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South Africa and Venezuela oil experiment on a slippery slope

Africa's largest petrochemical company says its black empowerment scheme has failed and that it's unable to pay fund debt.

Sasol says it has been forced to restructure its black empowerment fund, Inzalo, in favour of relaunching a scheme based on what it called “lessons learned” from mistakes made.

Sasol Inzalo, which was launched in 2008 by Sasol, was touted as a 10-year investment, which was structured on the back of high oil prices. When the scheme launched, oil was more than $100 a barrel, but is now languishing at about $50 a barrel.

The new scheme is called Khanyisa and Sasol says it will draw on what the company has learned over the past few years in order to ensure its success. In a statement on the JSE Sens news service it said it's looking at new ways to fund the debt and future scheme.

“Sasol is now undertaking to explore, in consultation with the external banks and Inzalo FundCos, different funding options to settle the relevant financing obligations,” it said.

“Sasol will therefore no longer pursue the preferred funding option, as described in the first announcement, of issuing up to 43-million ordinary shares through an accelerated book-build process.”

Sasol says its intention is to mitigate the amount of shareholder dilution while still maintaining Sasol’s investment grade credit rating. The full plan will be available in early 2018.

Khanyisa's ownership structure is intended to achieve about 20% direct black ownership in Sasol South Africa for a period of up to ten years, while linked directly to Sasol’s assets in South Africa. The company has interests in the US and Malaysia.

Inzalo has four elements comprising the Sasol Inzalo employee trusts, the Sasol Black Economic Empowerment shareholders, the Sasol Inzalo Groups funded element and the Sasol Inzalo Foundation.

The issue at stake is that the black empowerment or BEE scheme matures in 2018 which also means the debt and expenses need to be repaid.

But Sasol’s statement on October 9 2017 indicates this won’t be possible as Inzalo was financed by third-party debt through financial institutions.

Sasol had fixed its interest on the debt at the inception of the scheme, which it now says was a mistake because South Africa’s interest rates declined over the period between 2008 and 2017.

Internal debt will be written down according to Sasol, and will repay banks until all debt is serviced.

It says no value will be distributed to Inzalo’s shareholders at the disbandment, because of the external debt.

Inzalo's share price never recovered and also did not grow significantly, still trading at the same margins as in 2008. When the scheme started out, Sasol was trading at more than R400 a share, and Sasol offered the shares at a discount, costing R366.

Sasol is a state-owned company which was launched during Apartheid when it became clear that the government of the day would find it difficult sourcing oil.

South Africa has a wealth of coal reserves and the National Party government at the time launched a world first oil-from-coal company.


Venezuela faces oil price hardship

The price of oil has also affected Venezuela’s experiment of using its oil reserves to spread wealth among its population.

In the South American nation's case, the attempt at social engineering on the back of a single commodity has been far more destructive.

Venezuela relies on oil for more than 95% of its exports and revenue from the commodity has dropped precipitously. The country owes more than $120bn to foreign creditors and must make a payment of $7bn by the end of 2017.

There are fears that the country may default on the payment as oil prices remain in the $50 per barrel mark.

When Hugo Chávez launched his socialist revolution in 2002 he fired most experienced workers in the industry and rehired party members. Chávez was banking on the oil price continuing to rise, and some analysts at the time suggested it was set to go beyond $130 per barrel.

But the price of oil halved leading to 500% inflation by the end of 2016 and the collapse of the economy.

Venezuela’s population poverty rate has risen to over 75%, according to the World Bank, and the country is technically bankrupt.

In 1996, Venezuela was one of the very few countries in the world where per capita income was lower than it was in 1960, and its reliance on oil led directly to a drop in basic food production.

In 1999, Venezuela launched its new constitution, written by Chávez’s supporters, who ensured that the oil industry in the country was state owned, in an attempt at overturning what they say was a neo-liberal move to run the country.

But the reality is that the country, which is blessed with the world's largest oil reserves, is unable to refine oil and must import fuel from neighbouring states as well as the US.

It is used as a good example of what is known as Dutch Disease, where the reliance on a single commodity or industry leads to the direct decline in other sectors.

In Venezuela's case, its oil reliance has led to manufacturing and agriculture shrivelling.

The country's foreign debt is partly owned by the state-owned oil company, PDVSA. If the company is unable to service its debts, Venezuelan government officials fear the default will cause it to face lawsuits by bondholders. The state-run PDVSA has overseas assets including in the US, where it owns Citgo Petroleum Corporation, based in Houston.

This entity, in turn, owns dozens of fuel stations as well as oil storage depots and other capital goods which could be seized by bondholders as collateral.

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