Hide and seek over R14.5bn Ikhwezi loss

Facts on Ikhwezi loss held back

…sent to clients 12 Dec… In the first of several meetings of the Portfolio Committee on Energy regarding Central Energy Fund’s Ikhwezi Project, chairperson Fikile Majola has agreed with ANC MPs and Opposition members to reject the Department of Energy (DOE) report on the PetroSA impairment or write-off amounting to R14.5bn. 

Minister of Energy, Tina Joemat-Pettersson, had been once again been requested by Parliament to explain the reasons for the loss, having similarly failed to arrive at  meetings of the same committee to explain the sale of strategic fuel stocks at Saldanha Bay.

This time she was asked to present a copy of the full independent forensic report on the Ikwhezi loss apparently held back by her Ministry. She instead sent a letter of apology for her absence.

The forensic report, it is understood, is highly critical of management failures and gives some of the political background that led to the reasons for the loss incurred over two years and the failure of the projected maritime gas feedstock programme to sustain production at the Mossgas refinery plant.

Finally, legal argument has been presented to the Committee claiming that debate on the report should beheld in camera so as to protect individuals unknown from litigation. 

The blame game

It is known that funding is required if PetroSA is to continue operations. It is also known that the full audited forensic report carried out by independents exists and is with the Minister.   Sight of this has been requested by Opposition MPs for over a year, a request unfulfilled by the Minister of Energy for reasons unknown to the public and media. 

The Portfolio Committee have also asked for any plans she might have had to save the ailing refinery.

The first of two “meetings”

What instead was presented in the absence of the independent forensic report on Project Ikhwezi was a 25-page “own-departmental” report  put before the Committee by Acting CEO, Department of Energy (DOE), DG Thabane Zulu.  The report appeared to have been compiled by PetroSA.

His report, DG Zulu maintained, would give the circumstances surrounding decisions taken; the context of the loss; and a short précis on “the way forward”.  

As was already known to portfolio committee members, DG Zulu confirmed that Project Ikhwezi had been expected to deliver the first offshore gas offering in March 2013, which process would have extended the refinery’s lifespan to 2019. The first results were only made available some two years later.

Into deep water

The DOE presentation indicated that the loss, or impairment, incurred by the programme including all operating costs indeed totalled R14.5bn for Ikhwezi, which loss included figures to allow for a drop in oil prices and of increased capital costs which had ballooned during exploration and drilling. These facts were not expanded upon.

Out of their depth

The report also admitted,  as the Committee had heard before,  there was a lack of due diligence by the previous management of PetroSA primarily caused by inexperience of management officials and the pressure put upon them by the urgency to extract sea gas for the Mossel Bay refinery to ensure its survival.

A sad tale of inadequate risk management was again reported upon; over-long reaction time to issues arising and problem solving; there were unexpected delays in the delivery of equipment and contractors were changed causing downtime.

In general, it was admitted by PetroSA acting CEO, Siphamandla Mthethwa,  that this was not going to be the end of the story for PetroSA since gap-funding was now needed to continue operations despite a slow recovery now being experienced.

Litany of wrong-doings

PetroSA Chairperson, Bhekabantu Ngubane, told MPs that PetroSA had suffered from weak corporate governance; execution of the project was not treated as urgent; there was a lack of risk mitigation; lack of resources and lack of forward planning with no “walk -away” trigger points to stop the project.

Plans to undertake a turnaround of PetroSA by the heads of the new team, represented by acting CEO, Siphamandla Mthethwa, included moving away from natural gas fields offshore on the East Coast and focusing on imported light crude feedstock; increasing refinery capacity by four times; expanding downstream activities; diversification of revenue streams and installing operational efficiency factors.

Work on converting the refinery to process heavy condensate light crude oil, as well as handling gas, had started and savings effected in a wide-ranging cost cutting exercise was showing good results, CEO Mthethwa reported.    He said PetroSA’s upstream interests, the existing GTL refinery, its general gas business and all downstream activities would be ringfenced as separate business units after re-organisation.

Cabinet’s “wishlist”

He quoted a plan to rename the organisation as the National Oil Company (NOC) nominated by the state as its entity to be acquire petroleum rights, including free carry interests as being finalised and defined by amendments to the Mineral and Petroleum Resources Amendment Bill.  This would also include free carry on shale gas opportunities and “any other unconventional opportunities”.

The future plan, he concluded, was also for the NOC to be nominated by the GUMP (gas utilisation master plan), at present in draft, as the “gas aggregator”. The NOC would champion any additional SA refining capacity, entering also the downstream fuel retailing market, he said.

Meeting stopped

Before the meeting got any further, however, Shadow Minister of Energy, Gordon McKay interjected that what DOE was relating was not what the Committee had called for.   The report being presented was, in his view, totally unacceptable and irrelevant.   Parliament, he demanded, was not to be denied the cold facts of the actual forensic report on Project Ikhwezi, as called for.

Pieter van Dalen (DA) angrily questioned DG  Zulu stating that previously DOE had the Committee that the independent Ikwhezi  forensic report was “ready to present to Parliament”.  What was now before them, he said, was patently not “independent” but simply a report from DOE recounting what was already known.

All MPs agreed that DG Zulu’s report contained no new facts and certainly no reasons on what basis management decisions had been made and who made them and which parties were responsible for the losses.

Fog in a bucket

Chair Fikile Majola agreed that the meeting was wasting its time hearing this further  DOE version of the Auditor General’s findings and listening to PetroSA’s own version of events. More important, he said, was to hear the Minister’s views on the loss, what she was going to do about it and on future direction for PetroSA.

Van Dalen also  asked DG Zulu if any costs hidden in the total of R14.5bn include any sums incurred by pulling out at the last minute from “Project Irene”. This was the plan, unauthorised it appears by both Cabinet and Treasury, to buy Engen’s downstream activities, the sale having collapsed for lack of sufficient funding.

A halt having been called, chair Fikile Majola wound up the incomplete meeting saying that Parliament did not wish to accept the DOE presentation document or any more than it wished to hear the same reasons given once again by PetroSA for the Ikhwezi loss.  All that was wanted was the forensic report and the Minister’s presence, he said. Parliament would address the Minister again, he added.

More meetings, no result

In a further meeting on the same subject, the Portfolio Committee on Energy still did not either receive the forensic report or the Minister’s presence, it being noted that during this period a vote of lack of confidence in the President occurred involving the Cabinet’s presence elsewhere.

A particularly angry and frustrated Chair Fikile Majola appears to have confronted by legal argument, of which Minister Joemat-Pettersson must be fully aware. 

In discussions with MPs regarding Project Ikhwezi, there appears  to have been a point at which disagreements arose within the structure of PetroSA, maybe also including DOE and at Ministry level, as whether or not to proceed with complex issues surrounding the Ikhwezi Project on offshore drilling matters.

The debate might have been  based on specialist geological advice both on the extent of the field and the cost and difficulty of drilling both vertically and horizontally to account for fault lines in the area.  The wisdom of proceeding appears to be the crux of the argument that continues and where to put the blame for the decisions made.

This unfinished business would be resolved when Parliament re-assembled, Chair Majola has promised.

Previous articles on category subject

Central Energy Fund hatches fuel plan – ParlyReportSA

Strategic fuel stock supply has problems – ParlyReportSA

Chevron loses with Nersa on oil storage – ParlyReportSA

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