The pilfering of state assets in South Africa is starting to make crime on the country’s crime-wracked streets look like child’s play, with #Oilgate a classic case in point. BizNews has exposed how politicians, government officials and commercial business operators have stealthily taken at least R1.5bn from taxpayers. Equally astonishing is that South Africa has now sold off its entire strategic oil reserve. You can read an in-depth interview with a global oil trader with deep knowledge of the transaction and related articles by scrolling to the story links below. But for a quick primer, here are seven things you should know about South Africa’s oil sale scandal. – Jackie Cameron
1. Buying South Africa’s oil – why it was priced at a steal
In December, South Africa’s government sold the country’s entire strategic fuel reserve, 10m barrels of crude oil, at a substantial discount to the price at which the commodity traded. Firstly, the oil market is in a contango, a period where selling oil for future delivery translates into a progressively higher premium over the spot price. As BizNews editor-in-chief Alec Hogg explains: “The further forward you contract the sale and delivery of the oil, the higher the price. Yet South Africa’s reserves were sold with immediate effect. For another, the country dumped its oil reserves at $28 a barrel, at least $10 below the market price ruling at the time.”
2. Why selling off a nation’s strategic oil reserve is a bad idea
There is no international precedent for a country selling off its entire strategic oil reserve. To our knowledge, this is the first time any nation on earth saw fit to expose itself to actually having no oil reserves. The International Energy Agency suggests countries hold 90 days of net imports in their strategic stockpile. This is to safeguard against future supply disruptions and, effectively, avoid a catastrophic economic event. According to Investopedia, the US holds enough oil in reserve to meet its daily needs for more than a month. Many governments are increasing strategic stocks of oil, with China an example of a significant stockpiler.
3. Why oil traders say the government’s story isn’t credible
The authorities have presented the deal as a rotation of supply instead of sale. But, says a global trader, if this was a rotation, then the second leg of the transaction – the plans, contracts and prices related to the replacement oil – would need to have been concluded simultaneously.
Plus, a rotation now wouldn’t make financial sense. Explains the trader: “In the current market circumstances where the market is in contango – future oil prices progressively higher than the current spot oil prices – you wouldn’t sell your oil stocks promptly and you wouldn’t exchange current oil for future oil. This is because replacement oil bought for delivery in the future is already more expensive the moment you dispose of your current oil.”
4. The oil is still in South Africa – but it’s not ours to use
The oil is still in South Africa, but the country doesn’t own it anymore. The new owners will have immediately sold the oil forward for future delivery and fixed/hedged a price which is at a premium to the cost of storage and financing that oil. The odds are that this oil will be exported, says the oil industry expert, because this is the case for so much oil which is being stored in Saldanha Bay.
The government can buy oil from anyone presently storing oil in Saldanha Bay, but most likely at the prevailing market price if or when the country needs it in future. Plus, there is nothing to stop the new owners from removing the oil as and when they choose – which they are likely to do when market conditions change, sources tell BizNews.
5. Who bought the oil?
Two major international traders, Glencore and Vitol, and one other relatively small trading company called the Taleveras Group. Others were (apparently) not invited to tender for the oil, for example Chevron, which operates a refinery in Cape Town. For global oil trade experts, “the one thing you can’t get away from is was due process not followed – and none of these parties are new to doing business in South Africa”.
6. Who made this sale happen?
Minister of Energy Tina Joemat-Pettersson, members of the Department of Energy and the Strategic Fuel Fund are ultimately responsible. The Minister signed a directive to approve some transaction or other and presumably, this would have been discussed and she would have been briefed. “We don’t expect her to be an expert in crude oil trading or crude oil markets, but the people who work at the Central Energy Fund and SFF and many of those who serve on their boards have been around long enough to know – or be able to hire expert consultants to advise on the transaction. CEF/SFF would have briefed her on the transaction,” said the global trader.
7. How big a deal is #Oilgate really?
The #Oilgate scandal makes Nkandla – President Jacob Zuma’s multimillion rand home refurbishing at taxpayers’ expense – look like a picnic. But, since the first disclosure of the sale, bullshit has been baffling brains. This is why BizNews found an insider to quantify how it cost taxpayers and unpack what went down in language we can all understand. Have a read of the interview, on Biznews now.Fin24's top stories trending on Twitter: Fin24’s top stories