S Africa CEF seeks fuel levy share to fund turnaround

South Africa's state-owned Central Energy Fund (CEF) wants a 25pc slice of the national fuel levy so that it can fund its restructuring plan and infrastructure projects.

Inland gasoline currently retails at just over 12 rand/litre (65 cents/l), of which the government's flat-rate fuel tax comprises R3.77/l.

The CEF would use the money to fund conversion of its 34,000 b/d Mossel Bay gas-to-liquid (GTL) plant into a 46,000 b/d oil refinery and to develop an LNG import terminal at the Coega deepwater port in the Eastern Cape, both of which it wants to complete by by 2025.

The group is also seeking an unspecified share of South Africa's carbon tax proceeds, to finance initiatives such as biofuel projects.

The CEF's chief financial officer and outgoing acting chief executive officer, Lufuno Makhuba, outlined these requests in a 2020-25 plan this week. The CEF is yet to formally approach the country's treasury department. South Africa's revenue service has projected a shortfall of $15.4bn for the 2020-21 financial year.

The treasury, along with banks and insurers, have raised concerns about the CEF's financial sustainability, specifically pointing to a lack of stable leadership, an ineffective operating model, weak growth, irregular expenditure and governance failures.

The CEF acknowledged that it had "very low brand equity", in light of a failed drilling project by its subsidiary PetroSA in 2014-15, the Strategic Fuel Fund (SFF) sale of all of South Africa's strategic oil reserves in 2015, which was later deemed illegal, and "wrong perceptions" about a South Sudan oil exploration deal signed by the SSF in 2019.

Earlier this week, the CEF appointed a new chief executive and heads of PetroSA, the SFF and regulatory body Pasa. This means these bodies will for first time since 2014 be led by permanent rather than acting appointees.

The CEF's immediate focus is on stabilising the group and in particular PetroSA, Makhuba said. PetroSA is technically insolvent — it has incurred losses in excess of R20bn since 2014 and is close to negative cash flows. The Mossel Bay GTL refinery, its main source of income, will run out of domestic feedstock by December because the offshore gas fields that supply it are nearly depleted.

The plan to convert the plant into an oil refinery designed to process light crudes will address South Africa's shortage of cleaner fuels, according to the CEF. But the project has stalled ahead of ministerial approval. The CEF hopes for a final investment decision (FID) in the next 12-18 months.

CEF wants the government to shoulder PetroSA's R9.8bn in decommissioning liabilities, for which it has set aside only R2.4bn. Overall, CEF said it needs R15bn to restructure PetroSA. It said it would cost R13bn to unwind the firm and R25bn to keep it afloat in its current form.

From 2021 onwards, PetroSA stands to benefit from a 20pc carried interest in exploration and production (E&P) projects to which it will be entitled under the government's proposed E&P bill. The bill is currently before parliament and its final adoption is 3-6 months away.

The CEF also wants to operate some unspecified energy infrastructure assets on behalf of the state, to bring in "strategic equity partners" and be empowered to drive domestic energy technologies, specifically the gas-to-power programme.

The group held assets of R38bn, of which 50pc was in cash, as at 31 March 2019. Its other subsidiaries include gas development agency iGas and the African Exploration Mining and Finance Corporation (AEMFC).

By Elaine Mills