1. Liquid Fuels Charter Parliamentary Portfolio Committee Briefing 16August 2006

2. DME Team Nhlanhla Gumede – Chief Director Hydrocarbons Elizabeth Marabwa – Director Petroleum Policy Teboho Zide – Deputy Director Petroleum Mpho Madima – Energy Officer Mmbulaheni Mashanyu – SASDA CEO

3. Introduction Charter elements Progress in achieving the targets in the Charter Initiatives aimed at giving effect to the Charter Way forward Agenda

4. Introduction 21 September 2005: Tensions Hiked in Nigeria's Oil Capital as Militia Leader Arrested 23 September 2005: Chevron, Shell Close Doors as Militant Leader Set for Arraignment on Treason Charges in Nigeria 12 January 2006: Shell Shuts-In Offshore Nigerian Field After Workers Kidnapped 2 March 2006: Some Hostages Set Free in Nigeria; More Oil Sector Attacks Threatened 26 June 2006: Two Philippine Oil Workers Released by Kidnappers in Niger Delta 4 August 2006: Four Go Missing in Nigeria; Contractor Kidnaps Continue in Delta 24 April 2006: Companies Still Wary of Operating in Niger Delta 26 April 2006: Confidence in Niger Delta Security Plummets as Exxon Mobil Asks Staff to Stay Away Participation by locals is paramount for business survival

5. Introduction Without ‘local content’ Gulf of Guinea will “burn” Without ‘local content’ Africa’s development remains a dream Transformation is a business imperative BEE means growth and development for RSA Like Malaysia and Norway, procurement could be –Part of the industrial strategy –Means of diversifying the economy We should not be apologetic about our development BEE is about real economic revolution BEE is about economic emancipation

6. The first Charter in RSA Signed on the 2 nd November 2000 at the Liquid Fuels and Petroleum Industry Empowerment Summit Being the first means a number of loop holes are evident Since signature, some movement but not as envisaged Needs a review! Charter Background

7. The parties to the Charter agreed that –The 25% ownership and control of all facets of the industry that the parties to this Charter are seeking to bring about over a ten year period means HDSAs owning in total, by the end of that period, not less than 25% of the aggregate value of the equity of the various entities that hold the operating assets of the South African oil industry –The parties to the Charter agree that the measurement of the extent of the achievement of this target of 25% of the aggregate value of the equity will be based on the asset values per the audited accounts of the entities concerned Charter Background

8. Scope of the Charter Applies to the privately owned parts of the industry (applies across the value chain) –Exploration and production of oil (Upstream) MPRDA domain –Liquid fuels pipelines; Single Buoy Moorings; depots and storage tanks –Oil refining and synthetic fuel manufacturing plants, including lubricants –Transport, including road haulage and coastal shipping –Trading, including import and export –Wholesale and retail assets/infrastructure

9. Charter’s strategic focus areas Ownership –Financing –Sustainability –Access to Ownership of Joint Facilities Control Supportive Culture Capacity Building/ Skills Development Employment Equity Preferential Procurement Corporate Social Development Preferential Payment Terms

10. LFI Charter impact Equity Control Some Progress Procurement Poor industry performance Human Resources Development Good progress made

11. The Minister appointed an Empowerment Evaluation Committee (EEC), following the signing of the Charter –to advise on the progress in meeting charter requirements –to ascertain stability of deals The EEC was dissolved in April 2004 Consultants appointed in 2005 –to conduct a 5-year Charter review –to advise the Minister on developments which could impact on BEE in the petroleum industry –to assess the sustainability of BEE transactions –to advise the Minister on a possible corrective course of action that could be required Empowerment evaluation

12. Ownership – Overall Finding Charter Requirement DescriptionFindings Summary Findings Will the BEE partners achieve 25% equity participation by 2010? None of the BEE parties involved in the petroleum sector deals in question will enjoy 25% equity participation by 2010. Some Companies ring-fenced some activities from deals Anticipated Level of Compliance on Equity Participation (2010) Anticipated level of proportional achievement of the charter target Most of the BEE parties will each achieve proportional compliance to the 25% target, ranging from approximately 8% to 23% Some refineries have not even commenced with deals BEE companies have to shoulder blame as well for effectively ‘fronting’

