It was Cabinet – not PetroSA – who announced, in December 2023, that Russia’s Gazprombank had been selected to restart Mossel Bay’s gas-to-liquids refinery.
The choice of a sanctioned Russian bank was seen as risky by some and suicidal by others, but with Cabinet’s seal of approval, the R3.7-billion deal had the political cover it needed to go ahead.
Now, a year later, Gazprombank appears to have reneged on the deal, leaving PetroSA scrambling to find a new partner for the mothballed refinery, which is costing PetroSA upwards of R500-million a year to maintain.
The details of how the Russian deal soured are set out in two draft internal audit reports and letters exchanged between PetroSA and Gazprombank, obtained by amaBhungane from a number of sources.
The documents suggest that Gazprombank’s bid should have scored just 40 points out of 100 – not 80 – which would have put its bid in distant third place.
They also show that the bank has failed to deliver the $200-million (R3.7-billion) in funding it had promised, or even the $3-million (R56-million) needed to complete a bankable feasibility study.
“[I]f you fail to deliver … PetroSA will have no further option but to recommend termination of any further engagements with [Gazprombank],” PetroSA told the Russians in August.
“Based on the serious deviations identified in this report … Internal Audit recommend that Management consider the cancellation of [the Gazprombank tender] prior to finalising definite agreements,” three senior members of PetroSA’s internal audit team told executives in a draft report circulated in October.
When acting CEO, Mmete Fusi, appeared in Parliament a few days later he told MPs: “We should know whether we continue or not continue with the current partner – we are at that decision point.”
The only qualifying bidder
When Gazprombank was announced as the winning bidder of RFP 0001/2023 in November 2023, it looked like a stitch up: 20 companies had bid and 19 had been eliminated on technical grounds, leaving the Russians as the only qualifying candidate.
Adding to suspicions is the fact that the Russians had made an unsolicited bid for the refinery in 2022, before the tender specs were written, but when PetroSA’s internal audit team was asked to review the scores last year, they immediately picked up irregularities.
Restarting the atrophying gas-to-liquids refinery is a major undertaking, so bidders had to prove that they had access to upwards of $200-million (R3.7-billion) in funding by providing a letter of interest, a credit guarantee or a term sheet.
The Russians provided nothing.
Instead, PetroSA officials went online, found the annual report of the Gazprom Group, and concluded that this was good enough. (Score: 20/20)
To show they were serious, winning bidders would also be required to put up $5-10-million (R189-million) to fund the development of a bankable feasibility study.
Gazprombank only promised $3-million (R56-million), but still scored 10/10.
When the internal audit team reviewed these scores, they baulked. “We did not find sufficient supporting evidence … to substantiate [Gazprombank’s] scoring of 80 points,” they wrote in a draft report delivered to management in October last year.
Instead, a score of 40 points out of 100 was more appropriate, the internal audit team concluded.
This would have put the Russian bid in distant third place, behind the bids from two private companies, BB Energy Gulf (75/100) and Phezulu Natural Energy Resources (72.5/100).
The officials who initially gave Gazprombank 80/100 were asked to comment on the internal audit’s findings.
Some of the reasons they provided were partly defensible: for instance, Gazprombank said that it needed only $3-million for the bankable feasibility costs, meaning their offering was fully funded and 10/10 was justified.
Other reasons beggar belief: for instance, the evaluation team overlooked Gazprombank not providing proof of its financial commitment because the tender said that “this could take the form of a letter of interest, or credit guarantee, or term sheet”.
“[T]he language was not prescriptive,” group supply chain manager Comfort Bunting wrote, underlining the word could. “The Evaluation Team considered the annual report and since Gazprom is a public entity, the Team accepted the information as sufficient evidence.”
As the internal audit team pointed out, Gazprom – Russia’s state-owned oil and gas company – wasn’t even the bidder. Gazprombank Africa, the local arm of an opaquely owned Russian bank was.
