- Energy Minister Gwede Mantashe is in the conflicted position of trying to reduce loadshedding with one hand while allowing PetroSA to profit off it with the other.
- The Central Energy Fund’s long-awaited annual report shows that PetroSA generated R24.5 billion in revenue in 2022/23, largely by selling diesel to Eskom; PetroSA is able to earn “aggressive margins” on diesel sales because Mantashe refuses to grant Eskom a diesel wholesale licence.
- Mantashe and PetroSA also refuse to tell Parliament, Treasury and the public where the diesel comes from, saying revealing the names of the companies that profited from these contracts would kill PetroSA’s business. In one instance, an evangelical pastor was poised to profit from funding PetroSA’s covert Eskom monopoly before a leak torpedoed his R3-billion deal.
- For more financial news, go to the News24 Business front page.
Two government ministers are in a tug of war over the future of the state’s oil and gas assets.
In September last year, Public Enterprises Minister Pravin Gordhan gazetted the National State Enterprises Bill which, if passed in its current form, would remove the Central Energy Fund (CEF) and its valuable oil and gas assets from the control of the Department of Mineral Resources and Energy (DMRE).
CEF is the holding company for PetroSA, which owns the rights to offshore oil and gas fields, as well as iGas, which owns a significant stake in the Rompco pipeline that imports gas from Mozambique.
Gordhan’s proposal is to create a more independent holding company to manage state-owned entities – including Eskom, Transnet, Denel and CEF – that have been crippled by political interference and State Capture.
When we asked Energy Minister Gwede Mantashe about Gordhan’s proposal in October, he told us: “It’s a debate that one, leave it to be exhausted internally.”
Asked if there was an ideological battle coming over CEF’s future, he said: “Yes. A big one.”
A month later, Mantashe presented his own bill to Parliament: the South African National Petroleum Company Bill.
If passed, Mantashe’s bill will gut CEF and move its oil and gas assets into a new state-owned entity controlled by his own department: the South African National Petroleum Company (SANPC).
The rival bills – both presented by the ANC – are now making their way through Parliament.
A dirty diamond
The Central Energy Fund was established in 1977 with the mandate to “contribute to the security of the energy supply of South Africa”.
Aside from PetroSA and iGas, CEF also manages the Strategic Fuel Fund, which looks after the country’s strategic stockpile of crude oil and controls around R11 billion in assets.
On Wednesday, it presented its annual results to Parliament, declaring a R1.7 billion profit. The profit, however, is somewhat artificial as PetroSA reevaluated its rehabilitation liability, which put R2.7 billion back on its balance sheet. Without this, the group would have been R1 billion in the hole.
While CEF owns valuable assets, they have also been plagued by mismanagement and scandal: PetroSA’s Project Ikhewzi blew R14.5 billion drilling for oil offshore in the early 2010s. In 2015, the Strategic Fuel Fund sold off the country’s strategic fuel stocks for $5 billion without approval. In December, PetroSA announced it would enter into a R3.7 billion deal with Russia’s sanctioned Gazprombank.
Part of the motivation for the National State Enterprises Bill is to prevent a repeat of these kinds of scandals. Critically, the Bill would also remove SOE’s from the control of individual ministers and make the president the sole shareholder representative.
“This would separate the state’s ownership functions from its policy-making and regulatory functions, minimise the scope for political interference, introduce greater professionalism, and manage the state’s assets in a way that protects shareholder value,” Gordhan told Parliament in 2022.
This centralised shareholder model flows from the recommendations of the Presidential SOE Council, made up of government ministers and business leaders.
But it is unpopular as it flies in the face of the decision taken at the ANC’s December 2022 elective conference to “place SOE’s that operate in specific sectors of the economy under the relevant government departments”. Under this model, Eskom would be returned to the Department of Mineral Resources and Energy.
Public Enterprises spokesperson Ellis Mnyandu downplayed the conflict between the bills:
The question of which SOEs will be transferred into the [state enterprises] holding company is a matter that is still to be decided upon.
