Merger of PetroSA, iGas & Strategic Fuel Fund; update on CEF Group Forensic Reports and Project Ikhwezi – briefing by CEF Group, with Minister

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Mineral Resources and Energy

02 March 2021
Chairperson: Mr S Luzipo (ANC)
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Meeting Summary

Video: Portfolio Committee on Mineral Resources and Energy - 2nd March 2021

The Committee met virtually to receive a briefing from the CEF Group on the planned merger of three of its subsidiary companies: iGas, PetroSA and the Strategic Fuel Fund. CEF Group also provided an update on the forensic reports into a range of serious incidents of mismanagement, malfeasance and criminality at its subsidiary companies. Many of these are the subject of ongoing investigation by the Hawks, the CEF Group and the Department of Minerals and Energy. In addition to the three petroleum entities, the forensic investigations also involved the African Exploration Mining and Finance Corporation and the Regulator, the Petroleum Agency of South Africa. The meeting also considered a detailed and highly technical update on the failure of the multi-billion Project Ikhwezi at PetroSA.

The new entity that will emerge out of the merger will be called the South African National Petroleum Company. The Minister stated that key decisions on the merger still had to be made by Cabinet and there was no use explaining details before engaging with the Cabinet. The Department would have to come back to the Portfolio Committee with an updated report.

Members asked detailed questions about culpability for the unauthorised sale of 10 million barrels of oil from the country’s strategic fuel stock in 2015. What consequence management process had been put in place following the R14.5 billion impairment charge at PetroSA in 2015? Members asked what steps had now been taken by the CEF Group and its subsidiaries to ensure that the mistakes identified in the forensic investigations are not repeated in future. The Committee suggested there ought to be a timeframe for all persons who committed acts of gross misconduct to be investigated.

The Committee Chairperson said that by following up on the alleged corrupt practices from the entities, the Committee should not be misconstrued as being vindictive. The main objective was administrative justice and accountability for any wrongdoing.

Meeting report

The Chairperson welcomed and thanked everyone for being in attendance. The purpose of the meeting was to be briefed by the Central Energy Fund (CEF Group) and to discuss post visits to certain areas including Mossel Bay.

The Chairperson announced changes of Members for the Committee.

Input by the Minister
The Minister of Mineral Resources and Energy, Mr Gwede Mantashe, said managing the Department without a Deputy Minister was quite challenging. He introduced his delegation. He said that the briefing on the Merger Transformation Project of PetroSA, iGas and the Strategic Fuel Fund (SFF) was of the utmost importance because it has an objective of setting up a formidable sustainable petroleum company for the country. The Department had set a time frame to achieve the objective [by 1 April 2021], but it should be appreciated that it is the Cabinet’s decision [whether to follow the timeframe] as three entities are a result of statutes. He said that the Department would update the Committee on the progress to see if there is any need for any legislative amendments. He mentioned that there would be briefing on all Forensic Reports within the CEF Group. He handed over to [an unidentified board member] to introduce the CEO of the CEF Group.

The CEF Group board member greeted everyone and mentioned that she was not going to go over the agenda that the Minister had already outlined but assured attendees that from the board point of view the governance and financial sustainability and stewardship of the CEF Group was at the centre of the agenda. [The board would] make sure that all the matters that were going to be discussed will be put on an agenda and monitored on a regular basis to make sure that governance is promoted and consequence management is enforced. The Committee was being briefed on the progress done about the Merger Transformation Project, and specifically Project Ikhwezi . It would be looking at Forensic Reports and all other matters still under investigation and discuss what needs to be done in terms of consequence management. She apologised and asked to be excused from the meeting as she needed to attend to an urgent personal matter but assured that Ms Nolubabalo Sondlo, [a non-executive director of CEF Group] would be accountable for all relevant questions to ensure continuity. She introduced the CEF Group CEO, Dr Ishmael Poolo, who was to be supported by subsidiary CEOs where it was relevant.

Presentation by CEF
Dr Poolo greeted and thanked everyone for being in attendance. He said that he would be sharing a status update on Group Forensic Reports and Project Ikhwezi. He reminded Members that the Cabinet had mandated the merger of three CEF subsidiaries as per the State of the Nation address of 13 February 2020, [one of several interventions] to repurpose and rationalize state-owned entities. As a result, the Department has since already started with the process to merge PetroSA, iGas and the Strategic Fuel Fund. It was very important to note that there were solvency and liquidity challenges at PetroSA, therefore rationalisation will go a long way in stabilizing the group.

