Mozambique Oil & Gas: Sasol’s response to the Mozambique Centre of Public Integrity

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Sasol facilities

We appreciate the role that civil society organisations such as the Centre for Public Integrity (CIP) play in promoting greater integrity and transparency within Mozambique. This can only assist us as a company and we welcome any feedback they provide.

However, we believe that the various reports issued by the CIP on Sasol’s activities in Mozambique, including the two most recent ones, contain inaccuraciesand downplay the value created in Mozambique through the investments by Sasol and its partners.

Mozambique remains firmly at the centre of Sasol’s growth strategy for Southern Africa and we are committed to driving mutual value and ensuring the country’s hydrocarbon resources benefit all its people.

Over the past decade, Sasol and its partners have invested about US$3 billion in Mozambique and as a consequence more than US$1 billion flowed to the Government of Mozambique. This amount includes corporate taxes, royalties and social investments, as well as profit share and dividends paid out to state-owned entities.

We firmly believe that the Production Sharing Agreement (PSA) will drive further investment and sharing of benefits with the Government of Mozambique (GoM).

As an organization, we will continue to engage with the organization in a spirit of transparency and mutual respect.

FREQUENTLY ASKED QUESTION

Q: What is Sasol’s initial reaction to the assertions made by CIP in its research suggesting that Mozambique benefits very little and is in fact at a disadvantage from Sasol’s activities in the country?

A:We believe that the reports issued by CIP do not fully acknowledge and account for the value created in Mozambique through the investments by Sasol and its partners.Mozambique remains firmly at the centre of Sasol’s growth strategy for Southern Africa. We strive to continue to drive mutual value creation in the country and, above all, to ensure that the country’s hydrocarbon resources benefit its people.

Over the past decade, Sasol and its partners have invested about US$3 billion in Mozambique and as a consequence more than US$1 billion flowed to the Government of Mozambique. This amount includes corporate taxes, royalties and social investments, as well as profit share and dividends paid out to state-owned entities.

Q: Sasol has made the assertion that some of the information in CIP’s research was incorrect. Please elaborate.

A:Based on the information that we have, we find the reports published by the CIP to contain inaccuracies that understate the value of the contribution made by Sasol and its partners.

For example, the cost of US$400 million cited by the CIP on the expansion of our Central Processing Facility (CPF) is inaccurate. The cost of the Central Processing Facility (CPF) expansion from 120 MMGJ/a to 183 MMGJ/a was, in fact, US$220 million and included additional scope beyond just the 4 gas processing train to enable the desired operating efficiency.

For the first 10 years of the project, about US$1 billion (2004-2014) has flowed to the Government of Mozambique instead of the US$500 million quoted by CIP. Furthermore, based on ourcurrent projections, our contribution over the lifetime of the Petroleum Production Agreement (PPA) project would be closer to over US$3 billion (2004-2029) unlike the US$2 billion highlighted within the CIP’s report.

Q: The allegation by CIP is that Sasol is selling its gas to South Africa at seven times the price that it is buying from itself in Mozambique is one that the NGO plans to take to the African Union. At the report release, the CIP accused Sasol of illicit financial outflows and transfer pricing. What is your response to this?

A: The allegation that ‘Sasol is selling its gas to South Africa at seven times the price that it is buying from itself in Mozambique’ is inaccurate. Unlike oil, natural gas does not have global reference prices, but is driven by regional market dynamics which take into account alternative energy cost of users.

To establish and develop a gas industry, you need a market and baseload customers to absorb that gas, which includes Sasol. Since producing gas, we have made substantial investment in developing the South African and Mozambican gas markets.

The Mozambican gas price was intended to stimulate the development of a domestic gas market. Sasol doesn’t charge the Mozambican government a handling and transportation fee and is not involved in the selling of royalty gas. These factors, together the laws governing the respective countries and the agreed commercial terms taking into account the market factors, contributes to the difference in gas prices between the two countries. It is also important to note that in South Africa gas prices are regulated by the National Energy Regulator of South Africa (NERSA).

Gas produced by Sasol Petroleum Temane and processed at the Central Processing Facility is sold a number of customers in the South African including Sasol and third parties and Mozambican gas market. The commercial terms of the gas sales agreement with Sasol Gas, which governs the sale of gas, was negotiated between representatives of the Government of Mozambique supported by international legal and technical advisers from Europe and representatives of Sasol as an arm’s length transaction.

Accordingly, the price set was a price negotiated between independent entities. Additionally, the necessary safeguardmechanisms were put in place for negotiating commercial contracts and for ongoing project operations and management. Formal approval of the agreements was provided by the required approval authorities, as prescribed by the Government of Mozambican governance procedures.

Q: In the two reports released by CIP, the organisation highlights the inflation of costs as well as your development plan under the PSA as problematic.

A:We find the report published by the CIP to contain inaccuracies that create unfounded perceptions regarding the inflation of costs.

Sasol has a fiduciary duty to its shareholders to ensure all capital is applied responsibly and this is the case for the PSA. Accordingly Sasol’s governance procedures and due diligence mechanisms ensure that sufficient project preparation is done prior to any investment. These governance procedures have been followed to make the investment decision for all of our operations in Mozambique. In addition, both INP and ENH have audit rights to hold the operator (Sasol) to account for any expenditure.

