Reclaim SA's strategic oil reserves

The Organisation Undoing Tax Abuse (OUTA) has applied to intervene in the court case which seeks to cancel the sale of South Africa’s entire strategic oil reserves five years ago. The oil is kept to ensure that South Africa has sufficient crude oil in times of shortage and emergency.

OUTA has applied to intervene as an amicus curiae (friend of the court), to emphasise to the court the importance of public procurement procedure, and to ask the court to prioritise public interest over company profits. OUTA believes the sale was illegal, should be cancelled and the stocks returned.  

The case was brought in March 2018 in the Western Cape High Court by the Central Energy Fund (CEF) and its subsidiary the Strategic Fuel Fund Association (SFF) against 10 respondents, including eight businesses which benefitted from the cut-price deals.

The CEF and SFF seek to declare the decisions to dispose of the reserves and the transactions illegal and reverse them, thus reversing decisions by previous SFF management. OUTA supports this.

The oil was sold under highly suspicious circumstances. The reserves were sold in December 2015, when the crude oil price was at an 11-year low.  According to the SFF at the time of the sale, the selling of the oil was an emergency as it needed to “rotate” old oil by selling it and purchasing new oil.  However, based on a world-leading expert, whose evidence is before the court, that was simply false.  Crude oil has been underground for a thousands upon thousands of years. There is no need to rotate crude oil for emergency reasons. In addition, the purchasers of the oil were happy to continue to store the oil in SFF’s tanks for many months after the transaction (waiting for the oil price to increase).

According to the evidence before the court, at the time of the transactions, the CEO of SFF, Sibusiso Gamede, received R20 million into his law firm’s trust accounts and his personal bank account.  Most of the money was received in cash instalments of R20 000 that was physically loaded into ATMs around the country. The Hawks are currently investigating the matter. 

Gamede did not tell the SFF board (let alone seek its approval) that the oil had been sold until the following year. He also sold the oil in direct violation of the instructions issued by the Minister of Energy (which said that the oil must be sold at a profit). 

OUTA’s application

OUTA’s application for intervention is outlined in an affidavit by Advocate Stefanie Fick, the Director of OUTA’s Accountability Division.

If OUTA’s application to intervene is successful, it intends to make submissions on these aspects:

1. First, OUTA urges the court to hear the matter. The legal proceedings were only instituted two years after the oil was sold.  In terms of South African law, all government decisions must be challenged within a reasonable time (this is usually limited to 180 days). OUTA will urge the court to overlook the state’s delay in bringing the case.  And this is important. If the court does not “condone” the delay, then the matter will not be heard and the unlawful contracts will continue to be valid. This would be a shocking result because all the parties in the matter (including the state and the oil traders) accept that the contracts were entered into unlawfully.

2. Second, the oil traders want the state to reimburse them for their losses. But the evidence presented by the state shows that the oil traders knew that contracts were suspicious but they nevertheless concluded the agreements. In this event, the oil traders should not be compensated for their losses. And they should not be compensated for their losses from state funds. According to the state’s case:  

• Vitol, one of the oil traders who benefited from the trade, was the catalyst for the impugned transactions. Vitol proposed the strategic stock rotation to the SFF in exchange for Vitol not suing SFF relating to another deal.  All public tenders must be made public, so it was unlawful for Vitol to propose the deal without the matter going through a public tender process. Vitol also encouraged SFF to place terms of use that would limit the number of companies that could contract with the SFF. In particular, in an email sent to Gamede, Vitol said that the successful contractors should be “able to pledge at most times the corresponding amount of crude rotate [sic] with other physical barrels stored independently in Saldanha Bay.  Only few companies will be able to bid this way… Take good care my friend”.

• Cantango, another oil trader, failed to disclose to the court that it had invoked a guarantee for its losses in terms of a legal agreement it had with another entity. If the court compensates Cantango in this matter, it could see Cantango compensated twice for the same loss (and that compensation would come from the public purse).

• Glencore, another oil trader, also had ample reason to suspect that the transactions were being concluded in violation of proper procedure. Glencore was turning a blind eye to the impropriety.

3. It appears that none of the oil traders requested proof from Gamede that the SFF board (or Minister) had in fact authorised the sale of the oil.  If they had asked for such proof and conducted their due diligence for such a massive transaction, they would have known that the sale was unlawful. Their failure to make enquiries is outrageous given that the oil was sold at break-neck speed and at a time when the oil price was at an 11-year low.  

4. The oil traders should not be compensated for their losses with public money.  Public interest in the spending of public funds is more important than any potential financial loss to the respondents from cancelling the sale of the oil reserves. “Any financial losses alleged by the respondents are far over-shadowed by the overwhelming public interest in ensuring that the state is restored lost tax revenue and its emergency oil supplies,” says Fick. “Private companies contracting with the state do so on the understanding that the state must always act in the public interest and within the legal framework.” Thus, if the applicants prove that the sale was irregular, these transactions could never serve the public good, and the courts should not protect the private companies from financial loss. OUTA has therefore intervened to ensure that the state does not compensate the oil traders for their losses. 

The sale of the reserves

The case is brought by the CEF and the SFF. Both are state-owned entities, with the SFF a wholly owned subsidiary of the CEF.

The SFF is responsible for managing South Africa’s strategic crude oil reserves.  By law, the country must stock crude oil for at least 21 days in the event of a shortage (which is the equivalent to at least 10.3 million barrels of oil).

The reserves were sold in December 2015 by Gamede, with the approval of then Energy Minister Tina Joemat-Pettersson.

There was no public tender process, no bid specifications, contracts were hidden even from the SFF and CEF management and boards and the National Treasury, and the oil was sold below market value.

Eight of the respondents are companies which benefitted in the transactions: Venus Rays Trade, Glencore Energy UK, Taleveras Petroleum Trading, Contango Trading SA, Natixis SA, Vesquin Trading, Vitol Energy (SA) and Vitol SA.

About half the oil was Basrah Light crude and about half Bonny Light. The Bonny Light is more commercially valuable, as it is cheaper to refine and more environmentally friendly.

In December 2016, Parliament was told how the sale brought in $280 830 970: 

• 3 million barrels of Bonny crude oil were sold to Venus Rays Trade (which resold it to Glencore) for $90 224 970.

• 3 million barrels of Basrah crude sold to Vitol for $78 606 000.

• 2 million barrels of Basrah and 2 million barrels of Bonny sold to Taleveras (which resold to Contango) for a total of $112 000 000.

These prices are an average of $26 dollars a barrel (for Basrah) to $30 (for Bonny). Prices at the time were depressed, but even so this was a discount.

The main application is outlined in the March 2018 founding affidavit by Luvo Makasi, the CEF chair.

“Mr Gamede unlawfully and irregularly disposed of a fundamental national public insurance,” said Makasi, adding that Gamede “took decisions that have caused serious and grave prejudice to the State, the fiscus and the public”.

On the Minister’s approval of the sales, he said: “The Minister made no effort to apply her mind.”

Further information

A soundclip with Advocate Stefanie Fick talking about the case is here.

OUTA's founding affidavit is here and heads of argument are here (part 1 and part 2).

For background on Oilgate and this case, see here.