Gas: a key solution to our electricity problems?

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RYK VAN NIEKERK: Good morning and welcome to this special Moneyweb podcast. My name is Ryk van Niekerk.

PetroSA (Petroleum Agency South Africa) is South Africa’s state-owned oil company, tasked with a wide range of responsibilities to help ensure energy security in the country. Over the past few years the company has been in the news for the wrong reasons, mostly related to corruption and the company suffering huge losses. PetroSA also no longer produces liquefied natural gas [LNG] since feedstock to its gas-to-liquids [GTL] refinery in Mossel Bay ran out at the end of 2020. This is an issue because PetroSA’s gas-to-liquids refinery remains the third-largest gas-to-liquids refinery worldwide.

Read: PetroSA seeks CEO to lead revamp in SA
Listen/read: Wilhelm Hertzog of Rozendal Partners on why SA’s refineries are out of action

Sandisiwe Ncemane is the acting CEO of PetroSA. She was appointed to this role late last year. Sandisiwe, thank you so much for joining me today. Let’s talk about PetroSA for a moment. What is the status of the company? Are you producing any fuel? What are your main operational successes at the moment?

SANDISIWE NCEMANE: Good morning, Ryk. Thanks for having me on your show. My name is Sandisiwe Ncemane and I’m happy for you to call me Sandi. I definitely want to share some of the highlights. But I think as we go into that let me also indicate that, yes, you are correct that PetroSA over the last few years has had to overcome some key challenges, anchored on the depleting feedstock to its gas-to-liquids plant in Mossel Bay. That has required that we look at interventions from multiple perspectives.

I think it’s also opportune for me to share that last week one of the key milestones that starts talking to how we are resuscitating this particular plant and how it ties into our long-term strategy, I think started to have its anchors in the market through the request for proposals that were sent out into the industry, requesting potential partners and funders to respond, indicating their interest.

That really entails an opportunity to reinstate the gas-to-liquids plant in Mossel Bay. Central to that is also ensuring that we do have a stable feedstock supply into that particular facility.

Now, how does this talk to our long-term strategy?

I’d like to perhaps paint the picture that also gives you a sense of what we are prioritising in the more immediate term. So for PetroSA our long-term strategy really starts to talk to the period 2027 onwards, where for us gas is among the critical feedstocks, not only in the context of reinstating our refinery but also in terms of contribution to power generation, as well as stimulating various industries with the provision of natural gas.

So an integrated gas economy for us is part of what our outlook is in terms of contributing to security of supply and also delivering to the integrated energy planning of the country.

I spoke to that in terms of it being our long-term strategy. Enablers of course of that at the time when we are able to secure that feedstock [are that] we have a captive utilisation or offtake in the form of the refinery that would be going through the restatement. As you are aware, that refinery in the current capacity [has] a capability of 46 000 barrels per day that it can generate. It’s based on a three-train system.

RYK VAN NIEKERK: That 46 000 barrels per day – if the plant is running at full capacity, how much of the fuel can that plant produce relative to what we use every day in the country?

SANDISIWE NCEMANE: Well, it’s also linked to the combination of … products [is] that you would essentially be producing. So let me give you a view of what typically we would have produced in the period, say, pre-2018, where one of the key products we were producing, over and above the diesel, your petrol and a bit of, say, paraffin, [was] specialised petrochemical products, which in themselves had actually anchored themselves through markets internationally, and particularly in Europe where we had established a special vehicle, the Europe BV vehicle, which we had utilised to trade in that particular region. That should give you a sense of the myriad products that we then provided through that refinery.

But, as I’m saying, what the outlook is – additional to that refinery with the availability of gas – what we would want to also be contributing is to the power-generation solution.

In the more immediate or, shall I say, short- to medium term, we are seeing an opportunity for PetroSA to do that through the tail gas that we’re still receiving from our offshore fields. As you mentioned, Ryk, over the years we’ve seen the depleting resources or reserves from that particular field. However, from what our last reserves audit indicated, we still have capacity to the tune of about 45 to 50 million stuff [barrels?], if you will, coming through that particular facility that we can then use to drive power generation. We call that gas ‘tail gas’.

And from some of the indicator studies we are doing, we’re seeing a capacity of close to 200MW of power that can be generated utilising that tail gas.

Why I am highlighting this is because there is already development work that we’re doing that would essentially enable this. So not only have we got access to the gas – and from the volumes we’re talking to we could have at least three years’ provision to drive that particular solution – we also have undertaken a lot of the development work, including starting work around some of the permits. An environmental impact assessment is one of the enablers that we need to have in place, and that work has been triggered. We’ve also had a team that’s led work around the grid capacity assessment. So, once you generate the power, how do you evacuate it? That’s critical. And of course from the commercial side it would be important to then secure the offtake [agreements].