And even if Gordhan’s bill does pass, Mantashe’s would ensure that there is little left of CEF for the state enterprises holding company to inherit.
Gutting CEF
The merger of CEF’s subsidiaries has been on the cards for years. In May last year, Mantashe told Parliament that Cabinet had approved the merger of three CEF subsidiaries: iGas, PetroSA and SFF.
“[C]abinet approved the merger of iGas, PetroSA, and the Strategic Fuel Fund to form the South African National Petroleum Company (SANPC). … for the state to participate meaningfully in oil and gas developments,” he said.
“[T]he final draft of the SANPC Bill has been submitted to the state law advisor for constitutional certification… We implore Members to ensure its finalisation before the end of term of this administration.”
In practical terms, what this means is that “[e]very person who is in the service of iGas, PetroSA and SFF on the date this Act takes effect must be transferred to the services of the [SANPC]” and “[a]ll assets and rights issued … or held by iGas, PetroSA and SFF … be consolidated and transferred to the [SANPC].”
On Wednesday, CEF said it expected the transfer to happen by August 2024, although the transfer of some of PetroSA’s troubled assets would take longer.
This would eventually leave CEF with just one commercial asset: the African Exploration Mining and Finance Corporation (AEMFC) which owns Vlakfontein, a coal mine in Mpumalanga that supplies Kendal power station.
Asked how CEF felt about potentially being gutted by its own shareholder, spokesperson Jacky Mashapu said:
CEF as an implementing agent of the shareholder, it’s not better placed to make pronouncement on any policy related matters. In this instance, we believe that both DMRE and DPE are better placed to answer all these questions.
Eskom 2.0
When the South African National Petroleum Company Bill was gazetted in November it widely interpreted as Mantashe’s attempt to build an “Eskom 2.0” under his own control.
Although the SANPC’s mandate is largely focused on petroleum – infrastructure, supply, storage, distribution, aggregation, marketing and trading – it has also been tasked with “providing for renewable energy” and “the acquisition, generation, manufacture, marketing or distribution of any form of energy”.
Initially, the SANPC’s main business will be supplying diesel to Eskom: in the 2022/23 financial year, PetroSA generated R24.5-billion in revenue, largely by selling diesel to Eskom to burn in its Open Cycle Gas Turbines.
In the past, PetroSA would have refined its own product, but now it merely buys diesel and sells it to Eskom and other SOEs at an “aggressive margin”.
“The current corporate plan is premised on aggressive returns from the purchase and resale of purchased products [i.e. petrol and diesel],” CEF’s 2022 annual report noted. “PetroSA continues to explore and attract new business for the supply of finished products, particularly with state-owned entities, which will further improve the downstream business and related margins.”
Eskom would like to do this in-house, but Mantashe has refused to grant it a diesel wholesale licence.
This has created a situation where one SOE (PetroSA) is allowed to cannabilise another (Eskom), and has placed Mantashe in the conflicted position of trying to reduce load shedding with one hand while allowing PetroSA to profit off it with the other.
Transparency would help to keep this conflict in check, but instead this R24.5 billion a year industry operates in complete secrecy.
No tenders, just contracts
PetroSA stopped issuing competitive tenders for diesel in February 2022. A new tender was issued in September 2023, but seemingly never awarded. Instead, over the past two years, PetroSA has operated outside the law.
The Public Finance Management Act allows departments and SOEs to award contracts without a tender but requires that they file an expansion or deviation notice after the fact with National Treasury.
Those notices are published every quarter by the Office of the Chief Procurement Officer and provide a fascinating insight into when, where and how government is skirting the rules.
PetroSA continued to file expansion and deviation notices with Treasury throughout 2022 and 2023 but failed to disclose the lucrative diesel contracts that account for 90 percent of its business.
“PetroSA has not been granted a departure from reporting deviations and expansion,” a Treasury spokesperson confirmed in January.
