In the past few days the media have carried stories making serious allegations against PetroSA, South Africa’s National Oil Company. These allegations have been devoid of truth and context, apart from the fact that deviations from our standard procurement processes did occur.
•The final price of $500 million agreed upon with the seller for the acquisition of Sabre Oil and Gas Holdings in Ghana was within the mandate given by the PetroSA Board and was sanctioned by the PetroSA Board, the CEF Board and other relevant authorities whose approval was required.
•The final price of $52 million agreed upon for the acquisition of Pioneer’s stake in South Coast Gas was within the mandate approved by the PetroSA Board and was sanctioned by the Board.
•When concerns about possible malfeasance were first made within PetroSA, the PetroSA Board proactively launched an independent investigation and the allegations were investigated thoroughly. In the 2011/12 Annual Report, the PetroSA Board made reference to the investigation and specifically drew attention to it when PetroSA appeared before the Portfolio Committee on Energy in September to present its financial results. The Board has since received the findings of the investigation and is in the process of taking corrective action, with some actions also recommended to the Shareholder.
The past two years have been among the busiest to date for PetroSA. During that period PetroSA made a critical acquisition of a company involved in a strategic partnership in a producing oil field in Ghana, thus gaining access to hydrocarbon-rich West Africa, and it has also intensified efforts to enter the downstream market in South Africa. Both activities have been in pursuit of PetroSA’s strategy to be a significant player in the liquid fuels sector in the country, accounting for a 25% market share by 2020. Such a market share will enable PetroSA, as South Africa’s National Oil Company, to be more effective in discharging its duty of ensuring security of liquid fuels supply in the country.
Acquisition of Sabre Oil and Gas Holdings Limited, which has a shareholding in the producing Jubilee field in Ghana, has given PetroSA access to an alternative source of revenue, while acquisition of depots in Bloemfontein and Tzaneen has laid a solid foundation for the company’s downstream entry. In both endeavours PetroSA has been competing for these opportunities against many established players, most of which are in the private sector and are unencumbered by some of the regulatory provisions with which PetroSA as a State-owned company has to comply.
In making transactions of the type that PetroSA has been involved in, swift decision making and quick turn-around times are critical and can sometimes mean a difference between closing a deal and losing out on an important opportunity. Therefore, in the process of increasing PetroSA’s chances of successfully closing these deals, unfortunately some deviations from our normal procurement processes have occurred. These were duly declared in the 2011/12 Annual Report and mentioned to the Portfolio Committee on Energy in September last year. Reference was again made to them in Parliament on Thursday, 18 April 2013 when PetroSA appeared before the Portfolio Committee on Energy to present its 2013-17 Corporate Plan. There has been absolutely no attempt to hide these deviations from procurement procedures or to sweep them under the carpet.
Audit reviews commissioned last year by the Board on these matters have been completed and findings and recommendations presented to the Board, which is now in the process of taking the necessary corrective actions and making recommendations to the Shareholder. Where any impropriety has taken place, the Board and, where applicable, the Shareholder will take appropriate action. The PetroSA Board has tasked the executive management team to ensure that lessons are learned and that no repeats of these lapses occur.
We have been alarmed that commercially sensitive documents, which have been the subject of discussions at Board level, have found their way into the hands of The Mail & Guardian. Given the commercially sensitive nature of the discussions that PetroSA has been involved in with industry players with regards to a downstream acquisition, we have implored The Mail & Guardian to omit from its report the name or names of the company or companies that PetroSA has earmarked for acquisition or a partnership. Such premature disclosure will potentially jeopardize the transaction and sabotage PetroSA’s – and South Africa’s – strategic interests in the liquid fuels sector.
