Publications
Partners
- PetroSA wants to partner with Russia’s Gazprombank to restart the gas-to-liquids refinery in Mossel Bay.
- The bid for this project had unusually strict criteria that saw the other 19/20 bidders disqualified.
- The PetroSA board and bid committee have raised concerns about awarding the bid to Gazprombank as it is currently under US sanctions.
- For more financial news, go to the News24 Business front page.
The state-owned Petroleum Oil and Gas Corporation of South Africa (PetroSA) wants to partner with Russia’s Gazprombank to restart the gas-to-liquids refinery in Mossel Bay.
PetroSA advertised a tender in January looking for a partner willing to invest at least $200 million (R3.7 billion) to refurbish the refinery.
Twenty companies submitted bids, but the unusually strict technical criteria meant that 19 of the 20 were eliminated, leaving Gazprombank’s local subsidiary, GPB Africa & Middle East, as the only qualifying bid.
However, leaked documents, seen by amaBhungane, reveal that the PetroSA bid evaluation committee and board raised concerns about partnering with Gazprombank, which is under US sanctions, and advised PetroSA to enter into negotiations with other bidders, including Azerbaijan’s state oil company, SOCAR, and China’s state-owned energy infrastructure company, CMEC.
PetroSA pushed back with a legal opinion from Ledwaba Mazwai Attorneys that said it had "no right to entertain other offers" aside from the Russians’. Although the lawyers advised PetroSA to cancel the tender and start again, it appears to have ignored this advice.
Instead, PetroSA presented a second legal opinion from Centurion Law Group, a boutique law firm run by fossil fuel lobbyist NJ Ayuk, arguing that the risk of South Africa facing sanctions over its relationship with Russia was low.
This contradicts the Reserve Bank’s warning back in May, after it added 'secondary sanctions' to its list of nine major financial risks facing the country.
The Reserve Bank warned:
A source close to the bidding process told amaBhungane that PetroSA plans to award the contract to Gazprombank anyway.
We sent three pages of questions to PetroSA two weeks ago. On Friday, spokesperson Nonny Mashika provided a one-line response: "PetroSA is currently undergoing Stakeholder Engagements with various governance structures and therefore cannot comment on the matter."
Bleeding Eskom
The gas-to-liquids refinery is a critical part of energy minister Gwede Mantashe’s plan to jumpstart the gas industry and resuscitate PetroSA.
Built in 1989 by PetroSA’s predecessor Mossgas, the refinery was intended to help the apartheid government bypass the United Nations oil embargo. Normally, petrol and diesel are made by distilling crude oil. The Fischer-Tropsch method used in the gas-to-liquids refinery instead produces synthetic petrol and diesel from natural gas and gas condensate.
When running, it can process 46 000 barrels of fuel per day, but the refinery has been ‘parked’ since December 2020, when it ran out feedstock.
For now, PetroSA buys imported diesel and sells it on to Eskom at a profit. But the margins on trading diesel are small and PetroSA’s long-term plans rely on rebuilding its in-house refining capacity.
If PetroSA’s deal with Gazprombank goes ahead, the Russian company will not only invest R3.7 billion and be responsible for refurbishing the refinery, but also provide PetroSA with gas condensate, at least until domestic natural gas becomes available.
In exchange, Gazprombank will get a share of the profits.
Any diesel that the refurbished gas-to-liquids refinery produces is likely to be sold to Eskom to burn in its Open Cycle Gas Turbines.
Load shedding has provided a lifeline to PetroSA and helped grow its turnover from R12 billion last year to an estimated R20 billion this year. For a partner like Gazprombank, this could be a goldmine.
Unsolicited bids
The request for proposals (RFP) raised eyebrows when it was issued in January.
It revealed that PetroSA had already received unsolicited bids and suggested that these so closely matched the criteria for the tender that bidders were told: "Entities/Applicants who previously submitted unsolicited proposals in the last 6 months need not resubmit."
In fact, three state-owned entities had shown interest: Russia’s Gazprombank, Azerbaijan’s SOCAR and China’s CMEC. But the only detailed proposal had come from Gazprombank.
The RFP also made clear that PetroSA wanted to partner with a state-owned entity from an oil and gas producing nation. A bidder that was majority state owned would score 10 points, while a company that was minority state-owned or state-supported would only score 5. Private companies would get zero points.
Although state-ownership only accounted for 10 out of 100 points, an unusually high technical threshold of 80% meant bidders could only afford to lose 20 points overall before they would be eliminated.
The only company that scored 80 points was Gazprombank’s local subsidiary, GPB Africa. BB Energy Gulf, an energy trader based in the UAE, came a close second with 75 points, but did not qualify.
We asked PetroSA whether the average person would not reasonably conclude that the RFP had been tailored to suit the unsolicited Russian bid. But this was one of the questions it chose not to answer.
Spooked by the Russians
Gazprombank is a shapeshifter: the de facto financial arm of Russia’s state-owned gas company Gazprom, it is also technically a privately owned bank.
This ambiguity allows Gazprombank to play at being a state-owned company one day and an independent bank the next.
The bid evaluation team, for instance, appears to have treated Gazprombank as a stand-in for the state-owned Gazprom: "Gazprom Africa is technically and strategically a good fit for PetroSA. This is due to their large oil and gas reserves, financial reserves and the fact that they meet the stated objectives of the RFP in that they were State Owned," an extract from the bid evaluation committee report, quoted in the Ledwaba Mazwai legal opinion, reads.
Gazprombank has so far avoided the strictest sanctions imposed on Russia. While eight Russian banks have lost their access to the SWIFT system – blocking all transactions in US dollars – Gazprombank remains open for business.