In terms of key milestones [referring to slide 4], the Steerco kicked-off on September 15 2020 starting with phase 1.a dealing with Strategy and Merger Design. That process looked at project enablement including integration management office work together with leadership, culture and change initiatives. This was followed by Strategic Business Design four weeks later which comprises of Corporate Plan and Value realization, Growth acquisitions and Business model. The last area to be worked on was the Operating Design which comprised of the Group governance and operating model and Synergies and integration where the baseline assessment and the funding strategy were completed. He mentioned that significant progress has been made for the past five months to establish the South African National Petroleum Company (SANPC). As mentioned earlier on, under the Baseline Assessment, detailed assessment /benchmarking of Operations, Finances, Governance and Operating model were completed. A synergy potential of R1.4 billion was identified through business optimization.

Under the Newco Strategy, the vision, mission and strategic objectives of SANPC were defined with a detailed model of pro-forma financial statements and a funding schedule. A comprehensive corporate plan was drafted for final approval and would be approved that same week at the Steerco. In terms of the operating model, a detailed organisational structure, job descriptions, business functions and processes were completed. The transitionary board and executive structure was defined and secondment requirements and appointment processes were ready to be implemented. In terms of the stakeholder engagement, there had been meetings with different stakeholders via newsletters, townhalls and face to face interaction with the employees in smaller groups and sometimes through union engagement and management teams.

Under the Merger Archetype, [slide 5] a comprehensive due diligence was done to assess the most probable merger archetype. Out of the due diligence, recommendations were made for a Lease & Assign model and input on the preferred merger archetype was provided to the DMRE for submission to the Cabinet. Under legal matters, due diligence was also conducted on assets contracts, liabilities, rights, licenses and governing legislation. Some agreements are already completed while others are on the verge of completion. Public Finance Management Act (PFMA) s51 and s54 applications for incorporation [of the SANPC] as a State-owned Enterprise (SoE) were also ready.

In terms of the project risk, Dr Poolo said the Department will continue to close project deliverables as per the project plan, however execution of critical operationalisation actions is highly dependent on Cabinet approval which will be undertaken soon. In the coming weeks, the project team will wait for the approval and finalise the corporate plan. The Steerco would sit to approve the corporate plan for the Newco and to operationalise the transitionary board and executive committee. Following approval by Cabinet, the project team would operationalise transitionary business functions (support focused), and post registration processes. The project team would also finalize and enter into legal agreements to lease and assign relevant aspects of legacy businesses.

In terms of the forensic reports, the investigations at PetroSA, the biggest subsidiary [has uncovered] serious allegations of mismanagement. These were brought to the attention of the PetroSA board in relation to the Human Resources (HR) function and procurement and contracts. Feed Stock and Shutdown Processes are required by the Labour Department and the board took investigations which are directed by CEF. The investigation focused on the process of voluntary severance packages (VSP), any contravention on the appointment of related VSP. It also focused on procurement and contracts, including so-called “evergreen contracts”, and compliance with legislation such as the PFMA, the Preferential Procurement Framework Act (PPFA), the Constitution and laws governing Broad-Based Black Economic Empowerment (B-BBEE) and foreign transactions. The investigation also focused on feedstock procurement process and the reasons for the extended shutdown of the refinery. The report is at the final stage and will be finalised in March 2021. The consequence management will depend on the outcome of the report. The key outcome was that the investigation is still in progress and if required, law enforcement agencies will be engaged. The investigation that is underway relates to misstatements and impairments in the annual financial misstatements [sic – see slide 10], insubordination, alleged money laundering and failure to implement the Solar Water Heater Project. The purpose and scope for the forensic investigations is to focus on the alleged delay on the implementation of the National Solar Water Heater (NSWH) Project and the failure to reinstate officials in acting positions to their substantive positions. It also focused on the failure to establish the Board Procurement and Finance Sub-Committee, alleged insubordination and payments effected on behalf of the Petroleum Agency of SA (PASA) by CEF Treasury into a fraudulent offshore account. Consequence management will depend on the outcome of the report as the investigation is still underway.

Moving on to the forensic update report on the SFF Association, Dr Poolo said that 10 million barrels from the strategic crude oil reserve were unlawfully sold to a number of trading companies. This was done without the proper authorisation of the SFF and CEF Boards and the then Minister of Energy, and without the concurrence of National Treasury in terms of s54 of the PFMA. The sale contravened both the Constitution and the Companies Act. The purpose and scope of the investigations covered contract validation, the role of key players including management, financial trail and email correspondence. The report is currently with the Hawks and lawyers are looking into the consequence management process. The key outcome is that the Hawks are handling the criminal case which is at a delicate stage. On 20 November 2020 the court agreed to reverse the crude oil sale and SFF got back ownership of the crude oil. An adverse finding was made against CEF/SFF for the payment of hedging costs and legal costs in respect of the two traders. An appeal was lodged with the High Court.

