financial year included the successful and safe completion of the statutory shut down of the Gas-to-Liquid (GTL) Refinery, resulting in a cost saving of R 42 million. The longest horizontal well was drilled at a depth of 3600 meters, a first in the country. In addition, revenues had improved by 12% year-on-year from R 18.9 million to R 21.2 billion which contributed to a progressive gross margin. PetroSA also achieved an operating profit impairment of R2.2 billion in the year under review. PetroSA also made significant progress in decreasing fruitless and wasteful expenditure from R31 million in the previous year, to R 6 million during the year under review. However, a number of challenges were encountered; with regard to sustainability, PetroSA obtained 90% of its income from a single source, declining feedstock was also a serious concern. The delays at Ikhwezi had resulted in reduced production, together with the depleted cash reserves. PetroSA was also faced with difficulties in securing Industrial Development Corporation (IDC’s) participation in Project Mthombo. The PPPF Act presented a challenge to increase Broad-Based Black Economic EmpowermentB-BBEE opportunities. Treasury was however being approached to allow for set asides and other transformational initiatives. In addition, women still only made up only 30% of PetroSA’s population and more effort needed to be made in ensuring the employment of people with disabilities.

The main challenges which PetroSA had made progress were Ikhwezi, Mthombo, the LNG and PetroSA Ghana. PetroSA had also made significant progress with regards to downstream acquisition.

The entity’s revenue was at R 21.9 million and R 18.8 million for the previous financial year. With regard to audit opinions, the annual financial statements submitted for auditing were not fully compliant with SA GAAP, as required by the auditors and the Companies Act. No material audit findings were raised. Other reports included two investigations mandated by the Minister of Energy and by the Board of PetroSA, which were completed. The outcomes of these investigations were considered by the accounting authority at PetroSA and the accounting authority of CEF. PetroSA was in the process of resolving the matters. With regards to expenditure management, steps were taken to manage fruitless, wasteful and irregular expenditure. PetroSA had incurred R 6 million in wasteful expenditure and R 1.6 billion in irregular expenditure.

Mr Andrew Diepenaar, Acting Vice President: Upstream, PetroSA, informed Members that he was the managing the Ikhwezi project. The delays that had been encountered to date with the project mainly had to do with construction or the modification of the project. The project had three main work streams - the drilling, the subsidy infrastructure and modifications on the project. The biggest challenge was in the modification of the top sight platform, and this had to do with the way the project was being executed in terms of the model execution which was embarked on initially. However this had been dealt with. The construction was being finalised and this would enable PetroSA to deliver oil to the refinery. To date, three wells have been drilled. However, significant challenges have been faced such as non-productive time use on site.

PetroSA has donated over R 340 million to various Corporate Social Investment (CSI) projects. Transformation remained at the heart of PetroSA’s business. Looking ahead, long term solutions would be developed for Mossel Bay. Cost-containment remained a key area of focus across the organization.

Mr Mncwango concluded that as a partner of choice to the state, the CEF Group was gathering itself up to be a relevant and significant player in making sure that CEF had the right capabilities to deliver on large scale projects, and that the right leadership qualities are in place to address and execute on the core CEF mandate in support of the broader NDP programmes. Going forward, the Board Strategy workshop identified four focus areas that needed to be addressed as part of the broader agenda for turning the Group around:

•Commercial issues

•Governance issues

•Operating environment

•Development issues

Discussion

Mr Esterhuizen asked about PASA’s financial challenges. In addition, he asked whether it would not be suicide if the MPRDA was adopted and signed. PetroSA’s balance sheet was down by 54% from the previous year and said this was a serious concern. A lot of people had lost their money as a result of the disappearance of the hedge fund which had their money; would these monies be refunded?

Mr Greyling said PASA was a very good entity and the concerns around funding were worrisome. The President recently announced operation “Phakisa”, which talked about the enormous wealth which was still locked up in the country’s oceans. Given that PASA was the entity which was involved in looking at what was available, had companies started with drilling operations or where they still holding back? Due to the uncertainties with the MRPDA, there had been little major investment around the coastal line. On PetroSA he asked that more clarity be provided on the asset write down. Impairments were as a result of increases in costs; why was this the case? What was the assurance that once Ikhwezi came on line there would be sufficient gas from it? What were its anticipated gas reserves? Would PetroSA solve the problem at the GTL refinery? If this was not the final solution; what was the final solution to the GTL refinery? How long did the plant still have in terms of its life? Would it be feasible to import LNG and transport it along a pipeline to Mossel bay?

Mr Greyling said that PetroSA was still committed to being a downstream player; however cash reserves were still low. How did PetroSA propose to get the reserves for any downstream acquisitions? Was PetroSA speaking to National Treasury for any kind of guarantees or was private investment an option? On the Equatorial Guinea and Egypt acquisitions; he asked whether these had been concluded. What were PetroSA’s other options for exploration?

Ms Mahembehlala referred to the presentations by CEF and PetroSA and asked whether there were any plans in place for the sustainability of the plant when CEF took over 20 years ago? What was the real problem with PetroSA?

Mr Mncwango thanked Members for the questions. He requested PASA to address the questions around affordability and operation Phakisa and the uncertainties with the MPRDA. He asked that PetroSA respond to the questions on downstream acquisition as well as the Ikhwezi impairment. Concerns raised by Ms Mahamebehlala on the state which CEF inherited at PetroSA and what the leadership had done so far would be addressed collectively.

Ms Mekwe addressed the question about the impact of the MPRDA. She said PASA was a regulator; it did not conduct shale gas development, the company only regulated. Therefore “free carry” was one of the provisions which had been mentioned by the DMR in terms of how it would make sure that the state participated and benefitted from offshore and/or onshore operations. Moving PASA to the DMR therefore was a decision made by the DMR to this effect. PASA would be guided by the DMR. On the questions around funding model and the unveiling of operation Phakisa she said. PASA has had two drilling operations; one in the deep water, the other conducted by PetroSA.

Ms Lindiwe Bakoro, Chief Financial Officer, PetroSA, responded that the plant at Mossel Bay was pretty young at 22 years in operation. Most of the plants which produced diesel around the country were built as long ago as 1953, and they were still in operation today. Therefore with good maintenance, the plant could last for another 30-40 years. The hardware was therefore not the problem; the problem was with the feedstock. Therefore if gas would continue to be the source, PetroSA was looking at scenarios of how to optimize low gas throughput, and for this PetroSA was relooking at its business model. She said the plant was capable of running liquid. With regard to the operations in Egypt and Equatorial Guinea she said PetroSA was not operating in either of those countries currently. PetroSA’s strategy was to look at assets which have been de-risked. PetroSA was therefore currently not looking at exploring anywhere outside South Africa.

Ms Nokwe-Macamo responded to the question around affordability given the status of the balance sheet, and the question of impairment and why the asset was written down.

The Chairperson thanked CEF and its subsidiaries for the presentations. All outstanding responses would be submitted to the Committee in writing.

The meeting was adjourned.