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Interview

Johan de Vos – CEO, Gigajoule Group, South Africa

20.04.2018 / Energyboardroom

Johan de Vos, CEO of Gigajoule Group, shares the group’s amazing achievements in developing natural gas infrastructure in Mozambique over the past decade, the important role for the private sector in southern Africa’s energy story, and his ambition to position Gigajoule as the leading partner of choice for South Africa’s transition to a gas economy.

 Johan, over ten years after we first met you in 2006, where is Gigajoule Group today in terms of its projects and accomplishments?

To start at the beginning, in 2005, we completed the gas network in Maputo province in southern Mozambique through the Matola Gas Company (MGC). In 2007, we brought the first Compressed Natural Gas (CNG) system to the same region, and today we have close to 40 industries linked, either using pipeline gas or, for those customers that is not easily connectable by pipeline, CNG. We have seen growth in domestic, vehicular and industrial use, with the majority being in the last one.

We are proud to have also had major developments on the power side of our business. Since 2013, we have been supplying gas to two temporary power stations in Mozambique. In 2015, we completed our first own power station. This USD 200 million 120 megawatt (MW) power station was completed within budget and on time, in 18 months, and since December 2015, we have been supplying power to the grid. Not only did we play an instrumental role in the establishment of the company, Gigawatt Mozambique as an equity partner and co-shareholder, we also played very important roles as a project developer, on the technical aspects and also in terms of funding in putting the financing structure together. We are currently in the design phase of a major upgrade and expansion of the power station.

We will also supply gas to the 100 MW Japanese-funded EDM power station being completed in Maputo.

On top of everything, we are very proud of the positive environmental impact these projects bring. Gas offers a major environmental benefit compared to other hydrocarbons like coal and oil.

As a country, South Africa has been discussing its energy mix for a number of years now. With a new President and a new Cabinet, including a new Minister of Energy in 2018, what is your outlook on the domestic energy sector moving forward?

It has been a very interesting period in the last few years, especially as the region has undergone a complex cycle, with the substantial power shortages experienced in 2008 having turned into power surplus now. With the changes in the political space during the recent past, I expect to see fundamental questions being asked about the role that state-owned enterprises (SOEs) should play within the country’s energy mix and strategy.

As an example, in 2017, Transnet completed the New Multi-Product Pipeline (NMPP) linking Durban to Gauteng. The initial budget was ZAR 12.7 million but the final cost was north of ZAR 30 million – substantially more expensive. An important question to ask is whether SOEs are the right vehicles to build pipelines? My personal view is that the private sector could do much better. In fact, at that time, we were involved in the design of a competing pipeline linking Maputo to Gauteng, which was halted due to the overdesign of the Transnet pipeline and the fact that the energy regulator allowed Transnet to cross-subsidize the new pipeline with revenues from the other Transnet pipelines.

In our 2012 interview, the country had just started its Renewables Energy Independent Power Producers (REIPP) program, which I called one of the most important steps in the right direction. While this has stalled for the past few years, new energy minister Jeff Radebe has finally announced that the pending power purchasing agreements (PPAs) will be signed soon. In the meantime, however, our national electricity utility, Eskom, has built two giant coal-fired power stations, Medupi and Kusile. While budgeted at ZAR 70 billion and ZAR 80 billion respectively, both projects are now over budget and the final price tag is estimated to be as high as ZAR 200 billion. We are talking about nearly ZAR 250 billion having been taken out of the South African economy as a result of incompetence. Eskom borrowed money for these projects and so another question that arises is whether they are going to be able to repay those loans? Yet another question is what will happen to power pricing in the country?

We already have a group of IPPS, several of which have already been executed within budget and on time. This goes to show that if we allow logical, economic decisions to drive the process of building the country’s energy mix, we will see far better outcomes. The private sector needs to be allowed to play the right role in building the country’s energy future.

Adding the Mozambican as well as the Sasol Secunda and Sasolburg natural gas power plants together, we already have 500 MW of power generated from natural gas without one KW hour of PPA guaranteed from the South African government or Eskom. Pure fundamental economics have driven the projects. Governments simply need to say how much power is needed and allow the private sector to submit proposals. They should not be prescriptive about where or how the energy will be generated. They just have to let the private sector do their job!

Looking at your achievements in Mozambique, Gigajoule has relied on public-private collaboration. What lessons can South Africa learn from Mozambique in terms of working together with the private sector?

When we started the first feasibility studies in 2003-2004 on the gas network, there was limited knowledge and skills in Mozambique. We had to work in a closely cooperative environment and be willing to take the risk of building something from scratch. We also had to secure the funding. Another crucial factor was our decision to allow the government to participate as a partner, which gave them ownership of the project and its future success. ENH has now learnt from that experience and taken on projects with other companies, so the skills transfer has been successful on that front.

