Johannesburg - More than R20.6bn has been lost recently by just five of South Africa’s biggest state-owned enterprises, with PetroSA the latest to make headlines when it reported the biggest loss on record by a parastatal.
The state-owned oil company managed to blow more than R12bn on a fruitless exploration mission off the coast of Mossel Bay in the past financial year, bringing its total loss to R14.5bn for the 2015 financial year. (It reported a loss of more than R1.6bn in 2014.) The parastatal’s 2015 financial loss is 35% more than the allocation the Northern Cape received from National Treasury this year.
Other bleeding parastatals include South African Airways (SAA), the South African Broadcasting Corporation (SABC), the South African Post Office and the South African National Roads Agency (Sanral). Their combined losses top R20.6bn, without much hope of their prospects improving drastically in the near future.
SAA, for example, which has received over R30bn in government bailouts, loan guarantees and grants since 2007, is yet to turn a profit. Its latest publicly available results, for the 2013/14 financial year, show a loss of R2.59bn. The SABC’s 2015 loss of R394.7m, meanwhile, dwarfs the budget of the Public Protector, who needs to make do with a mere R246.1m this year.
PetroSA’s financial and governance woes are of particular concern as the parastatal is earmarked to hold government’s free-carry stake in new oil and gas projects, which are already hampered by low oil pri?ces and regulatory uncertainty. A number of oil majors, including Sasol, Eni and Royal Dutch Shell have halted exploration projects as they await more clarity on government rules for the nascent industry.
Financial disaster #1
Much of PetroSA’s financial position can be attributed to the spectacular failure of Project Ikhwezi, an explor-?ation programme which was aimed at extending the life of Mossgas, PetroSA’s gas-to-liquids (GTL) refinery near Mossel Bay, through tapping new gas fields. To date, Mossgas has produced more than 1tr cubic feet (Tcf) of gas and more than 70m barrels of oil.
But just 10% of the predicted 40 to 50bn cubic feet of gas buried under the seabed has proven to be there, and the exercise resulted in a R12.2bn impairment.
In addition, while the R11bn initial investment was to drill five wells, by the first quarter of this year, only three of the wells were operating.
The extent of the disaster was only exposed when an email was sent to the board by Ikhwezi project leader Frank van Baarsel, who said extra funding was needed to keep Ikhwezi going.
The project started with an R11bn investment budgeted for five wells, which, once operational, were expected to produce between 40bn and 50bn cubic feet of gas. Five years later, only three of the exploration wells were operational – and they were producing way below the required volumes.
Financial disaster #2
This was Project Irene, a government-backed attempt to buy retail service station network Engen and an oil refinery owned by Malaysian state-owned company Petronas. The deal, worth about R18bn, was set to transform PetroSA from a primary supplier of fuel to a distributor and retailer.
Despite PetroSA being repeatedly warned by transaction advisers and the Treasury that the proposal didn’t make any business sense, the project was backed by energy minister Tina Joemat-Pettersson and President Jacob Zuma.
According to PetroSA, chief financial officer Lindiwe Mthimunye-Bakoro was at least partially to blame for this since she had ignored a board instruction in February last year to put aside R5.6bn for the purchase. It was only in October last year that it was found she hadn’t done as she had been told. The Malaysians pulled the plug on the deal in December.
“The funding plan originally contemplated that PetroSA would contribute equity of R5.6bn… the failure to make provision for this was the main reason for the failure of the project,” PetroSA said.
Financial disaster #3
But this is not all: a third blunder came in the form of its exploration operation in ‘Block Q’ off the coast of Equatorial Guinea. The auditor-general noted ?liabilities outweighed assets by R1.4bn at the PetroSA subsidiary – a guarantee from the parent company was needed to cover its debts when they fall due. A further R2.2bn loss was incurred on PetroSA’s investment in Ghana’s Jubilee oil field.
Not surprisingly, PetroSA says its offshore oil investments will be reconsidered and scaled down. The chairman of Parliament’s portfolio committee on energy, Fikile Majola, has demanded that the entire board resign and be reconstituted to rescue PetroSA.
This is an excerpt of an article that originally appeared in the 15 October 2015 edition of Finweek. Buy and download the magazine here.