But in coming to its conclusions, the three-member internal audit team also had the benefit of hindsight. By the time the draft report was delivered in October 2024, the Russians had reneged on the deal.
Ultimatums and threats
By January last year – two months after Cabinet’s announcement – it should already have been clear to PetroSA that Gazprombank wasn’t going to fund the project itself.
A note from a 31 January workshop involving PetroSA and Gazprombank read: “Next steps included that Gazprom to search for investors and present to PetroSA.”
Five months later, Gazprombank was still looking.
“The second important component of our work for now is the selection of an investor. As you know, two large Russian oil companies have expressed interest in participating in the project, as well as three international investors,” Gazprombank Africa CEO Murad Bagliev wrote in a June 2024 letter to PetroSA’s acting COO Tsiea Morojele.
As for the $3-million (R56-million) to fund the project development costs? Gazprombank now wanted South Africa to put up the money: “[T]wo grant applications have been prepared and submitted to the relevant authorities, which will allow our BEE partners to begin the process of Feasibility study,” Bagliev wrote.
A month earlier, PetroSA had erroneously told Bloomberg that “the feasibility study is currently underway.” Instead, the letter reveals, Gazprombank would only begin the feasibility study once an unnamed BEE partner had secured a grant from Infrastructure South Africa, an SOE housed within the Presidency.
Morojele had evidently tried, in an earlier letter, to impose some deadlines on the Russians, but Bagliev pushed back, reminding the PetroSA COO that the project had political cover from, amongst others, Minerals and Petroleum Minister Gwede Mantashe.
“It should be noted that the Minister and other officials supported and approved this Plan. I would especially like to add that the industry management did not set any strict timeframes for us,” he reminded Morojele.
This was especially galling because Gazprombank had committed to an aggressive schedule to get the refinery back on track.
Now, however, the Russians refused to be rushed: “We also cannot accept your ultimatum to sign the Co-operation Agreement within five days, by 28 June, with your threats to review the results of the national tender approved by the Cabinet and Parliament of South Africa,” Bagliev wrote. “In such circumstances let me ask – has this approach been agreed upon with the Strategic leadership of the Energy Industry?”
Visa challenges
Over the next six weeks, the problems multiplied.
The Russians wanted to be able to take ownership of the gas-to-liquids refinery in Mossel Bay, but PetroSA said no, noting that “the partnership … will not involve ownership of PetroSA’s assets as such assets remain state property.”
The deadlines – which had been a key criterion when evaluating the bids – were now stretching off into the distance. The schedule that had been provided to PetroSA turned out to be “not the actual schedule” but rather an internal document.
In fact, Gazprombank said that it needed to do a technical inspection of the plant before it could agree to any deadlines.
A visit to the Mossel Bay refinery with a technical team had been planned for late July, but at the last minute the Russians told PetroSA they weren’t coming.
“[D]ue to reasons beyond our control, namely the non-working electronic visa issuance system of South African Home Affairs and the inability of the South African consular in Moscow to issue visas for the technical team in a short period of time, the visit was postponed until the necessary approvals were obtained for all participants. Once visas have been obtained for all assigned technicians, the team will be sent to Mossel Bay,” Bagliev, the Gazprombank Africa CEO, told PetroSA in August.
When PetroSA officials appeared in Parliament in that month, they repeated the line about “visa challenges” and said that a new invitation letter had been issued to the Russians.
Behind the scenes, however, PetroSA was fuming: “Equally concerning is that [Gazprombank] had confirmed on the 23rd July 2024 to come to Mossel Bay, even if it means that they will have to leave a team member behind. It was also surprising to be told on the eve of the scheduled visit, that the trip has been postposed, without prior arrangement with PetroSA,” then-CEO Xolile Sizani wrote in response.
PetroSA, he said, had offered to intervene with the South African Embassy and had requested copies of the visa applications, but the Russians had failed to take them up on the offer.
