PetroSA’s desperate ploy to stay alive

…..article dated 10 March…..

Mossel Bay’s LNG refinery out of feedstock…

PetroSA, the liquid gas participant in the Central Energy Fund (CEF) portfolio of state-run entities, has for some time reported to be running out of gas feedstock for its Mossel Bay LNG plant but it remains unclear yet whether the refinery has actually stopped production.   Input from the gas field supplying the plant was supposedly to end by December 2020 or thereabouts, this date being the basis of a staff retrenchment programme and the preparation to mothball the refinery portion of the plant. 

The Mossgas gas-to-liquid plant sources its feedstock from PetroSA’s natural gas deposits known as the Oribi and Oryx oil fields in the continental shelf complex off the Southern Cape coast. The plant is capable of producing a crude oil equivalent of 45,000 barrels per day based on reliable gas feedstock supplies from its wells.

For geological reasons existing wells are exhausted and further exploration and very costly development at the same location considered by CEF unwise, particularly bearing past experience.

So, what now

In what may be a desperate attempt to survive and re-design its future in the gas industry, a last-ditch attempt by PetroSA management was listened to by Parliament to try and keep the Mossgas refinery and its operations in play with new sources of feedstock.

Whatever its future, MPs have been demanding for the last three years some sort of strategy to justify its existence of the plant and to explain, in the fog of changing staff and political upheaval, where the PetroSA adventure is taking the taxpayer.

In a effort to finally get to grips with the PetroSA problem and after getting no explicit answers for two successive years on either on development or a future strategy to survive, a parliamentary team represented by the Portfolio Committee of Mineral Resources and Energy flew in during mid-November to Mossel Bay on an oversight visit to find out for itself what was going on.

Calling for clarity

In terms of their oversight programme, chairperson Sahlulele Luzipo (ANC) said they wished to know what was happening on the ground at Mossgas and end all the rumours in the media and for the sake of workers and staff at the refinery gain clarification. Holding company, CEF, is on record as stating their plan was to curtail any further losses, sell off assets and mothball the plant but the management team at PetroSA was saying something else, the Energy Committee learned.

The Committee team, on arrival, found there was indeed a plan drawn up by the limited and existing technical staff and a small team management of employees under new Group CEO, Pragasen Naidoo. Naidoo had considerably impressed the  parliamentary energy Committee with is enthusiasm on his first visit to Cape Town on being appointed to his new job as CEO. PetroSA has been without a full management team for a number of years.

Sleeping on the job                                                              

It emerged, MPs have now reported, that a new plan to develop the refinery in order to return PetroSA to the market and be a major GTL producer of fuels, had been heard earlier by the PetroSA board.  They had expressed little interest, it was learned, but the ideas promoted had nevertheless gone forward to CEF.  According to the PetroSA team, the plan was now bogged down with the CEF board.

 It also was also confirmed by Naidoo that it was his impression that at no point had the plan been sighted by the Minister of Energy or DOT

R15m debt incurred

PetroSA, the supposed “national oil company”, has been technically bankrupt for a number of years primarily because its nearby gas maritime gas fields are exhausted. Some six years ago, CEF accepted the plan called “Project Inkwezi” against the advice of a number of geological experts and continued its supply from the faulted gas field in the waters just offshore.

Mossgas has only, at best, ever produced 60% of the estimated potential on which the funding was based, dropping now to zero.

Big dreams

The ANC has stated on numerous occasions that its wants PetroSA to become the state flagship in the downstream fuel supply market and its failure to become this despite massive loans and preferential treatment is a prime example of political interference and meddling by the governing party.

At present, the board of CEF, as the holding company for the state’s oil and gas interests, is in the process of merging PetroSA with its other energy units, iGas & the Strategic Fuel Fund, confirmed by Minister Mantashe in early March.  PetroSA is the openly suspected nominee for all free-carry income from future oil and gas development under the Upstream Development Bill.

Moment has come

In the plan presented to MPs by CEO Pragasen Naidoo and his management team at PetroSA, it was stated that there was now a good future in the gas to fuels industry for South Africa if timeous investment was now made. This view was particularly generated as a result of the recent Total Oil strike in nearby coastal seas in the area of the Outeniqua Basin, some 175kms from Mossel Bay.

Total are currently exploiting finds operating in the distant, in deep waters in the Brulpadda block, Prince Edward Island area, Naidoo reminded MPs. However, with this new find at the Outeniqua Basin yet to start drilling, Total could be delivering in 5-6 years’ time. Total were already moving a major sized drilling rig into position, it was reported from Cape Town.  Naidoo is asking for Minister Gwede Mantashe to start negotiating now with Total for offtake for Mossgas.

