Since the procurement of strategic crude oil stock by the government’s Strategic Fuel Fund (SFF) in 2001/02, there have been a number of uninformed views expressed on the matter by the Mail & Guardian, among others.
Unfortunately, writing on the oil business is dogged by a complete lack of understanding of the industry. During the apartheid era, the SFF procured any grade of crude oil from any party, at any price, from anybody willing to break the United Nations-imposed sanctions.
Post 1994, the SFF focused on the commercial management of strategic crude stocks. This was achieved by determining a new target level for strategic stock (almost 15-million barrels) and technically determining the type, number of grades and the most economic manner of procurement.
The process followed is captured in an official strategy document that finalised the choice of grades of crude oil about 10 months before the tender process started in late 2001. The process included a full economic evaluation to achieve the maximum benefit from the available finances.
Iraqi Basra Light was selected as the primary grade and Nigerian Bonny Light as the secondary grade. On the basis of prevailing market conditions two cargoes of Bonny Light were bought on the international spot market.
A decision was taken to procure two further cargoes of Basra Light by an open tender. The media have, ad nauseum, repeated the lie that the process was dogged by controversy, but are unable to substantiate this.
In fact, the SFF functioned with a clear strategy to purchase Bonny Light and Basra Light as cheaply as possible.
During its planning process the SFF was approached by trading companies — and even men of the cloth detouring from religion — who offered to supply the black gold.
To grant these interested parties an opportunity, the SFF went out on tender. For the first time new entrants and the old ”oil boys’ ” club had an equal chance to supply the SFF. The state was protected by bidders providing a $1-million performance bond and the preferred bidder being subject to a due diligence.
But why specifically Basra Light, an Iraqi crude? The SFF had good reasons.
The pricing basis and the various levels of discounts for different crude types were known to SFF during the planning process. No fair-minded oil trader can argue that the decision to purchase Basra Light from a price and relative quality point of view was incorrect.
Storing a proliferation of grades at Saldanha would require a large number of tanks, resulting in substantial losses from tank bottoms owing to the size of the tanks.
The assertion that Basra is not suitable for processing in local refineries is without any factual basis. Basra was used by some of the refineries as a design crude oil and many of them have been processing it since 1997.
The SFF’s rationale was no different to that of United States companies, which purchased the bulk of Basra, as the latter was underpriced through US and UN smart sanctions against Iraq. The mere choice of this grade saved the SFF millions in comparison to both Arabian Light and Iranian Light.
In the case of Iranian Light, Caltex as an American company, is not able to process it owing to US sanctions against Iran. The SFF could not choose a grade of crude oil for strategic stock that cannot be processed by a major national refinery.
The field of potential suppliers was not limited, as 21 local and international companies tendered for the contract. Many local companies tendered with international partners.
The short tender period was normal by industry standards as the whole process had to be completed within a month to avoid the change-over in the prices the UN overseers set for Iraqi oil. The market was aware that SFF had put out a tender and the law of supply and demand in this case meant that the UN would reduce the discount.
The claim that there was an apparent change in pricing formula mid-course of the tender process is absurd, as all in the industry know that crude oil is priced against Brent for comparison purposes and the parties tendering were required to provide prices relative to Brent.
Basra was priced by the UN at an official selling price (OSP), which is calculated at Brent less a discount. In fact, many bidders reflected both the Brent price and the OSP price in their submissions.
The Brent price submitted by all bidders had large built-in premiums to cover market risks that were not transparent while the OSP price revealed the premiums in relation to the UN discount.
The bid of Imvume, ultimately the winning bidder, did not go from expensive to cheap as it provided SFF with both a Brent price and OSP price in its tender document.
It would have been impossible to obtain a predetermined outcome in a price-driven process that encompassed some 21 bidders. All bidders had an equal opportunity to reduce their price when those who tendered were requested to provide OSP-related prices.
Imvume was not SFF’s first choice as it came out third in the bidding process. But the first two parties failed on fulfilling preconditions of the tender process, namely to provide SFF with a $1-million performance bond and satisfactorily complete a due diligence.
It is untrue, as the M&G has suggested, that the SFF due diligence of the company indicated that the Stalwarts Research Trust [a trust benefiting the African National Congress — editor] was a beneficiary of Imvume.
The Democratic Alliance has falsely asserted that the purchase of Basra Light contravened UN sanctions. In fact, the purchase was with UN approval under the Oil for Food Programme.
At all times, the board of SFF performed its fiduciary duties diligently. Unlike past boards, this board saved the state significant amounts of money.
Mohammed Riaz Jawoodeen is a former director of the Strategic Fuel Fund