South African PetroSA Makes Record-Breaking Loss
PetroSA, which had the task of extending the life of the country’s only gas-to-power project that uses indigenous offshore resources, has hit the record books for making the biggest loss of any South African state-owned enterprise.
Members of parliament in Cape Town March 14 gave PetroSA a fortnight to come up with a rescue plan, with Slovo Majola, chairman of the portfolio committee on energy, also questioning whether the board of PetroSA should be fired.
This followed a projection to MPs by PetroSA that it would lose R2.2bn ($172mn) in the year to March 2017, including an impairment charge of R1.1bn. This followed a spectacular impairment charge of R14.5bn ($1.1bn) in the 2014-15 financial year.
“There was broad support of MPs from all the major parties to hold PetroSA accountable for its R14.6bn impairment and the additional R1.1bn impairment for the current financial year,” shadow energy minister Gordon Mackay told NGW. “PetroSA should take the warning of the committee seriously. While there seems less of an appetite to have the board removed, the committee is no mood for any further dithering."
Bankruptcy is unlikely at this point as PetroSA is seen as a strategic state asset. However, the ability of the South African government to bail out the operation is extremely limited in the current financial climate. There is huge pressure from the Treasury for PetroSA to become self-sufficient.
The heart of the problem lies with Project Ikhwezi, an attempt to find new feedstock offshore South Africa for PetroSA’s gas-to liquids (GTL) plant in Mossel Bay. The new wells produced just a tenth of the expected amounts. An earlier independent report into the fiasco suggested that part of Project Ikhwezi’s problems lay with poor management. The Mossel Bay power plant is now being converted to run mainly on imported liquid feedstock.
PetroSA pushes financial boundaries at its GTL plant, leaving government to explore possibilities
Despite this disaster, large retention bonuses totalling R17.3mn ($1.4bn) were paid to senior managers. Mackay said of PetroSA’s finances: “This is a result of the high level of politicisation of PetroSA. Politically-connected individuals without the requisite skills-sets were appointed on overly favourable contracts.”
Frans Cronje, head of the SA Institute of Race Relations, an independent think tank, told NGW that the problems at PetroSA reflect the dangers of the state running a business.
“It is unfortunately just one example of a now familiar pattern of management under-performance in state-related companies. It is quite a serious matter, as a weak link in the energy chain risks deeper knock-on effects across the economy.”
He said he could not comment in detail on PetroSA as: “We won't comment on a specific entity without first having conducted detailed research into its specific facts. However, where we have conducted such research into other poorly-performing state entities, a combination of political deployment processes, corruption, and counter-productive ideological influences underpinned their poor performance.”
There are plans by South Africa’s Department of Energy for two new floating LNG import, storage and regasification (FSRU) terminals for gas-to-power generation at Coega and Saldanha Bay.
It has been suggested that PetroSA should become involved with there as part of a public-private partnership. Cronje feels that, given the state body’s track record at Mossel Bay, this be unwise.
“The state should create the correct policy climate, sensibly regulate key sectors, but leave operational matters to private sector providers that tender for such projects according to competitive and transparent bid processes,” he said.
If you are a Premium Subscriber you can access NGW magazine here.
Natural Gas World welcomes all viewpoints. Should you wish to provide an alternative perspective on the above article, please contact email@example.com
Kindly note that for external submissions we only lightly edit content for grammar and do not edit externally contributed content.