with Bonang Mohale, Chairman, Shell South Africa Energy (Pty) Ltd.
You took over the Shell operations in South Africa on January 1st 2009. This must mean that you have taken the company through rough waters, as the global economic crisis has had its profound impact on the oil and gas industry in subsequent years. As a business leader, has this been a challenging time?
I think I was lucky to join the energy sector as a whole and the oil and gas industry in particular during the 2008 global recession, at a time where the world was struggling with a range of energy challenges. In South Africa specifically, we experienced a black-out that first month I joined, which further highlighted the role of Eskom and the centrality of energy.
When I came in, it was a deep dive into general issues rather than a soft landing. Within this respect, we had to deal with 3 key issues in particular. A first step was to fully replace the Enterprise Resource Planning (ERP) system, where we moved from 6 systems into one SAP-supported global system. Out of the 104 countries, we were one of the 33 countries designated to pilot this global SAP project. Ordinarily this should have taken 24 months, but we managed to complete the change in 18 months.
In a second step, we needed to address our finances. The global crisis had turned the world into a difficult place and many of our customers were lacking liquidity. We therefore embarked on a South Africa turnaround strategy. I am pleased to announce that within 12 months, we managed to leave many of these issues behind us and put the company back on a sustainable financial footing.
A third and last step was to leave 2011 as the year where we comply with all the global changes. This particularly as Shell had its new CEO, Mr. Peter Voser, taking up his new role. In line with his vision of the 2009 transition, a number of changes were implemented. For example, we had to oversee the divestiture of our downstream business in around 19 African countries. The next big thing was to merge some of the business units we sold. For example, we had to manage a seamless disposal of our LPG business after it had been sold. Lastly, we also merged our lubricants business by October 2011.
I thus arrived in a period of frenetic activity with several big projects lined up. It gave me an opportunity to immerse myself into genuine issues that drive this industry and that, in turn, can be leveraged.
You have not been the only company to sell off some of its downstream businesses. BP for example sold off its downstream business to Trafigura. Is this a general trend you see continuing in the sector?
We were probably motivated by different reasons. First of all, we used to have a presence in 33 of the now 54 African countries, including Tunisia, Algeria, Morocco, Egypt, and so on. South Africa used to represent more than half the profits of these 33 countries. The Strategy of Royal Dutch Shell was to concentrate more on upstream in terms of capital allocation by being profitable in its downstream operations.
Our downstream strategy rests on three legs. While the first is a focus on operational excellence, the second exists in concentrating on those markets where we can win. Our last leg exists in pursuing selective growth. When we put the different strategies together, it comes down to being present in fewer larger markets. In South Africa, we have a good market share in a place and market that matters. We have become one of the exciting growth areas within Shell worldwide.
Because of this, it also made sense for us to dispose some of our downstream business. We have sold refineries in Greece and the UK, and in a similar way divested some of our downstream operations in 19 African countries. Of these, 15 have already been through the process, while we are in process to divest the operations in the 4 remaining countries. In doing so, we aim to sell all businesses to one player: a consortium consisting of the world’s biggest energy trader Vitol and a Pan-African private equity firm known as Helios. This consortium is aiming to buy 80% of our oil business and 50% of our lubricants business. In the future, we will see how this exciting partnership can further progress.
In the continent as a whole, refining capacity has mushroomed from 0 refineries in the 1950s to 48 refineries today. And of course, there is Shell’s refining capacity in South Africa. Together with BP, Shell manages the largest refinery on the Sub Saharan continent, of a similar size to the Port Hartcourt refinery in Nigeria. What does the Sapref refinery in Durban mean in terms of Shell’s commitment to South Africa?
Having the largest capacity in South Africa and Sub Saharan Africa gives us a great sense of responsibility. While the refinery is jointly owned by BP and Shell, we are the operator of these facilities. We hire, fire and run the operations. We produce 180,000 barrels per day, which represents a significant share. If the refinery closes down, the market is negatively impacted. The issues of reliability, safety, downtime and planned and preventative maintenance become of absolute key importance. The challenge that we have with Sapref is that whenever we plan a shutdown, this needs to be coordinated with the market. For instance, we know that a major holiday in South Africa is December, when most people take their annual leave and travel immense distances.
Furthermore, we need to ensure that we have got homegrown skills to support sustainable operations of a refinery like Sapref. There is already a shortage of skills in South Africa, so this can be quite a challenge.
The last aspect is that we need to be absolutely consistent with the national strategic vision of government. The issues of energy, energy security and fuel supply are closely coordinated with our government.
Other big refining hubs in Africa are known to be Egypt, Algeria and Nigeria. Following the 2011 Arab Spring, at least 2 of these countries have lost political stability. Is this an opportunity for South Africa to become more of a preferred refining hub on the continent?
