Dave W. Wright – Secretary General, South African National Energy Association (SANEA)
Dave Wright, secretary general of the South African National Energy Association (SANEA), shares his thoughts on the developments and challenges of the South African energy sector in the past few years, the country’s need to develop a gas infrastructure as well as South Africa’s upstream potential.
Dave, having been Secretary General of the South African National Energy Association (SANEA) for over three years, what have been some of the highlights within the South African energy sector?
“South Africa has great potential! The offshore sector has not been explored very well and there ought to be ample opportunities for investors.”
Unfortunately, it is my view that the energy sector in South Africa has stagnated in the past five years. We have not taken the opportunities that have presented themselves, as a result of the low oil prices in preparation for the longer term when the oil price does pick up. For instance, we should be looking to make our policy environment more attractive for E&P activity, where we have huge potential in the offshore sector.
I do not think we are receiving the government leadership needed in order to build the sort of enabling environment that industry wants to see. For instance, within E&P, the regulatory framework is outlined under the Mineral and Petroleum Resources Development Act (MPRDA), under the Department of Mineral Resources (DMR). As a result, the approach that has been taken has been very mining-based, and the initial draft made it very unattractive for investors. There has been a tacit agreement within the government that petroleum regulations need to move to the Department of Energy (DoE) in the long term, but this has not been done – and our upstream licensing body, the Petroleum Agency of South Africa, has just moved from the DoE to the DMR! A new version of the MPRDA was supposed to have been approved by end-2017 but this has now been postponed to 2018.
As you are undoubtedly well aware of, as long as there is policy uncertainty, investors will not come and invest in E&P. The oil and gas industry requires certainty for ten, if not twenty years! Clarity is especially important right now with low oil prices as people are very particular about their exploration investments.
Another element within the upstream debate is our shale gas potential, which is nothing like the 400-plus tcf that it was initially purported to be. A recent study has suggested that there is around 10 to 15 tcf – which is still a good resource that should not be sneezed at! However, the study has also suggested that it could be difficult to extract. What these studies really demonstrate is that there is a lot more work to be done in terms of obtaining baseline understandings of the geology, water table impact, and so on. Again, there has been no leadership or drive to lay out a coherent plan. What we ought to do is encourage companies to drill more holes in the ground to determine whether we can actually access and develop this resource in an environmentally sustainable fashion.
There is a logjam – all along the value chain – which can only be broken by government leadership. Individual oil companies are constrained by the policy environment.
What changes would you like to see within the regulatory environment to fully develop South Africa’s potential in both the upstream and downstream sectors?
As mentioned in my previous response, the critical development needed in the regulatory environment to develop South Africa’s E&P is the approval of the MPRDA. I understand that the conditions that are now in the latest draft of the MPRDA are more likely to make exploration in South African offshore and onshore acreage more attractive to Upstream Oil companies than the initial draft.
Also as mentioned previously, timing is critical because if oil prices start to lift significantly then exploration activity will increase and it will go to the regions which are ready and offer attractive or reasonable conditions to those that explore.
There is an Integrated Energy Plan (IEP) – and the most recently approved version is based on 2010 data. We are awaiting a new draft that was meant to be approved by the end of 2017. First and foremost, the government needs to provide a supportive regulatory and policy environment.
As an example, South Africa has been facing a clean fuels conundrum, where the drive for cleaner, better-quality fuels has not been environmentally-driven but by the automotive industry, who wants to utilize the best engine technology from their parent companies. In 2012, they pushed to move us from our current Euro 2 level to the Euro 5 level. However, given the existing downstream regulatory environment, there is no mechanism for refineries to recoup the investment needed to make that change – which, based on 2010 data, was estimated at around USD 5 billion. The industry engaged with the government to explain the problem and essentially proposed that there needs to be some cost recovery mechanism. Nothing was provided and therefore no progress has been made.
In the same vein, the government has also expressed the desire for a new refinery since 2008, when a proposal was put forward for a new 400 tbd refinery in Coega near Port Elizabeth. Having looked at the numbers myself, I do not think this was economically viable. New refineries being built globally are located next to the wellhead and with huge capacity. I suspect a new 400 tbd refinery in South Africa will negatively affect the economics of a few of the existing refineries resulting in them shutting down. I think there is a lot of confusion within the industry; for instance, the proposed IEP assumes that the PetroSA and SASOL (the synfuel producers) will shut in the planning period (2016 – 2050) but all other refineries will continue to exist, with some new crude refining, CTL and GTL capacity added to the mix. What is missing in the entire debate is a coherent national vision.
Another hot topic is the question of diversifying South Africa’s energy mix given that 70 percent of its energy comes from coal at the moment. How much progress has been made?