Leniency we can no longer afford
When Gazprombank was first picked as the preferred bidder, PetroSA’s management had warned the board against putting all its eggs in the Russian basket.
“It was pointed out that Russian delegations are hard negotiators and if PetroSA had to wait until the negotiations are completed with the Russians before moving onto other potential partners, that process might take PetroSA a long time,” minutes from a special board meeting read.
By August 2024, those chickens were coming home to roost.
“By the way again, PetroSA wants to emphasise the fact that your appointment in this contract is on the basis that you have access to funding. So this condition that funding must be secured first before the schedule is develop is totally unacceptable,” Sizani, the then-CEO, told Bagliev in a letter.
“As much as we have shown leniency with regard to the project schedule in the past, we can no longer afford to do so.”
Gazprombank Africa did eventually deliver a letter to “confirm that we will be able to secure funding in the required preliminary amount of up to US$60,000,000”.
But the letter, the internal audit team noted, wasn’t even signed, and committing to provide $60-million would only have earned Gazprombank Africa 5 points out of 20 when the bids were scored.
Government foots the bill
As for the initial $3-million urgently needed for the feasibility study?
“[Gazprombank Africa] was appointed as the preferred partner on the basis that it would be able to finance the feasibility studies, based on the premise that it is a subsidiary of Gazprombank JSC [the bank in Russia partially owned by the state], which has more than sufficient funds to fund this project,” Sizani reminded Bagliev in August.
By September, PetroSA had come up with a plan B: “Infrastructure South Africa (ISA) has approved our application, and this will see PetroSA and ISA partnering in developing a bankable Business Case for the Refinery reinstatement,” PetroSA told staff in an internal memo.
We asked Infrastructure South Africa if it was aware that it was potentially giving Gazprombank a $3-million free pass by funding the feasibility study the Russians had committed to paying for, but chief director of external communications, Nombulelo Nyathela, avoided the question:
“The project preparation support entails the procurement of necessary skills, including but not limited to the transactional advisory, to support the project development and overseeing implementation of the work and payment of invoices,” she told us over email.
Infrastructure South Africa would still control the funds, but Nyathela declined to say how much government had agreed to spend.
The question is, would the deal still involve the Russians?
Decision time
By October last year, the Gazprombank deal seemed to be tentatively back on track.
The final details of a co-operation agreement were being ironed out, and following the rescheduled site visit, Gazprombank was ready to present three potential solutions to PetroSA.
Around the same time, however, the internal audit team delivered its 100-page draft report slamming the deal and recommending that PetroSA pull the plug. Out of the 11 deviations identified in the report, 10 were considered high risk.
These “significant governance concerns” included a potentially “sub-standard” due diligence, Gazprombank’s failure to meet key project milestones and concerns that Gazprombank may have had access to more information than other bidders thanks to its early unsolicited bid.
“The RFP Project team was not part of the negotiations taking place with Gazprom/Gazprombank Africa during the unsolicited bidding process that pre-dates [tender],” the internal audit team noted.
Transcripts of some of these early meetings weren’t available, and the fact that Gazprombank didn’t ask for the documents that were shared with the other shortlisted bidders only added to suspicions that PetroSA officials had given the Russian delegation a wealth of information before the tender was even advertised.
This could expose PetroSA to “potential litigation from unsuccessful bidders” leading to “litigation costs and financial losses,” the internal audit team warned.
Then there was the issue of sanctions.
An international pariah
When Gazprombank Africa was selected as the preferred bidder in May 2023, PetroSA had been concerned that sanctions against the Russian parent company would trickle down to South Africa.
Centurion Law, PetroSA’s legal advisors, had assured them the risk of official sanctions was low, but warned that there may still be blowback.
“[I]t is important for PetroSA to consider the potential reputational impact/international geopolitical repercussions (and even the potential threat of the imposition of secondary sanctions) that could result from doing business with a sanctioned entity that is effectively owned and controlled by the Russian Federation,” it wrote in a September 2023 legal opinion.