Every company is being driven by a number of issues, such as technology, socio-economics, political stability, and so on. These aspects present both challenges as well as opportunities. The recent UK riots, for example, were all driven by young people. With the Arab Spring, the dynamics were once again different. For us the message is that, surely, peace needs to be addressed. With hundreds of thousands, if not millions, of unemployed, this is a key challenge. In South Africa we struggle with the 3 challenges of inequality, unemployment and poverty.
Companies like ourselves cannot operate in isolation of these key national challenges. We ought to be utilizing our time, energy, efforts and all of our resources in trying to help government to deal with these problems, because these are not problems for the government but for the country as a whole. Indeed, these are also problems for big businesses like ourselves.
When you have instabilities in other parts of the world, the opportunities indeed exist that you can present yourself as a sustainable, and reliable operator and an effective and efficient refinery, but also as a country that is politically stable and attractive for foreign investment. You need a country that is open for business, that provides skilled labor and that is competitive. What is needed is a regime where people can make profits and repatriate them back to their principals. We probably have a first world financial services sector here in South Africa. If people today have the choice between putting a dollar in Northern Europe, Eastern Europe, South America or in the African continent, they will ask themselves where they will get the best return on investment. That is where Africa ought to position itself. In this respect, South Africa is ahead of the pack. Both in terms of infrastructure spend and institutions of democracy, South Africa is best positioned.
You would put your dollar here?
I would definitely do so! The risks are there, but when they are well understood and articulated and if they can be mitigated, there are huge returns of investment to be made in South Africa. This is an area where you can make a significant difference because every dollar that is being invested here, almost directly shows the causal effect in the quality of lives for the majority of people. It is the most exciting market to be in the world.
Companies such as PetroSA and Sasol are investing in additional refining capacity in the country. What role do you see for Shell to do more in this respect?
Although our refinery has been built over 50 years ago, we are upgrading several parts every year. When you look at our refineries, you will not find a piece of metal that is 50 years old. We are constantly upgrading, maintaining and renewing our refineries at a minimum of USD 50 million per annum, in order to make sure that they can meet the present day challenges.
The second is the issue of clean fuels. Our government is working closely with the industry to ensure that Africa, and South Africa in particular, can also avail itself of clean types of fuels. The amount of sulfur, measured in parts per million, is ought to be coming down continuously because we genuinely care about the environment.
Lastly, as good corporate citizens, we also need to make sure that we use this refinery to build refining, engineering, mechanical and technological capacity in the country, so that these skills can be found inherently within the country itself. This is the role I see that Sapref has to play.
On the upstream side of the business, you have acquired exploration rights for the Orange Basin Deep Water area just last week. What kind of change will this cause in terms of Shell’s business model in South Africa?
This is an exciting time for Shell in South Africa, as the Minister of Mineral Resources has awarded Shell South Africa Upstream B.V. an exploration right in the Orange Basin Deep Water area off the nort-west coast of South Africa on February 10, 2012. This is the first time in 108 years that we will have an upstream business here. South Africa still faces energy poverty, where 10 million of the 50 million South Africans have zero access to any form of energy. They are the people that bring down our forests and trees just to cook, heat and be able to provide some general energy. In a country that is relatively advanced in terms of being endowed with natural resources, clearly this situation cannot be. If oil or gas is found, it could reduce South Africa’s dependence on imported energy supplies and help meet growing energy demand. The biggest single contribution Shell can make to social and economic development is by helping to meet growing energy demand while respecting the people and the environments where we work.
This is why we are looking at unconventional gas as a supplement for electricity generation. This is also why we applied for a technical cooperation permit for 2 blocks –one onshore and another offshore- 3 years ago. The exploration area covers just over 37,000 kilometers and is located approximately 150 kilometers to 350 kilometers offshore in water depths between 500 meters and 3,500 meters. So far, there has been limited exploration activity in the area. This is an area where we will be searching for crude, condensate and gas. For the first time in history, this creates the opportunity for South Africa to have an abundance of indigenous crude, for which we are still a net importer today.
The second exciting area is onshore in the Karoo region. Initially, we were awarded a technical cooperation permit for 200,000 square kilometers (almost 20% of South Africa’s landmass) to do studies and see whether we are still interested to move these projects forward. On December 14th 2011, we put in an exploration rights license application and we are still anxiously waiting for this government to do the right thing and award us this license after having truly assessed the dangers to the environment of processes like hydraulic fracturing (“fracking”). Gas makes a strong case. It is a cleaner source compared to coal-fired power stations at around one tenth of the cost. Moreover, as a nation we support the Kyoto Protocol, the World Summit on Sustainable Development and COP17. We take the climate change challenge and carbon emissions seriously. It is worth pointing out that gas has 50 to 70% less CO2 emissions than coal-fired power stations. The case for gas is incontrovertible.
