Warwick Blyth – CEO & Executive Director, South African Oil & Gas Alliance (SAOGA)
While E&P activity in South Africa is rather limited, South Africa has a role to play as a service hub for Sub-Saharan oil and gas developments. What would you say have been the key developments in the last 5 years that have affected this status?
One aspect that has been rather clear since 2006, is that we ran into some problems in our own upstream activity. This came forth out of a change in the mineral rights regime in 2002, which moved the ownership of mineral rights from the private sector to the state. Everyone that owned mineral rights was required to reapply for these rights. The impact of this changeover was effectively a moratorium on the issuing of upstream licenses for almost 6 years up until late-2009. Since then most of the rights have been settled and the activity is ramping up again.
Another recent development has been the fact that PetroSA’s Mossgas has been running out of gas reserves. They are urgently looking for new resources, which is why they have triggered the FO field project. This is a billion dollar subsea development, with 5 wells and 40km of pipeline tied back to the existing field. While this has had its impact in South Africa, I would like to see the local industry more involved in this. At the moment, a lot of this project’s procurement is still done from outside the country.
A third area that has continued to accelerate, has been the upstream activity in the region as a whole. Looking back at a snapshot of the West Coast activity in 2000, you would find most of it situated in Angola and Nigeria. Since then, there has been a huge explosion in activity along that Coast, with projects taking place wherein South African companies have been able to tap. Increasingly, we have seen more and more crew changing taking place through Johannesburg too.
Another area that has become much more significant very recently has become the Sub-Saharan East Coast. In this region, the Tullow discovery in Uganda as well as significant gas discoveries in Northern Mozambique and Southern Tanzania have been some key developments. The Mozambique discoveries are quickly transitioning into LNG development projects and there is a clear need for more logistics, supply, and so on.
Moreover, South Africa, for historical reasons, is better connected to the East rather than the West Coast. Mozambique, for example, is a country with tight linkages to South Africa. As a result, South African companies see the opportunity to become involved in increased E&P activity in that region.
I have seen more companies starting to ask themselves whether it makes sense to put their African base in South Africa. Weatherford is such company that has grown a large office locally-staffed in Johannesburg. Expro is another such example.
A last important development in recent years has been the A-Berth facility in the Port of Cape Town. This is a newly constructed facility dedicated to repair and maintenance of rigs, specialized upstream vessels and associated equipment. It has been completely redeveloped with the sector in mind.
As activity is increasing along the coasts, we can imagine that those local economies are also growing further. Will it become more challenging for South Africa to keep its hub status?
An interesting question remains how to service the region as a whole. Africa is a big continent and the industry remains challenged by this question. In Angola, Nigeria, Gabon, and so on, local content laws are a significant challenge for international players. While Ghana is more attractive in that sense, it is geographically less attractive to reach the East Coast.
The coast line is quite a significant factor, as most of the equipment comes in by sea, rather than air. While the question has remained unanswered so far, I have seen more and more global companies setting up base in South Africa for aftermarket service of equipment, for setting up logistics & supply hubs, for equipment storage and so on. We believe South Africa’s position in the centre of the sub-Saharan coastline makes it a natural hub for logisitics and staging and servicing equipment into the region.
Two of the bigger names that have recently made investments in Cape Town are WorleyParsons and Jacobs Engineering. A latent proposition of South Africa is the country’s engineering capabilities. We have strong universities that enable engineering firms to source talent locally. As many of the larger international firms have been tapping into this potential by buying out local engineering firms, we can speak of a clear recognition of engineering as one of the country’s strengths nurturing the oil and gas sector.
All in all, there are quite a number of attractive propositions for South Africa’s hub status, i.e. the preferred head office location, a center for servicing, as well as a center for engineering.
Moreover, both Cape Town and Johannesburg have great flight connections, well equipped ports for logistics, fabrication and the repair of equipment.
How important is Durban in this context?
In terms of logistics, most of the supply chain is still focused on West Africa. It will be interesting, however, to see how this chain will further develop in the future. DHL, for example, has just established an oil and energy hub in Cape Town. Their African head office and –manager are now also located here in Cape Town. This must be reasonably indicative of how things are going to evolve. The global logistics provider has already a strong base in Angola, is now establishing a West African hub in Ghana and is also looking at Dar Es Salaam on the East Coast. You can see how Cape Town or South Africa is becoming part of this network.
Considering the service hub status of South Africa, we can draw a number of comparisons with other hubs such as Singapore and Aberdeen. In one of your recent presentations, you also drew comparisons between Saldanha Bay and the Australian Marine Complex near Perth. Are these role models?