In a second instance, three hundred thousand barrels of crude oil were unlawfully loaned to Enviroshore without proper approvals from the SFF and CEF boards and the Minister of Energy, and National Treasury concurrence. The purpose and scope of the investigation included allegations of irregularities in respect of the award of contracts, the decisions around the concluding of the SFF Ogies Storage Facility Recovery and processing of Sludge from Mine Oil as well as the agreement on pumping water from boreholes between the SFF Association (SFF) and Enviroshore Trade and Logistics (Pty) Ltd on 10 January 2014. The report is currently with the Hawks and there is an ongoing investigation of a possible criminal case. Forensic Investigations were concluded and a claim has been received from Mecuria, the company that bought the three hundred thousand barrels from Enviroshore, claiming that the former CEO [of SFF] gave Mecuria a guarantee that the crude oil bought from Enviroshore was unencumbered. SFF signed a storage agreement for those barrels and SFF is in negotiation with Mecuria on the matter.

On 6 October 2015, the then Acting CEO of SFF wrote a letter to the then Minister of Energy requesting a ministerial directive for stock rotation. On 8 October 2015, Minister Joemat-Pettersson issued a directive in response to the Acting SFF CEO’s correspondence of 6 October 2015. Minister Joemat-Pettersson imposed the following conditions: Any rotation of strategic stock will be undertaken with a Ministerial Approval, preceded by a detailed due diligence undertaken by the SFF, and supported with a comprehensive motivation to the Minister. The integrity of our Strategic Stock levels must be assured in all instances. A trading division should be established within the SFF and must be appropriately staffed with skilled personnel and resources to undertake trading activities which must generate revenue for SFF. The SFF shall provide a Monthly Report to the Minister and the Department on all activities in relation to the Directive granted.

The strategic stock was sold when the market was in contango without having a back- to- back purchase agreement in place. The process followed by the then SFF acting CEO [Mr Sibusiso] Gamede was not transparent, fair and equitable. The Acting CEO failed to comply with the conditions for rotation of stock laid down by the Minister on 8 October 2015 and the SFF board on 23 November 2015. SFF EXCO members only became aware of the Minister’s in-principle approval of the disposal on 13 November 2015. The Acting CEO elected to follow a negotiated process instead of an open bidding process for the strategic stock disposal. No cogent reasons were supplied for utilizing negotiation without a prior tendering process. Dr Poolo explained the word “contango”. It means that the forward price of a future contract is higher than the spot price.

The process that should have been followed required a fair transparent procurement process at SFF in engaging and selecting the traders for the rotation in adherence to the procurement process. The supply chain procurement policy of the SFF should have been adhered to. The establishment of the trading function was a condition of approval, but it was not done. Required approvals of the SFF Exco and Board for the rotation were not in place. There had been no submission to CEF Board for approval in compliance with the group materiality and significance framework. After CEF approvals, there would have been a further need for ministerial approval as well as National Treasury concurrence and adherence to the Companies Act.

Key lessons learnt were that none of the above approvals were sought by the Acting CEO of SFF. There was no rotation as proposed to the Minister, but it was rather a disposal as the replacement stock was never purchased. Failure to adhere to the conditions imposed by the Minister was established. The CEF was only alerted to the sale when the proceeds were paid into the SFF bank account which is managed by CEF. Upon inquiry, the CEF Board was subsequently advised of the sale by the management at the time.

Another forensic report [slide 17] dealt with the transaction when SFF bought 10 million litres of diesel in Zimbabwe from IPG and sold it to another company Line Petroleum in Zimbabwe with no trading license in Zimbabwe. Line Petroleum did not honour the contract and SFF has never received the 10 million litres of diesel. The purpose and scope of the forensic investigation was to look at the circumstances surrounding the disposal of 10 million barrels of the strategic crude oil reserves during the years 2015 and 2016. The report was currently with the Hawks and they are investigating a criminal case. Line Petroleum was taken to Court and SFF won the case, but the probability of recovery is low as Line Petroleum has no assets in South Africa. The lawyers are looking into the possibility of initiating legal proceedings against Line Petroleum in Zimbabwe.

The forensic report on the subsidiary, African Exploration Mining and Finance Corporation (AEMFC), related to the violation of procurement policy and procedure, an unauthorized overseas trip and the mismanagement of AEMFC strategic projects as well as abuse of power by the AEMFC Chief Executive. The AEMFC CEO was found to have transgressed procurement policies and mismanaged company resources. The CEO and three executives were dismissed. Two other executives and one senior manager resigned before disciplinary processes were instituted.