Following our questions, Treasury wrote to PetroSA looking for answers. In February, we were told: “The National Treasury is still awaiting a response from PetroSA.”
By mid-March, Treasury still had no update.
On Wednesday, the Auditor-General disclosed that PetroSA lost R11.5 million when it sold diesel to a “fictitious company”.
AmaBhungane has submitted three Promotion of Access to Information Act (PAIA) requests to PetroSA asking it to disclose the names of its diesel suppliers. PetroSA told us it could not read our first two requests, then ignored our third, handwritten, request.
Mantashe, meanwhile, has openly said he will never disclose PetroSA’s diesel suppliers.
“[I]f you want to expose the business of PetroSA you’re basically killing it, you’re saying we must just kill it…” he told amaBhungane in October.
“PetroSA is trading with fuel and that is a highly contested space in the market. Now, nobody in that market will publish their suppliers or their consumers, nobody. Now you want PetroSA to do that, and I’m saying it’s a formula to close it down.”
The pastor
To be fair, transparency has proved fatal to some PetroSA deals.
In September last year, PetroSA approached Sanlam Investments to act as transaction advisors to set up a $160 million (R3 billion) facility to bankroll PetroSA’s diesel purchases.
PetroSA has severe cashflow issues. The annual report notes that “[a] material uncertainty exists regarding the entity’s ability to honour obligations as they fall due because of low cash reserves”.
Sanlam was not asked to put up cash for the new facility; instead the funding would come from a company called Idwala Energy, which would allow PetroSA to borrow up to R3 billion at a time, and repay the loan up to 45 days later.
We estimate that for this service Idwala would have earn between R60 million and R500 million over three years, as it would be guaranteed at least one vessel per month, according to a leaked term sheet.
But where Idwala’s funding would come from is less clear.
The company’s sole director, Harold Edwards, is an evangelical pastor who bought the company in 2019. In 2021, it secured a diesel wholesale licence from the DMRE, but to date, still shares an address with Edwards’ Perfecting Church International in Industria West outside Johannesburg.
At the time, PetroSA declined to comment on the deal, saying:
The information requested herewith is commercially sensitive, therefore, PetroSA will not be commenting…
Although Sanlam stood to make R75 million in fees, it declined to participate in the transaction.
After amaBhungane sent questions, Idwala withdrew: “We are not continuing with the project, we’re not going to help PetroSA,” Edwards told us in November. “There’s too much controversy around the entire issue. We’ve signed an NDA with the parties involved. It was an above-board deal. I don’t want to involve my name in anything that’s seen as dodgy or shady or corrupt. For the sake of my integrity.”
Similarly, PetroSA’s R21.6 billion deal with EquaTheza, exposed by amaBhungane in January, appears to be on the rocks.
In December, PetroSA appointed Theza Oil & Gas and Equator Holdings to develop its offshore oil and gas fields. As part of the deal, the newly formed joint venture, EquaTheza, would be required to source up to R21.6 billion in funding.
But on Wednesday, PetroSA’s presentation to Parliament indicated that EquaTheza was already in breach of the agreement: “Delayed deliverables on technical work programme by Equatheza. Work presented to date by Equatheza is not inspiring confidence that they can deliver.”
According to the presentation, EquaTheza was required to put up $12 million, but the payment date came and went “with no commitment on new date”.
“By end March PetroSA will seek way forward regarding dealing with Equatheza due to their failure to deliver satisfactory technical work programme and funding solution.”
Director Barend Hendricks disputed PetroSA’s dire description of the deal, and attributed the delay to PetroSA instead: “Equatheza Oil and Gas dispute the Breach. It is currently finalizing the Report as per the schedule and will submit on Monday.”
With other transactions, however, PetroSA has simply ignored the bad publicity and ploughed ahead.
In November, we reported that PetroSA was about to sign a R3.7 billion deal with Russia’s sanctioned Gazprombank to refurbish the gas-to-liquids refinery in Mossel Bay. Despite the uproar, PetroSA went ahead with the transaction.
