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Interview

with Charl Möller, Chief Executive, Transnet Pipelines

17.03.2012 / Energyboardroom

Transnet Pipelines has a history dating back to 1965, although you joined Transnet 10 years later, you only joined the pipeline division in 1992! The recent commissioning of the New Multi Product Pipeline (NMPP) has been a milestone in this history. Transnet’s Group CEO Brian Molefe even described the project as one of the “most cutting-edge and innovative infrastructure investments in the world.” In your own view, what did this new pipeline mean for the nation?

Up to the mid 2000s, there was uncertainty around the mandates for the transportation of petroleum products in South Africa. In the early 2000s there were even talks of privatisation of Petronet, the predecessor of Transnet Pipelines. We then received the specific mandate from the South African government (around 2004) to look after the country’s strategic assets from a pipeline petroleum transportation perspective. There is a certain challenge in terms of the dualism this presents. On the one hand, there are business imperatives that require you to operate sustainably. On the other hand, as a state-owned company, you need to follow the broader strategic direction the country requires. At the moment, I am very excited on how dependent the country is on Transnet Pipelines from a security of supply of petroleum products perspective. Also, I am pleased that we have our ducks in a row to achieve what our stakeholder –the government- expects from us. This is a specific responsibility we need to adhere to, brought in by the NMPP.

Transnet’s current chairman, Mr. Mafika Mkwanazi, started the NMPP process back in 2001-2002. The NMPP project was initially driven by the need to replace the old pipeline from Durban to Johannesburg. The previous infrastructure had been around since 1965 and was reaching the end of its economic life. We tackled the NMPP project from a business perspective and decided that a bigger pipeline would be needed to address the country’s growing energy needs. We initially settled on a 16 inch pipeline. Later on, in 2006 however, the then Department of Minerals and Energy (now Energy) concretized our role into a strategic one and asked us to increase this capacity to 24 inch. This resulted in a totally different scenario from that we had initially planned.

The initial 16 inch pipeline would have followed the route of the old 12 inch pipe and would have dropped off product along the way. With the newly proposed 24 inch pipeline, this was not possible, simply because the clients’ infrastructure would never be able to cope with such big inflows at a time. This is how the idea was born ofa trunk line between 2 terminals. The old pipeline reached efficiencies of only 90%. The NMPP, however, runs uninterrupted between the 2 terminals, which function as buffers against any disruption on either end of the pipeline (production or distribution). According to the latest indications, we can reach efficiencies as high as 99%. Compared to the previous situation, this really is a state-of-the-art system!

Because the government expects us to supply capacity ahead of demand, we also needed to ensure that we would be able to increase the pipeline’s future capacity as and when needed. This is the real beauty of this project. The big 24 inch pipe we have put in the ground is our way of pre-investing into a scenario to allow us to later on add more capacity. The adding of capacity throughout the pipeline’s life will be done through the adding of pump stations or pumps. At the moment, we are in the first phase of a 5-phased expansion plan. With present projections of demand, we aim to complete the final expansion by 2035. The government has also supported this pre-investment by allowing a security of supply levy to be included in the fuel price. This helps us to finance the pipeline and is proof of the support of the government for this legacy project.

On the downside, the project was expected to be completed in September 2010, while total completion will now only be reached in December 2013. The initial price as discussed with the government when the levy –support was agreed on was on the basis of R12.7 bn, which has now been seen a huge increase to R23.4 bn. Both the schedule and cost challenges have created a certain negative perception around the NMPP which is regrettable. I am however pleased to hear that our clients have been very excited about the NMPP, most particularly because the facility will be a major infrastructure asset for the country in years to come. If we adhere to our strict operating and maintenance programs, experts have estimated its economic life to 75 years. This is rather what should be remembered about our project than the negative perceptions currently around it!

Another aspect in terms of security of supply, is the fact that we are still part of a value chain. If the refineries at the one end do not invest or if the distributors do not have the necessary tankage, Transnet Pipelines also cannot perform optimally. This is something that worries us at the moment. By December 2013, we will have a very competitive facility for transportation, but urgent investment on both sides of the NMPP is still needed as well.

Minister Peters already shared with us her thoughts that further investments on the refinery side will be needed in the coming years, most notably with regards to the upcoming clean fuels specifications. How confident are you that sufficient investment in such upgrading will take place?

We currently see a scenario where roughly 25% (some say even up to 40%) of the clean fuels should initially be imported. Brownfield investments on the present refineries would therefore not be required for a while. On the Transnet side, the import facilities available for clean fuels in the Port of Durban may be a challenge. In Transnet’s 7-year R 300 bn investment plan, such an import terminal is not included. This implies that a solution has yet to be found, for which the Minister has been looking at private sector involvement. Getting new role players into this idea is also another challenge.

At the moment, we have a situation in which the black economic empowerment (BEE) companies battle to get into an industry that is dominated by the big international oil companies. These companies own the infrastructure and have the tanks, and any company that wants to enter the sector needs to work through them. As Transnet, we almost need to accept our responsibility in finishing the NMPP while at the same time encouraging the development of an import terminal in the Port of Durban. This will not only support the imports of clean fuels, but will also help other companies to enter the market. The new dawning idea with respect to the clean-fuels challenge is to support significant imports before entering into brownfield conversions.

You talked about an industry being dominated by a few majors. What other steps can be taken to facilitate the entrance of BEE companies in the sector?

