British oil giant Shell — which is preparing to sell its downstream interests in South Africa — intends to have non-binding offers by June and to conclude sale and purchase agreements by December for its 72% stake in Shell Downstream South Africa (SDSA).
It has appointed auditing firm PwC to conduct due diligence and prepare financial reports on its plans to exit the downstream business, which includes more than 500 service stations and forecourts.
Business Times understands that Shell is assessing potential bidders for the downstream business, including Trafigura — the world’s second-largest oil and gas trader — which owns Puma Energy; British oil company Prax Group; state-owned oil and gas company PetroSA; local energy and chemicals giant Sasol; Saudi state-owned oil company Saudi Aramco; TotalEnergies; independent oil and gas products supplier Oryx Energies; and the EG group, a network of service stations and convenience retailers across the UK and Ireland, continental Europe, Australia and the US.
Shell is believed to have had engagements with minerals & energy minister Gwede Mantashe and his trade, industry & competition counterpart Ebrahim Patel regarding its plans.
Shell confirmed that it had been approached by interested parties but would not divulge any further information.“Shell has been approached by several highly credible parties, which cannot be disclosed at this stage due to confidentiality agreements,” spokesperson Pam Ntaka said. “With regards to our stakeholder engagement, as a responsible company we take our communication and stakeholder engagement commitments very seriously and will always proactively communicate through the appropriate channels and forums, as and when required to do so.”
The company said it was divesting in the downstream business after a detailed review of its renewables and downstream businesses in the regions in which it operates.
Shell's relationship with Thebe is not the reason for Shell exiting South Africa
— Thebe Investment Corporation
“Shell has decided to reshape the downstream portfolio and intends to divest our shareholding in Shell Downstream SA. Considering SDSA’s illustrious history, this decision was not taken lightly,” it said in a statement released this week after the Sunday Times first reported on the matter.
A storm broke out over whether Shell was leaving South Africa due to investor fears of a possible post-election pact between the ANC and EFF and what impact it would have on economic policy.
However, observers have pointed out that Shell has been exiting its downstream business in markets around the world in favour of rolling out investments in charging stations and the adjoining forecourts business.
It is understood that the 22-year relationship between Shell and local black empowerment partner Thebe Investment Corporation — regarded as one of the most successful and transformative broad-based BEE associations in the country — hit rock bottom after Thebe’s proposal in August 2022 to exercise a put option and sell its 28% stake in SDSA.
But Thebe has disputed claims that’s the reason for Shell’s exit from the downstream business. “This is incorrect. Shell’s relationship with Thebe is not the reason for Shell exiting South Africa. Thebe Investment has recently been informed formally by Shell of their intention to exit the downstream business,” it said.
Still, the company confirmed there was a dispute between it and Shell, which it has referred for arbitration. When the partnership was signed in 2002, Thebe invested about $70m (about R1.2bn at the current exchange rate). It said that after reviews of its investment strategies and its portfolio landscape to meet long-term goals, its board had decided to “exit its investment with SDSA”.
The relationship between Thebe and Shell has been unsteady since 2015. Insiders said at the heart of the dispute was Shell having received almost $340m (R6.2bn) a year in management fees, while Thebe had received about $2m (R37m) in dividends over the same period.
It’s alleged that Shell only responded to Thebe’s notice to exercise its put option in March 2023, and came back with a different opinion on the valuation conducted by PwC. The auditing firm is said to have valued Thebe’s shares at R3.7bn, but according to insiders, after a back and forth between the partners, Shell reconstructed and changed all the numbers to arrive at a zero valuation.
“In their annual financial statements of June 30 2022, there was value; but five weeks later ... the value changed to zero. There was a back and forth. They have been stringing Thebe along because they knew that they wanted to leave the country ... This was planned — no-one wakes up and decides they are selling and are leaving,” the Sunday Times quoted an unidentified shareholder as saying in its story last Sunday.
Philip Short of Flagship Asset Management, whose company has invested in a number of international energy and oil companies, said it made sense for Shell to exit the downstream business in South Africa. “I spoke to Shell’s global investor relations team last year, where they emphasised their strategy and subsequent success in Europe with their electric vehicle (EV) charging station setup, along with the adjoining forecourts, and how they want to roll that out globally,” Short said.
“So, instead of taking your petrol/diesel car to get filled up, in Europe you take your EV car to recharge at a Shell, and as it takes a bit longer to charge an EV than it does to fill up with diesel, while charging you go into the forecourt and have a coffee, a snack and so on with the returns on the forecourt business being quite attractive.”
He said Shell’s strategy superseded any political and regulatory issues in South Africa. “Exiting South Africa makes sense, as [the country] is far behind the EV curve versus Europe, China and the US.
“Coupled with other challenges such as port and rail issues to transport product in South Africa, which could lower profitability, I can see why it makes sense for them to deploy capital elsewhere. Shell was quite specific in their EV forecourt strategy and perhaps other oil and energy companies don’t share that strategy, in which case they could be buyers of Shell’s SA assets,” Short added.
Exiting South Africa makes sense, as [the country] is far behind the EV curve versus Europe, China, and the US
— Philip Short of Flagship Asset Management
“It’s probably still an attractive business to be in considering that SA’s migration to EV technology is a long way off, thanks to Eskom’s inability to keep electricity flowing ... So yes, the names you mention could all be contenders,” he said.
“But there’s another factor here ... refinery capacity. As far as I’m aware there’s only one refinery left in SA that’s operational ... so it’s not necessarily just about the downstream. There may well be upstream issues to consider,” Gilmour added.
Independent retail analyst Syd Vianello said Trafigura would definitely be an interested party, alongside Sasol and the Saudis.
“Trafigura would be very happy to have a guaranteed market for refined fuel,” he said. “If they own the purchaser, obviously they’ve got a guaranteed outlet and they will be able to procure all the refined fuel that’s required to run the operation. The infrastructure is there, Shell downstream has the depots, the service stations, they’ve got everything, all you would need is a continuation of the business.”
Sasol could be a bidder because it has a relatively small footprint and would be able to combine its own downstream operations with those Shell is exiting.
“They can run a single business and cut a lot of costs out of the business and [still] be able to operate two individual brands,” Vianello said. “I don’t believe Total would be a buyer because it will never be allowed to operate the Shell brand in South Africa, given that they are competitors and they would have to convert everything to Total.
Vianello said Saudi Aramco had the experience of pumping fuel and refining it in that country. “They have expressed interest in establishing a refinery in Richards Bay, but nothing ever came of those discussions. Logically, if Saudi Aramco was really interested in putting up a refinery in Southern Africa then owning downstream would be very useful to them.”
The department of mineral resources and energy said Shell’s move reflected a reduced appetite for downstream businesses by oil majors globally. This “presents an opportunity for new local players, including small and medium enterprises, to participate in the downstream liquid fuels market which remains attractive”.
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