As the exploration boom in parts of Africa continues, South Africa’s strength is its ability to deploy alternative technologies that have been developed around its available resources
Oil and gas companies have had little choice but to learn to live with the challenges of running businesses in Africa.
The continent supplies some 11 per cent of the world’s oil and has significant untapped reserves. It is expected that the region will soon pass North America to become the third largest producing area after the Middle East and Central and Eastern Europe.
In order to access this potential, however, it seems companies are required to negotiate a range of challenges, most notably an uncertain regulatory framework. The inaugural PwC Africa Oil and Gas 2010 Survey found this to be the top constraint in developing oil and gas businesses in Africa.
Regulatory frameworks
“The prioritisation of regulatory frameworks as the number one challenge has probably been influenced by changes in the regulatory environment in Nigeria, and regulatory frameworks under development in Ghana, Angola and Uganda.” PwC said limitations relating to infrastructure and corruption also continued to feature.
Despite these constraints, foreign investment flows into Africa continues with oil rich economies to the north of South Africa the main beneficiaries.
At $1.6bn, inflows of foreign direct (FDI) investment into South Africa last year were down substantially on 2009’s $5.4bn. According to figures from the World Investment Report 2011 of the UN Conference on Trade and Development (Unctad), South Africa slipped to Africa’s tenth largest destination for FDI with 2.8 per cent of the continent’s total in 2010.
League Tables
Angola, Egypt and Nigeria topped the FDI league table for 2010 when inflows to Africa were $55bn, 9 per cent down from 2009.
While some government policies and talk of nationalisation by the ANC Youth League have been unpopular with investors, a major reason for South Africa’s declining share of African FDI is the allocation of funds to the oil industry that seems to be dominating flows. The rise of Angola and Nigeria, amongst others, as major oil producers is among the factors diverting FDI flows from South Africa.
Oil Prices
According to Reuters, Angola, Africa’s second largest producer after Nigeria, is scheduled to export at least 1.57 million barrels per day (bpd) of crude in October, with the new Pazflor oilfield still a way off reaching full capacity. Strong oil prices have helped Angola reduce debt and generate expected economic growth this year of more than 7%.
Similarly, in Nigeria oil output has rebounded. According to Opec’s figures for 2010, Nigeria overtook Iran as the cartel’s second largest crude exporter, thanks to relative calm in the Niger Delta. In Ghana, oil was pumped from the Jubilee offshore field for the first time in December with the field expected to produce 250 000 bpd by 2013. The IMF forecasts economic growth of 13% this year for Ghana.
The recent announcement by Namibia’s Mines and Energy Minister, Isak Katali of a significant oil find off the Namibian coast, which could yield 11 billion barrels in reserves, could have economic benefits for South Africa, in particular the Western Cape’s service hub.
SAOGA
The SA Oil and Gas Alliance (SAOGA), which promotes South African-based companies supplying the upstream oil and gas industry, said that over recent decades the initial development of South Africa's oil and gas resources and, more recently, the rapid growth of upstream opportunities in West Africa had underpinned expansion. Local supplier capacity had been complemented by many of the world's leading service companies supplying domestic and regional upmarkets from South African bases.
Shaped by available resources
South Africa’s oil and gas industry lacks the potential of some of its neighbours in terms of reserves of crude oil, and has taken shape around available resources - mainly coal and gas.
Sasol is the world’s biggest manufacturer of fuel from coal. Sasol Synfuels at Secumda in Mpumalanga converts more than 40 million tons of coal a year into liquid fuels in a process that tends to be more capital intensive than refining crude oil.
However, the group recently reported improved profitability in the third quarter of its 2011 financial year to end June. This was due to enhanced operational efficiencies, business improvement plans and cost management, Sasol’s chief financial officer Christine Ramon said.
Sasol Synfuels
After carrying out its largest planned maintenance outage ever in the first half of the financial year, Sasol Synfuels significantly improved production performance. Robust commodity prices countered the impact of the strong rand, supporting healthy margins while improved production volumes sustained good cash generation and a solid balance sheet.
“We remain committed to increasing shareholder returns through accelerating our gas-to-liquids (GTL) growth strategy and enhancing operational efficiencies. Our strategy to increase natural gas reserves through exploration and acquisitions that complement our GTL value proposition remains on track,” said Ms Ramon.
Sasol’s Oryx GTL facility in Qatar delivered a positive production performance with plant utilisation improving in May 2011 to an average production of 32 000 bpd, or 99 per cent of capacity.
Commercial hydrocarbons
Ms Ramon said Sasol’s second shale gas acquisition would drive its GTL growth strategy. “We have completed our acquisition of 50 per cent in Talisman’s Cypress A acreage. In March 2011, the suspensive conditions relating to the acquisition of the Farrell Creek assets were fulfilled and we included our first share of production from Farrell Creek in the third quarter.