Part of this has to do with the European Union’s continued dependence on Russian gas and on Gazprombank to facilitate payments. Imposing severe sanctions on the bank could trigger a retaliatory shutoff of gas from Russia. So, for now, the US has imposed more limited sanctions on Gazprombank that prevent it from raising funds in the US.
Even so, PetroSA appears to have been spooked by the prospect of partnering with a Russian company.
The technical team that assessed the bids in March 2023 asked the board to consider the top six companies, even though everyone except Gazprombank failed to pass the technical evaluation.
Aside from Gazprombank and BB Energy Gulf, this now put Azerbaijan’s SOCAR and China’s CMEC in the running, along with two South African companies: Phezulu Natural Energy Resources and Theza Oil and Gas Exploration.
The board, however, went its own way. On 15 May, it passed a resolution that selected Gazprombank as the preferred bidder to refurbish the gas-to-liquids refinery in Mossel Bay, but added: "In the event that the negotiations with GBP Africa are unsuccessful and no commercial agreement is reached … the offers received from CMEC and SOCAR will be considered in line with the preference to partner with State Owned Companies which was stipulated in the Request for Proposals."
It is important to remember that being state-owned was not a requirement of the tender: bidders would get points for state-ownership, but both BB Energy and Phezulu had outscored their rivals without it.
The board’s decision put PetroSA in a legal pickle: on the one hand, could it risk partnering with a Russian company? On the other, could it risk the legal fallout if it changed the rules of the tender and rejected the only qualifying bid?
Cut your losses
When Ledwaba Mazwai Attorneys was brought on board in July 2023, it was given a simple brief: "[P]rovide a legal opinion to confirm that the process followed to enter into negotiations with CMEC and SOCAR is legally defendable."
The answer PetroSA received was a firm no: "[O]ur opinion is that … PetroSA is not entitled to negotiate with CMEC and SOCAR."
The RFP allowed PetroSA to negotiate with the top three bidders, but only if no one met the 80% technical threshold, the attorneys reasoned.
"PetroSA cannot enter into negotiations with the Bidders who did not meet the minimum 80 points under the circumstances where there is a Bidder who has met the minimum points," the firm wrote in its August 2023 opinion.
Drill, baby, drill
All indications are PetroSA chose to ignore this piece of advice.
Instead, PetroSA commissioned a second opinion from Centurion Law Group, a boutique law firm in Sandton run by controversial Cameroonian lawyer and lobbyist NJ Ayuk.
Questions around his past have dogged Ayuk following news articles suggesting he was the same man who in 2007 pled guilty to fraud charges in the US. His spokesperson has denied the claims, stating, "These allegations have been debunked many times."
More recently, though, Ayuk has rebranded himself as "a leading authority in the African energy sector and a strong advocate for African entrepreneurship".
When PetroSA wanted an opinion on whether partnering with Gazprombank posed a sanctions risk, it turned to Ayuk’s firm.
Sanctions risk
The legal opinion, written by a senior attorney in Ayuk’s law firm, is detailed and appears well-reasoned. It argues that the sanctions imposed by the US and UK on Gazprombank would extend to GPB Africa even though the local subsidiary is not named on the sanctions list.
But it also argues that the sanctions imposed against Russian entities have been primary sanctions, not secondary. This would prevent US and UK companies from transacting with Gazprombank but would not prevent other countries from doing so.
"[A]ll the United States Russian Sanctions programs only restrict United States persons or entities from doing business with the listed Russian entities/persons," the opinion reads.
"Even assuming that there may be a risk, no matter how small that risks [sic] may be, the facts do not show that any ‘non-US person’ has thus far been sanctioned for transacting with a sanctioned Russian person on transactions that occur entirely outside the Russian Federation."
However, the opinion ends with a word of caution: "[I]t is important for PetroSA to consider the potential reputational impact/international geopolitical repercussions (and even the potential threat of the imposition of secondary sanctions) that could result from doing business with a sanctioned entity that is effectively owned and controlled by the Russian Federation."
In other words, going into business with Gazprombank may not immediately lead to sanctions on South Africa, but accepting large amounts of money and gas from Russia would have fallout.
Reserve Bank warning
This was partly what the Reserve Bank was getting at when it added “secondary sanctions amid heightened geopolitical polarisation” to its economic risk dashboard in May, in the wake of the Lady R incident.
"The risk of secondary or indirect sanctions being imposed on South Africa if its neutral stance on the Russia-Ukraine war is perceived as unconvincing has increased," it warned in May, in the wake of the Lady R incident.
The Reserve Bank’s risk and vulnerability matrix considered the risk to be moderate – less likely than "slow and inequitable domestic growth" but more likely than a "successful systemic cyberattack".
The impact, however, could be catastrophic if South African banks lost their ability to make payments in US dollars.
"Should this risk materialise, the South African financial system will not be able to function if it is not able to make international payments in USD and it could lead to a sudden stop to capital inflows and increased outflows," the bank warned.
But is PetroSA listening?
Full steam ahead
In October, energy minister Gwede Mantashe told journalists at Africa Energy Week that a deal on the R3.7 billion gas-to-liquids refinery was imminent: "[W]e have already seen and shortlisted three partners that have complied with all the requirements. We are hoping that before December we will finalise the partnership with whoever agrees to work with us."
AmaBhungane understands from a source privy to some of the negotiations that PetroSA plans to present Gazprombank’s name to Cabinet before the end of this month.
PetroSA chose not to respond to any questions, saying instead: "PetroSA is currently undergoing Stakeholder Engagements with various governance structures and therefore cannot comment on the matter."
