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Interview

Niall Kramer – CEO, South African Oil and Gas Alliance (SAOGA)

Niall Kramer, CEO of the South African Oil & Gas Alliance (SAOGA), shares his perspectives on the most pressing problems for South Africa’s energy sector and enthuses about the country’s unexplored E&P potential as well as the urgent need to develop a gas economy in order to fuel future electricity, enable renewables and support industrial development for the benefit of all South Africans.

Niall, not only has the global oil and gas industry seen significant change in the past few years following a drop in the oil price, the South African political and economic environment is undergoing a period of uncertainty as well. What have been some of the major developments you can highlight in your past two years as CEO of SAOGA?

“South Africa has never had a local large upstream oil and gas industry so one of the biggest challenges is the culture of safety and compliance.”

In the past few years, some things have changed in the South African energy sector – most crucially, the potential for LNG imports – yet in very important respects, absolutely nothing has changed because of policy gridlock.

Minister of Finance Malusi Gigaba recently presented his Medium Term Budget Policy Statement, which predicts some ZAR 50 billion (USD 3.7 billion) in deficit. Yet we are still in talks on talking about drafting policy for what is probably the biggest possible silver bullet for the South African economy in terms of growth, productivity and jobs. For context, South Africa is growing at around 0.5 or 0.6 percent this year; the Western Cape is seeing higher growth. The world average is around 3.6 percent. Economic growth has to exceed population growth to seriously start addressing employment needs. This means that South Africa needs six percent growth over 20-odd years to see the kind of job creation and national development it wants.

We will not have serious growth and especially industrial growth without stable, reliable and affordable energy. The Council for Scientific and Industrial Research (CSIR) released a recent analysis concluding that the most affordable option – and the option of least regret – is renewables mixed with gas. At some 63 cents per kilowatt hour (kwh), the price of renewables is highly compelling. Gas is added to address intermittency, which increases the price slightly. Nevertheless, it seems the nuclear energy is still very much on the horizon, and as an association, we are worried about the potential cost and transparency of that decision. But once the Integrated Energy Plan and Integrated Resource Plan are known, we may have more clarity regarding the thinking.

How ready is South Africa to transition from coal to this ideal mix of renewables and gas – given that it is not a significant gas producer at all?

We absolutely have to establish a gas economy. As an indication, below 3 percent of our total energy mix is gas, compared to the world average of 20 to 25 percent. The timing also could not be more fortuitous as the world – and the continent – is currently awash with gas, with the Henry Hub price under USD 3 per unit (MMBTU) and projected to remain low until 2020 to 2023. Now is when South Africa should be executing the deals to bring LNG into the country.

The Independent Power Producers (IPP) office under the Department of Energy (DoE) has been responsible for putting together a gas-to-power program. They have designated three ports for LNG import: Richards Bay and Coega in round one, and subsequently, Saldanha Bay in round two, for a total of 3.2 gigawatt (GW). It is critical that LNG imports are linked to power generation infrastructure and more specifically, to an anchor customer. This is how it becomes a catalyst for industrial development. The Gas Industrial Unit recently conducted a survey that revealed that there is a demand from current users, who will switch to gas along a number of different price points – not to mention potential new users. LNG can now also be transported in virtual pipelines, i.e. through road and rail links, providing for access to more remote locations and reducing the need to operate in Metocean conditions. This is something SAOGA is mapping at the moment to see what the end game might look like.

As we are not yet a gas producer, there is some sensitivity around security of supply and being dollar exposed, but oil and gas are fungible products and the industry is inherently an international one. This is something that simply needs to be managed. For South Africa, while prices remain low, LNG provides the huge opportunity for us to leapfrog in terms of industrial development. Even the establishment of the required LNG infrastructure will stimulate job creation and local economies akin to a massive public works program. Furthermore, we need to think about what opportunities can be unlocked along the entire value chain. For instance, desalination plants can be integrated into gas-to-power plants, which will boost our water and agriculture sectors.

On another note, South Africa – and in particular the Western Cape – has established a track record of acting as a maritime service hub for much of the continent’s oilfields. How has this sector weathered the drop in oil price?

SAOGA was established initially to cater to the needs of the regional marine oil and gas service providers to develop opportunities and support local businesses. The drop in oil price negatively impacted this sector but today, it is at USD 63 and on an upward trend. This is a good price. Looking at the continental E&P map, some of the largest gas finds in history have occurred in Africa in countries like Tanzania and Mozambique. The West Coast has been active in oil production and East Africa’s hydrocarbons sector has recently begun blossoming as well, so we are very well-positioned to service rigs and provide services in both East and West Africa. Our nearest competitors, Canary Islands and Singapore, are around 20-30 days away.

However, without a local Gas to Power and E&P sector, our service providers are simply competing with each other for a declining market. We cannot sustain a service economy based on a declining base. South Africa correctly has the aspiration to become the OG service hub but we need to have our own industry as well and be exploring seriously in our own waters in order to sustainably grow our oil and gas industry.

South Africa has been sitting for a while now on the cusp of what is probably its largest economic opportunity at the moment. But there has been significant regulatory uncertainty. The draft Integrated Resource Plan was supposed to sketch out a national energy strategy and we are awaiting its publication ,and interaction with it, in the next month or so. The proposed Mineral and Petroleum Resources Development Act (MPRDA) amendments are expected to provide the commercial attractiveness and stability for international investors, and we are eagerly awaiting this. We also need policy certainty and harmonization around the plethora of related regulations from pricing, the National Energy Regulator of South Africa (NERSA), the Gas Act, gas-to-power, the legislation under which the Transnet National Ports Authority (TNPA) operates, and so on.

