State-owned PetroSA has hit out at claims of charging Eskom inflated prices for diesel.
The claims were made by energy expert Chris Yellend and consultancy group EE Business Intelligence (EEBI), who said in a report that Eskom has been forced to pay exorbitant prices for diesel it buys in bulk from PetroSA, the financially distressed state-owned entity which is its main diesel supplier, even as the utility battles to stave off worsening stages of load shedding.
PetroSA responded to the claims made in the report authored by Yellend and Mariam Isa to clarify ‘misconceptions in the article, “Diesel or darkness: PetroSA Charges Eskom unfair prices, extracts upfront payments".
Diesel is needed to power Eskom’s open-cycle gas turbine (OCGT) plants, Gourikwa and Ankerlig, its emergency back-up generators that can mitigate against two stages of load shedding if running at their full 2067MW output.
The gas turbines are expensive to run, and were intended for use only in peak-demand periods, However, they are now being heavily relied on to meet daily demand as breakdowns and unplanned outages spiral within Eskom’s ageing coal-fired power station fleet.
Eskom’s management first warned that they had run out of money for diesel in November 2022, after spending double the R6 billion budget allocated in the financial year ending March 31 2023, with four months still to go.
Because of these financial constraints, initially Eskom indicated it would stop using the OCGTs to meet daily electricity demand. However, rolling power cuts immediately significantly intensified to 6 000MW, which resulted in huge political pressure to ramp up usage of the OCGTs again.
PetroSA said: “It is our view that this is a deflection designed to take away focus from the real issues and challenges that our economy has in relation to power generation. We see it fit to respond to this unfortunate article which seems not to be well versed in appreciating the dynamics and pricing structure in the product market and how this is linked to product supply nominations..
“It is important, first, to provide context and dispel the misinformation that is being peddled in this article ... It is important to note that the contractual terms between PetroSA and Eskom are based on the basic fuel price (BFP) pricing mechanism,” the entity added.
The national oil company of South Africa said that this ensured that PetroSA sold diesel to Eskom in line with the M-1 BFP.
“Given that PetroSA has a thorough understanding of how the product market works, PetroSA engaged Eskom in October 2022 requesting the power utility to provide us with at least a three-months forecast for their demand for diesel. This was mainly due to the losses that PetroSA was suffering due to the erratic or spot nature of the nominations of product volumes from Eskom,” the company stated.
“The request for a three-month forecast from PetroSA was informed by Eskom’s increasing burn rate which clearly indicated that the power generation challenge was deepening.
“This meant that spot nominations would have been a thing of the past had the PetroSA request been acceded to and by implication would have led to better landed product prices resulting in both Eskom and the South African economy benefiting. In relation to the November 2022 supply to Eskom, PetroSA once again had prompt or spot demand from Eskom.
“This prompt demand resulted in PetroSA having to buy two spot cargoes that were not linked to M-1 pricing,” PetroSA said.
“The published BFP pricing in November 2022 was based on the preceding month which resulted in the pricing exposure. In relation to December 2022, PetroSA took a position in November 2022 and bought a cargo priced in November 2022 which would be aligned with the December 2022 published BFP.”
PetroSA said that Eskom did not purchase any volumes in December 2022 from the oil company, and only requested volumes in January 2023.
“This meant that PetroSA was now exposed to a flat price with a huge price exposure to a January 2023 published BFP. The January 2023 BFP dropped by 140sacpl and this drastic drop exposed PetroSA to heavy losses hence the price of volumes sold to Eskom were not aligned to the January 2023 published BFP,” PetroSA said.
“We make this point in relation to the two months to indicate the importance of providing a minimum 3 months forecast so that there is no pricing exposure and that volumes can be landed at the most favourable terms and price. There is no substitute for planning demand to produce a forecast when it comes to the demand side in the product market, otherwise spot prices will prevail. It is for this reason that PetroSA advises its clients that forecasting and planning are critical to ensure that cargo prices can be locked at favourable terms. We reiterate that we are under no obligation to share commercial terms entered into between PetroSA and its customers. It is also important to state that PetroSA and Eskom will continue working together to find amicable ways to reduce loadshedding which is caused by high levels of breakdowns and limited emergency generation reserves,” PetroSA further stated.
According to Yellend’s report, “Eskom paid R1.3-billion for this first tranche of 50-million litres of diesel, which translates to an extortionate R26.00 per litre – about R1.00 per litre above the retail pump price at which members of the public in Cape Town could fill up their car with just 50 litres of diesel.
At the time, the public was led to understand that in view of the deepening power crisis, PetroSA had supplied the diesel as some form of “donation”, while agreeing to resolve the issue of payment later after further negotiations between itself, Eskom and the government departments involved. But, in fact, Eskom had to pay upfront for the first emergency tranche.“
The report from EE Business Intelligence further stated, “On 6 January 2023, Eskom made a second procurement of 56-million litres of diesel from PetroSA for some R1.265-billion, which translates to a price of about R22.59 per litre – a more realistic 10% bulk discount off the retail diesel pump price in Cape Town.
This second tranche would enable Eskom to continue burning diesel at a relatively high rate, until close to the end of January 2023, according to sources within the organisation.
Then on 23 January 2023, the purchase of a third tranche of R1.5-billion worth of diesel was approved by the Eskom board, which Eskom has since begun burning. This was expected to last until the middle of February 2023, but at the current high burn rate, it will run out much sooner.“
BUSINESS REPORT