Scrambling for Southern Africa’s Gas
Sequestered deep beneath Southern Africa’s onshore and offshore surfaces are their next trillion-dollar resource boon, lying in wait – if industry and government can manage downside risks.
By some accounts, the world could be entering a “Golden Age” of natural gas (natgas) led by aggressive Chinese consumption: a scenario in which the natgas share of energy consumption rises from 21percent in 2010 to 25 percent or more of total usage by 2035.
And while North Africa has traditionally dominated continental oil and gas production and exploration (P&E) headlines, Southern Africa has the gas resources to defy expectations by stealing some of that spotlight, especially when the controversial hydraulic fracturing (fracking) process gets the green light in South Africa’s onshore bounteous shale plays situated in the coveted Karoo Basin landscape.
While Mozambique is already leading the charge to export gas to Asia, South Africa’s potential gas assets are five times larger in volume.
And on June 16, 2013 Angola’s first liquefied natgas (LNG) exports set sail for Brazil with Asian buyers watching in the wings.
Nevertheless, the proved amount of South Africa’s technically recoverable, largely untapped, largely onshore natgas reserves trapped in shale rock formations totals an estimated 11.04 trillion cubic metres (Tcm) of volume, the equivalent of about 390 000 trillion British thermal units (TBtu).
South Africa’s reserves have been ranked at eighth-largest in the world.
To be sure, the “technically recoverable” volume overstates what is economically viable to release from “tight” rocks.
But despite that South Africa’s energy needs may mean a largely domestic focus for its natgas development – and rightfully so – that doesn’t preclude Asian interest.
That China Petroleum & Chemical Corp. and PetroSA signed a co-operation framework in March 2013 is proof in the pudding.
If South Africa’s coal industry is an indication of its trajectory, it will find a way to balance domestic needs against the draw of export growth.
Pricing Southern Africa into the market
The cost to produce the gas is one issue. The price it may fetch in domestic, regional, or international markets in the future is another.
The overriding calculus is informed by a mélange of considerations including the proven scale of the economically recoverable gas, subsuming the extraction costs including resource and capital inputs, the costs of regulatory compliance and expected market value.
Local consumption is one piece of the puzzle. Regional natgas producers at the country level are more freely empowered to deploy price controls than in global sales.
While both have international investment interests onboard, including Asian players in each, Mozambique’s will to export is by far clearer than South Africa’s.
That’s because South Africa’s economy is 26 times larger and is home to a population twice the size of Mozambique’s, and uses 23 times the amount of electricity. (A paltry 16 percent of Mozambique’s population was estimated to have some level of access to electricity in 2013, compared to 80 percent of South Africans).
And perhaps most importantly of all, Mozambique’s natgas resources under development are offshore and “conventional”, ie – not trapped in shale rock formations.
By comparison, South Africa’s production is characterised by a small, but developed and growing level of offshore natgas production activity, with a flurry of exploratory activity taking place onshore, but with an uncertain future, given the contentiousness of fracking. Mozambique, on the other hand, recently discovered large offshore holdings, and has a more developed onshore natgas industry.
The four “pillars” of gas industry growth according to the International Energy Agency are:
· accelerating natgas demand out of China;
· slowing growth in global nuclear energy capacity;
· expanding natgas use in transportation;
· and expanding global natgas supply optimism.
Some analysts are arguing that China’s demand alone will drive LNG demand in the near future.
Although China is home to the world’s largest supplies of shale gas, the economic feasibility of its recovery is in question, as is their domestic technical capability to execute on fracking methods pioneered in the US and Canada.
And apart from coal investments in Mozambique, Japan has sent national energy companies scrambling to weigh the prospects of more of the world’s LNG imports than any other country in 2012.
As aforementioned, weak demand for nuclear power is a “pillar” of a “Golden Age” scenario; Japanese demand affects both the level at which supplies are sought and their resultant prices.
The largest construction company in the US, Bechtel Corporation, won the front-end engineering and design contract for Mozambique’s LNG facility in January 2013 and began initial activity in February.
It’ll have the capacity to liquefy five million metric tonnes (MMT) of natgas per year; though will be built for an expansion of to up to 50MMT capacity.
The LNG export terminal is billed as what will be upon its completion, the world’s second-largest of such terminals in the world (at a cost of US$50 billion) and its current group of investors are eagerly awaiting the investment decisions of Japanese parties who seem to be stalling the process.
Although gas isn’t scheduled to come online until 2018 when the project is completed, investors have been keen to solicit LNG importers in advance; in addition to resolving the nuclear power question, Japan is evaluating what will be its level of LNG imports from the US before committing to a particular level of imports from Mozambique’s Indian Ocean production.
