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Is South Africa heading to a gas-powered future?

The ambitious Integrated Resource Plan may struggle to convince investors and overcome vested interests. The reality could include a far greater dependence on gas than envisaged

The South African energy sector is in desperate need of investment and reform—with state power utility Eskom as its emblematic, dysfunctional centerpiece—while potentially transformative discoveries await development.

South Africa has a near-complete set of natural resources to exploit, from coal— which it already amply does—to recent vast discoveries of offshore gas and liquids, largely untapped solar and wind potential and possibly even unconventional hydrocarbon resource in its vast Karoo semi-desert. The first IRP update in more than a decade contains plans for coal, gas and renewables, and even a new generation of modular nuclear power plants.

South Africa is more than 70pc reliant on coal, at 86mn t oe, for its 121.5mn t oe primary consumption of energy: gas demand of 3.7 mn t oe also lags well below oil (26.3 mn t oe) and above only renewables, nuclear and hydro, according to the 2019 BP statistical review.

The IRP 2019 unveiled in October set out a generation mix overhaul to meet 2030 demand for its 57mn and growing, at 1.4pc pa, population. It aims to reconcile three key pillars—ensuring energy security, minimising costs and meeting environmental commitments. “The planning framework must be dynamic and updated regularly to keep abreast of new developments in the energy sector,” minister of mineral resources and energy Gwede Mantashe said in November at Africa Oil Week in Cape Town.

The IRP is particularly ambitious on renewables—6GW of new solar PV capacity and 14.4GW of new wind power. Just 1GW of new gas-fired capacity is planned to be installed by 2023, rising to 2GW by 2027.

85,000 Coal industry workforce

These commitments call, though, for large investments, and South Africa’s economy is faltering—contracting by 0.6pc in the third quarter, pointing towards recession. The budget deficit for 2019-20 has soared to 5.9pc and for 2020- 21 is projected to reach 6.5pc, a two-decade high.

In early November, ratings agency Moody’s changed the outlook for the government’s ratings from stable to negative and affirmed Baa3 long-term foreign and local currency issuer ratings. “It is not looking good for the kind of long-term sustained investment needed to make the IRP a reality,” says Indigo Ellis, Africa analyst at global risk consultancy Verisk Maplecroft.

The genuine commitment of Mantashe—known affectionately as ‘King Coal’—to alternative energy sources and technologies will be a key factor in the effectiveness of any changes to the generation mix. A radical shift from coal could also face opposition from the over 85,000 South Africans that work in the industry, as well as the three-quarters of the population who saw keeping power prices low as a priority in a recent energy ministry poll.

Mantashe maintains strong links with the unions (he is a former Communist Party chair) and mining industry and is expected to retain his current cabinet role for the foreseeable future. In his view, South Africa’s coal plants, with over 30GW of installed capacity, and abundant coal resources will “continue to play a significant role”. The IRP even provides for 1.5GW of new coal-fired capacity.

But South Africa’s ageing coalers already require substantial investment, and the list of potential backers is dwindling due to coal’s, albeit fully deserved, reputation as a pollution ‘bad boy’. The World Bank, and by association its International Financial Corporation (IFC), will not support coal projects and institutional investors are increasingly preoccupied with ESG metrics.

Mantashe maintains that “new investments will be directed towards [high-efficiency, low-emission] coal technologies, including underground coal gasification [and] carbon capture and storage to enable us to continue using our coal resources in an environmentally responsible way”. Perhaps, but, as decarbonised coal technologies are either ruinously expensive or unproven at scale, these solutions are “entirely pie in the sky”, says Ellis. “It is implausible, they are not in the financial position to be making any big investments of that kind.”

30GW Installed coal capacity

Nor do South Africa’s most recent coal plant construction projects inspire confidence. The Medupi power station, where construction started in 2008, is still not fully operational and is reportedly responsible for the periodic load-shedding. It needs fresh investment as it was built “incredibly poorly”, says Ellis. “It suffered from state capture.”

And, on its current economic trajectory, there is a very real possibility that the IMF will be called upon to prop up the South African government’s budget within two years. Its conditions would almost certainly include moving away from its overreliance on coal.

“Coal just does not have a future with regards to foreign investment, and South Africa does not have the capital to start investing,” says Ellis. “They will not be able to fund it themselves. Gas is where the future lies for power generation in South Africa.”

Mantashe does at least seem willing to consider gas options. Eskom operates 16 coal-fired power stations and “many of them are coming to the end of their lives and will be decommissioned or [receive an] extension of life”, he says. That lifespan extension could involve replacing coal turbines with gas turbines: “That would be welcome, because it would extend energy availability in an area where a lot of capacity is being turned off.”