The CEO of AEMFC has been blacklisted from any future employment with the state. The CEO approached the CCMA and the matter is at an advanced stage of arbitration. Two other executives have also approached the CCMA and AEMFC is in the process of instituting civil action against service providers to recover losses by AEMFC. Another outcome of the investigation has been an affidavit to the Hawks by the Chairman of the board, which was prepared with the assistance of Werksmans Attorneys.

The last part of the presentation was the Ikhwezi report which Members had requested to be updated on. Dr Poolo said that the slides were more technical but he would simplify it for the benefit of everyone. He explained the diagram on slide 20 [enlarged on slide 34]. He mentioned that the important factor of slide 20 was that at some point [the management plan] just prolonged the interval before closing the refinery, instead of looking for solutions that would have resulted in [increased] fuel production (3x3). This should be an objective as the refinery is being sorted for now to provide a permanent solution so that the refinery runs in full capacity for a number of years to come as there is potential in the specific region.

Ikhwezi was developed in 2007. South Coast Gas and was developed in 2010 as a stop-gap measure when feedstock challenges were threatening the future of the PetroSA Gas to Liquids Refinery (GTLR). A number of studies were conducted to find the best solution to sustain the GTLR and number of options were considered, including using imported liquid natural gas (LNG). In 2011, the project was approved to proceed, but approval of the drilling contract was deferred. The project schedule was not updated to accommodate delayed approval. Delayed approvals allowed the operator to exercise additional options which further resulted in a year delay. In 2013, more financial and human resources were further deployed. It was a Board initiative to make up for the 2011 delays. In 2015, the Board suspended Ikhwezi because of under-performance. Quite a number of investigations were undertaken. The ERM RISK review in 2011 dealt with governance and risk issues. KPMG dealt with governance and risk issues looking at the deficiencies in governance structures compared to best practice. Comments on changes in project structure and personnel changes were done. In 2013, under the DNV risk review, PetroSA conducted a comprehensive risk assessment to deliver an extensive, still relevant risk baseline. The Risk Management Team’s methodology, whilst qualitative, provided a good basis for communicating and rating capital projects’ risks. Recommendations for improvements were made, including moving to quantitative and probabilistic risk management practices.

In 2015, under the IPA (Independent Project Assessment) findings, the project did not meet the Final Investment Decision (FID) business objectives and it was established with less than average practices. Three contractual changes made post FID by management undermined key elements of project definition and negatively impacted the schedule. The high turnover of executive and board level personnel in the project resulted in loss of accountability for the business case and inadequate project status reporting initially. Inadequate attention was given to the risk department reporting to governance structures because they were seen as bearers of bad news and recommendations were made.

External consultations and investigations continued. In 2015, an investigation was conducted on the expenditure with incurred because of drilling the FO-12 pilot well. The SNG investigation looked into the PetroSA performance and the R14.5 billion impairment charge. Dr Poolo said the reports prepared for PetroSA for purposes of this investigation were protected by legal privilege as the reports contain sensitive information. The information provided in the document issued with this presentation to the Board of Directors should be treated as confidential and with the sensitivity that it requires. 2015 also saw the amicable termination of the CEO & CFO’s contracts of employment.

In terms of the lessons learnt, the contracting methods which were central to the losses of the project, did not protect entities. Moving forward, before getting into any contracts, interests of the group must be protected and a penalty clause must be enforceable. Major capital projects should not be fast tracked and changes in scope post Front End Engineering and Design (FEED) and FID will be avoided. PetroSA no longer has the resources needed to execute major capital projects. The forward corporate plans emphasise technical and financial partnership strategies that will reduce PetroSA’s risk exposure and increase its ability to successfully execute future capital projects.

PetroSA issued a notice of suspension to the regulator (PASA) in 2015. This suspension was accepted, but could be challenged. PetroSA has not yet fulfilled its work program obligations under the Production Right awarded to PetroSA [in terms of the Mineral and Petroleum Resources Development Act (MPRDA)], which includes the drilling and completion of five producing wells. PetroSA completed only three wells and until the work program is formally changed to work already completed, there remains a risk that PetroSA could be deemed non-compliant to its obligation, should there be no clear efforts demonstrated to work towards continuing [drilling] post suspension. PetroSA may lose the right to produce from the Production Right (PR). The award of a PR to an operator requires the operator to use best efforts to bring a B-BBEE partner on board during the production period. PetroSA has not pursued this, given the challenges experienced with Ikhwezi and may be challenged, as was the case before, by local companies of being in breach of the obligations associated with the PR.

