SA’S Oil & Gas Discovery – Huge Potential or Major Hype?

As South Africans woke up to petrol costing them a whopping 76c/l more yesterday, Sassda Western Cape Regional Manager Michel Basson investigates the significance of the discovery of a ‘multi-million barrel’ oil field off the Western Cape Coast and whether it has any real potential to alleviate our reliance on imported fuel or the potential to boost the local stainless steel sector?

Southern Africa is at a cross roads with the current development of regional gas-fields which will lead to natural gas becoming a more important fuel in South Africa. In addition, with the availability of natural gas in neighbouring countries, such as Mozambique and Namibia, and the discovery of offshore gas reserves in South Africa, the gas industry in South Africa is undergoing rapid expansion.

In addition to coal gas and Liquid Petroleum Gas (LPG), South Africa produced about 930 000 tonnes of natural gas and 104 860 tonnes of associated condensate in 2003. The entire gas and condensate output is dedicated to PetroSA’s liquid-fuel synthesis plant, and accounts for about 1.5% of total primary energy supply. Gas manufactured from coal accounted for 5% of net energy consumption, while LPG accounted for about 6 percent.

Natural and coal gas play separate roles in the energy system, with natural gas being used solely as a feedstock for the production of synthetic fuels, and coal gas as an industrial and domestic fuel, thus its importance.

Mossgas, launched by the apartheid government in the face of possible oil sanctions, cost an estimated R12-billion to build and has been labelled a white elephant ever since it went into production in 1989. With a drastic increase in global oil prices around the turn of the century, Mossgas was at last able to show a breakeven in 2000, 11 years after starting production.

It was initially designed with an intended  life span of 35 years, but fortunately the discovery at that time of new gas fields in the vicinity extended this life span to 2008. Since then the facility has operated at around 55% of its production capacity and rendering little impact on the local cost of energy.

Shot in the arm?

Total’s discovery near Plettenberg Bay at the Brulpadda exploration site seems to have the capacity to renew the life span of the production facility and offer some hope to drive some economic growth for South Africa.

The hope is that this discovery will lessen the country’s dependence on imported oil and gas imports. This fact cannot be argued away as a potential possibility, but the South African authorities are already reporting that they will start legislation to separate the conditions for exploring  and exploiting oil and gas resources from those for traditional markets.

In the words of the chairman of the African Energy Chamber, “The oil industry hopes this will be a catalyst and encouragement for all policy makers to work on an enabling business environment for exploration and drilling activities in Southern Africa”.

This brings us to two questions, namely, will parliament be able to create this enabling conditions given the track record on making doing business in the country more “ business friendly”?. This will only be answered in time. The more pertinent question is whether it would contribute to an increased use of stainless steel in the local industry with accompanying increase in local engineering activity and job creation?

An unknown quantity

At this stage there are so many unknowns regarding the actual production from gas at this newly discovered site, that it would be rather reckless to make any prediction but it might be worth looking at the facts underpinning this uncertainty.

The operator of the licence is French company Total, with CNR International and a South African consortium, Main Street, as partners. According to media statements, the South African consortium will hold a 10% stake in the venture. At this stage it is also not very clear who Main Street is and what role they will play.

It is also not certain that government will be able to design and put in place legislation and regulations on time and to the level to which it is required. The role of the SOE PetroSA is unclear and the internal capacity of Petro SA can also be questioned. The process for moving from exploration to production can be difficult and time consuming. At this point in time no final scheduling for production has been released.

Since the shareholding of the local consortium is low, it is not a finality that South Africa will receive any real benefit in energy cost since the gas can be sold on the open market. In practice, the drilling operation is contained to the platform and except for maintenance and repair work, not much of the equipment for drilling and exploration will be fabricated locally.

The French industry is known for bias towards French suppliers and it can be assumed that Total will operate in relative disconnect to any local engineering with specialised equipment being obtained abroad. Transportation of the product from the drilling platform might produce some local content should piping be used.

The alternative is to use large gas tankers that can, in theory, take the gas anywhere in the world – not necessarily to the Mossgas facility which is currently running at just more than a 50% capacity. Therefore, no immediate upgrade or expansion to the plant is envisaged with only the necessary servicing and maintenance to take place. Some jobs might be created at the Mossgas plant in order to get back to full capacity, but no real work potential is foreseen in the stainless steel industry.

While the discovery of the new gas field holds the promise for respite to the economy by making the country less dependent on the exchange rate when buying energy, it still cannot be called a boost and, in our opinion, will not contribute directly to a spike in local stainless steel consumption.