E3.2BN OIL RESERVE TENDER TO ATTRACT LEGAL CHALLENGES

MBABANE – The tender for the construction of the strategic oil reserve facility at Phuzumoya may be thrown into disarray.

The Eswatini National Petroleum Company (ENPC) has issued an invitation for the procurement of consultancy services for the development of an emergency petroleum product supply plan. This will include operation modalities for the strategic oil reserve facility (RFP No.10 of 2022/2023).  On the other hand, Kantey & Templer (K&T) Swaziland (Pty) Ltd has found another partner in Portugal that has agreed to undertake the project. The original tender was awarded to K&T. However, the agreement between this company and the Eswatini Government was terminated on the strength of a letter signed by former Principal Secretary in the Ministry of Natural Resources and Energy, Winnie Stewart. At the time of locking gates on the project site by the officials of the Ministry of Natural Resources and Energy in October 2017, K&T had received formal undertaking from Vitol Group, that it would finance the project. Vitol’s representatives had visited the country to meet the local company’s directors and government.

commodity

Vitol is a Dutch energy and commodity trading company that was founded in Rotterdam in 1966 by Henk Viëtor and Jacques Detiger. In its business profile, the company ships more than 350 million tonnes of crude oil per year and controls 250 supertankers and other vessels to move it around the world. Vitol has been operational for the past 55 years. Inyatsi Construction, subcontracted to K&T, had also done some work at a cost of E6.1 million. Inyatsi took K&T to court, demanding payment of the money. It must be said that K&T had accumulated a bill of over E10 million.The argument by the company was that how could it have not been working when Inyatsi completed some work there. K&T was engaged in 2014 to construct the facility, but its agreement with the Government of Eswatini was signed on April 5, 2017. In October 2017, the gates were locked. The agreement was to assist the company access finances for the project.

In a letter dated June 21, 2018, addressed to Stewart, K&T stated: “We note with concern the unlawful conduct by the ministry, which is in fact a violation of the signed agreements particularly on dispute resolution mechanism to be invoked by the parties.” Article 22.1 of the agreement provides that in the event of any dispute arising out of or relating to this contract or the ‘breach’, termination or ‘invalidity’ thereof, then any party may give written notice to other party to ‘initiate certain processes’. The agreement, which served as a contract, can be terminated by either party to initiate certain processes. In terms of Article 22.2, the parties shall first settle the dispute by ‘mediation’. Unresolved disputes are referred to the arbitrator in terms of the contract.

concern

Sources have raised concern that there was neither a mediator nor arbitrator that legitimised the termination of the contract by the ministry, on behalf of the Eswatini Government.
“The parties may agree on the mediation procedure and on the mediator and failing agreement within five days of the notice referred to in Clause 22.1. The mediation shall take place in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Model Conciliation Rules and the mediator shall be appointed as agreed to by all parties,” partly reads the contract that was terminated by the Ministry of Natural Resources and Energy through a letter. K&T and government had agreed that the appointing authority was to be the Association of Arbitrators (Southern Africa). “The number of mediators shall be one, and the number of arbitrators shall be one,” further reads the agreement. The parties agreed that the place of mediation and the arbitration shall be Ezulwini, Eswatini.

It has been established that K&T has not stopped working on the project behind the scenes. This is regardless of the fact that K&T directors are unable to access the project site at Phuzumoya in Siphofaneni since gates were locked in 2017. Sources said the local company received correspondence dated February 9, 2023, from BMT Portugal LDA in which the European firm expressed an interest of entering into a joint venture with K&T.

strategic

The proposed joint venture agreement which K&T sought from BMT is for the design, engineering and construction of the strategic oil reserve facility of 90 million litres storage capacity. The foreign company pledged to secure the project funding against the sovereign guarantee of about E900 million issued by the Government of the Kingdom of Eswatini. Regarding the ENPC, in its invitation for services, the depot will hold strategic fuel stocks of 40 million litres, the equivalent of 30 days of consumption. This will be accompanied by a component of commercial stocks to allow for refreshing of product. The ENPC stated that it would increase the capacity from time-to-time, depending on demand. Despite the reduction of the fuel capacity to 40 million litres, the estimated cost for the project has increased against the sovereign guarantee issued by the government (E900 million). The guarantee was for K&T, it has to be said.