So notwithstanding Japan’s hesitations, the industrial activity in Mozambique surrounding natgas P&E is distinct from South Africa’s shale exploration by the presence of more numerous smaller, state-owned company players in partnership with a few larger multinationals.
In contrast, South Africa’s forestalled shale plays are being tending by a super-major, Dutch Royal Shell, amid four other players.
Italy’s Eni is the largest of Mozambique’s non-Asian players. Other interests include South Korea’s Kogas, India’s BPRL, Japan’s Mitui E&P, and most recently, China’s CNPC who took a 20 percent stake in “Area 4”, the largest of the offshore gas plays, for US$4.21b.
Additionally, India’s ONGC Videsh and Oil India had revolved into and out of news surrounding Mozambique’s natgas development as a potential buyer of a 10-20 percent stake. That was before they concluded a deal on June 25, 2013 to buy a 10 percent stake instead, sold to it by Videocon, also of India, for about US$2.5b.
The presence of national companies is significant because they operate in execution of national energy commodity procurement interests, which means they’re often willing to pay more for their stakes in operations, as well as sell resources back to their countries of origin at a loss.
What this brings to bear on South Africa’s natural gas development interests made known thus far is that global price levels would have a deeper impact on P&E investment in the absence of (Asia’s) state-owned enterprises.
The Big Debate
Ramping up natgas P&E and consumption is an environmental conundrum. Different-interested parties herald it as either humanity’s energy salvation in the face of global warming and pollution, or as the next underappreciated salvo of self-inflicted poisoning.
And the war of natgas is being waged at the global level.
In other words, the debate surrounding natural gas’s bona fides as “clean” energy is hotly contested.
A 730-page report on global shale resources says that China may have over 360 trillion cubic metres of natgas trapped in its rocks, which is more than the US and Canada combined.
But Canadians residing near to fracking wells are lighting their tap water on fire, evidence of methane contamination, and a Chinese farmer said that his chickens stopped laying eggs after exploratory fracking began in his region.
Anecdotes like these and worse have stoked skepticism and outright opposition to the notion of natural gas as a deliverance from environmental disaster.
So, when it comes to its onshore shale gas holdings, South Africa, among regional players in natgas P&E seems to be proceeding most carefully of all because it’s been busy mulling and internalising a more holistic schedule of the potential costs related to drilling and fracking, beyond what are more readily held out as its benefits.
That, and South Africa’s local environmental activism has been adept to keep the administrations’ attention and bind its hands on the fracking issue.
Even with powerful super-major interests (Shell) waiting on the sidelines, groups like the Treasure Karoo Action Group, through activism including legal action, has won the de facto extension of a fracking ban in South Africa that was formally lifted in September 2012.
But so far, alternative forms of energy, even in their largest examples around the world, have failed to achieve a scale of even a considerable fraction of the output of fossil-fuel fired power generation.
And as suspected, gas super-majors like Shell are minding their environmental reputations in China over fracking, where talk of public health and environmental concerns are closely monitored by the Communist Party as the most important among issues that could endanger public opinion of its developmental policy.
Given the ubiquity and importance of water resources, there is an understandable skepticism invoked by companies like Shell, who claim that they are far better able to fine-tune their fracking operations to prevent water contamination than are smaller or newer players.
But the South African government wants to increase the role of gas in national power generation from accounting for just three percent of the 2011 total to comprise 11 percent of electricity in 2030.
In power generation alone, the planet used 73 125 TBtu of energy in 2011.
If all of South Africa’s shale gas were extracted, it could fuel the planet’s energy generation for five years and four months at its 2011 level.
Although a fraction is feasible to produce, its value doubtless still orders in hundreds of billions of dollars – a figure environmentalists will struggle to defeat in the long-term, in light of its marketed environmental advantages at the stage of power generation.
By May 2013, South Africa’s Department of Energy had drawn up amendments to the Gas Bill; they have set the financial year-end as the submission target date for that legislation, after a period of public review and comment.
The draft allows for an expanded role for the National Energy Regulator of South Africa who had been prevented from entering an area where an illegal gas operation was suspected to have been taking place. But the public are being solicited their views on how to improve the Gas Bill and Energy Minister Dipuo said in May 2013 that fracking in Karoo would probably proceed.
Mozambique will use its energy commodities, namely coal and natural gas, to fuel export-led economic growth even while its population shares some of their anaemic 2 300MW with South Africa.
Meanwhile, South Africa will likely continue to diversify its energy mix out of coal, even whilst bringing new globally ranked, large-scale coal-fired generation capacity on-line with construction ongoing at Medupi and Kusile Power Stations.
Angola is already a world-class energy commodities provider with oil producing windfalls from trade with China and elsewhere, and with LNG export already underway.
• This paper has been excerpted from Consultancy Africa Intelligence. The full document can be found on their website, http://www.consultancyafrica.com