OFFSHORE ASSETS - JSE MAGAZINE

OFFSHORE ASSETS

Extensive exploration investment by the supermajor oil companies may see gas discovered in huge quantities off SA’s coast. Could this be the answer to the country’s energy security problems?

OFFSHORE ASSETS

South Africans have been watching the huge gas discoveries in neighbouring Mozambique with some degree of envy. Many may be surprised to hear that there is no sound geological reason to expect SA’s own continental shelf to be any less bountiful. The fact is, SA’s offshore potential is under-explored.

That seems about to change with the recent entry of a number of the supermajor oil companies. Chevron, Total, Royal Dutch Shell and ExxonMobil are among those who have acquired exploration acreage over the last two years.

The experience, technology and deep pockets these companies bring to the table suggest some definitive answers to the question of SA’s gas potential. However, as significant exploration appears to be finally getting started, regulatory issues – especially those related to resource nationalism – are threatening the process.

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In Mozambique, the 2010 gas discoveries by Anadarko Petroleum and Cove, as well as Italian giant ENI off the north of Mozambique, have been appraised at between 57 trillion cubic feet and 70 trillion cubic feet of recoverable gas, almost as much as Kuwait’s entire reserves. It is the scale of these discoveries in Mozambique’s Rovuma Basin that accounts for the excitement.

Standard Bank oil and gas expert Simon Ashby-Rudd says: ‘With gas exploration you have to find an elephant field to make it worthwhile.’ Off Mozambique, he says, ‘they didn’t find just one elephant – they found a herd of them’.

The earlier history of the industry in Mozambique was much less spectacular. For a number of years, there was an offshore industry that was based on the Pande and Temane fields, which provided feedstock to Sasol’s Secunda II plant. However, these resources were not game changers. Mozambique’s new discoveries have already enabled plans for power plants and exports along the liquefied natural gas route.

Those with a stake in SA will be hoping for a similar development sequence in this country. The Mossgas project off the Cape’s south coast offers a parallel with Mozambique’s early industry. Given considerable sunk costs, carried by the SA government in the 1980s, the three developed oil fields in the Bredasdorp Basin (Oribi, Oryx and Sable) are commercially viable.

Gas condensates are piped to the PetroSA production facility in Mossel Bay where they are separated into petrol, diesel and kerosene. A floating oil-production facility supplies crude oil to a refinery in Cape Town.

There are political, legal and regulatory reasons for the lag in offshore oil and gas exploration in SA. Until the late 1980s, the only explorer allowed was the state-owned Soekor, the company that opened the Bredasdorp Basin fields off Mossel Bay in the 1980s. Later, in 1999, Soekor was combined with the state-owned Bredasdorp operating company, Mossgas, and reconstituted as the Petroleum Agency of South Africa.

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‘You have to find an elephant field to make it worthwhile. They didn’t find just one – they found a herd of them’

SIMON ASHBY-RUDD, OIL AND GAS EXPERT, STANDARD BANK

The key framework legislation, the Minerals and Petroleum Resource Development Act only came into effect in 2004. New licensing rounds, including new deepwater acreage, were held after 2007. It took a few years to process rights holders and sub-lease holders, and for these companies to become comfortable with the new regime. By the end of 2012, all rights off the SA coast, up to a depth of 1 000m, had been taken up.

As exploration rights are only valid for three years, companies are under pressure to act. According to Ebrahim Takolia, chairperson of the South African Oil and Gas Alliance (SAOGA), the issuing of 30 licences to 20 companies for offshore exploration around SA will see initial private-sector activity in 2014.

For the first time, major exploration is expected off the coast of KwaZulu-Natal this year. In June, Sasol Petroleum International announced a partial rights sale (or ‘farm-in’, in the jargon of the industry) with ENI, the company that discovered and is developing one of the two big 2010 gas projects in Mozambique. This brings ENI’s experience and resources to the process. The licence runs until 2016. Neither company has yet announced a drilling programme.

