PetroSA on the brink after R14.5bn loss

2017-06-25 06:02


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Financiers seek assurances in the wake of the gross mismanagement and incompetence that led to Project Ikhwezi’s collapse.

A confidential evaluation report of national oil company PetroSA’s botched Project Ikhwezi reveals that the venture – which saw the parastatal make a R14.5bn loss – was doomed by gross incompetence.

The collapse of Ikhwezi, which caused the biggest corporate loss ever for a state-owned company, has left financiers in a panic.

But the report, dated February 2015, almost four years after Ikhwezi started, found it was doomed to fail.

Ikhwezi was aimed at drilling offshore wells to supply natural gas to the parastatal’s gas-to-liquid refinery in Mossel Bay.

And in a desperate attempt to make it work, the report found, senior company officials chopped and changed construction companies and the project’s scope.

In addition, since the start of the project, there had been a high turnover of key staff – including three chief executives, two chief operating officers and four project managers – at PetroSA.

The report also highlighted further corporate chaos: some of the contracts were awarded without proper tenders, and some contractors had no contracts and worked with a “letter of intent” instead.

These “considerable” management changes resulted in PetroSA discovering too late what was happening.

A senior executive from the Central Energy Fund (CEF), which oversees PetroSA, said the project went awry because PetroSA changed construction companies four times, often without going to tender.

“One of the companies decided to drill vertically when they were supposed to drill horizontally, resulting in them missing the gas. It was all a big mess,” he said.

Ikhwezi was supposed to yield 242 billion cubic feet of gas from five wells at a cost of $1.344bn (R17.3bn), but ended up producing nine times less gas from three wells.

PetroSA spokesperson Thabo Mabaso said: “Currently, the contribution from Ikhwezi is 30% of the total daily gas production rate at the Mossel Bay gas-to-liquids refinery.”

Mabaso said the company had learnt several lessons, “which have been especially incorporated into our gated framework processes to ensure that the same mistakes are not repeated”.

Financial woes and boardroom battles

Meanwhile, financiers have held a series of meetings with the CEF and PetroSA to seek assurance about their investments.

Emails show that in the past three months, PetroSA and the CEF have had back-and-forth engagements with Absa, Standard Bank and Sanlam.

City Press has learnt that the financiers, which provided PetroSA with funding, guarantees and insurance for some of its capital projects, are concerned about the company’s deteriorating finances and board instability.

The documents show that in March, Absa requested meetings with PetroSA and the CEF to discuss their plans to deal with governance lapses and changes in directors at PetroSA, as well as their turnaround plans, the appointment of executives at both bodies and details of the strategic direction of the entire CEF group – including PetroSA and the Strategic Fuel Fund.

A senior CEF executive with knowledge of these meetings said: “Just last week there was a teleconference between us and [insurers] Sanlam, based in London ... They had concerns about leadership. They are not happy about the number of acting people in key positions at PetroSA and CEF. But we allayed their fears and they were happy.”

The group, he said, also recently met with Standard Bank representatives, who raised similar concerns.

Besides its financial woes, PetroSA is also facing boardroom battles.

CEF chairperson Luvo Makasi in April asked PetroSA’s board to resign or provide reasons they should remain.

Makasi has accused the board of financial mismanagement and failing to appointing a chief executive officer (CEO).

But in a report compiled in response, board members said they were not to blame, adding that they had tried to hire a CEO and other executives, but the CEF and Makasi himself had halted the process twice.

They also said they could not take the fall for Project Ikhwezi because most of them arrived in 2014, when the project was nearing completion.

In their report, they wrote that they called for an independent review of the project and thereafter “stemmed the losses and brought the project to a halt”.

Four PetroSA board members have since resigned (only two remained), but one told City Press: “We resigned, but it is important for the public to understand that we are not responsible for the mess at PetroSA.”

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