Brulpadda bonanza

South African gas’ long-term future looks equally positive. Total and its partners announced the game-changing Brulpadda gas and liquids discovery off the Mossel Bay coast in February. Blocks 11B/12B of the Outeniqua Basin, covering 19,000km², were described as a “worldclass gas and oil play” at the time by the find’s operator.

At 175km out into heavy seas, Total will have to draw on all of its UK West of Shetland deepwater expertise. The conditions offshore Mossel Bay have scuppered previous exploitation ambitions. But the major—which has a 45pc stake together with Qatar Petroleum (25pc), Canada’s CNR international (20pc) and South African consortium Main Street (10pc)—is upbeat.

“You could not want more information from an exploration well,” says Enzo Insalaco, vice president of Africa exploration at Total told Africa Oil Week. “That data acquisition has really put us into a great position going forward to accelerate the next well and the evaluation.”

South Africa's Mineral Resources and Energy Minister Gwede Mantashe looks on during a news conference in Pretoria

The results were so positive that Total was “already negotiating contracts for 3D seismic” while drilling was ongoing, with shooting by mid-March and evaluation by June. Fast-tracking the process means that Total can drill fresh wells in early 2020. “I do not think you can compress that timeline any more given the given the operational constraints,” says Insalaco.

The rapid seismic acquisition “allowed us to optimise well placement, derisk the prospects and accelerate the whole programme”. Total will shoot follow-up prospects in early 2020. “We feel that the petroleum system is prolific and it is really [just] a question of finding the right place in the play to have follow-on success.” The seismic conducted on the Brulpadda blocks have given Total far greater insight into the geology of the wider Paddavissie Fairway play and its prospects. “There is clearly a lot of work to do to fully understand the geology and the potential of the block,” says Insalaco.

Barring the challenging marine conditions, development hurdles seem relatively low—the geology is proven, there is a waiting domestic market, infrastructure is already partially in place and the government has signed a memorandum of understanding (MoU) to give Total complete rights to operate. “I do not think there is much that could stop this project coming online,” says Ellis. It is too early to predict when FID will take place, but gas could start flowing in the mid-2020s.

The South African domestic market is the most commercially viable option, according to consultancy Wood Mackenzie. Given Brulpadda’s proximity to the Mossel Bay gas-fired power plant, it would have at least one anchor customer. And, even if Total wanted to consider LNG export options, it may well encounter regulatory issues.

“Gas is where the future lies for power generation in South Africa” Indigo Ellis,

Mantashe is “confident that this find will spur further interest in the upstream potential of South Africa” and is eager for further upstream development. But while Brulpadda should provide supply in the medium to long-term, South Africa will need to import gas in the meantime. Mantashe sees additional import potential from northern neighbour Mozambique’s major gas 85,000+ Coal industry workforce “Gas is where the future lies for power generation in South Africa” Indigo Ellis, Maplecroft finds, as well as from Tanzania.

The IRP makes provision for gas-fired power projects from 2024. “We intend to establish the first LNG hub in the Coega IDZ, in Eastern Cape province... Herein is an opportunity not only to invest, but to also help develop the gas industry in this country,” says Mantashe.

The Coega Special Economic Zone (SEZ) site will enable new gas-fired plants as well as the conversion of diesel plants to gas—and import feedstock for the Mossel Bay gas-to-liquids refinery—with a framework to support the programme to be announced shortly. Gas-to-power technologies will provide the flexibility required to complement intermittent renewable energy and meet demand during peaking hours.

“While, in the short term, the opportunity is to pursue gas import options, local and regional gas resources will allow for scaling up within manageable risk levels,” says Mantashe. “Indigenous gas like coal-bed methane and, ultimately, local recoverable shale and [offshore] gas are options we are considering.”

Mozambique connection

South African refiner Sasol has imported the bulk of gas currently consumed in the country via the Rompco pipeline from Mozambique since 2004. The 865km pipeline transports gas from the Pande and Temane fields to Sasol’s industrial customers, including the Secunda and Sasolburg petrochemical plants. However, as these fields age, it has warned of supply constraints from 2023.

State-owned logistics firm Transnet aims to tender in mid-2020 for South Africa’s first LNG import terminal at Richards Bay on the country’s east coast, backed by $2mn from the IFC, with a projected 2024 start date. Gas was found offshore Mozambique-Tanzania in 2010, with proven reserves shared two-thirds and one-third respectively. While Tanzania has progressed very slowly, FID on the $20bn Mozambique LNG project, based on a 75tn ft³ (12bn bl oe) discovery in northern Mozambique’s offshore area, was taken in June, and construction of the LNG facility commenced in August. Total, which will operate the facility once its acquisition of the stake held by US independent Anadarko prior to it being swallowed by fellow US indie Occidental completes, is targeting a 2024 start-up.

