Hitting the gas in South Africa

Policy and projections

South Africa’s intention to expand the role of LNG in its energy mix is reflected in the country’s Integrated Resource Plan (IRP), which was published in October 2019. The IRP envisages the creation of an additional 8,100MW of gas- and diesel-fired generation capacity by 2030 in order to support energy security. This capacity is expected to make up the shortfall caused by the delays to the completion of the mega coal-fired power stations Kusile and Medupi, and the future decommissioning of other existing power generation facilities as they reach their end-of-asset-life in the coming years.

The first steps towards achieving this target could be prompted by two ministerial determinations for the procurement of new electricity generation capacity (published by the minister of mineral resources and energy under section 34 of the Electricity Regulation Act). The first determination provides for the procurement of 2,000MW of capacity via the Risk Mitigation Power Procurement Programme (RMPPP), in order to bridge the short-term supply gap previously identified in the IRP. The release of the RMPPP bid documents is expected to be imminent.

The second determination, which is still under consideration, concerns the procurement of 11,813MW of new generation capacity, of which 3,000MW must come from gas- and diesel-fired power plants.

8,100MW – New gas- and diesel-fired generation capacity by 2030.

The South African government announced that it has selected the Coega Special Economic Zone (SEZ) (and the adjacent port of Ngqura) situated in the Eastern Cape for development of the nation’s first LNG import terminal, as well as a new gas-to-power plant. Creative technical solutions will be required to utilise the port, as there is a risk of traffic congestion and related challenges due to difficult sea conditions in the area outside the port.

Domestic production and processing

South African NOC PetroSA is the primary producer of indigenous natural gas in South Africa. Its offshore producing gas field is located in the Bredasdorp basin and is used as feedstock for its gas-to-liquids refinery in Mossel Bay.

As this field is depleting the planned LNG hub at the Coega SEZ could act as a base for the import of additional feedstock. The cabinet has announced the planned merger of PetroSA, the Strategic Fuel Fund and gas development company iGas into a single entity to drive efficiency among the subsidiaries of the Central Energy Fund, the government’s energy sector holding company. It is unknown when this merger will take place.

Renergen, a local company listed on three stock exchanges (South Africa’s Johannesburg Stock Exchange and the A2X as well as Australia’s ASX), is the only other local producer of natural gas. Renergen utilises onshore wells at its Virginia Gas Project in the Free State, which is also reportedly the site of the world’s richest helium deposits.

Renergen is the first company in South Africa to build a small-scale onshore LNG plant. It intends to monetise its LNG by developing 12-18 LNG filling stations across South Africa by 2023. Renergen has signed a deal with Total under which the French major will rebrand two of its filling stations on the N3 national route between Johannesburg and Durban as LNG outlets. The LNG sold at these filling stations would be exclusively for the use of trucks and buses, and will reportedly cost 15-25pc less than diesel. The first phase of the project is planned to supply 400 trucks from 2021, with the second phase supplying approximately 3,000-5,000 trucks from 2023.

Further exploration for natural gas is also underway. Offshore exploration by Total over block 11b/12b resulted in the Brulpadda gas condensate discovery in early 2019. This discovery, the first of its kind made in extreme deepwater conditions offshore of South Africa, has the potential to be a game-changer for the country.

Despite ongoing regulatory uncertainty and logistical challenges posed by the pandemic, Total is set to proceed with drilling operations using the Deepsea Stavanger platform, which has now completed its voyage from Norway to Cape Town. Total’s drilling operations in block 11b/12b will be watched with anticipation by all stakeholders.

The minister of mineral resources and energy has delivered on his promise to separate the upstream oil and gas industry from the mining and minerals industry, and the draft Upstream Petroleum Resources Development (UPRD) Bill was published on 24 December 2019. On 3 February 2020, the minister said that the government “remains committed and continues to work with the investor community on improving our regulatory framework”.

Although delays to the UPRD Bill have been exacerbated by Covid-19, it is hoped that it will be signed into law early next year. It is expected that more licence-holders will commence drilling activities once the long-outstanding UPRD Bill is enacted and regulatory certainty is improved.

Cross-border cooperation

Mozambique will serve as the second-largest LNG producer in Africa after the completion of various ongoing projects, and it has the potential to become the third-largest global LNG exporter after Qatar and Australia. To put this into perspective, the combined production capacity of Mozambique’s Area 1 LNG Project, the Rovuma LNG Project, and Coral South FLNG Project would equal 81pc of all African LNG exports in 2018.

The new ground being broken by international energy companies shows that the private sector recognises the potential of a natural gas enhanced economy in South Africa.

Due to its limited domestic production, South Africa imports the majority of its natural gas from Mozambique via a transmission pipeline. This pipeline is owned by the Republic of Mozambique Pipeline Investing Company (ROMPCO), which has been set up as a joint venture comprised of iGas, Mozambique’s Companhia Mocambicana de Gasoduto and South Africa’s Sasol. Sasol has announced that it will divest some of its interest in the ROMPCO pipeline and is inviting binding bids. It remains to be seen whether the Central Energy Fund or any other of the South African state-owned companies will submit a bid to Sasol.

The ROMPCO pipeline conveys 240mn GJ/yr from the Pande and Temane gas fields in Mozambique to Sasol’s facility in Secunda, South Africa. However, it has been reported that these ageing fields will begin to be depleted from 2024, which poses a risk to Sasol’s operations in Secunda. In anticipation of this, Mozambique’s Matola Gas Company, in partnership with Total, recently announced the construction of an LNG terminal in Mozambique’s Port of Matola. It has been reported that LNG will initially be imported from the international market and will later be replaced by LNG produced from gas reserves in Mozambique’s Rovuma Basin.

Construction of the Matola terminal, a $300mn investment, is expected to begin in 2021. The project will include a floating storage and regasification unit moored in the harbour and a gas-to-power plant that will be connected to South Africa’s gas network. The Matola power plant is well-situated to alleviate some of the ongoing concerns around South African energy security, given its proximity to the country.

Conclusion

The new ground being broken by international energy companies shows that the private sector recognises the potential of a natural gas enhanced economy in South Africa—and companies have already started to position themselves to utilise this opportunity.

There are many opportunities for continued growth in the sector under the right circumstances. Stefano Marani, Renergen’s managing director, said: “This part of the world enjoys a unique geology which lends itself well to unconventional gas onshore. Offshore there is no doubt South Africa might be endowed with large natural gas reserves, and collectively this has the ability to reduce South Africa’s reliance on importing refined product from other countries, which naturally means more jobs and an improvement to South Africa’s balance of payments. It simply needs a more business-friendly environment with a defined framework.”

It is encouraging that the IRP is in place and that the UPRD Bill is on its way to becoming law. Once other government policies such as the Gas Master Plan are fast-tracked, the development of the budding natural gas sector could help South Africa to transition away from its reliance on coal.