Unaccountable 00044: PetroSA — bankrupt but open for business

The previous two instalments of the Unaccountable series looked at the international companies that stand to benefit from continued oil and gas exploration in South Africa, based on Open Secrets’ fourth volume of the Corporations and Economic Crime Report on the oil and gas majors. That report highlights the environmental and human rights impact of oil and gas production, and how the secretive nature of the sector creates corruption risks. This piece focuses on South Africa’s struggling state-owned petroleum company, PetroSA.

A nearly constant stream of scandals has rocked PetroSA since its establishment in 2002. They have left the entity in complete disarray, with poor governance, mismanagement and corruption tainting all areas of its business.

In September, the new state-owned South African National Petroleum Corporation (SANPC) officially started operating. Minister Gwede Mantashe claims that the SANPC will allow “the state to participate meaningfully in oil and gas developments”.

Initially, the state had envisioned the new entity resulting from a merger of PetroSA, the Strategic Fuel Fund and iGas. However, PetroSA’s disastrous financial state meant that much of it was deliberately excluded from the new entity because so much of PetroSA is not considered “financially viable” and it would have sunk the new entity from the get-go.

Compromised from Day One

PetroSA has a long history of being used for narrow political gain and corruption. In 2002, the same year PetroSA was formed, a company called Imvume won a R750-million contract to supply oil to PetroSA. In 2005, the Mail & Guardian exposed what became known as the ANC’s “Oilgate”: Imvume was effectively a front company for the African National Congress (ANC) and had diverted R11-million from the contract to the ANC in the run-up to the 2004 elections.

In 2013, new stories emerged about a series of irregular payments in less than a year under the acting leadership of Yekani Tenza. In 2015 — the same year PetroSA reported an eye-watering R14.5-billion annual loss — Tenza was ordered by a court to repay R83-million to PetroSA due to a series of irregular procurement decisions. This was linked to Tenza’s irregular appointment of lawyer George Sabelo in connection with PetroSA’s attempt to acquire Sabre Oil and Gas Holdings, a “British Virgin Islands-based company with an opaque ownership structure, which owned offshore oil acreage in Ghana”.

Tenza and Sabelo were charged with fraud and theft in 2019 on the basis of dubious payments made by PetroSA to Sabelo that were signed off by Tenza.

Just three years later, in 2016, PetroSA was forced to impair R14.5-billion in assets due to a failed gas project called Ikwezi. The project to drill offshore for natural gas was undermined by continual changes in contractors by PetroSA without proper procurement processes, and the wells ended up supplying nine times less gas than had been forecast.

A forensic investigation into the Ikwezi debacle found that the project was doomed by leadership turmoil, poor governance and a lack of oversight, but PetroSA’s leadership sought to have the parliamentary hearing into this issue and the related forensic report kept secret. These failures have had dire financial consequences. In 2017, PetroSA reported a further R1.4-billion annual loss and the Auditor-General cast doubt on the company’s financial viability. Its financial struggles have accelerated following the closure of its Mossel Bay gas-to-liquids refinery in 2020.

Leadership crises

PetroSA’s woes have been made worse by the rapid turnover of CEOs and other senior leadership at the entity. Since 2011, PetroSA has had nine different CEOs, with seven holding the position in an acting capacity.

On more than one occasion, senior executives have resigned citing excessive meddling by the board. In June 2023, Africa Intelligence described PetroSA as an “almost bankrupt firm hobbled by inept management”. In October 2024, as this article was being finalised, the latest CEO, Xolile Sizani, was suspended “pending an investigation”, just eight months after his appointment.

These executives have generally taken home high remuneration packages, despite the poor performance of the entity. Pragasen Naidoo was CEO between 2020 and 2022 and earned more than R5-million per year. When he parted ways with PetroSA in 2022, the then chairperson, Nkululeko Poya, tried to dodge parliamentary questions as to whether Naidoo had been dismissed or whether he had received a generous golden handshake. News24 reported that Naidoo had been paid a significant portion of the three years remaining on his contract, despite PetroSA needing to borrow money just to pay its employees.