What was also very important was that while the necessary regulations were absent, instead of telling industry to wait two or three years for the right regulations to be implemented, the Mozambican government developed the legislation in parallel with the project development. This required a huge amount of trust between the public and the private sector, but was ultimately the only way forward to success.

As I mentioned, we built up a gas network in Mozambique. In 2012, we sold around 3.5 million gigajoules per annum. We sold 20 million last year. That is massive growth – and goes to show that when the infrastructure is created, and the private sector is allowed to generate power, there will be demand and you will create that gas economy.

The government can be the enabling factor to create a playing field but the private sector needs to be allowed to play its role! For instance, in 2012, I mentioned the 30 trillion cubic feet (tcf) gas reserves discovered in northern Mozambique. That figure has now ballooned to 200 tcf – this is enough to meet South Africa’s total energy needs for the next 200 years! The Mozambican producers’ current plan is to liquefy and export it, but 220 tcf is such a vast quantity that they can pipe LNG down to South Africa and still have more than enough for export. The government should assist the private sector to bring some of that gas into South Africa instead of – once again – falling into the trap of trying to do it through SOEs. With great partnerships, this could be a great solution for South Africa’s energy future.

At the same time, when we spoke in 2012, South Africa was facing serious power shortages but today, the country has excess power generation capacity. Are there still opportunities for the sort of gas infrastructure projects Gigajoule does?

Our current surplus situation allows us to examine the ideal future energy mix for the country. In Eskom’s present financial situation, it seems likely that they will have to close some power stations, and in fact, there are some old, coal-fired power stations coming to the end of their lives. While we enjoy a power surplus now, we should close those power stations that do not add value to our energy mix.

Looking forward, the cheapest energy will be renewables so we should be pushing their development as fast as possible. The best way to offset the intermittency of renewables is with large battery storage technology, which will hopefully become economical in a few years, but until then, gas is the solution. Neither coal nor nuclear can balance renewables in the same way that gas can – and in any case, gas is substantially more environmentally friendly.

We have actually already presented the first feasibility study to the Mozambican government on a new gas pipeline from Mozambique to South Africa.

In 2016, you were awarded the Ai African Developer of the Year award by the World Bank. What are the hallmarks of a successful infrastructure project on the continent?

Fundamentally, there is no difference between successful projects in Africa and those in other regions. The requisites are reputable shareholders, people that can execute projects in a robust EPC contract, sound technical design, bankable financial designs, and watertight commercial and contractual documents.

These skills are sometimes difficult to find on the continent and we have seen many cases of people without those skills poorly executing projects, which has hurt the region’s reputation. For the right project sponsors with the right contracts and technical design, there is more than enough appetite from financiers. In the beginning of our project in Mozambique, we had to finance a lot of the gas conversions ourselves because there was a lack of expertise in the country and we also had the financial muscle necessary.

What is absolutely critical is building that track record and structuring each project properly.

You spent two decades with Sasol before start Gigajoule. How strong would you say the entrepreneurial mentality is in South Africa?

Not everyone in the corporate world is an entrepreneur. I was very fortunate to have done a lot of project work in diverse areas, from coal mines to pipelines, and was trained to develop projects and be entrepreneurial.

We also build this within Gigajoule by doing much of a project in-house. We have a core team of South Africans and Mozambicans covering engineering to finance and legal, and we will build a project in-house up to a certain point while also bringing in consultants for areas where we lack the specific expertise, before contracting out the work.

In terms of our people, we start with a strong selection process to ensure that we recruit the right people. Then we take them academically as far as we can. The rest of the training happens in-house because you cannot train someone in project execution by sending him to university. You need to throw him in the deep end and train him through the physical execution of a project.

With the new ‘millennial’ generation, what I find extremely positive is their great technical and computing skills. Much of our work relates to prediction and modeling, and many of my young employees can produce models far beyond my ability or level. But what we need to train them in is the gut feel of a project, because they tend to rely too much on the models and take whatever comes out as the answer. Successful entrepreneurs and business people also need to have a gut feel of the business.

To begin wrapping up, what is your five-year vision for Gigajoule?

I would like to see Gigajoule playing its rightful role in the energy mix of not only Mozambique but also South Africa. With the right political will, I am certain gas will have a major future in South Africa. If one looks at a country like Spain, it is a country without any natural gas reserves, but they have an extensive gas infrastructure across the country with pipelines through the Mediterranean and LNG terminals. This could be South Africa as well. We just need to allow supply and demand to meet each other on economic terms without any political interference.

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