The Karoo region is said to be one of the top 5 shale gas areas in the world. At the same time, fracking remains a sensitive topic that has been under fire in South Africa by various action groups. However, you have publicly stated earlier that several of these concerns are based on “back of a matchbox mathematics”. Would you say that the moratorium is not necessary?
The moratorium is useful, needed and critical. Albeit a 60 year-old technology everywhere else in the world, hydraulic fracturing is a new technology in South Africa. In North America, Shell has been successfully drilling for over 20 years using this technology. Even more so, we have been drilling wells both vertically and horizontally. The industry as a whole has drilled around 1.1 million wells in North America alone. Five years ago, North America was a net consumer of energy, while it has become a net exporter of energy today. This is a revolution that has been driven mostly by unconventional gas, tight, shale and coalbed methane (CBM).
The moratorium is designed to inform all the affected and interested parties about the good and the not-so-good about hydraulic fracturing. Like anywhere else, you then need to weigh these results against the other options we have. We see it as a possibility for South Africa to create a brand new industry that will give the 50 million South Africans energy and economic and environmental benefits. It is possible to go and deploy newer technologies such as horizontal drilling and hydraulic fracturing. It needs to be said that the latter exists in injecting 99.5% water and sand at high pressure, with about 0.5% of chemicals to stimulate the movement of this gas. We know that this gas has low permeability and low porosity. Without this technology, such gas cannot be harvested for the broader good of mankind. However, it can be done with both the respect for people and the environment. For us it is not “either or”, it is “both and together” at the same time.
Now that you have the new offshore rights, do you feel that this may be good way to take some of the stress away from focusing on one area, the Karoo?
The two applications –offshore and onshore- were separate. Offshore is our bread and butter, which has become a routine operation for an oil major like Shell. Our business is to drill offshore in the middle of the ocean in the some of the most difficult and complex areas in the world. For this, we deploy Shell’s latest and most up-to-date technology that we have developed over the years. To succeed in deep-water, experience, safety and reliability are critical for delivering profitable and environmentally responsible projects. Shell has been a leader in deep-water exploration and production for over 30 years and has undertaken more than 20 deep-water projects. Our global portfolio of large-scale deep-water projects, combined with our rigorous safety standards, demonstrates our ability to meet technical, engineering and operational challenges in some of the world’s toughest and most complex environments.
In the first three years of the right, Shell will conduct studies and collect seismic data to evaluate the basin and determine whether there is the possibility of hydrocarbons being present. Further exploration activities will be determined by results from this activity. The deep-water portion of the Orange Basin has evidence of source rocks which have the potential for significant commercial oil and gas discoveries, although it is as yet largely unexplored and it may be some years before the potential will be apparent. These discoveries could be to the benefit of both the country and its people.
The issue of hydraulic fracturing onshore in the Karoo is entirely different from offshore exploration. It is close to people’s farms and the most pristine and less inhabited part of the world. For such less economically developed areas, you need extra sensitivity, understanding and accommodation. The answer that we will give to the people of the Karoo is that –first and foremost- we have an absolute commitment to our health, security, safety and environment policy. To us, it is non-negotiable. The safety of our people goes before any profits within this company. Secondly, we have the ability to support small businesses in particular in the area of the Karoo, for the broader economic development of the area. Lastly, it is also a matter of job creation at a large scale. History has taught us that such operations create up to 100,000 jobs once the production is reached. This country needs 5 million jobs by 2020 as per the plans of South Africa’s Minister of Economic Development Ebrahim Patel. We would like to play our part in ensuring that we hire people in great numbers to be able to deal with this scarceness where people end up being thieves out of necessity.
Things are clearly moving! For the offshore exploration a next phase will be 3 years of studies. Once we come back in 5 years from now, what will we ideally see?
In the horizon, you will see our rigs in the middle of the ocean, robustly constructed. We will be producing gas, condensate and crude, supporting Eskom’s efforts of providing electricity for economic stimulation, creating hundreds of thousands of jobs at both the low and the high end. You will further see hydrologists and geologists that we have employed from within South Africa. There will be security companies, catering providers and artisans –such as electricians and plumbers- that we employ. You will start to have hope that the nieces and nephews of the people that work in our plants will also be filled with hope, as they receive the opportunity to become absorbed in responsible companies like Shell.
Would you have a final message for both the readers of the Oil and Gas Financial Journal, as well as the South African stakeholders?
South Africa is amazingly positioned to take its rightful place within a world economic agenda. Africa represents the most exciting investment opportunities in the world, with almost a billion people that are being underserved in a majority of industries. This continent will experience the fastest growth and will be the most willing in terms of labor to help and pull themselves up by their own footsteps. If I had a dollar to put somewhere, I would put it in the continent of Africa as an investment.