With the implementation of the Renewable Energy Independent Power Procurement programme (REIPPP) over the last few years, we have seen a small shift (less than 10 percent) away from coal-generated power. This was a good start but uncertainty has now been created in the programme due to the reluctance of Eskom to sign the PPAs (power purchasing agreements) for the projects in the latest rounds.
To provide some context, the IEP is the overall energy plan encompassing all energy sectors. There is also an Integrated Resource Plan (IRP), which is a subset of the IEP specifically for the electricity sector. Importantly, it legislates what generating capacity can be built and in what timeframe. The output of the current draft IRP developed by the DoE shows a further shift away from coal-generated power, with more RE, gas and nuclear brought into the mix. Unfortunately there were various constraints imposed on the model when the DoE ran it for the draft IRP and the least cost option was not developed. The Council for Scientific and Industrial Research (CSIR) Energy Centre has run the exact same model under the same conditions but with no constraints and in the lowest cost output mode. The results show that the future generation capacity should all be solar PV, wind and gas.
In order to bring gas into the mix, given that at present there is no local gas resource to access, and given the global low prices of gas, the approach would be to import LNG.
Most of the Eskom coal generation fleet is due for retirement from around 2022. Now, this aligns very well with the lead time required for LNG infrastructure to be developed. With gas prices being so low now, it is the perfect opportunity to do this. I think there has been a poorly made assumption that we will receive access to Mozambique gas, but this is not a given as operators in the Rovuma Basin are naturally looking to find the best markets to send the gas to.
The big challenge for LNG imports is the need for a baseload customer, which is typically a power generation facility, and yes, there is a Catch-22 situation where it appears we have too much power at the moment. However, until we can show that we have offshore or shale potential, we need to import LNG if we want a gas industry. The Department of Trade and Industry (DTI) has had a Gas Working Group for a few years, which I was a member of. The conclusion was that until we can find a baseload in the form of a power generator, it is difficult to get any other companies or industries on board because their utilization is quite disparate and not in a high enough volume to warrant the investment into LNG import infrastructure.
The other piece of the puzzle is South Africa’s historical role – most notably on the Western Cape – in providing critical ship repair, rig repair and other maritime logistics services to the global oil and gas industry. How has this sector been impacted by recent industry dynamics, including the fall in oil prices?
The Western Cape is extremely well-placed in terms of being on a busy shipping route. Companies that go to the north or the east could come south to us for repairs and other services. However, in my view, we still have some room for improvement as we have not developed a strong enough reputation within the international community for people to look to South Africa as the first choice. Other places have put more effort in and developed that attractive track record. But there is a bit of a chicken-and-egg problem: how do you develop a reputation if you do not get business – and how do you get business if you do not have that reputation? We need to put a lot more effort in establishing that reputation and then communicating it.
In fairness to the provincial government, they have been very supportive in driving the growth of this sector, particularly in terms of establishing the requisite oil and gas maintenance and support facilities. Nationally, with Operation Phakisa under way, Saldanha Bay Industrial Development Zone (SBIDZ) is going to play an important role and is very well-placed to service both West and East Africa. We still have a lot of work to do in terms of the skills to service this industry better but it will create many jobs and opportunities.
On a separate note, there has also been huge effort and interest from the Western Cape government to position Saldanha Bay as an ideal LNG import opportunity. However, the latest draft of the IRP has stated that LNG imports will in the first phase come in at Richards Bay or Coega. Richards Bay is a logical choice given its proximity to the existing gas pipeline route and the access this provides to the Gauteng region, the industrial heart of the country. They also have an Industrial Development Zone in place aiming to provide services much like the SBIDZ. As the East Coast opens up, they could well become a strong competitor for the Western Cape.
Against this interesting backdrop, what goals is SANEA currently working towards?
SANEA is the South African member committee of the World Energy Council so we take an agnostic approach to the energy sector. There is a place in the sun for everyone and we do not try to play one off another; we are not a lobby group. It is more about being thought leaders, sharing the work that the World Energy Council does, and providing a platform for our members to engage with each other and grapple with important energy issues. We want to stimulate thinking about energy and the best energy mix for South Africa for the future, which should allow the opportunity for all sectors of energy that make the best economic and social sense.
A final message for our investor audience?
South Africa has great potential! The offshore sector has not been explored very well and there ought to be ample opportunities for investors. The renewable energy program initiated under the Independent Power Producer (IPP) Office is also a brilliant model for the world to follow but it has been recently derailed by the reluctance of Eskom to sign the power purchase agreements for the last rounds of the program.
Looking at what South Africa has done in the past, and the future potential from a market and growth perspective, we are absolutely a long-term good investment opportunity – provided we can put in place the empowering regulatory policy and supportive leadership we need.