THE HIGH COURT OF SOUTH AFRICA (WESTERN CAPE DIVISION) JUDGMENT Case No: 4305/18 In the matter between CENTRAL ENERGY FUND SOC LTD FIRST APPLICANT SSTRATEGIC FUEL FUND ASSOCIATION SECOND APPLICANT NNPC and VENUS RAYS TRADE (PTY) LTD FIRST RESPONDENT GLENCORE ENERGY (UK) LTD SECOND RESPONDENT TALEVERAS PETROLEUM TRADING THIRD RESPONDENT DMCC CONTANGO TRADING SA FOURTH RESPONDENT NATIXIS SA FIFTH RESPONDENT VESQUIN TRADING (PTY) LTD SIXTH RESPONDENT VITOL ENERGY (SA) (PTY) LTD SEVENTH RESPONDENT VITOL SA EIGHTH RESPONDENT MINISTER OF ENERGY NINTH RESPONDENT 2 MINISTER OF FINANCE TENTH RESPONDENT Coram: Rogers J Heard: 14-16 September, 23 October 2020; supplementary submissions on 10 November 2020 Delivered: 20 November 2020 (by email to the parties and same-day release to SAFLII) 3 JUDGMENT _____________________________________________________________________ Rogers J Introduction [1] This case is about the sale, in late 2015/early 2016, of South Africa’s strategic stock of 10 million barrels of crude oil for about $281 million. The seller was the second applicant (‘SFF’), which is a wholly-owned subsidiary of the first applicant (‘CEF). They are public entities listed in Schedule 2 of the Public Finance Management Act 1 of 1999 (‘PFMA’). They seek the review and setting aside of the decisions to sell the oil and of the ensuing transactions. [2] The oil is 5 million barrels of Basrah Light (‘Basrah’, an Iraq oil) and 5 million barrels of Bonny Light (‘Bonny’, a Nigerian oil). Basrah is less valuable than Bonny because it is heavier and has more sulphur. SFF has six underground storage tanks at Saldanha Bay with a combined capacity of 44,4 million barrels. The strategic stock was stored in Tank 2 (Basrah) and Tank 6 (Bonny). [3] SFF sold 3 million barrels of the Bonny to the first respondent (‘Venus’). Venus immediately on-sold it to the second respondent (‘Glencore’). [4] SFF sold 2 million barrels of the Bonny and 2 million barrels of the Basrah to the third respondent (‘Taleveras’). The fourth and fifth respondents (‘CTSA’ and ‘Natixis’) financed Taleveras’ acquisition of the oil. This was done by way of an on-sale of the oil by Taleveras to CTSA coupled with a repurchase obligation. (For convenience, I shall refer simply to CTSA, save where separate reference to Natixis is needed.) [5] Finally, SFF sold 3 million barrels of the Basrah to the sixth respondent (‘Vesquin’). Vesquin is a subsidiary of the seventh respondent (‘Vitol Energy’) which is in turn controlled by the eighth respondent (‘Vitol SA’). Vesquin kept the oil. (Save 4 where it is necessary to distinguish between them, I refer to the sixth to eighth respondents collectively as ‘Vitol’.) [6] The sale agreements (SPAs) were coupled with storage agreements (SGAs) in terms whereof SFF would continue to store the oil in Tanks 2 and 6. The oil was still in these tanks when the applicants repudiated the transactions and gave notice that they were bringing review proceedings. Recently SFF pumped the Basrah from Tank 2 to Tank 5. Subject to any relief the applicants may be granted, the current owners of the oil are (or were until recently) Glencore (3 million barrels of Bonny), CTSA (2 million barrels of Bonny and 2 million barrels of Basrah) and Vitol (3 million barrels of Basrah). I say ‘until recently’, because Vitol cancelled its contracts with SFF in June 2020, the practical effect of which is that it has abandoned its oil with a view to claiming damages. [7] The ninth respondent is the Minister of Energy (‘MoE’). The tenth respondent is the Minister of Finance (‘MoF’). They do not oppose the application and have not participated in the proceedings. The Organisation Undoing Tax Abuse (‘OUTA’) was admitted as an amicus curiae without opposition. [8] Venus has not participated in the proceedings. Glencore, the party to whom Venus on-sold the 3 million barrels of Bonny, opposed the application and filed affidavits. During the course of the hearing, the applicants and Glencore came to terms reflected in a draft order. The result is that counsel for the applicants and Glencore did not address me on the merits of Glencore’s opposition or on its contentions about just and equitable relief. [9] Taleveras does not oppose the review but filed ‘explanatory’ affidavits, the thrust of which is that it has accepted an offer, allegedly made by the applicants in their affidavits, to refund the purchase price and storage fees plus interest. CTSA opposes the review and contends that if restitution is to be made the money should go to it, not to Taleveras. 