The larger than anticipated loss was mainly due to a R14, 5billion impairment charge on the company’s operating assets. An R11, 7billion impairment charge related to the company’s Mossel Bay Gas-to-Liquids Refinery, and arose mainly from the non-performance of Project Ikhwezi, the five-well gas drilling programme designed to augment dwindling hydrocarbon reserves feedstock.
When approved, Project Ikhwezi was expected to deliver 242 Billion Cubic Feet (BCF) of commercial gas reserves. At year end, the project had only delivered 25 BCF of commercial gas reserves from three wells.
The 21% year-on-year fall in international crude oil prices also contributed a further impairment charge of R2, 8billion, which mainly affected PetroSA’s flagship Jubilee and TEN oilfield assets in Ghana. The cash profit before non-cash items was R2, 5billion (2014: R3, 3billion).
An impairment charge arises when the value of the entity’s operating assets is eroded due to external circumstances such as, in PetroSA’s case, the non-realisation of expected reserves and the fall in crude oil prices. Concerning Project Ikhwezi, the R11, 7billion impairment charge arose following the Project Ikhwezi drilling programme that spanned a four-year period. Essentially, PetroSA did not derive the anticipated return from its investment in the drilling programme, hence the non-cash impairment charge.
“We are generally not happy with the performance but are confident that we have put in place stringent safeguards to mitigate against the recurrence of the scenario,” Mapula Modipa, PetroSA’s Acting Group CEO said.
These safeguards include the establishment of a project management office to ensure all such initiatives are executed employing best-mechanisms for success. The PetroSA Board and Central Energy Fund, the shareholder company, have also embarked on an initiative, called Project Apollo, to develop a turnaround strategy that will secure the company’s long-term viability and financial sustainability.
The year ended 31 March 2015 was challenging for PetroSA with production and sales volumes 30% and 17%, respectively, below expectations. Gross revenue decreased by 15% to R18 billion (2014: R21, 2billion). The group’s financial position has also weakened with total assets now valued at R19, 8billion (2014: R34billion) and an available cash balance of R4, 1billion (2014: R5, 1billion).
“The fall in the crude oil price affected the group negatively across all operational units, necessitating the suspension of the Oribi/Oryx crude oil section. The weakness of the rand against all major currencies, normally a positive influence on revenue, could not offset the impact of the reduction in crude oil prices,” said Webster Fanadzo, the Acting Group CFO.
Despite the gloomy scenario, PetroSA was able to repay and refinance an interest bearing debt of R1, 5 billion in the year under review. The company also saw cash generated by operations increase to R3, 5billion (2014: R2, 2billion).
PetroSA also forged ahead with its stated goal of advancing transformation in the oil and gas industry. In the year under review the company recorded total procurement spend of R8, 7billion on Broad-Based Black Economic Empowerment companies, which equates to 103, 1% of discretionary spend. The company also spent R10, 3million on Corporate Social Investment initiatives to uplift historically disadvantaged individuals and communities.
Since 2002, PetroSA has spent R348million on community development initiatives.
In an effort to sustain itself PetroSA embarked on a drive, dubbed BillionPlus, to contain and optimise operating costs. The company set itself a target to save R1, 25billion in recurring costs. At year-end savings of R1, 1billion were achieved.
“Despite the results, the PetroSA Group is a going concern,” Ms Modipa, PetroSA’s Acting Group CEO, said.
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