Their problem is that more infrastructure is needed on both sides of the pipeline. We have had 5 players coming in that passed through our rigorous process of accreditation. We do regularly transport product for them, but their real challenge persists on the down and upstream side. This is where they lack depots and tanks. This, in turn, makes them very dependent on the other players and is the area we need to focus on if we want to successfully get these emerging companies to play a meaningful role in our Industry.

In terms of Transnet’s own infrastructure, Tarlton is still your flagship terminal with a storage capacity of approximately 30,000 m3. It has been argued that there was room for more terminals to come on stream. Can you elaborate on what developments we can expect to see taking place in the future?

The Tarlton terminal has the specific purpose to improve our service to Botswana, which is very dependent on South Africa for its supplies. If anything goes wrong in our country, our neighbours are the first to feel the heat which is of a concern to them. It is therefore essential for us to give them the best service we can which means that our service through the Tarlton terminal is a priority! We have even gone as far as obtaining our own rail tank cars. We probably need to expand this terminal even further, which again provides room for some of the BEE companies to play a role. One of them in fact already bought some land there, while another player received approval from the regulator to build a terminal at the end point of the NMPP.

The dream that we had at some stage was to aggressively diversify our terminals. This is probably something we need to tune down a bit now. Following our huge NMPP investment, we need to look at a scenario where the private industry can play a greater role. From a strategic Botswana perspective, I do however feel that Transnet Pipelines has the role to optimise the operations at the Tarlton terminal as efficiently as possible.

Can you also highlight the key technical measures that have been taken to enhance the reliability of the NMPP?

Any disruptions on the supply side for instance are already buffered by our 2 terminals. This buffer can last up to 5 days, in which most supply issues are generally resolved. The concept of the terminals also enhances the efficiency of the system, as mentioned before, from 90 to 99%. Dropping off product along the route is probably something that few pipeline companies will continue to do in the future, and is quite a challenge in our industry.

In terms of the system’s design, we have also increased our reliability through the use of stand-by power generators. This is particularly important to be able to respond to potential power shortage as the ones South Africa faced during 2008. We have also made an investment into a Siemens control system which is although at a pioneering stage in its pipelines application, really a state of the art facility. The application comes from another industry and still needs to be adjusted to a pipeline context. As soon as this system becomes stable, we will be able to monitor our entire process optimally, as well as any leakages for example.

In terms of safety, we have also invested significantly in top class steel for the pipelines (X65), as well as coating and padding of the highest possible standards. Provided that we remain responsible in maintaining and looking after this pipeline, we estimated an economic life of 75 years!

The separation of the product within the pipeline is done through different types of equipment, so-called pigs and spheres. At the moment our target is to limit intermixture, or off spec product to 0.02% of the volumes transported, a target we have been beating consistently. Initially, we expect to struggle in the NMPP once it is a multi-product pipeline because of the low flow rate and the low initial usage of the NMPP. However, with the new Siemens system in place and the increased usage of the pipeline, we are confident in meeting our targets going forward. At our Tarlton terminal, we also have a so-called intermixture Refractionator which is really a mini-refinery to support further product treatment. The off-spec product that is created in this process is being re-refined and put back into the closed system at the correct quality.

Further technological advancements have also brought forward so-called “intelligent pigs”, which can better assess the condition of the old pipelines too. The latest results have shown that several of the defects on the old lines can still be fixed, which effectively can extend their economic lives too even for the oldest line, the DJP. This also indicates that our maintenance regime is spot on.

Do you feel that the NMPP can be a role model for similar developments across the world?

As Transnet’s Group CEO Brian Molefe said, we have paid our school fees and we can now share our results with others, both from a technical-engineering as well as an operations and even project management perspective. We have got most of the challenges covered and this is a facility most people can be proud of. We are currently facing an environment with more negativism on this project than what should be the case. I am convinced that our future generations will look back at the NMPP and say it was a good decision. Pipelines are exactly all about this: a significant upfront investment but a facility that can later be considered as “magic” because of its long-term nature.

We often receive visits from other African countries that are interested in pipeline solutions for their fuel transportation challenges. We often see a number of other problems in these countries, including lacking volumes, lacking road and rail infrastructure, and so forth. Therefore, we now want to play a specific role within the African context finding an overall transport solution, not just pipelines. The pipeline community in Africa can capitalize on the lessons learned from the NMPP. Countries from outside the African continent have also shown interest in what we have achieved.

To end on a more personal note, we see that you have already spent nearly 40 years with Transnet. What do you feel has been your biggest achievement in all this time?

It is a combination of the several achievements I mentioned before. A few years back, there was still a lot of uncertainty around the business’s future and its mandates. Quite clearly now, we have a specific mandate to look after the country’s pipeline strategic assets. We are doing a good job and manage to stay ahead of demand. Most importantly, we have achieved this as a team. Overall, Transnet’s investments have all come together. The future of our business is one that should be clearly mapped and my biggest concern is that we will let our shareholder down. It is our vision to be able to stick to our mandate in a very strategic commodity area and meet our shareholder’s expectations. To do so, our shareholder is providing excellent support through our dynamic Minister.

There have also been disappointments of course, most notably the fact that gas developments have not taken place as we thought back in 1995. With natural gas coming in, we were hoping for gas to account for around 16 to 17% of primary energy by now, while we are only at around 4 to 5% today. However, the understanding is that gas has to be the way forward! I am hoping it will now really take off to reduce our dependency on a commodity that is becoming very expensive. With Sasol’s technology, the gas finds in Mozambique and other sources of natural gas in South Africa, this should be one area that will hopefully come sooner than later.

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