It is important to note that Sasol Petroleum Temane (SPT) was established as part of the unincorporated joint venture (UJV) under the Petroleum Production Agreement (PPA). SPT is a subsidiary of Sasol Petroleum International (recently renamed to ‘Sasol Africa (Pty) Ltd’). Per standard industry norm, SPT is obligated to pay out dividends to its shareholder per the terms of the Joint Operating Agreement and according to its equity stake.

Regarding the Production Sharing Agreement (PSA), we firmly believe this development will drive further investment and sharing of benefits with the Government of Mozambique. It is our view that the field development plan (FDP) for PSA supports the Government of Mozambique’s drivers for in-country monetisation, energy security, further industrialisation and skills development.

We continue to optimise the FDP and apply prudent costs and project management measures. To ensure even greater gains for Mozambique, we are currently in the process of negotiating Farm-down and Joint Operating Agreements with ENH for the transfer of 30% of the rights in the PSA licence.

Q: The allegation has been made that Sasol invested in increasing its capacity but production did not increase which limited Mozambique’s taxation.

A:Since 2004, there have been a series of expansion projects to theCentral Processing Facility (CPF)in Temane which has increased capacity of the plant to 197 million giga joules per annum as it stands currently. Initial consumption was mainly to South Africa, as the industrialised nature of the economy enabled it to absorb this gas. However, over the years consumption has increased to Mozambique with Ressano Garcia developing into a gas-to-power electricity generation hub that it is today.

We are currently underway with exploration of further hydrocarbons in Mozambique to expand our production capacity. As we produce more gas, so too does the level of taxation on that production.

We believe that the reports issued by CIP do not fully acknowledge and account for the value created in Mozambique through the investments by Sasol and its partners.

To date, we have contributed US$495 million towards tax and the Mozambican Tax authority awarded us as one of the largest tax payer in the country.

Q:People staying in Inhambane are complaining that they are not getting jobs from Sasol and that the gas is making them sick and make their agricultural soil sterile. Is Sasol aware of this and what is it doing about it?

A:To date, over 300permanent jobs have been sustained since inception across our various businesses in Mozambique, the majority being in Inhambane Province. Sasol and its partners established a Community Liaison Forum (CLF), in Maimelane in Inhassoro district, Inhambane Province, which helps with jobs opportunities for the 22 surrounding areas of the Central Processing Facility (CPF). Approximately 600 jobs have been allocated to members of these communities to date.

Sasol and its partners recently launched the Youth Development Programme in Inhambaneto address the high youth unemployment rate by providing skills training towards entrepreneurship. Other programmes include the development and resourcing of technical schools and facilitating bursary programmes.

As part of normal operations, we conduct regular and continuous soil, noise and air monitoring and results are presented to all stakeholders. These results have shown that Sasol project activities over the licence areas in Mozambique have not been materially disrupted nor prevent agricultural activities.Soil monitoring is conducted at the CPF and outside the CPF premises annually according to the operation Environmental Management Plan (oEMP) requirements. An external specialist company collects the samples and sends them to accredited laboratories (ISO 17025). The results are disclosed to the Government of Mozambique bi-annually.

Q:Allegations being brought forward are that the Mozambican government has allowed this problem to stay because members of the ruling party, Frelimo, have interest in Sasol or benefit as individuals. What is your comment to this allegation?

A: Sasol is an independent international company and does not hold any association or affiliation to any political party in any of the locations in which we operate. Furthermore, as a publicly listed company on both the Johannesburg and New York Stock exchanges, Sasol complies with all applicable laws.

Q:What has Sasol done for the villages in Inhambane to benefit communities there?

A: Over 150 projects implemented thus far have reached over 500 000 beneficiaries in three provinces along the Natural Gas Project with an investment of over US$33m to date – the majority of which has been dedicated to Inhambane Province. We work to develop and promote long-term sustainable programmes through the development of social investment initiatives based on input we receive from extensive engagement with our neighbouring communities. We have prioritised providing access to education, healthcare and clean water.

Sasol and its partners also contribute towards a number of social investment initiatives including a Youth Development Programme in Inhambaneto address the high youth unemployment rate by providing skills training towards entrepreneurship. Other programmes include the development and resourcing of technical schools and facilitating bursary programmes.

Recognising the importance of clean water in driving sustainable development, Sasol and its partners have to date sunk over 80 boreholes and installed water reticulation systems. We have also enabled access to healthcare through construction of medical facilities such as clinics and dental facilities.

Q: Is Sasol open to renegotiating the Mozambique deal to increase its share of benefits from the gas extractions there?

A:This is not a simple matter. The existing gas sales agreements were also signed on the back of bilateral and inter-governmental agreements between Government of South Africa and Mozambique, given the cross boarder nature of the investment. To facilitate the project, the two governments negotiated a general Bi-lateral Agreement on Natural Gas Trade. The 2004 natural gas project initiated regulatory co-operation between Mozambique and South Africa. Re-negotiations of these contacts could potentially nullify the inter-governmental agreements that were concluded at the initiation of the natural gas project. Agreements such as this are underpinned by bilateral agreements that enable a stable regulatory backbone of an economy.

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