Discussion
Before Members asked any questions, the Minister emphasised that the report from the presentation dates back from few years ago.

The Chairperson suggested that they start discussing the merger before the forensic reports.

Mr K Mileham (DA) asked that since the project kicked off in September 2020, what is the proposed organisational structure of the new entity and what is the proposed mandate of the new entity and what are the major costs of merging those entities. Lastly, he asked what the expected and financial benefit from the merger was and its objective.

Ms V Malinga (ANC) thanked the CEO for explaining the terminology used on the presentation for clarification purposes. She mentioned that she fully understands that the merger is as a result of the Cabinet approval, but hearing the Forensic Report from the three entities, she asked if it would be possible to still achieve the main initial objective of the merger. She also asked if PetroSA would scale down as she witnessed a lot of offices when she visited the site.

Mr S Kula (ANC) thanked the Minister for attending the Committee. He asked that with the challenges facing PetroSA, how they will impact the merger in the long run. He also asked how long the legal agreements would remain pending and how the red flags from the forensic report would impact the merger.

The Chairperson said it is important to note that even if the Cabinet approved on the steps the merger would follow, the merger is expected to kick off on 1 April and many questions will arise. He mentioned that the CEO of CEF is the acting CEO of iGas and how does iGas have three employees? That is the question that will arise since CEF is overseeing the merger process. The lines of governance are blurry and should be clarified. He also asked about the legislative framework.

The Minister said the dichotomy of presenting a report to the Portfolio Committee before there is a formal engagement with the Cabinet on the direction to take is problematic because the majority of people would advise differently. He said he was expecting that kind of question from the Portfolio Committee. He said the organizational structure would depend on the advised option taken. The mandate envisaged is the formation of a viable, sustainable petroleum company for the country. When it comes to costs, the Department does not make any distinction between expenditure and investment. Any money spent becomes a cost. When talking about an investment, the intention is to form a company that generates revenue. The main question which arises is how PetroSA became a struggling company when it was given money. Out of three plants, only one is operational therefore it is sustained to continue employing people. It is not as bad as it looks because PetroSA Ghana is making money whilst PetroSA South Africa is struggling. He said that if there are assurances to achieve the objective, one would not attempt to fix anything. He emphasised again that these entities are a result of statues and every technical decision to be taken, will need to relate with the legislative framework. He advised that at the moment it is not important to look at the organizational structure, but it is important to look at the work that is being done in merging the entities. He added that Dr Poolo would comment more, even on the issues that he briefly answered.

Mr Frans Baleni, Board Chairperson, PetroSA, said the Minister touched briefly on the issue raised by Ms Malinga about visiting PetroSA offices. Once the merger is completed, there will be a complete different structure in terms of management and the Board. Therefore, he emphasised that Members must ignore the current organisational structure.

Dr Poolo said the work that has been done by consulting companies suggests that the benefit of the merger would be R1.4 to about R2 billion through synergies. In terms of the current costs, the project has budgeted R65 million until the end of March. When it comes to the market potential based on the analysis, this suggests that if the Department moves now to position the merger, the market potential that can be accessed by this new entity ranges from R60-R90 billion. In terms of solvency and liquidity, it is important that the Department move with speed because the merger itself affords the CEF Group with the capacity to isolate bad business from good business and deal with legacy issues over time. It is a good initiative and the sooner it is done, it is more beneficial to the Group itself. Legal agreements will be able to be completed by 25 March 2021 in terms of the schedule that is at his disposal. To answer the Chairperson on the issue of the CEO of iGas, he said there is a concept in management that one does not work as an individual in terms of the work execution. There are management teams from iGas, though limited, but decisions get to be made by the small team supported by the group from the administrative point of view. Every other decision gets to follow governance structures. There are management meetings, sub-board committees and the main board that takes main decisions.

Ms N Sondlo, Chairperson of iGas, answered the question raised the Committee Chairperson. In terms of the presentation, she said there is an archetype proposed to the Cabinet. In that proposal, there is a detailed process on the status of the three entities once the merger is done. iGas is managed through a memorandum of agreement between CEF and iGas and it is monitored on a quarterly basis to ensure that everything the CEF Group is supposed to do on behalf of iGas is done looking at the perceived conflict of interest.