The fuel storage completion costs are now estimated at E3.2 billion. Against the estimated E3.2 billion, K&T has no alternative but to stick to the E900 million mentioned in the sovereign guarantee. It has reportedly told its partners that the storage capacity would remain 90 million litres, the equivalent of three months of consumption. According to the ENPC, the 40 million litres of fuel will be an equal split of petrol and diesel.

commencement

It is stated in its invitation for services that the actual commencement of construction work at Phuzumoya is expected by mid-2023. “To date a lot of work has been focussed on developing and optimising the designs of the SFRF (Strategic Fuel Reserve Facility) to ensure that it is a feasible project,” reads the document. It is said that the energy sector plays a central role in the development of any country; hence it is critical for a State to have strategies to ensure security of supply.  Since Eswatini is a landlocked country, the ENPC says it is even more important for the country to have concrete plans to ensure security of supply and mitigate fuel supply disruption to protect its economy. While the oil industry can resolve some minor petroleum supply disruptions, the company is of the view that there is a need for government to help facilitate and coordinate response to severe and major supply disruption in an effort to protect the country’s economy. It is stated in the document that Eswatini holds no known reserves of oil, but sources her petroleum products from the international markets through South Africa and Mozambique. Most of the products are distributed from the commercial storage facilities in Matsapha.

limited

“Currently these commercial storage facilities are very limited in terms of security of supply with a volume corresponding to about 2-3 days’ consumption of petrol and diesel,” reads the ENPC’s document on the procurement of the consultancy services for the facility. The Petroleum Act of 2020 has put a 14-day stockholding obligation in terms of commercial stocks, to the oil companies. It must be said that a levy of 35 cents per litre is currently being imposed to the fuel price to finance the construction of the facility as well as for the purchase and storage of the strategic stocks. To ensure that the strategic fuel is always maintained in correct specifications, the ENPC has said it was critical for the government to clearly outline the operational modalities of the strategic facility. This may include specifying requirements to be imposed on the oil companies on the withdrawal of fuel from the facility while ensuring that adequate fuel reserves are always available. It is suggested that the private oil marketing companies may also be allowed to store their commercial fuel and be charged a storage fee as determined by the model under preparation. To enhance security of fuel supply, Section 78 of the Petroleum Act calls upon the government to develop an Emergency Petroleum Product Supply Plan, which will guide the emergency release of the strategic stocks and commercial fuel in cases of major supply disruptions in the country.

petroleum

Pertaining to the invitation for the consultancy work, the ENPC said it wants to develop an emergency petroleum product supply system. It said it wanted a system that would be appropriate for the domestic situation, so that the country is found to be ready to respond to severe petroleum supply disruptions affecting the local oil market. The plan should take into account the country’s oil market structure, petroleum legislation and regulations, political institutions, and the entire energy system. The consultant is expected to develop an operational modality of the strategic oil reserve facility at Phuzumoya. The modality shall set the minimum requirement for fuel to be drawn by the oil companies, while ensuring that adequate strategic fuel reserves are always kept for the country. The scope of work was expected to cover the following activities:
(a)     Identify and calculate the days of net import cover the country has through stocks held locally or other countries for logistical and emergency purposes based on short-term lease contracts.
(b)     Identify key players and their role in declaration of emergency status in the country in line with key legislations and regulations in the country.
(c)     Develop a detailed emergency petroleum response plan, taking into account response programmes and strategies such as prioritisation of fuel, rationing of supply, fuel sharing, strategic supply points, etc.

Sikelela Khoza, the Communication Officer at the Ministry of Natural Resources and Energy, said issues related to the fuel storage were being handled by the ENPC. The ENPC’s Chief Executive Officer, Nhlanhla Dlamini, however, felt issues related to the old contractor should be addressed at ministerial level.

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