The government has quietly agreed to end a ”dispensation” in which fuel giant Sasol was to repay subsidies — worth R6-billion since 1989 — paid to the fuel-from-coal giant when oil prices were low.
The result is that while Sasol received billions of rands of direct support while oil prices were low, it is not required to repay these funds now that oil prices are stratospheric.
This has sparked a sharp response from the Democratic Alliance, which will formally ask Parliament’s standing committee on public accounts (Scopa) to investigate the matter.
”Sasol is making enormous profits, exceeding all expectations. Some of this profit should be passed back to the consumer,” said the DA’s energy spokesperson Hendrik Schmidt
The terms of a 1989 agreement, as detailed by an Arthur Andersen report in 1995, provided price support for Sasol if oil prices were below $23 a ÂÂbarrel. ”When the derived crude oil price exceeds $28,70, 25% of all income above this level is forfeited until the cumulative benefit of protection enjoyed since July 1989 is repaid in full,” the report said.
It said subsidies paid to Sasol between 1989 and March 1995 amounted to R3,72-billion.
Sasol Oil MD Ernst Oberholser, participating in a radio debate last week, said that R6-billion in total had been received in price support, of which R50-million had been repaid.
The Ministry of Minerals and Energy said there has never been a formal agreement between the government and Sasol with regard to tariff protection.
”There was a regulatory dispensation applicable to the synfuels industry put in place by government with regard to tariff protection. It was not an agreement,” the ministry said in a faxed reply to questions e-mailed to Minister of Minerals and Energy Lindiwe Hendricks.
Based on Sasol’s profitability, the Arthur Andersen report recommended that the $23 support price be scaled back to $19 a barrel in 1995/96, falling to $16 in 1999/2000.
It made no recommendation that the R3,72-billion should not be repaid.
The ministry statement denies that repayment was part of the original deal. ”This dispensation did not include any concept of ‘cumulative benefit’ as you suggest.”
It said that the initial dispensation prevailed from the privatisation of Sasol in 1979 until 1995.
”In 1995 Cabinet determined a new dispensation based on the so-called Arthur Andersen report, but not precisely the same as they recommended. That dispensation did not include an element that had existed in the previous dispensation whereby the synfuels industry made payments into the Equalisation Fund of 25% of revenue when oil prices were above $28 a barrel. The minister at the time was Pik Botha.”
”The taxpayer supported Sasol when oil prices were low. Sasol should be repaying that money now in terms of the original agreement,” said the DA’s Schmidt.
The DA has been unable to find any public disclosure that the agreement has lapsed and that the outstanding R5,95-billion will not be repaid now that oil prices are considerably above $28 a barrel.
Sasol’s income in the last financial year from its synthetic fuel operations was R7,6-billion, suggesting it would have paid back R1,9-billion during the year if the agreement was still in effect.
Sasol said when its results were announced last week that the protection agreement had lapsed in 1999. ”The tariff protection dispensation for synthetic fuels lapsed six years ago. Sasol received no protection since then.”
The then-energy minister, Botha, announced in May 1996 that the subsidy would be phased out. ”Sasol produces 35% of our liquid fuel. For years, Sasol’s tariff protection continued, with at most a few mutters here and there. Then it became a burning issue, a bitter bone of contention.
”However, this nettlesome problem has been resolved. Tariff protection is being phased out over the next four years.” He did not give details.
The 1999 Budget Review says that the government announced its intention to phase out protection to the synthetic fuel industry and resolved that protection afforded to Sasol and Mossgas — now PetroSA — be phased down to $16 a barrel with effect from July 1 1999.
”Since November 1996 international crude prices have decreased to levels far below the applicable ÂÂtariff protection crude oil floor-price.
”This resulted in significant tariff protection for the synfuels industry and required large transfers from the Equalisation Fund.”
The review said tariff protection afforded to Sasol amounted to R984-million between April and November 1998.
Sasol chief executive Pieter Cox confirmed in an interview in September 1999 that the company had received R1,2-billion in subsidies that year. Cost savings had pushed its production cost from $13 to $11 a barrel, with a further $1 a barrel saving anticipated.
Cox said Sasol was at the time negotiating protection levels and he said Sasol would lobby for them to stay at $16 a barrel.
Gemini Consulting’s website records this as a case study, Gemini being involved in attempts to find R1-ÂÂbillion in new profits to offset the loss of ÂÂsubsidies. ”The target of R1-billion annual operating profit improvement was reached in 2000,” says Gemini.
United States Department of Energy data shows that oil prices averaged $16,56 in 1999, the last year Sasol received the subsidy. Oil prices have been substantially higher since, averaging $27,39 in 2000, $27,69 in 2003 and $37,66 last year.
Sasol spokesperson Johan van Rheede said ”the synthetic fuel industry did indeed receive tariff protection in the past, in common with most industries in South Africa.
”Sasol has met all its obligations towards government as a result of such protection, including the repayment of all monies due to government in terms of the then applicable tariff protection dispensation.
”The last tariff protection mechanism lapsed in 2000, and there has been an investigation by government on possible future policies. It is our understanding that the findings of this study have been forwarded to Cabinet with a recommendation. We are not privy to Cabinet memoranda. We therefore await Cabinet’s decision in this matter.”
The ministry statement said that the 1995 dispensation decision ”included a review in 2000. That review is still under way and recommendations will be made to Cabinet in the near future.”