These are certainly some of the models I have in mind, and which we push forward to the South African government. Why should we not be able to have a similar edition of the Australian Marine Complex here at Saldanha Bay, with the addition of an Industrial Development Zone (IDZ) around it? This is the position South Africa should start taking in this industry. UAL, the specialist shipping line and base operator has recently obtained a lease in Saldanha Bay and is looking to establish a supply base in the port. Around USD 30 billion are being spent in the Sub-Saharan region every year, reaching up to countries such as Ghana and Cote D’Ivoire.
What is attractive about Singapore is that the country does not have any oil and gas resources. Yet, it has become an oil and gas service hub for that region. Their status has come from having the ability to service and provide a good home to companies operating in the region. This is a good analogy to work towards in South Africa.
When it comes to the repair and maintenance capabilities of South Africa, what would you say makes the country more competitive than other African nations?
At this stage, the main advantage is probably the strategic location of the country. When I speak of location, I mean that we can offer something that cannot be offered nearby. We can offer a service in the region than cannot be offered anywhere else. Compared to Saldanha Bay, moving a vessel from Lagos, Nigeria, to Singapore for example, is 104 extra days on a round trip. You can easily count on another 52 to the UAE and 56 days to the US in that respect.
A lot of the repair and maintenance work currently taking place in South Africa relates to big floating structures, from drillships to accommodation barges. FPSOs are still a bit more difficult, as we cannot yet accommodate the widest vessels in our drydocks. Smaller FSOs, however, can be repaired in drydocks here. The fundamental proposition of South Africa remains the proximity to the market, the ability to offer the service, and the facilities to offer these services.
I still think we have some way to go on the facilities, the depth of services, and the prices of the services that we offer. While we survive because of the extra costs of sailing to places such as Singapore, our services are generally rather highly priced.
Where do you now see most competition coming from in the region?
For most of the floating structures, Singapore remains the main competitor. Very recently however, we have identified a number of complementarities with Asian shipyards. They have large drydocking facilities which are generally very busy. Many of the newbuilt structures are therefore being pushed out of their docks before they are completely finished. They are then finished as they are towed across the Indian Ocean and enter the South African ports for final work and commissioning. Singapore, therefore, cannot strictly be seen as a competitor.
At a more local level, Walvis Bay in Namibia is most likely the biggest competitor. However, there seems to have been quite a lot of disillusionment there as more of their larger projects have been shifting to South Africa. The truth is that, if you are a rig operator, you do not have a lot of choices in this part of the world. Other competitive locations are mostly in Europe, Dubai and Singapore.
If you look at where the world’s major rig manufacturer Keppel FELS has its facilities, you will find them all over the world, except for Africa. The gap there is quite clear. One of the immediate questions to ask is thus: Where are companies like Keppel FELS going to go? I think we are going to see one or more of the big ship and rig repair and maintenance players moving into Africa. The question will be how they will do so, and where. Obviously, we would like to go after such companies and attract them to South Africa.
Many of the South African service providers are a member of SAOGA. What are some of the key challenges they still face today?
That depends quite significantly on the sector you are dealing with. There is a fabrication and construction sector that manufactures anything from subsea modules to jackets, topside modules and vessels. When it comes to repair and maintenance of ships and rigs, the biggest constraint is port space as well as the facilities themselves. Traditionally, the hub for this niche has been Cape Town. At the A-Berth facility, we have around 12 to 14 meters of draft, which is not deep enough.
For the first time this year, we could not accommodate a number of projects coming into South Africa. Some of these projects have instead been taken to the port of Coega (Ngqura), which is not ideal from many points of view. The port is still rather empty at the moment and the industry remains more concentrated along the West Coast. We have been using the facilities there however, because of the depth. The challenge today is to obtain more deepwater key space, which will be in Saldanha Bay rather than Cape Town. Yet, the timing and coordination of further infrastructure developments is sometimes still lacking, which is another area of improvement.
Apart from ship and rig repair, there is also the broader niche of repair and maintenance as a whole. A number of international service companies, have been looking at establishing their service facilities in Cape Town. Their idea would be to sell the equipment in the region, and use the South African hub for spare parts and maintenance.
Our labour costs and productivity make are a significant constraint to being competitive in the fabrication segment.. I do not think we can fabricate competitively with the East Asian markets and in particular would not be able to build rigs or undertake large scale conversion projects for the foreseeable future.. This work is being done here either because of local procurement requirements or because of another reason, e.g. time constraints. In some cases, it is also possible that the work is so highly niche and specialized that the margin is high enough to support the higher labor cost.
The other constraint is the track record in the industry. The upstream industry is a huge industry in terms of scale and revenues, but it is small in terms of numbers of participants. A key reason for that is the risk associated with opting for a new supplier. This is why companies such as Schlumberger keep growing bigger and bigger.