Another supermajor will also be active in the same area. ExxonMobil has farmed-in to exploration rights in a roughly 5 million ha part of the Durban Deepwater Basin, held by a company called Impact Oil and Gas. ExxonMobil announced that it 0will begin operations in 2015.

So far, SA’s east coast region – essentially Port Shepstone to Richards Bay – has been explored only by seismic survey. According to PetroSA, only four exploratory wells have ever been drilled but these have shown oil- and wet gas-prone source rocks.

PetroSA lists five leads in the two main east coast basins. A ‘lead’ is simply a feature of geological interest; after it has been more fully evaluated, it becomes a ‘prospect’. A third, often misused term in oil and gas exploration is ‘play’, a generic name for rock formations associated with oil and gas.

The Dolphin lead in the Tugela Basin features ‘deepwater turbidites and fans in early and mid-Cretaceous sandstones’, according to Impact Oil and Gas executive chairman Mike Doherty, the same plays that characterise the enormous Jubilee oil and gas fields off the coast of Ghana.

The activities of another supermajor, Total, are an even better indication that big potential lies off the SA coast. The company is selling its two working coal mines in SA.

Although there is no direct link between this and its exploration drilling plans, it is significant that Christian des Closières, the company’s chief executive for SA, has stated that its ‘exploration strategy is now more aggressive’.

Total has farmed-in to acreage held by Canadian Natural Resources in the western part of the well-known Bredasdorp Basin off Cape Agulhas. The company is preparing to drill SA’s first ultra-deepwater well in a 1 450m area. In February, it stated that it would be spending ‘hundreds of millions of dollars’ on exploration in SA waters this year.

Also off the Cape’s south coast are exploration programmes run by Anadarko, which is famous for its Mozambique success, in partnership with PetroSA.

A third hot spot is off the west coast, south of the Namibian border. Shell is active in exploration in the area while Sunbird Energy is developing the Ibhubesi gas field with a view to supplying an Eskom-owned ‘peaking’ power plant north of Cape Town (Ankerlig).

That plant currently uses imported diesel, costs about R500 million per year and is five times more expensive than Eskom’s electricity sales price. Ibhubesi was the first and only offshore gas project in SA since Mossgas in the 1970s. It contains an estimated 540 billion cubic feet of proven and probable recoverable gas reserves.

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The biggest argument in favour of gas generation is that it lends itself to smaller-scale capital commitments and an incremental approach

While there is much promise in these waters, there is also a looming regulatory problem. The SA government approved amendments to the Mineral Resources Petroleum Development Act in March 2014. Although yet to be signed into law by President Jacob Zuma, who can effectively veto the legislation, it has disturbing implications for the sector.

The law does two things. Firstly, it entitles the state to a free carried interest (that is, a share of profit) of 20% in all petroleum licences. While this could be seen as a further tax, it is not the most worrying aspect of the law.

The second, however, is the removal of the upper limits to the percentage that the state can force companies to sell to it, making it theoretically possible for the government to take 100% of an oil companies interest in a project at ‘an agreed price’.

The uncertainty stems from the discretion granted to the Department of Mineral Resources. The circumstances under which the state may exercise its right to buy out a company are not clear.

Numerous voices have been raised in protest. ‘The legislation needs to be sorted out,’ says Ashby-Rudd. Meanwhile, a SOAGA press release argues that ‘[Investment] could be delayed if some of the issues related to legislative uncertainty are not resolved’.

The supermajors, however, do not appear to be particularly worried. Des Closières points out that the amendments will only apply to future licences, not those currently in circulation. But he adds that ‘when we start drilling in future we need to know the terms. It’s good the 20% is known. We don’t want to see that change in future’.

Gas has revolutionised the US economy in recent years to the point where the US Energy Information Agency is unabashed in its references to ‘a new age of gas’. It has proven cheaper than coal generation in addition to being much more environmentally friendly.

In SA, gas – and its potential for on-grid power generation in particular – has been the subject of considerable discussion in recent years. Much of it has centred on the potential of shale gas in the Karoo, the country’s arid heartland.

