with Johan de Vos, MD: Gigajoule Africa, Gigajoule
Looking back at 2004-2005, Gigajoule conducted its first feasibility study for gas infrastructure in Mozambique. As a brief introduction to the readers, can you first explain what drove this initial project into an opportunity for the company?
Mozambican gas was already discovered in the 1960s and was first connected to South Africa through the construction of the Sasol gas pipeline. Then, there was a specific need from the government of Mozambique to ensure that some of the gas would be used for domestic consumption. We became involved in an advisory role initially, which evolved into supporting the setting up of the Matola Gas Company later on. We started construction in July 2004 and by March 2005 we had completed 100 km of gas network that connected the first industries. Since then, we have connected more than 30 industries in Mozambique, which were converted from imported fuels to natural gas. This was the first imperative. What we then found happening in the last couple of years is quite different. We have seen several investors now moving to Mozambique.
Coming from a position as Project Director at Sasol, it must have been quite an entrepreneurial environment too. What were some of the first challenges encountered?
The first 2 big challenges were related to funding and technical aspects. Back then, very few people understood anything about gas. We had extreme support from the Mozambican government and were surprised to be able to build such project in just 9 months. We made a mistake by assuming that the customers would have the funding to do the gas conversions. Finally, we ended up with situation where we actually funded the majority of these conversions ourselves.
Initially, we brought contractors from South Africa but later we were successful at training contractors from Mozambique. For the construction onsite, we also had to clear 2 minefields, which were left from the civil war.
What have been the other key milestones since then?
We have installed the first community kitchen in Africa! Unfortunately, there are still areas in Mozambique where people do not have access to electricity, and where paraffin and charcoal are being used for cooking.
We also brought the first compressed natural gas system outside of Egypt to Southern Africa, which allowed us to transport natural gas to areas where customers do not have access and where it is not economical to have gas. The added benefit was that infrastructure was now also created for gas vehicles. We are very fortunate that Mozambique today has 150 buses running on gas, while an increasing number of private vehicles is also being converted. The biggest achievements are not only in creating the basic infrastructure in Mozambique, but also in taking it one step further and creating a gas vehicle infrastructure system so that the Mozambicans can benefit more from their own natural gas.
23 December 2010 was a big day too, as the Council of Ministers, on behalf of the Mozambican Government, awarded Gigawatt a 25 year concession for the generation of 100MW of electrical power, using Mozambican natural gas as fuel. What did this mean for the company?
With regards to the power sector, we started talking to the government many years ago. Still today, Mozambique exports over 90% of its gas. Our theory was to add value to some of this gas and sell the higher value power, but also ensure that the capital investment and the job creation remains in Mozambique. We were very fortunate that, as the Mozambicans got to know gas better and as they saw the increasing range of opportunities, they realized that they needed to increase the size of their own market.
While the concession was signed in 2010, construction started just last week. Thanks to the regional shortage of power, we see the whole Ressano Garcia power park developing in something much bigger. In fact, we are already in negotiations with the government to expand the concession and use this market opportunity to generate more power.
As you said, around 90% of the Mozambican gas is still being exported today. What exactly has been missing?
It is a process of understanding what you can do with gas. Because they start from a very low base, it has not always been easy to grow the market in Mozambique.
With your involvement in Petroline Holdings, you looked at creating the first privately-owned pipeline connecting Mozambique and South Africa. Was this international context a different ballgame?
Rather than a technical challenge, it was indeed the cross-border context that made this project more complex. The moment you get into the fuel sphere, you face many other competitors as well as the involvement from the governments. It was a valuable learning experience.
What was the key lesson you took away then?
We believed –and still believe- in the fundamentals of Petroline. If government starts interfering in basic economics however, great projects will not proceed. Maputo is the closest port to Gauteng, has almost unlimited storage facilities and a port that is not congested. But you cannot compete with another project that is being supported by the South African government.