The Committee Chairperson emphasised Mr Mileham’s questions. He appreciated the presence of the Minister and expressed gratitude on surviving the coronavirus and extended condolences, because the Minister lost one of his close relatives and a colleague. He expressed his view on the governance structure and mentioned that he was happy the Chairperson of iGas had explained. He said he would not like a situation where one individual has several positions because it can be allowed and encourage the Members to trust and follow the process.

Mr Mileham said that his question on the proposed organizational structure on the new entity was not fully answered.

The Chairman said he thought he was answered but he would not like to answer without complete information. The Cabinet might have a different perspective but the principle of integration on merger is agreed. Only the final stamp is left. He liaised with the Minister asking if he was giving the right version of the answer and the fact the Minister does not have a deputy, he would not like to assume the duties.

The Minister said he already answered that and emphasised that the Department will table its options to the Cabinet and will go with the preferred option. It is no use explaining now before engaging with the Cabinet. The Department will have to come back to the Portfolio Committee with an updated report.

The Chairperson noted that the forensic reports date from a few years back. He opened a discussion platform regarding the presented forensic reports.

Mr J Lorimer (DA) asked how much money was involved in the transgression of procurement policies of AEMFC and whether the transgression was with one or several companies. He asked if the Hawks were given a timeline to report back and when will criminal charges be decided by the Department? This was on slide 18. He asked if criminal charges are brought forward, will they be aimed potentially for officials.

Mr W Wolmarans (ANC) [referring to slide 10] said that the forensic report on CEF says investigation is underway. He would like clarification because at some stage there was an engagement with the National Solar Water Heaters (NSWH) which is a new project, compared to the failure to reinstate officials and the payment done on behalf of PASA by CEF Treasury into a fraudulent offshore account. His concern was that these issues are bandaged together when they could have been separated. He raised a second question on slide 17 where the problem period is stated as 2017-2019. He asked why it did not correspond with the period 2015-2016 which was mentioned under the purpose and scope of the forensic investigations. He asked for the correct version in terms of the timeline.
 
Mr Mileham said that all the fingers point to Mr Gamede and it seems unlikely that he acted alone. It is very unusual that there were no controls in the entire organisations of the SFF and CEF Group, and he was able to facilitate such transactions on his own. This meant that there were other people involved and this appears to be glossed over. He asked if there were other individuals involved. The report indicated that there ought to be an approval from the CEF Board and the Minister. He said the report makes it very clear that the CEF board only discovered [the problems] after the transactions were made, but it does not answer the question of the role of the then Minister in the sale of the strategic stock. His second question was directed to Minister Mantashe. He asked if it was not yet the time for strategic fuel stock policies to be put in place. He said that there was once a draft that was never implemented.

Ms Malinga said that the presentation by the CEF CEO outlined how the strategic fuel was supposed to be disposed. There is no clarification about when the then Minister learnt about the disposal of the strategic stock besides that the Board learnt about it in November 2015 and that CEF was only alerted to the sale when the money was paid into the SFF Bank account which is managed by CEF. She also raised the issue that it is unlikely that Mr Gamede worked alone and asked if there were any accomplices and if there been any consequence management on the people involved. She also said that she is worried about the AEMFC, whose CEO was blacklisted for taking an unauthorized overseas trip but the person who unlawfully sold the state resources was not blacklisted. She said that she understands that the matter is with the Hawks but suggested that the same measures should be imposed on that person who undermined the executive authority. PetroSA was supposed to drill five wells and ended up drilling three wells and the estimated amount for five wells was around R3 billion. Now that the CEO has mentioned an amount around R14 billion she asked about the consequence management process. She also said that during the oversight visit the Portfolio Committee heard of the exact money that had to be paid to resolve the issue of the strategic fuel. SFF is paying billions and the SFF CEO cited that should they lose the appeal, the R2 billion profit would be lost as well. The Department should really focus on that. The money that was lost in the illegal sale might not be recovered. She also asked if the barrels sold to Zimbabwe were ever recovered and what happened to the person who sold that and what happened with the unregistered company and the person was heading it?

The Chairperson emphasised that all the mistakes should be corrected so they do not repeat. He mentioned that he was watching the Commission of Enquiry [into State Capture] and realised that not all information is disclosed. He said that there is no huge difference on all forensic reports; the only difference is with PetroSA because the entity was not selling but was drilling. It can be seen that there was no one looking at the cost implication of the exercise and the entity was convinced it was the right thing to do. That is the same with SFF. There had to be a decision about the PetroSA drilling. Either to let the matter go, sweeping it under the carpet or pretend it never happened. He said that he was not sure if the forensic reports were complete because when the Committee visited Mossel Bay, there were forensic reports that implicated a lot of executives and the issue was raised by the Labour Department. The main worry raised by the Labour Department about PetroSA was not only the drilling issue but had to do with the investigation that was conducted. There are allegations at PetroSA, CEF, SFF and the Department that there are people that were implicated with the previous reports but are still working with the entities and no consequence management was undertaken. He was of the opinion that what was presented was not the forensic report itself but reports on the forensic investigations and presenters should not act as if they are under oath because it misleads the audience. He suggested that there ought to be a timeframe, for example, it can be said by June all persons who committed acts of gross misconduct would have been investigated. He said that it is worrying when the approval of National Treasury is involved, but it also could have been misled. There ought to be a proper consistent investigation on every entity and every individual who was implicated.