Although he was the chairperson of the board, Poya had designs on the CEO position and was Mantashe’s favoured candidate However, Poya failed the vetting process, partly because he had been implicated in serious corruption in a previous post at the Railway Safety Regulator. To make matters worse, Poya is under investigation by the Hawks for fabricating a court order saying the investigation into his conduct had been set aside. Poya claims his lawyer is responsible, but admits the court order was faked.

Poya resigned as chairperson when he failed to get the CEO post, but his tenure as board chair from 2021 to 2024 coincided with two further controversial PetroSA deals, including the decision to partner with Russia’s Gazprombank to restart its gas-to-liquids (GTL) refinery in Mossel Bay, which has been inoperative since 2020 due to a lack of feedstock. Gazprombank is the financial arm of Russia’s state-owned gas company, but it is also a privately owned bank — and its subsidiary, GPB Africa and Middle East, was selected for the project and is set to invest $200-million (R3.7-billion).

Serious concerns around sanctions were raised by the PetroSA bid evaluation committee as well as the board, as Gazprombank is under US sanctions because of Russia’s invasion of Ukraine. However, those pushing for the deal received legal opinions from fossil fuel lobbyist NJ Ayuk’s law firm, Centurion Law Group, which argued that South Africa was at low risk of being sanctioned. Despite the cautions it received, PetroSA has embarked on the risky partnership.

PetroSA was further thrown into the spotlight for another worrying choice of partner in a separate tender. On 11 December 2023, PetroSA entered into a R21-billion deal with the businessperson Lawrence Mulaudzi, granting his company, Equator Holdings, the mandate to “fund and rebuild critical gas infrastructure” at both the offshore platform that is used to connect offshore gas to pipelines to bring it onshore and the part of PetroSA’s Mossel Bay refinery that deals with gas. This dodgy deal, which has since fallen apart and led to litigation by aggrieved competitors, is the subject of the next instalment in the Unaccountable series.

Eskom keeps PetroSA afloat

PetroSA has repeatedly reported multibillion-rand losses over the last decade. Between 2017 and 2020, it reported losses totalling nearly R10-billion, and it has not released any audited financial statements since its 2020 report. In that report, management reflected that PetroSA was unlikely to continue as a “going concern” and the Auditor-General reported the state-owned enterprise (SOE) was technically insolvent, with its total liabilities exceeding its assets by around R4.5-billion.

A lifeline to PetroSA came from another South African SOE in crisis: Eskom. Until recently, the electricity supply crisis had forced Eskom to enforce daily rolling blackouts coupled with near-constant burning of diesel in its open cycle gas turbines (OCGTs). Between 2019 and 2024, Eskom spent an astounding R65-billion on diesel. As one of Eskom’s largest suppliers of diesel, PetroSA was a huge beneficiary of Eskom’s failure, even more so as it was apparently charging a premium.

At the end of 2022, already far over its annual diesel budget, Eskom requested R19.5-billion from the National Treasury to buy diesel for its OCGTs, as it said that it no longer had the funds to purchase the diesel. The Treasury denied this request, citing mismanagement and reckless expenditure at Eskom, and forcing Eskom to use R1.3-billion in funds from its savings to secure an emergency procurement of 50 million litres of diesel from stock held by PetroSA in late November 2022. This equated to R26 per litre, significantly more than the R23.51 it usually paid (which was already an elevated price).

Eskom purchased another R2.8-billion in diesel from PetroSA in January 2023. Eskom thus paid just over R4-billion to PetroSA in the space of three months to urgently procure diesel at apparently inflated prices. For all the payments, PetroSA demanded full upfront payment due to its own cash flow concerns.

In February 2023, energy expert Chris Yelland and his consultancy group, EE Business Intelligence, found that Eskom paid R20.36 per litre for diesel from Engen and R20.28 and R20.22 from Astron and Shell, respectively, but paid a premium price of R23.51 to PetroSA. PetroSA released a media statement denying the claim that it had overcharged Eskom. It stated that the contractual terms between itself and Eskom were based on the basic fuel price pricing mechanism.