Total, reporting to the media recently, said the strike could have the potential of four wells and most likely could supply natural gas around the clock for an undetermined but lengthy period.

Pandora’s box

On the financials of PetroSA which he was investigating and trying to rectify, CEO Naidoo stated that previous leadership elements at PetroSA had failed dismally to exercise their responsibilities to exercise compliance with Treasury regulations; did not monitor compliance with applicable laws and regulations and management did not prepare any accurate and complete financial reports.

He said he had established that PetroSA had made material misstatements in the consolidated and separate financial statements during the audit which also constituted non-compliance with PMFA rules.

Naidoo said he was calling for  consequence management; the SIU to interview previous management on certain criminal issues and for audit fines, stating that a new relationship with CEF had to be established. He told MPs that the parent company CEF as shareholder “hampers any future planning because the interests of CEF and PetroSA are not aligned.”

Going nowhere

In presenting a future plan to MPs, he said “At present there is no clear strategy coming from CEF or that has been found within PetroSA in the past.  It has been unclear for years whether the company should remain as the gas business or be converted to liquid fuels industry nor is there any footprint nationally in the downstream business”.

He pointed out that the role of government as shareholder is unclear and that DMRE have not supplied any mandate or objectives. He complained that with a situation of lack of maintenance of the plant causing unplanned downtime coupled with PetroSA’s depleting indigenous gas feedstock situation, his staff are de-motivated and frustrated. He said the same applied to the Mossel Bay community in general regarding the presence of PetroSA and this should be dealt with.

Price of closure

Finally, Naidoo said, the massive load of the decommissioning liability in the books of some R9.6bn, going back to the policies of the Nationalist Government, was a constant  “baggage” and a hill too large climb in order to recover as a going concern.  He said this was a liability to the taxpayer and he had suggested a way to CEF to deal with this but again had received no response.

He told MPs that in general the liquid fuel market is governed by the constant fact that all four major refineries needed some US$4bn for them to upgrade their fuel to the new specifications for fuel and thus ensure their continuity in both in market and labour markets. It appears that some will make choices on what product to supply and how or may not stay.  This allowed for market decisions by PetroSA.

Strike now

He said, “The opportunity exists during this short window therefore for PetroSA to play leading role by upgrading the refinery at Mossel Bay and at relatively low cost using enhanced condensate processing (ECP) with a major investment of some R2.5bn with interested parties or other governments.”

Naidoo proposed that PetroSA needs to invest heavily in exploration” right at this moment” since, in PetroSA management’s opinion alone, not the PetroSA board, to have security and some degree of control over input sea gas will be the only to sustain the company during its lifespan.  “Without such PetroSA will always be seen to be suffocating itself”, Naidoo added.

The attention of MPs present was drawn to the fact that the there is a very strong possibility that PetroSA will be the receiver of state  20% carry funds per the Draft Upstream Petroleum Resources Development Bill from oil and land and sea exploration rights.

Closing down

Naidoo concluded that the company has already started selling its non-core assets to trim down, this being the instructions of the board. He asked that this be stopped and the strategic merger of PetroSA, iGas and SFF halted for the moment whilst the status of PetroSA was sorted out in the light of the new Total find and a strategy for PetroSA finally established.

He said his PetroSA team was at odds with unions over retrenchment packages and dates of closure and also at odds on the next way to go with closure, in particular the sale of assets resulting in the immediate amount of cash available.

What to do

Upon their return to Cape Town, MPs reported in a December virtual meeting the issue of PetroSA’s  concern that it was about to run out of feedstock and also noted PetroSA board, as against its management, wanted to sell off non-core assets to ensure that PetroSA is able to meet its financial obligations including paying staff but the unions and organised labour said non-core assets should not be sold off until the merger with other entities is completed.

There was agreement that the Committee would recommend the Minister keep it informed of progress made in obtaining feedstock to keep PetroSA operational, as a matter of urgency. Members also raised concern on the lack of relationship between PetroSA and its staff, the unions and local municipalities, particularly Mossel Bay.

Chair Sahlulele Luzipo recommended, and the committee agreed, that the National Executive be notified of the urgency to require immediate feedstock until the proper decision is made and the CEF be notified that a merger of the three of the subsidiaries could not take place whilst one of them was in the process of stripping assets.

The Committee is to meet in mid-March to establish the latest position, whilst Chair Luzipo furthers the matter with both CEF and DMRE and possibly the Minister.  The population of Mossel Bay is about 100,000.

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