Legislative delays keep the lights off

1Liquid natural gas a viable alternative for SA energy.

Eskom is spending over a billion rand a month on diesel fuel to power its open cycle gas turbines in bid to keep the lights on.

In its 2013 financial year, these fuel costs amounted to R11 billion. This year the costs are likely to be higher.

It seems inevitable that the gas turbines, located in Atlantis near Cape Town and Mossel Bay, will be run hard for the foreseeable future. This is a costly last resort as the turbines were designed to supply peak load into the grid, not base load as it is doing now.

There is another fuel source for these gas turbines; one that could feasibly cost a third of what diesel is currently costing the SA taxpayer.

This is liquefied natural gas (LNG) which can be imported into the country at a lower cost than diesel, says John Shoobridge, Shell’s LNG business development manager for Africa. “LNG can help to address the power needs of this country,” he says, “and can be an interim solution ahead of domestic gas production.”

The government has stated that gas is an important part of the overall energy mix. Shell, along with other oil and gas experts, has been actively involved with the Department of Energy on the development of the Gas Master Plan which outlines the role that gas could play in the economy and provides a framework for investment in the necessary infrastructure.

This plan, which forms part of South Africa’s integrated electricity plan, was due to be released in the second half of 2014, but is now expected early in 2015.

South Africa’s gas industry is tiny and accounts for 3% of the country’s energy needs. It includes PetroSA, the state-owned oil and gas company, which operates a gas-to-liquid plant at Mossel Bay and Sasol, which pipes gas into South Africa from Mozambique.

However when one considers the much-discussed shale gas potential in the Karoo; the offshore gas potential on South Africa’s West, Southern and Eastern coasts; and the large quantities of gas that are being discovered in Mozambique, gas has the potential to play a far bigger role in the economy.

The trouble with both shale and off-shore gas is that they could take anything from eight to twelve years to bring on stream, says Shoobridge.

While the potential of gas is being unlocked in SA, the country can move forward and import LNG, he says. Eskom’s gas fired power stations would be an immediate customer (following a small conversion to the turbines) and PetroSA could buy gas to feed its GTL plant, as its own gas supplies have dwindled almost to nothing, he says.

The advantage of this approach is that it would kick-start the development of a gas market and infrastructure to transport gas ahead of SA’s own gas coming on stream.

Gas fired power stations can be built within three to five years. “They cost half of what it takes to build a coal-fired plant and they generate less than half of the emissions,” Shoobridge says.

They will also complement SA’s growing renewable energy industry. “The more renewables you build, the more back-up [power] you need,” says Jan-Willem Eggink, Shell’s GM for upstream business.

Shell is not punting gas as an energy source ahead of other options like nuclear, coal or renewables. “There is something to be said for a diversified energy mix,” he says. “We would argue that there is room for everybody.”

Of course one can’t simply import LNG. It also requires infrastructure – specifically re-gasification terminals. These convert the liquefied gas (cooled to 160° c below zero) back into gas. Once this is done the gas can be pumped into storage tanks or a pipeline.

DOE is considering three sites for the development of one or more terminals – Saldanha Bay, Richards Bay or Coega.

While Shell is exploring possible partnerships with private and state owned gas companies for the development of an LNG infrastructure, it also has $200m provisioned for the exploration of shale gas in the Karoo. If all goes well this could increase $1bn. Exploring for gas off the West Coast of SA is another risky and expensive endeavor. Drilling one well would cost about $200m.

However Shell cannot move ahead with any of these investments. Other pieces of legislation relevant to the development of SA’s gas industry are still outstanding.

The one the industry is watching mostly keenly is the controversial Mining and Petroleum Resources Development Act Amendment Bill, which, in its current form, allows government a 20% free carried interest on all new exploration and production rights of oil and gas. In addition to the free carry, the state is entitled to a further participation of up to 80%, “at market rates”.

“Exploration drilling is expensive and yields results perhaps 10% to 20% of the time.” Eggink says. “We don’t have a problem with government’s increased participation, it is beneficial to have government’s involved.

“What we need is clarity and stability and terms that make it attractive to invest – we have to compare South Africa against a global portfolio of opportunities.”

In addition to the MRDP, the DME will publish the long-awaited regulations governing how shale gas will be extracted from the Karoo in January.

Following this it is expected to issue exploration licenses in June or July. “We are a little impatient for all of this to happen,” says Eggink. “The energy crisis is severe; the unemployment problem is severe. With enough energy South African can create jobs.”

Until then there is nothing to do but wait – hopefully not in the dark.

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