The Minister said the worst mistake is losing focus of the objective. The approach of the Department aims at complete outcomes. He said that the Hawks are investigating the forensic reports and it’s a process, therefore it is difficult to provide a timeline. He said that Adv Mokoena (Director- General of the DMRE) would be able to explain better. He had witnessed some cases that are concluded in a very short time frame whilst other cases take long to be concluded. He said the Department is not spending money but it is paying back the money it owed because it has the stock. The Department has the right to appeal. The Department is on a mop up exercise because it was over taken with positive and negative challenges. The Department will answer the questions about PetroSA drilling projects in the next meeting. He encouraged Members not to pretend to be judges even if all the fingers point at Mr Gamede. The Hawks are doing their best with the ongoing investigation.

Mr Thabo Mokoena, the DG, said that in any investigation, information will be gathered, and the Hawks are engaging with the Department on regular basis in that regard. The Department does not have control of the time line. Investigations are also ongoing regarding implicated officials, and when the time is right, the Department will update the Portfolio Committee on the outcome.

Dr Poolo said the investigations of CEF stock arose last year November and included two employees in the Departments of Finance and Energy Projects Division (EPD). He said that the CEF Group does treasury work for PASA [as its subsidiary].

Mr Godfrey Moagi, CEO of SFF, mentioned that he lost the link of Mr Wolmarans question (slide 17) and will come back to it if it concerns SFF. He said that there are three legs to the strategic stock. The criminal case is being investigated by the Hawks. The Department is unable to control the pace but is cooperating with any needed information. There was also an issue with a civil case. In the beginning, traders wanted to take stock and the Department focused mainly on the civil case, to stop the entire process. The case was a success and the court found that the transaction was unlawful and 10 million barrels of strategic crude oil was returned to the country. He said that SFF did not pay the money but refunded the money to all the three traders. While the stock was in storage, traders paid storage fees and storage fees were also refunded to the traders because the stock belonged to SFF. Additional interest was paid to one trader who agreed to the refund of oil and storage. The third leg that is being currently dealt with is Labour Law wrongdoing. The focus is not centered on Mr Gamede only. When the civil case was instituted, the traders filed affidavits that raised the need for further investigation. That will expose if there were wrongdoing from the current employees of the organisations. The then Minister issued a directive, but did not approve the disposal of the significant stock. She imposed conditions. Due diligence should have been done, which was not done and not to compromise the stock of the country. As soon as the CEF board was informed, the then Minister was notified. Mr Gamede was not blacklisted because he had left SSF as an employee at the time and therefore no disciplinary hearing took place. He emphasised that the Hawks are handling the whole investigation. The issue [in slide 12] of three hundred thousand barrels of crude oil is in court and SFF is going after the company which took the title of the product, but the product is still in the SFF tank. No product was released.

Mr Pragasen Naidoo, CEO of PetroSA, said that with regards to questions raised towards PetroSA, the first one is in reference to Project Ikhwezi and the consequence management process. The investigations were conducted and the consequence management was implemented. This resulted in the termination of two executive positions at the time. The report will be available end of March and as soon as it is available necessary disciplinary measures will be implemented. The report on project Ikhwezi that is available from PetroSA is the summary of what was presented by Dr Poolo. He said that PetroSA will be guided by the Minister and Department should a need arise.

Ms Zanele Sibisi, acting CEO & Chief Operations Officer, AEMFC, responded on behalf of AEMFC on the question that was posed about the amount of money involved in the non-compliant procurement processes. She said that there were a number of companies that were associated with that finding and AEMFC deals with different companies and provides services to different entities. Concerns were raised by the company that supported AEMFC with diesel supply and fuel management systems and the company that supplied AEMFC with mining equipment. R400 million is in question. She stressed that it had been a lengthy process to address this with the executives that were involved. She said the matter had been finalised the previous day and everyone that was implicated in the forensic report had been dealt with. There is no confirmation on the time that the Hawks will take to conclude investigations but assured the Portfolio Committee that AEMFC has internally actioned the recommendations of the forensic report as a key note.

