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Can Brulpadda find deliver on high hopes?

Total has made what could be a major discovery in South Africa, but there is a long way to go before the commercial prospects become clear

Total's deepwater Brulpadda find offshore South Africa is being touted as the long-awaited energy discovery that could help transform the country's economy and hasten the demise of coal as a power feedstock. But, while it promises to bring in valuable revenues and much-needed gas supply, the wider impact may be less far-reaching than some are predicting.

In February, Total said it had opened up a "a new world-class gas and oil play" with a gas condensate discovery on its Brulpadda prospect on Block 11B/12B, located some 175km (109 miles) off Mossel Bay on the southern coast. The discovery could hold up to 1bn bl oe of gas and condensate light oil, according to Patrick Pouyanné, Total's chief executive.

Optimism over Brulpadda's commercial viability was bolstered because the exploration well not only encountered gas condensates in lower cretaceous reservoirs, but also found reserves lower down in a secondary target, the Brulpadda-deep prospect.

Since then, marine geophysical firm Polarcus has been contracted to carry out a 3D seismic survey over the Paddavissie Fairway area of the block to help firm up further exploration targets. That is due for completion by the end of April.

Total hopes to drill up to four more wells in the next southern summer, at the turn of 2019/20, when the often-hostile weather and ocean conditions in the area are likely to be at their most benign. That drilling campaign should provide a clearer idea of the potential scope of any development.

Homegrown demand

Unusually among sub-Saharan African countries, South Africa has a viable ready-made domestic market for the natural gas in the shape of national hydrocarbons company PetroSA's gas-to-liquids (GTL) plant in Mossel Bay. This receives gas from other fields closer to shore, but that supply is running out. Not far away are petrochemicals plants and other industrial users around Port Elizabeth, providing another potential market-and there is possible future demand from the power sector.

The opportunity to sell gas from Brulpadda to the local market, rather than ship it overseas via a multi-billion-dollar LNG export facility, will be attractive to Total and its partners, given the complex and costly drilling programme.

Garrett Soden, chief executive of independent producer Africa Energy-which holds a 4.9pc stake in Block 11B/12B via its stake in local entity Main Street-says the Mossel Bay GTL plant may require Brulpadda to supply its full feedstock capacity of some 200mn ft³/d by the time any development comes on stream.

The GTL facility operates at just a third of its capacity because the fields supplying it can only produce some 65mn ft³/d and continue to decline. Meanwhile, a nearby power plant, currently reliant on costly diesel, could also provide an additional 100mn ft3/d of gas demand, if it switches fuel.

"You could have ready nearby demand of 300mn ft³/d of natural gas here at attractive prices. The GTL facility is buying at approximately $7/,000ft³and power generation facilities could probably pay $10/,000ft³ to replace diesel," he tells Petroleum Economist.

Gas-to-power prospects

Whether the Brulpadda discovery could lay the foundations for a surge in gas demand from the wider South African power sector, should further discoveries be made, is uncertain. The government has been pushing renewables as a green and increasingly cheap alternative to the domestically produced coal, on which it relies for more than 80pc of its power, via its renewable energy IPP programme.

"The price of electricity generated through solar and wind can now actually be cheaper than baseload coal. It is certainly cheaper than gas-based power," says Neeraj Mense, an African energy sector expert for consultancy Frost and Sullivan. He believes the higher cost may prevent domestically produced gas from making big inroads into the South African power market as a baseload feedstock, though it may have a role in peaking plants.

Others question whether wind and solar make economic sense in South Africa; but the government aspires to a sharp increase in renewable energy levels and-at least prior to the Brulpadda find-only a modest boost in the use of gas.

The government's integrated resource plan, unveiled in 2018, envisages the addition of 8GW of gas-fired power generation based on imports by 2030, tripling existing capacity. That would account for 16pc of the generating mix in 2030 compared to 44pc provided by 34GW of coal-fired generation and 25pc from solar and wind combined.

The new discovery may yet prompt a revision, but the appetite for a widescale transition to another fossil fuel may be limited by the time Brulpadda comes on stream-that looks unlikely to be before the late-2020s, even if its potential is firmed up in the coming months.

Contemplating condensates

Doubt over the potential for future gas-to-power demand may not weigh heavily on considerations of Brulpadda's commercial viability, so long as sales deals with the GTL plant and industrial users can be tied up. But the Total-led consortium will also hope that the condensates element of the find will prove significant, as a means of reassuring investors of its profitability.

"The value is also in the liquids and being able to sell them either to the domestic or international market," says Soden , noting that condensate sells at a premium of about $2/bl compared to the Brent benchmark. "We should be able to separate the liquids and supply local gas demand." He adds that analogous fields, such as the nearby Sable oil and gas field, have produced high condensate yields of about 115bl/mn ft³.

Still on the frontier

Even if the forthcoming drilling campaign has positive results, these will not necessarily translate into a stampede to drill more widely in South Africa.

ExxonMobil, Eni and Norway's Equinor are among the heavy hitters with interests in South African offshore acreage, but none has carried out drilling recently. The Brulpadda well is the first to be drilled in South Africa's deepwater acreage since Total's previous attempt to drill on the same block in 2014 was called off, due to the inability of the rig used then to handle difficult metocean conditions.

The Outeniqua basin has long been regarded the most promising offshore play, given the nearby existing discoveries that supply Mossel Bay. But those holding acreage elsewhere in offshore South Africa are operating in separate basins with differing geology.

Source: Petroleum Economist

So, while licensees can point to some promising plays on their acreage, Brulpadda, in itself, does not do much to de-risk their prospects of finding hydrocarbons-even though it could establish valuable mechanisms to sell any discoveries into the local market

Legislative vacuum

South Africa could still benefit from the resurgence of interest in frontier acreage on the back of the recent oil price recovery. But a continued lack of clarity over the future fiscal framework governing the offshore sector will not encourage investors who have a growing list of other oil and gas provinces to invest in around Africa and elsewhere.

"It is only Total that has stepped forward to drill an offshore well recently, because of the lack of clarity on the legislative side to allow the long-term planning needed by oil companies," says Jon Lawrence, an African energy analyst at consultancy Wood Mackenzie.

The implementation of laws governing future licensing terms was delayed last year for further government perusal and now probably will not happen until well after the 8 May general elections. A temporary moratorium on the issuance of new licences was imposed in 2018.

The buzz created by the Brulpadda discovery may increase pressure on the government to tighten terms and boost its take from future licensees; but this could backfire if it deters investors.

"it's important to remember that South Africa remains a frontier province in terms of exploration, and the fiscal terms probably still need to reflect that," Lawrence says.

Total has a permit to explore on Block 11B/12B until 2022, but still needs to negotiate terms on the exploitation of reserves with the government. Lawrence says coordinating hydrocarbons sales into the domestic market could be Total's biggest challenge if it is to maximise the development's potential.

"I think the project is likely to be commercial, just selling into the domestic market. But if Total wants to use more than one of the commercialisation streams-GTL, industrial or power-it will be beneficial to align those contracts. That means successful negotiations with multiple parts of the South African legislative and regulatory apparatus," he says.

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