Hydraulic fracturing to explore the potential for shale gas has encountered considerable opposition from environmentalists and local interests. While the future of tight gas from the Karoo is far from clear, the debate did at least insert an interest in gas into plans for SA’s future energy mix. It crept onto the agenda through the government’s National Development Plan, drawn up under the stewardship of former Finance Minister Trevor Manuel.

Offshore gas now forms part of the Department of Energy’s (DoE) recently mentioned ‘gas utilisation master plan’. The interest in SA’s deepwater gas prospects comes as the country faces up to a critical long-term decision regarding energy security. The call to deal with the post-2008 electricity supply squeeze by building two gigantic coal-burning power stations, Medupi and Kusile, proved fatally flawed.

The 4 764 MW Medupi, which is destined to be the third-largest coal burning facility in the world, is about three years behind schedule and massively over budget.

Although in some ways the government has proven slow to act on the potential of gas, it has been proactive in other areas. Compressed natural gas (CNG) is being punted as a fuel of the future by the departments of Energy and Transport.

In 2010, the South African National Energy Development Institute (SANEDI), a state-owned entity funded by the DoE, partnered with the Gauteng Department of Roads and Transport and carried out a series of tests using CNG with government vehicles. The results showed around a 30% saving in fuel and a 25% reduction in greenhouse gas emissions.

The project has since been rolled out to other vehicles, including minibus taxis. Most of the nearly 285 000 taxis in the country, with the exception of the oldest models, can run successfully on CNG.

One company, CNG Holdings, is already helping to convert 1 000 taxis so that they can run on CNG. Using conversion kits, they will allow the driver to switch between petrol and gas or, in the case of diesel-powered vehicles, dual-fuel diesel displacement.

The government, however, is still toying with big once-off solutions. With coal becoming increasingly problematic, it appears to be turning to another large-scale, large-cost option – nuclear power. In May this year, new Minister of Energy Tina Joemat-Pettersson stated that ‘nuclear will be used’. In June’s State of the Nation Address, Zuma confirmed the decision, saying that nuclear power would be a ‘game changer’ for the country.

The most viable option may in fact turn out to be offshore gas. Unlike nuclear, which has been in limbo for many years, gas-fuelled power stations are a strong recent development in Southern Africa.

In 2013, Sasol inaugurated a 140 MW capacity gas engine power plant at Sasolburg. The company, in partnership with the parastatal Electricidade de Moçambique, is currently constructing a similar plant at Ressano Garcia in Mozambique, close to Sasol’s gas pipeline to the Pande and Temane gas fields. Both plants are intended to supply the SA grid. This is not the only significant SA interest in this resource.

Electricity parastatal Eskom appears to have committed itself to converting the Ankerlig peaking plant to gas feedstock, drawing off the Orange Basin’s Ibhubesi gas field.

Perhaps the biggest argument in favour of gas generation is that the resource lends itself to much smaller-scale capital commitments and an incremental approach. Nuclear options may well require a decade of development whereas new and relatively smaller gas plants can be brought online rapidly – the Sasolburg plant took about two years to develop.

Although capable of producing only a small fraction of the output, Sasolburg’s R1.9 billion cost compares favourably against Medupi’s estimated R105 billion.

It has been suggested that SA could take an incremental approach to the gas issue. Former Cape Chamber of Commerce and Industry chairperson (and current Democratic Alliance member of parliament) Michael Bagraim has argued that the answer to energy security issues is to build gas power stations near the coast using imported feedstock.

In 2012, Bagraim anticipated importing gas from the new discoveries in Mozambique or perhaps even the more established offshore fields of Angola. His suggestion garnered support as a possible route to move away from the country’s current dependence on coal and apparent future commitment to nuclear power.

If the intensive current exploration delivers, it may be possible to attain the same end with domestically produced gas.

By David Christianson
Image: Andreas Eiselen/HSMimages