“With these two shale gas acquisitions adding more than 10 trillion standard cubic feet of contingent resources to Sasol’s upstream portfolio, Sasol and Talisman have commenced with a feasibility study on a GTL facility in Western Canada.”
Although, Sasol Petroleum International (SPI) stepped up global exploration, participating in drilling campaigns in Papua New Guinea, Mozambique and Australia, the wells failed to prove the presence of commercial hydrocarbons - a disappointment Sasol says should be seen in the light of the upstream success enjoyed in Mozambique over many years.
SETSPL
In 2009, Uzbekistan GTL LLC was incorporated as a joint venture between Sasol, Petronas and Uzbekneftegaz to study the viability of a GTL plant in Uzbekistan with a nominal capacity of approximately 38,000 bpd.
The project is nearing the end of the feasibility study stage with Petronas having indicated its intention to reduce its participation to 11 per cent. “Securing project finance and currency convertibility will be key criteria as we consider whether to move to the next stage,” Ms Ramon said.
In February 2009, the Indian Government awarded the North of Arkhapal coal block in Orissa province, with an estimated 1.5 billion tons of coal, to Strategic Energy Technology Systems Private Limited (SETSPL), for the purpose of developing a coal-to-liquids (CTL) plant. SETSPL is a joint venture between Sasol and the Tata Group.
Mossel Bay
In January last year, SETSPL launched a pre-feasibility study into developing a plant with a capacity of 90,000 bpd. A drilling programme to verify coal quality assumptions will enable a decision on whether to move to the next stage.
PetroSA is South Africa's national oil company and a pioneer in GTL technology. It owns and operates one of the world's largest GTL refineries at Mossel Bay from where products are supplied to the major oil companies which market them through retail networks under their own brand names.
In terms of upstream activity in South Africa, the South Coast is the only producing area thanks to gas production from PetroSA's FA platform that is piped 80km onshore to the GTL plant. According to SAOGA, the existing producing fields are close to end of life and PetroSA is actively looking to develop further reserves.
International partnerships include an agreement with the Korea National Oil Corporation, to cooperate in the exchange of commercial and technical information on hydrocarbon exploration and production in Africa, and to explore opportunities in the oil and gas sector in South Africa and the continent.
Hydrocarbon exploration
PetroSA also has exploration activities in South Africa and has acreage in Namibia and Equatorial Guinea.
Aside from its GTL activities, PetroSA is at an advanced stage of a project that could see the establishment of a worldclass crude refinery at Coega in South Africa's Eastern Cape province. Project Mthombo would create the biggest refinery in Africa but a final decision has been deferred to 2012.
According to the PwC survey, many African countries see increased refining capacity as essential to their national interests, allowing for greater security of supply and reduced foreign exchange outflows.
Introducing cleaner fuels
“Should all the proposed refineries across Africa reach fruition, total capacity would initially exceed consumption needs by 1 million bpd and continue to exceed consumption for the next 10 to 20 years. The reduction in global demand creates an interesting dilemma for refinery proposals in Africa as the export markets initially expected to take up the surplus have shrunk significantly.
“The more developed markets in Africa are coming under pressure from governments, environmental groups, car manufacturers and others to introduce cleaner fuels and more stringent emissions standards.
South Africa is perhaps the best current example of the complexities influencing the debate around refining capacity in Africa.”
According to the PwC survey, while PetroSA’s 400 000 bpd refinery would ensure security of supply for the foreseeable future, the anticipated costs of building and commissioning it are estimated at between $10 billion and $12 billion.
Some competitors have spoken out against the project saying the money would be better spent on upgrading pipeline capacity and existing refineries. Refining capability in South Africa is some 40 years old and stretched to capacity.
Against this background, the South African government, the industry and interest groups have been debating the need to introduce cleaner fuels. The cost of upgrading from Euro II to Euro V fuel standards is expected to approach $5 billion without a significant increase in refining capacity.
Cost recovery
Sasol says it continues to engage with government on cost recovery related to the capital investment required to meet more stringent national fuel specifications.
The recent release of draft regulations relating to fuel specifications and standards (Clean Fuels 2) has brought clarity to this issue.
They propose that South Africa moves directly from current fuel specifications, known as Clean Fuels 1 and which are compatible with Euro 2 emission standards, to Clean Fuels 2 by 2017. The latter are comparable with the Euro 5 emission standards.
“Sasol supports the objectives of Clean Fuels 2, which are an improvement in air quality and support for the local motor industry. We are committed to working with the Department of Energy and other stakeholders towards a reduction in vehicle emissions, and the consequent improvement in air quality. We also welcome the lead time proposed to make the required changes at refineries,” said Ms Ramon.