How do you see the country’s local companies developing in the coming years then?
There are a number of companies that are developing very well at a local level. Ilitha Engineering, for example, is a small player in engineering design and consultancy, but quite involved in work in Angola, Saldanha Bay and so on, with reputable clients such as PetroSA. They have well established themselves with a strong local team, and have just entered into a big global alliance with Jacobs Engineering.
Increasingly, local companies such as DCD Dorbyl are pushing deeply into activity on the West Coast. Some are looking at establishing facilities in places such as Pointe-Noire, Ghana, Walvis Bay and so on. We have seen these South African companies expanding. For the ship and rig servicing players in particular, an interesting question is going to be whether they will go on their own or partner with a global player. When Keppel FELS comes into the region, will they take over a DCD Dorbyl or a Dormac, or will the latter be able to offer the service on their own?
We also have some very successful niche players. South Africa has two top performing rope access companies that perform maintenance work offshore.
Overall, would you say that the oil and gas sector is sufficiently recognized by the government as a key growth driver for the South African economy?
This is an aspect SAOGA has been working very hard on. SAOGA started as the Cape Oil and Gas Supply Initiative, but very soon after we were formed we realized that there was no one else in the country driving this sector. This is why we changed into SAOGA. Today, most of our members are still located in the Western Cape region. This reflects the current spread of oil and gas focused companies. The other part of our members, some 25%, sits in the Gauteng area in the east. Gauteng is of course the hub of the South African economy as a whole, hosting some very big companies with activities in oil and gas. Johannesburg is an opportunity, but one opportunity that remains untapped there is the mining capabilities, in which many of the companies there are involved. Frankly, the services being offered to mining companies are not that different from oil and gas. Remote places, drilling, pumps, camps, and so on are all elements of the same production process. A future focal point should therefore be to draw these companies into the sector.
Up to a certain point, the national recognition of this sector has been nearly non-existent. Now, the sector has been well recognized as an opportunity and is considered as a priority sector for economic development. There is a growing national awareness, as well as activity that is driving the regions forward.
Looking ahead, can you elaborate to our readers what’s in the plans of SAOGA?
Two very clear initiatives are underway. One is the marketing and export development initiative, for which we have brought in a number of people with tremendous experience in export and trade development. It is about getting the word out and finding the buyers in the region. It is about promoting what is available here, what can be done here, and making them aware of the companies we have here. Part of this initiative also serves as a platform to help these companies find each other and form new partnerships.
The other is our port cluster development initiative. Today, around ZAR 1 billion is being generated in project work on rig repair, pipe-laying and so on. What we aim to do is pull this number up by 4 to 5 times. It is a very attractive proposition, particularly as unemployment is a significant issue in South Africa and seen that this work is very labor-intensive. It is thus about getting the infrastructure, the skills, the different companies, the government policies, etc. all aligned.
We have started the port cluster leadership team, which is a mixture of people from the industry, ourselves and the provincial government. However, we also realized that the early stages of these types of developments are all about lobbying. Therefore, we have also formed a more specialized task team that involved SAMSA, the National Ports Authority, the Department of Trade and Industry, etc. All in all, we have gathered all the key stakeholders in the country to unlock the South African potential.
Is there anything you would still like to add?
One of the challenges we have in the sector remains location. Going forward, we almost need a dual hub in the Western Cape. Cape Town has long been a center for the upstream industry. We have got the port facilities, are active in ship- and rig repair, host fabrication facilities, are home to logistics facilities and make up an attractive regional office proposition.
The problem with Cape Town is that there is no great space to further develop the port area. We are looking at turning Saldanha Bay into an oil and gas hub free zone. It is only about one hour from Cape Town and thus a very attractive future proposition.
I would also like to add that there is a lot of opportunity to do a lot more upstream training in South Africa. We now have 2 facilities that offer offshore survival courses in Cape Town and yet, too many people are still flying to Europe for such training. The infrastructure for training in South Africa is great. Moreover, a lot of crew changing goes through either Cape Town (offshore) or Johannesburg (for international stopovers).
An interesting problem in terms of South Africa’s regional integration is the country’s electricity problem. Our problem at the moment is that we have run out of power, a problem we now need to sort out in a cost effective way. Over the coming 20 years, we aim to double the capacity of our electrical generation system. This will results in a massive escalation of cost.
Interesting for the future of South Africa will be to further develop the natural gas resources. There is a lot of shale gas potential, which remains very controversial from an environmental point of view. At the same time, there have been significant finds in Northern Mozambique, which creates an interesting question on whether and how some of this gas can be brought in to South Africa. Overall, the power problem is going to drive more integration of South Africa within the upstream gas activities, both within the country as well as in the neighboring region.