The result of the sales to Eskom was that, after nearly a decade of financial crisis, PetroSA reported in August 2023 that it was set to make a profit of R2.4-billion for its 2023/2024 financial year, marking the first time the entity had reported a profit in nearly a decade. Crucially, revenue from its direct sales of diesel to Eskom was cited as an important reason for this.

In December 2022, it was also confirmed that the Department of Mineral Resources and Energy (DMRE) had denied an application from Eskom for a licence to import its own fuel directly, which would result in a price closer to R16 per litre and lead to billions in savings for Eskom. This decision, coupled with PetroSA’s financial reliance on Eskom purchases, has led to concern that the DMRE preferred to lock Eskom into buying diesel from PetroSA at above-market prices to support the financially vulnerable state entity.

Transparency would ‘kill’ PetroSA

Whether or not PetroSA was inflating the price of diesel sold to Eskom, we have no information about who PetroSA was procuring the diesel from, or on what terms. As reported by amaBhungane, PetroSA stopped going to public tender for diesel trading in February 2022 and then appeared to continue the practice of complete secrecy without submitting the necessary deviation reports to the National Treasury. PetroSA has repeatedly denied or flat-out ignored access to information requests from amaBhungane and Open Secrets, and Mantashe told amaBhungane that requiring transparency from PetroSA would “kill it”.

This practice of secrecy comes with significant corruption risks. As already stated, PetroSA has a history of abuse of procurement processes and inflation of payments to allow for kickbacks to the ANC and politically connected businesspeople. This is far easier to do when procurement is secret. In March, the Auditor-General found a further example of this, when PetroSA lost more than R11-million when selling diesel to a fictitious company.

The lack of transparency has been a feature of much larger multibillion-rand contracts awarded by PetroSA in the last two years. These deals are discussed further in the next Unaccountable.

Beyond rehabilitation?

With Eskom’s diesel demand much lower this financial year, in large part due to reduced load shedding, PetroSA’s trading business — which now forms part of the SANPC — will again have to scramble to find new financial opportunities. Yet, beyond new revenue sources, PetroSA faces another existential threat: a near R10-billion shortfall in funds it is legally required to have set aside for the rehabilitation of its operations. This gap is one of the major reasons that the entity was not seen as sufficiently financially viable to be incorporated into the SANPC.

A rehabilitation fund is a requirement of the National Environmental Management Act (Nema) and its related financial regulations. These require PetroSA to have enough money set aside to safely decommission and rehabilitate its onshore and offshore operations. In its last published annual report in 2020, PetroSA reported its decommissioning liability as R12.4-billion, and indicated that it only had R2.8-billion set aside; a R9.6-billion shortfall.

According to Nema and accompanying regulation, PetroSA had until February 2024 to ensure that this gap was closed, and its liability was fully funded. Alternatively, it would have to enter a payment plan with the minister of petroleum resources. Given the lack of reporting by PetroSA since 2020, there is no publicly available information on whether these requirements have been met. However, a failure to comply with these requirements is a criminal offence in terms of Nema and is subject to serious sanction.

The enormous gap between what PetroSA needs to safely decommission and rehabilitate its operations, and the resources it has available, is also a stark warning about current plans to expand oil and gas operations in South Africa. Those championing new oil and gas exploration often ignore the long-term costs associated with the responsibility to safely decommission any activities. As has been the case with PetroSA, many are happy to push the inevitable costs down the road. In the case of large oil and gas corporations, many are happy to avoid these responsibilities altogether and leave the costs to local communities and the public.

Fool us once 

Years of different governance crises, secrecy and outright corruption have very nearly run PetroSA into the ground. Yet despite its history and the enormous public costs of its failures, the entity remains a seemingly untouchable gem that has been given lifeline after lifeline. Its recent foray into deals with questionable partners shows that political elites still want to use the entity to access lucrative oil and gas deals. To do so, they seem willing to go to great lengths to keep the entity going at any public cost.

PetroSA did not respond to detailed questions sent by Open Secrets. DM

The questions PetroSA did not answer

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. To support our work including the investigations that go into the Unaccountable series visit Support Open Secrets.

Read more profiles from the Unaccountable series here.