This is particularly critical given the kind of plays we have. For shale gas in the Karoo basin, we want the A teams: large international players with significant shale experience and expertise. The initial estimates for the Karoo basins were 410 tcf of gas in place, but these have since gone down to slightly above 200 tcf recoverable, as estimated by the Petroleum Agency of South Africa (PASA). That is simply astronomical – PetroSA, our national oil company, has operated for two decades from one tcf in Mossel Bay! We must be careful here that people understand that “gas in place” numbers are usually large and go down as the “recoverable” is defined better, and then reduce again to what is “economically viable”. These tcf numbers are often bandied about without full context.

We have seen interest from major international oil companies (IOCs) including the likes of Total, ENI, ExxonMobil and Statoil. But both offshore and in terms of shale, there are significant technical complexities and we need to have the best regulatory environment in place to ensure that we attract the best exploration companies and teams in the world.

Southern Africa is possibly the last large unexplored frontier on the African continent. The rest of Africa has more or less been actively explored. This is a huge opportunity – and we need to be ready for it so that the local communities are able to actively participate. I do not want to spend another five years just talking about this potential.

Oil and gas companies do operate in many uncertain parts of the world, but uncertainty is never viewed positively by investors. As a country, we need to understand that there is intense global competition for oil and gas investments, and South Africa needs to provide a compelling value proposition in order to attract investors, who have global options if the terms are not attractive enough.

Given the highly technical and technological demands of the oil and gas industry, is the South African workforce ready to accommodate the growth of a local E&P industry?

This is a challenge that we need to address – and at SAOGA, we are already working on a few initiatives to map future skills needs and skills development programs.

South Africa has never had a local large upstream oil and gas industry so one of the biggest challenges is the culture of safety and compliance. For outsiders to the industry, the industry’s emphasis on safety may seem silly, for instance, when we talk about holding on to the handrails at all time. In an office environment, that level of strictness may seem redundant but oil rigs are potentially dangerous environments and serious accidents can result from accumulative mistakes and oversights. This needs to be developed. At our ports and facilities, we also need to develop more of a customer service orientation and delayer bureaucracy to attract more business.

In general, it also makes sense to develop transversal skills so that South Africans have the flexibility to work in multiple industries. An interesting proposition is that South Africa has a declining mining industry and a potential oil and gas industry in ascent. This gives us the opportunity to move highly-skilled people from one to the other, because there are transferable lessons and skills. An industry-funded consortium of universities recently executed a project where South African mining equipment and skills were used to drill two-kilometer-deep test holes in the Karoo to see if elements like appetite for safety and ability to handle a high-stress work environment were transferrable. We were delighted that not a single incident occurred.

We need to develop the workforce that can handle the requirements of the global oil and gas industry in order to fully benefit from a local E&P boom.

At the same time, while the regulatory environment is still uncertain, what advice do you have for potential foreign investors looking at South Africa as well as your own members?

Foreign investors should visit in person to understand the dynamics here instead of relying on second-hand views and data. That said, most of them have been here. On the E&P side, we still need more South African geologic data in order to make the right decisions – but again, these are waiting for the MPRDA amendments to be finalized. CSIR and others have already done good strategic assessments overlaying the potential risks of drilling in the Karoo in terms of biodiversity to water to historical sites, as has a number of other institutions. But more empirical and relevant South African geological information is needed to make fully informed decisions on the safe and responsible extraction of hydrocarbons. The only way to get this is to drill.

I think we also need to work more extensively with our regional neighbors, not just those close to us like Mozambique or Angola, who already have a track record of operating in the hydrocarbons sector, but also countries further away like Egypt or Ghana that set great examples in terms of how to fast-track a robust national hydrocarbons industry. Egypt, for instance, has overcome its own period of socio-economic and political unrest to forge great relationships and trust with international investors, make significant onshore and offshore discoveries, and build an LNG industry within a very short period of time. Ghana has also discovered hydrocarbons, produced them and established significant LNG infrastructure in under a decade since their first discovery, as well as implemented a very disciplined regime of stashing their oil and gas gains into a sovereign wealth fund.

We should not be blinkered in the way we look at our neighbors. Mozambique is looking to have an onshore allocation of gas with the requirement for it to be used in the local economy. But their economy right now may be too small to accommodate that much gas, so there may be opportunities for bilateral agreements and development for us to bring that gas into South African, produce, say fertilizers, and export to the region.

The global industry is often siloed into upstream and downstream, but from a macroeconomic perspective, Africa has 1.2 billion people looking to rise out of poverty. That requires energy. Energy powers development. Africa as a continent has the upstream resources, downstream users that could exceed two billion by mid-century and be final consumers. We have the huge opportunity to boost regional trade and energy integration – and we need to have the enabling policies in our own country to capitalize on these huge opportunities.

A final message?

At SAOGA, we are trying to position ourselves and our member companies to be ready for E&P and other related opportunities. We are trying to influence the shift to a gas and renewables energy mix. We are also developing capacity and skills programs to increase the employability of our workforce and the use of South African services and products. We advocate for the urgency and economic opportunities associated with LNG.

As South Africans, we need to develop oil and gas policies that are not merely an output of personality but are robust enough to serve the needs of the country. The risk is that we find resource opportunities but do not secure access to the benefits that they can bring. South Africa has the opportunity to learn from the lessons of both Norway and Venezuela. Oil and gas can be a silver bullet for the South African economy. We cannot afford to miss it.

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