Also in Mozambique, the Rovuma Basin fields Area 4 are being developed by Italy’s Eni, which farmed out 25pc to ExxonMobil in 2017, with minority partners. It will initially build a floating LNG facility “which will go ahead pretty fast,” says Gregor Binkert, director of Beluluane industrial park in the country. “Then they will build huge LNG trains onshore in Palma. We are talking about a $50bn investment. Most of it will go to the world market, with long-term contracts signed with various Asian [customers].”

The Frelimo party’s continuing dominance Mozambique politics is benefiting IOCs, according to Ed Hobey-Hamsher, senior Africa analyst at Verisk Maplecroft. “In the October elections, Frelimo placed the delivery of offshore gas reserves and related onshore infrastructure at the heart of its campaign—an encouraging sign for a predicted mid-2020 FID for Area 4, and a projected oil exploration drive in the Angoche Basin.”

A consortium has ambitions plans to construct a $6bn, 2,600km pipeline dubbed African Renaissance from Mozambique’s northern gas fields all the way into South Africa. “There is a lot of debate whether it’s going to make economic sense or not,” says Binkert.

Mozambique is also considering a southern LNG import facility, but this could potentially help, rather than hinder, the pipeline concept. “If one builds up the demand side in southern Mozambique and South Africa [through temporary LNG import facilities], maybe the big investment of the pipeline could be justified. At this point, the market in South Africa is not big enough to justify the pipeline,” he adds.

African Renaissance is, though, “probably more of a pipedream” than other Mozambique investments, according to Hobey-Hamsher. “A more viable route to import Mozambican gas to South Africa is through a new shorter pipeline, plus use of spare capacity in the existing Rompco pipeline and an FPSO off Matola. This was made clear through the recent joint development agreement between Total and South Africa’s Gigajoule Power.”

“Indigenous gas like coal-bed methane and, ultimately, local recoverable shale and [offshore] gas are options we are considering” Mantashe, minister of mineral resources and energy

Mozambique’s LNG export commitments could also limit supply for any pipeline supply alternative. And it also has growing domestic generation feedstock requirements—it recently secured multilateral financing approval for a 400MW gas-fired power plant and transmission line to the capital Maputo. Another 400MW gas-fired station on the Mozambique side of the border with South Africa is up and running and feeding into the southern African grid.

South Africa could alternatively secure gas from the apparently unlikely source of northern Zimbabwe. Scott MacMillan, CEO of Australian independent Invictus Energy, the 80pc owner of the Cabora Bassa Project, says that his 250,000 acre SG 4571 license potentially contains the largest seismically defined undrilled structure onshore Africa.

Local demand, beyond an MoU between Invictus and fertilizer manufacturer Sable Chemicals for 70mn ft/d for 20 years, is unlikely to soak up supply, especially given Zimbabwe’s deep economic crisis. The country’s post-Mugabe leadership is business-friendly, says MacMillan, and fully supportive of the project; it has removed foreign ownership restrictions and offers special terms in its special economic zones. And “southern Africa is desperately short of gas”.

Another option could be to construct gas-fired power capacity in Zimbabwe and transport electricity, rather than gas, to its southern neighbour. Both Zimbabwe and South Africa are part of the 12-member Southern African Power Pool.

Eskom conundrum

If Brulpadda and other gas discoveries are going to play a big part in South Africa’s future generation mix, Total and other producers will inevitably have to bite the bullet of working with Eskom. Unfortunately, the firm “is a complete liability”, says Ellis. “It is a risky prospect for Total.”

Eskom is slated to be restructured into separate functions, including a split of its generation, transmission and distribution arms. But Mantashe scotches rumours that the unbundling may be a precursor to privitisation. “There has never been a decision to sell Eskom’s power stations,” he says, suggesting that speculation has arisen from suggestions in a previous white paper that never became policy.

“Eskom remains a state-owned company, 100pc owned. It is going to be unbundled and re-define the role of transmission… and the buying and selling of energy. The objective is not private ownership—the objective is for Eskom to provide reliability and security of energy supply.”

The government will, though, surely try to smooth Total’s path. “They will be begging Total to take this on,” says Ellis, suggesting that an agreement would be put in place to ensure that it will not be exposed to the risk of an Eskom collapse.

Total could further shield itself by spreading its demand profile across a wider slew of industrial customers. While the South African economy is faltering, manufacturing represents a superior credit risk, with a variety of industrial users, particularly around the Port Elizabeth area, including vehicle manufacturers and heavy industry.

Agriculture, at just over 20pc of GDP, is another a major sector of the country’s economy—and a potential demand source for gas-based ammonia and nitrogen fertilizers. Industry is “a more solid credit risk for Total than Eskom in isolation”, says Ellis.

The government supports domestic demand creation. “Most of our gas and petroleum on the continent is not consumed on the continent. It is exported to all other continents except Africa,” says Mantashe. “We must consume sizable amounts of what we produce, and export what is left. It cannot be the case that massive production goes everywhere else— that is called a ‘pit to port’ economy.” 

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