Looking at the South African situation today, we see a shortage of energy supply and skyrocketing electricity tariffs. President Zuma has even interfered to limit Eskom’s 2012 tariff increase. How has this shaped the need for alternate supply projects?
One of the lessons we will hopefully learn in the region is that we must be careful on how we manage state monopolies. If we allowed independent power producers (IPPs) to come in much quicker, we would not have faced as many troubles as we do today. If we would have allowed competition to Transnet in the pipeline sector, our fuel situation would have been different.
However, I think that the National Treasury and the Department of Energy (DOE) did staggering work by launching the renewable tender process at COP17 last year. This is a milestone for South Africa and the success of getting that process in the country was internationally reputable. Now, they have extended the range to coal, gas and hydro initiatives.
Allowing IPPs at competitive prices and starting to build power stations is the only way for South Africa to get out of its energy crisis.
The key for the next years will be how quick we can get to a situation where we will actually have power. You cannot grow the economy of the country if you ask people to cut back on electricity and if you do not allow new developments.
We need to take the “actual cost of not having power” into account. There are specific examples where we have lost opportunities to have gas in the country. There is an inertia within our government system that has blocked a massive amount of opportunities, such as LNG in the Western Cape for example.
You have indeed been struggling with NERSA for a long time to get LNG or CNG into the Western Cape. Why was it worth the struggle?
You do not put energy and financial resources into something you do not believe in. LNG into the Cape can and must work. Now, we sit with a shortage of LP Gas in the country. Why did we not put gas in bottles and help the poor? We will never achieve this because our industries use massive amounts of LP Gas, which should essentially be replaced by natural gas. We are now paying the price for not having other sources of energy in the country. We are not pro-active in this regard.
Hypothetically speaking, if the moratorium on shale gas is lifted and production actually takes place in 10 to 15 years, how will this reshape the South African energy mix according to you?
Our total energy mix is still coal-based, which brings a lot of environmental issues. We then have coalbed methane (CBM) in Botswana, the Kudu and Ibubhesi gas fields on the West Coasts, the Karoo etc. The Sasol project was in the region of a 2.5 to 3 TCF reserve. The latest estimate for Anadarko’s finds in Northern Mozambique, however, is 30 TCF! Such developments could have a massive impact. What happened in Mozambique over the last few years is going to change the energy landscape of Southern Africa.
How do you see this playing out against gas finds on the West Coast of South Africa?
They should be concerned with the recent finds in Mozambique as their competitive landscape is changing. If they do not develop this gas, they will not be able to compete. Perhaps they have already lost the window of opportunity! Kudu has been discovered in the 1970s, why is the gas not yet flowing into a power station?
Gigajoule makes it part of its vision to maintain a strong focus on partnerships. From your point of view, how do you define an attractive partner?
You can have the best business model in the world, but if you cannot work out your relationship it does not matter. Forming relationships and building win-win joint-ventures is our way of leveraging these relationships. We are a minority shareholder in Matola Gas Company and Gigawatt, and we have the government as a partner. Any partnership must of course make economic sense too and lastly, the involved parties need to be passionate about the business.
The next couple of years in Southern Africa will be extremely interesting. Three, four years ago, everyone was talking about Kudu. Then, it was all about CBM and Shell. Last year, Mozambique changed the ballgame while Tanzania is popping up as well now. It is almost like watching an intriguing movie every day!
How can you remain flexible in such a dynamic environment?
If you have your relationships right, you can remain flexible. If people choose you as a partner of choice rather than a partner of obligation, you are on the right track.
This also applies to project financing, where we have longstanding relationships of trust with the financial institutions. Whenever we start a new project, we have an open discussion with the equity partners, shareholders and financial institutions.
How do you see the next 5 years?
I think we will be an apt player in the power game and I think you will see a changed natural gas space. The landscape will look totally different. What we have had in the last 10 from the first gas into Mozambique, is nothing compared to what we see happening right now. I am very grateful to be part of this game today and could not be in any better business place than Southern Africa. Watch the energy space!