“Another consideration is whether the transaction presents difficulties to any of PetroSA’s commercial contractual counterparties (including local and international financial institutions) who are themselves typically bound by the sanctions regime due to the global/multijurisdictional nature of their businesses.”
Bizarrely, the draft internal audit report reveals that PetroSA officials had floated Gazprombank’s name on National Treasury’s e-tender portal in early September 2023, before the contract had been approved by the board.
This, project manager Abram Moloto later told the internal audit team, was “a risk management process and negotiating tactic to allow PetroSA to ventilate the geopolitical implications of the sanctions risks to South Africa without raising unnecessary alarms.”
Satisfied that it could survive the blowback, Cabinet had approved the Gazprombank deal in December 2023.
A year later, however, the association was beginning to stink: “The sanction risk relating to [Gazprombank] materialised and have resulted in timelines and deliverables not achieved and the potential loss of key business stakeholders,” the internal audit team wrote in its draft report.
Mazars had been the only firm willing to act as transaction advisors on the deal. “Others declined on the basis of Russian links to the respondents of the RFPs and the subsequent US sanctions on certain Russian entities,” an unnamed member of the management team told the internal auditors.
PetroSA’s insurers, Marsh, had also warned in August that “they will not continue to provide services if PetroSA continue with GazpromBank Africa”.
Yet when Minerals and Petroleum Minister Gwede Mantashe appeared before Parliament a month later he was bullish, telling MPs: “We cannot take a hostile position because the West feels so. We will work with them … I am not one of the people who is sensitive in working with Russia, and believes that working with them will translate to sanctions.”
PetroSA’s newly appointed CEO, Mmete Fusi, was more cautious: “There’s a commitment to turn PetroSA around, especially the reinstatement of the refinery, no matter how difficult it may be,” he told MPs in October.
Whether PetroSA is committed to Gazprombank is, however, less clear: “We should know whether we continue or not continue with the current partner – we are at that decision point,” Fusi said.
Secondary sanctions
When Gazprombank had been unable – or unwilling – to deliver funding in August, it blamed sanctions: “Gazprom supports the project, however, at this stage, they informed us that the Reserve Bank is not authorising direct payments from Gazprom due to the sanctions issue,” Moloto told the internal audit team.
It’s unclear why the Reserve Bank would have blocked payments back in August and no one from the bank was willing to comment. At the time, Gazprombank was under limited sanctions in the United States, United Kingdom and European Union, but was free to transact in South Africa.
In November, that changed.
The new round of sanctions announced by the Office of Foreign Assets Control (OFAC) in the United States is far-reaching and makes any deal with Gazprombank radioactive. Gazprombank Africa was called out by name.
“The banks on the US sanctions list will be disconnected from the dollar-based financial system, and any entity cooperating with them may be subject to secondary sanctions and thus face similar restrictions,” the Centre for Eastern Studies in Warsaw warned.
PetroSA declined to answer any further questions about the status of the Gazprombank deal because it is currently embroiled in a court case with rival bidder Phezulu Natural Energy Resources, who is challenging the award.
Gazprombank’s local office simply ignored our emails.
If the Gazprombank deal has imploded, it will mean that all three of the multi-billion-rand offshore gas deals – concluded in December 2023 as a last gasp under PetroSA’s dictatorial chair Nkululeko Poya – are dead and buried.
The Equator deal to build and refurbish offshore gas infrastructure was cancelled in July after amaBhungane revealed that the company had been quietly placed in liquidation. The EquaTheza Oil and Gas deal to restart offshore gas wells was cancelled in June.
Read: The deal that got PetroSA CEO suspended.
PetroSA, however, cannot simply walk away. The gas-to-liquids refinery, offshore platform and pipelines that bring the gas onshore represent a R10-billion environmental liability on their books.
Gazprombank’s plan would, at best, have seen the refinery reopen by April 2026.
The post PetroSA’s deal with Russia implodes appeared first on amaBhungane.
