Mungo Soggot, Evidence wa ka Ngobeni and Nawaal Deane
The state oil company and the government are limbering up for a court battle in London over a controversial R1,5-billion oil contract under investigation by the Scorpions.
The contract in question was sealed last year by officials at the state oil company, the Strategic Fuel Fund (SFF), with Trafigura, a London-based oil trading firm.
Trafigura, which pulled off the deal with a local company, High Beam Trading International (HBTI), wants to keep its contract alive by entering into a formal arbitration hearing with the South Africans. The contract was secured in secret, without the knowledge of Minister of Mineral and Energy Affairs Phumzile Mlambo-Ngcuka, who has fired the board of the SFF for its handling of the deal.
On Thursday it remained unclear how the South African government and the management of the state oil company was going to handle the request for arbitration.
Until now, the government has been adamant that it wants to scrap the agreement. The government has contended there were serious irregularities in the way the contract was put together, which could include irregular payments to officials involved in the deal.
However, the contract itself is carefully worded, which could make it difficult for the South Africans to extricate themselves from the deal without paying a heavy penalty. Lawyers representing the South Africans were preparing to fly to London on Thursday night.
The legal action comes two months after Mlambo-Ngcuka publicly said she wanted to repudiate the Trafigura contract and referred the matter to the National Directorate of Public Prosecutions. Until now, Trafigura and its local partners for the deal, HBTI have kept quiet about the dispute.
The Scorpions and the Investigative Directorate Serious Economic Offences took up the criminal investigation into the contract after an initial investigation was carried out by the international business intelligence firm Kroll Associates. The preliminary investigation found serious irregularities both in terms of the way Trafigura and HBTI were lined up for the deal and in terms of the way in which the actual contract was cemented.
The deal with Trafigura essentially ceded control of South Africa’s strategic fuel stock for 15 months for what the South Africans believe is an unreasonably large fee. Trafigura and HBTI stood to make at least $20-million. The contract was signed by two senior officials at the state oil company, SFF chair Seth Phalatse and Keith Kunene, the chair of the Central Energy Fund (CEF), the holding company for the state’s oil assets.
Both Kunene and Phalatse and the rest of the SFF board were fired last December as Mlambo-Ngcuka announced a fully-fledged investigation into the deal.
In December the government also announced it wanted to cancel payments of up to $2-million that have already been made to Trafigura/HBTI on the grounds that they were unlawful, illegal and contravened government regulations.
Phalatse, the former SFF chair, signed off the deal without the knowledge of the minister, which contravenes government regulations on public finances. Sources close to the Department of Mineral and Energy Affairs have suggested that the core of the deal in terms of which Trafigura and High-Beam would acquire 40% of the state’s crude oil profits is unlawful as the acts specifically state that a third party cannot be part in the proceeds of a state oil sale.
According to the Public Finance Management Act, the SFF board has to seek the approval of the minerals and energy minister before entering into any oil contract. In this case, however, the minister was kept in the dark until an anonymous whistle-blower tipped her department off last June. It was only then that she commissioned an internal investigation into the deal, after which she called in Kroll Associates.
The state oil company, which was set up under apartheid to ensure South Africa survived the oil boycott, has lurched from crisis to crisis since 1994. In 1998 the former chair of the CEF, Don Mkhwanazi, a close associate of Kunene’s, was forced to resign after it emerged he had hired a notoriously corrupt Liberian politician to advise the company on privatisation.
A Trafigura representative said the government does not have legal basis on which to “unilaterally” terminate the contract.
“Trafigura does not believe that there is any legal basis on which the contract could be unilaterally terminated and have had this confirmed by eminent legal counsel.”
According to Trafigura it has never been suggested in any of the public statements by or on behalf of the minister, SFF or CEF that HBTI has been in breach of its obligations under the agreement. “In fact, there has been acknowledgement in the most recent statement by the minister’s spokesman that services have been performed and fees should be paid,” says Trafigura in the statement.
Trafigura is continuing to communicate through the normal channels and has very little knowledge of any investigations being conducted by or on behalf of the minister. “Nonetheless, we would like to stress that both it and HBTI have co-operated fully with all requests for relevant information relating to the contract,” says Trafigura.
When the allegations were made an internal investigation was conducted by Trafigura consistent with their very strict management and internal audit procedures. “As we expected, this did not reveal improprieties of any kind,” says the statement.