5 [10] Vitol, like CTSA, opposes the review. In June 2020 Vitol cancelled its contracts with SFF on the basis that it would pursue a claim for damages. It thus no longer lays claim to ownership of the Basrah which it bought. In this respect it differs from CTSA, which continues to assert ownership of the 4 million barrels it bought from Taleveras. Glencore’s formal position on the papers is the same as CTSA’s, namely that it is the owner of the 3 million barrels of Bonny which it bought from Venus. [11] Various supplementary affidavits were delivered. At the start of the hearing the parties agreed that all such affidavits could be received and form part of the record. [12] In their replying affidavits the applicants sought to amend their notice of motion. There was no objection, and the amendment was granted. The applicants’ counsel clarified that the omission, from the latest notice of motion,1 of a reference to just and equitable relief was an oversight. Accordingly, the latest notice of motion must be read together with paras 9-11 of the previous notice of motion.2 [13] A point to make at the outset is this. Large volumes of crude oil are traded globally every day. Currently global demand is about 100 million barrels a day.3 During 2015 South Africa imported 140 million barrels.4 Although a global crisis could have left South Africa short of oil (hence the need for strategic stock), no such shock has occurred since the impugned disposals. Success for the applicants does not mean that the country will retain a strategic stock of oil which would otherwise be forever lost; it just means that SFF gets to keep the oil it sold rather than having to replenish it at potentially higher prices. Oil terminology [14] Crude oil is normally sold with reference to a benchmark price. In the present case, Brent (more specifically Dated Brent) was the benchmark. Brent represents a basket of North Sea oils. It is the main benchmark against which crude oil is priced. 1 At 5208 2 At 6. 3 Jago para 4.27 at 4118. 4 KPMG report para 1.2.2 at 1305. 6 Brent prices are published daily by S&P Global Platts. Published prices on any given date differ according to delivery date. Dated Brent is the FOB price for prompt delivery (10-30 days hence). Prices for more distant delivery (forward prices) may be higher or lower than Dated Brent. These prices stretch several years into the future. Future- delivery oil is actively traded on the Intercontinental Exchange (‘ICE’) . [15] A typical pricing formula would refer to the average of Dated Brent over a specified number of days following some relevant future event, eg bill of lading or in- tank transfer (‘ITT’). (I refer to this as the pricing window.) Where the subject oil is inferior or superior to Brent, the parties would agree a discount or premium to Brent. [16] On any given day, the prices published for a range of future Brent delivery dates can be represented as a line (curve) on a graph, starting with Dated Brent on the left. The price (or forward) curve for future delivery may slope upwards (indicating that today’s prices for future delivery are higher than today’s prices for prompt delivery) or downwards (the opposite). Each new trading day has its own forward curve, because Dated Brent and its forward prices on a later date may turn out differently from those that were predicted by the forward curve on an earlier date.5 [17] When the forward curve is sloping upwards, the market is said to be in contango. When it is sloping downwards, the market is said to be in backwardation. In a contango market, traders may wish to buy prompt-delivery oil (at lower prices), store it, and sell it when the market reaches the higher prices predicted by the price curve. This is called a contango strategy or contango play. For the same reason, operators with storage space can expect to maximise their storage fees in a contango market, since this is when contango traders are looking for storage. [18] During 2015 and until August 2017 the oil market was in contango. In the present case, Glencore, Taleveras and Vitol were engaged in a contango strategy. Because the forward price of oil in December 2015/January 2016 was higher than the 5 The three-year forward curves of the contango market as at 15 and 28 December 2015 and 15 January 2016 are shown at 5301. 7 current price, they bought the oil at relatively low prices, expecting that the market value would go up. If this happened, a point might be reached when the market switched to backwardation, so that current prices were higher than forward prices. Once the market was in backwardation, it would no longer make sense to store the oil. The traders would thus uplift and sell the oil, anticipating to do so in a way that covered the original purchase price and the storage fees and still leave them with a profit (their ‘contango premium’).