Dr Poolo said that the issue about the investigation at PASA was that there was a R1.2 million claim which proved to be fraudulent. It was an offshore claim. There were changes in terms of the banking details and it was established that the changes were followed without the verification of the proper relevant documentation. PASA was supposed to give a detailed report on consequence management and the second line of defense was supposed to be at the CEF Group. The investigations are underway. The preliminary report suggested that polices that the forensic auditors relied on were wrong. Instead of international, they used domestic [standards] which means that all the administrative access would have been at PASA.

Mr Mileham said that PetroSA had all their eggs in one basket and relied on Project Ikhwezi to save their operation. He asked of other alternatives that were considered or are being considered to reduce the risk of running out of feedstock. He asked where would PetroSA get feedstock from whether the merger goes through or not.

Mr Wolmarans repeated his question on slide 17.

Ms Malinga said according to the slides that Dr Poolo outlined from Ikhwezi project in 2007, the decision was taken to drop throughput to (2x2) operations from (3x3). When an oversight visit was held in November 2020, it was found that the entity was working with (1x1) throughput. She then asked of the plan moving forward and whether that was a sustainable move and how long will it be sustained. It was mentioned that Mr Gamede was working with two officials and she asked whether there were consequences and if the officials were from the Department or the entity. She said the left the issue of National Solar Water Heater on purpose. It is also under forensic report. She mentioned that she is unable to remember the person who said the project will be up and running last year at Taj. The project is a total failure. She asked if there has been any consequence management from the Department on the brains behind the project.

The Chairperson made a distinction of the criminal procedure and labour law. He said that in most cases criminal procedure goes beyond the benefit of reasonable doubt while labour law deals with a balance of probabilities.

Mr Naidoo said one by one (1x1) operation [see slide 34] is not commercially sustainable because of the cost structure and the market pricing of the feedstock that is currently experienced. The feedstock challenge will be mitigated either by gas or liquid. The preference is gas and the entity has gas underground that [will last] approximately three and half years. That indigenous gas is not commercially sustainable to make liquid fuels but the gas is used to generate power. The entity will engage with Eskom or dispose of the gas into the market. He said that the long-term solution is split into two. One is the short term and is anticipated at five to eight years. In bringing in LNG, the entity engaged with the market and is currently evaluating proposals received but the feedback is positive. This is followed by a longer term solution. In parallel to the gas opportunities, he mentioned that the entity is also exploring and engaging with Total about their recent discoveries and hoped that due diligence will be provided. Liquid fuels depends on the market and the market is not currently favourable from a profitable perspective. PetroSA is always scanning the market to see when the liquid feedstock prices improve. There has been an improvement as the oil price has picked up but not sufficient enough for the entity to purchase the feedstock. The initiatives are directed at gas power in the Mossel Bay area.

The Minister said LNG is linked to the resuscitation of PetroSA and development of the gas industry. He advised Ms Malinga to seek information from the Department before making judgments. He concluded by thanking everyone and also by appreciating his invitation to be present at the meeting.

The Chairperson thanked the entire Department for presentation and the engagement with the Portfolio Committee. He assured the Minister that the Committee will follow up on the issues raised within a reasonable time. The Committee will also try to maintain the relationship between the executive and the administration. Lack of employment, increase in inequality and serious challenges that comes with unemployment should be addressed. Focus should never be removed from those issues and past experiences are a perfect lesson. The Department and the Minister were encouraged to keep updating the Committee to achieve development of the people. The NSWH needs to be addressed and recommendations were made to improve the project and encourage the relevant parties to engage with the Minister about that. He discouraged vengeance but working together to achieve administrative justice. He laid stress on the need for accountability and said that for any wrongdoing there would be consequences.

Committee minutes
The Committee considered and adopted the minutes of 23 and 24 February 2021.

Mr Wolmarans said the matters that were scheduled for the following day 3 March 2021 like the presentation had already been dealt with.

Mr Mileham raised questions about audited financial statements and annual reports from the entities. The second issue was the outstanding agreement on the South Sudan oil deal. He said that he once raised the issue but was it was suggested that it has to be a Committee request for the agreement to be tabled. The agreement has not been seen and terms and conditions are unknown.

The Chairperson suggested that when dealing with the programme for the next quarter the issue will be taken into consideration then it will be either adopted or not, because guidance had to be sought. He also expressed his worry for the lack of correspondence but advised that he will engage with the Auditor- General oversight Committee.

Meeting was adjourned






 

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