13. Assessment of Control Description Findings Level of compliance (current) Will the company meet a minimum of 25 percent representation across all levels? Only one company meets the target for control Expected Level of Compliance (2010) Control compliance across all levels (2010) Only one company will fully meet the target by 2010, but the remainder of the entities will meet a proportion of the target, ranging from 43% to 95% Control Indicators – Overall Findings

14. Employment Equity

17. Skills Development Skills development spend R72.2 million –R51.4 million spent on black people Skills development as a % of payroll –2.03% Learnerships –2.4% of employees on learnerships Internal spend accounts for 57% of spend Challenges –Verifying internal spend –Focus on core and critical skills versus only support skills

18. Supportive Culture Industry Is there a Full-time (executive) director for BEE at strategic level Yes : 43% Is there a black, full-time, Skills Development Facilitator Yes : 71% Is there a Functioning Operational Committee that deals with BEE, Skills Development and Employment Equity Yes : 100% Is there an approved policy to prohibit unfair discrimination at the workplace (approved by the Board). Yes : 100%

19. Procurement Overall Industry –Total Procurement = R102.9 billion –BEE Procurement = R3.4 billion –3.3% Overall Industry (excl PetroSA) –Total Procurement = R99.5 billion –BEE Procurement = R2.4 billion –2.4% Limitations –Narrow based (Ownership + Management Control) Charter defines HDSA companies –BEE status not independently verified potential for fronting –Total procurement taken into account Exclusions not defined in the Charter

20. HDSA company definition There appears to be confusion about what an HDSA company is… –But Charter is clear A company with 25% equity participation is not an HDSA company

21. Corporate Social Investment

22. Retailing

23. Review of retailing did not take into account –the number of sites and locations of retail stations –nor make a distinction between owners and operators –nor volume per different group Serious problems with survival of BEE retailers –Loss of life savings

24. DME Mandate Section 2C of PPAA, 2003 Transformation of the South African petroleum and liquid fuels industry 1)In considering licence applications in terms of this Act, the Controller of Petroleum Products shall- a)promote the advancement of historically disadvantaged South Africans; and b)give effect to the Charter. 2)The Controller of Petroleum Products may require any category of licence holder to furnish information, as prescribed, in respect of the implementation of the Charter.

25. Licensing concern “It would be unfortunate, for security of supply, if one or major refineries in South Africa were not granted a licence because they refuse to conclude an empowerment deal”

26. BEE as means to an end, not an end by itself… UpstreamWholesalingRetailingManufacturing Ancillary services Transport Storage Handling Goods & Services BBBEE R100 billion per annum Growth opportunity Current focus area

27. The services sector as an growth & development initiative Primary concern is growing and sharing the economy –Ensuring access to business opportunities –Skills development opportunity –Creating globally competitive SA companies –Ensuring broad based empowerment –Ensuring value and skills accrue to HDSAs

28. The Agency approach establishes the link and is demand driven Contracts Service Provider Suppliers SASDA Development Sourcing Accreditation Capacitating Existing and potential Interventions DTI Schemes Training institutions Financial institutes SETAs Key Starting point Availability Defines Requirement Existing/New Awards logged Not for profit organization In terms of the Companies Act Board of Directors The Agency Approach

29. Vision –To be a leader in developing globally competitive Black South African suppliers in the petroleum and liquid fuels industry Mission –To accelerate progress in the empowerment of historically- disadvantaged South Africans through increased access to industry procurement opportunities SASDA

30. Way forward Ownership –Review of some of the transactions Sustainability of the transaction need to be seriously evaluated –Source of finance –Terms of finance –Cost of finance –Maybe a new approach is required Control –Review the basis of determining control in the entities Shareholder level and Board level Employment Equity –Attention needs to be paid on black women participation

31. Way forward Procurement –Address fronting problems –HDSA participation across the value chain –Learn from Malaysia and Norway Retailing –Increasing of access to HDSAs –Innovative financing mechanism required –HDSA operational capacity improved Overall –Clear and measurable targets need to be set for all the elements of the Charter –Uniform measurement mechanism Compare all companies on a same basis

32. Way forward Licensing of liquid fuels operations critical –Use of import and export to promote HDSA wholesalers –Use of licensing to ensure retailer survival –Use licensing to promote development of local suppliers of goods and services Imperative for infrastructure development Critical for growth and diversification