With that context painted, we proceeded to respond as follows to The Mail & Guardian’s enquiries:
Sabre Oil Acquistion
1. The negotiating team’s mandate from the PetroSA Board was to negotiate up to a maximum of USD 640 million for the acquisition of Sabre Oil and Gas Holdings Limited, subject to the finalization of a Share Purchase Agreement (SPA) and approvals by all relevant authorities. These authorities were PetroSA’s holding company CEF, the Minister of Energy, the National Treasury, the Reserve Bank, the Ghana National Petroleum Company (GNPC) and Ghana’s Minister of Energy. All these approvals were subsequently obtained and PetroSA managed all the conditions precedent subject to Board approvals.It is important to note that the final purchase price was less that the amount approved by the Board for the transaction.The project team reported to Mr Everton September, the Vice President for New Ventures: Upstream, and he was responsible for ensuring that the project team executed the Board-approved mandate for the acquisition.
2.The management and shareholders of Sabre Oil and Gas Holdings never formally accepted the PetroSA team’s initial offer of US$480 million plus contingencies. Instead, Sabre insisted on USD500 million for the following reasons:
3.The PetroSA price during the acquisition process dropped from US$640 million to US$480 million plus contingencies;
4.There was concern that a price below the market value of Sabre would result in one of the Joint Venture partners pre-empting the PetroSA offer, something to which they were entitled in terms of the partnership agreement, in an effort to preserve their shareholder value.
Having considered Sabre’s demand and the reasons behind the demand, PetroSA’s then Acting CEO agreed to US$500 million plus contingencies, which was well within the Board-approved transaction price. The final agreement was a series of compromises by both parties, as typically happens in such transactions. The final negotiated deal was favourable to PetroSA.
The value of any negotiated terms is best tested in the open market. PetroSA’s deal was initially pre-empted by one of the existing partners in the Jubilee Joint Venture, thus signalling that our offer was competitive.
With respect to the retention amount, this was to provide for any eventuality that PetroSA might encounter during the company take over. The retention amount was included in the purchase price.
Regarding tax liability, PetroSA has mitigated all potential tax risks. There is currently no tax exposure related to the acquisition. In terms of the SPA between PetroSA and Sabre Oil and Gas Holdings, the seller has taken all responsibility for all tax-related expenses and transactions costs prior to the effective date of the acquisition.
The negotiations led to a deal favourable to PetroSA and South Africa, and the Sabre deal has presented an opportunity for the country potentially to grow its business presence in different sectors of the economy in West Africa, but especially in the oil and gas sector.
The PetroSA Board had approved an amount of up to US$60 million for the Pioneer acquisition. Final negotiations with Pioneer included members of the project team. The decision to increase the price from US$50 million to USD$52 million was made in order to limit PetroSA’s tax exposure, based on advice from PetroSA’s lawyers who felt that certain clauses needed to be amended to limit PetroSA’s tax liability. Pioneer’s advice from their lawyers was that the tax-related clauses that they insisted on would mitigate a tax exposure exceeding US$2 million. The compromise reached between the two parties was the retention of the PetroSA tax clauses and an additional US$2 million in payment in order to eliminate the tax liability.
This transaction allows PetroSA to be in control of the gas feedstock to the GTL refinery in Mossel Bay and has contributed positively to PetroSA’s financial performance in the past financial year.
An aspect of PetroSA’s corporate strategy is an entry into the downstream market. To deliver on this part of its strategy, the company has been exploring opportunities for downstream entry since 2007. PetroSA has pursued both organic and acquisitive downstream entry opportunities, and the company’s purchase of depots in Tzaneen and Bloemfontein in 2012 has been part of the implementation of that strategy.
In May 2011 the PetroSA Board mandated the executive management team, in a change in strategy, to engage with various industry players in order to explore opportunities to acquire a majority shareholding in their assets. These negotiations are on-going.
Core elements of deliverables for the advisor were the identification of funding options to support the project and selection of a company to purchase or invest in. Harith was appointed as a financial and transaction advisor for downstream entry. Since this matter was part of the investigation by the Board and CEF, PetroSA’s holding company, as soon as the due process of the investigation is completed all appropriate corrective action will be taken and an announcement made.
Commitment to Good Corporate Governance
The PetroSA Board and Executive Management team are fully committed to Good Corporate Governance and to growing PetroSA to be a reputable National Oil Company of which South Africans can justly be proud. Action will be taken to ensure that lessons are learnt from the procurement lapses of the past in order to ensure that they do not recur.