I think on the back of where we are located, one of the key offtakers whom we have been engaging at different levels would be Eskom. You are aware that they also have their own open-cycle gas turbine in Mossel Bay as well as Cape Town, and Gourikwa in Mossel Bay in particular is adjacent to our facilities. So even with the availability of gas, there’s an opportunity for them to convert that particular facility – to have a hybrid solution, if they will … gas.

RYK VAN NIEKERK: We’ll talk about the solution for our energy, the electricity problems, in a minute. I just want to go back to the plant in Mossel Bay. Is it standing idle at the moment, waiting for gas? And, if so, when do you think you’ll be able to get a consistent, adequate supply of natural gas to get that plant back to full production?

SANDISIWE NCEMANE: In December ’20 the plant went offline, again linked to the availability of the feedstock. One of the critical mass stories [that] I’m sharing [is] that we have now triggered the process which, one, would reinstate the technical integrity of the facility, through the partnership approach that we’ve gone out into the market to pursue.

Secondly, that would also assist us to find the most optimal feedstock solution. I’ve mentioned what the long-term solution would essentially be anchored around, which is gas, indigenous gas. If you look at that RFP [request for proposals], it allows opportunities to look at a range of feedstock that could be used in the more medium term, which include LNG, which would include as I mentioned the tail gas, which would also include the possible option of even liquid feedstock.

You are aware that the plant is configured such that it takes both gas and condensate to produce the full capacity of the refinery.

RYK VAN NIEKERK: The recent discoveries of gas offshore or close to Mossel Bay – I think the Brulpadda development is one of the big ones, one of the biggest finds in recent times near South Africa. When do you foresee receiving gas from that development and other offshore developments close to Mossel Bay?

SANDISIWE NCEMANE: When I talk to the long-term strategy, which is [for] 2027 onwards, it is quite linked to that particular engagement as well. So that particular opportunity is developed through the TotalEnergies Consortium [which] is the developer for that block 11/12. You are aware that they already have secured the exploration rights, and last year they triggered the application process for the production rights. Of course it is going to be informed by the point at which they secure an investment decision as that consortium. However, as indicated in some of the media engagement, they predict that 2027 or thereabout could be a good milestone for us to start to receive that feedstock. So our [responsibility] is to ensure that the market that would be consuming that gas is onstream to be able to create that value. And the work around reinstating the GTL is essentially to also ensure that we are indeed in a position to receive that gas.

RYK VAN NIEKERK: But that is still a few years away.

SANDISIWE NCEMANE: That is a few years away on the back of the work that is really entailed in any exploration and production value chain, and the timelines associated with it. I think, of course, this particular entity – I’m referring to the Total Consortium – have been quite aggressive in how they’re developing this plant from the point at which they made the discoveries, and then now [are] pursuing the production right. I trust that we will then see how that timeline unfolds.

However, I think there are likely to be other developments that too could contribute to our being able to talk to a stable supply of gas, of feedstock by the period 2027 on this. In the more medium term, if I could say, I think the options that are outlined in the RFP could possibly also present viable solutions in terms of the reinstatement of the refinery in itself.

I think what I also want to make sure that we are talking to is a view of an integrated solution on the back of feedstock, and particularly gas feedstock, because I think it’s a conversation in a way that we might have been looking at [as] a single-project view. Once we start to look at it in a consolidated manner, I think it starts to also talk to a critical market that makes these projects, I think for the developers, more attractive…

RYK VAN NIEKERK: You referred earlier to the RFT [request for tenders] you issued to work with private sector partners. Just tell us about the strategy there. Is it an outsourcing of some of the functions? I know some people would even suggest that it’s a privatisation of operational responsibilities. What would the future structure of such relationships be?

SANDISIWE NCEMANE: I think the way it is structured really is opening up the discussion for various modalities. What I can indicate to you is that PetroSA will remain with a share in the solution. I think that’s a critical aspect to keep in mind in terms of the value that we’re also bringing into ensuring that we make this work. Remember, from a state perspective we still hold a key mandate from a security of supply perspective, and I think that will remain central in ensuring that this solution is viable and implementable.

What is also an important aspect I’d like to share when we talk about the reinstatement of the GTL is that this approach we are taking is we can get partnerships, and partnerships also from a government-to-government level…. We are quite keen on engaging parties that have a support linked to a government or a country associated with them. We also appreciate that there are private players that come with that kind of configuration, so we are keen on seeing the responses that we’ll be getting.

As you look at that, you will see that there are really two elements to this particular implementation. There’s an element that says we’re looking for a partner to co-invest in the reinstatement, as well as an element that says how optimally we [might] fund this particular work. So that’s what you see in that particular opportunity.

RYK VAN NIEKERK: You’ve said PetroSA will retain or hold a stake in these ventures. Does that mean the partners or the private-sector participants would have an equity stake in such projects, their own equity stake?

SANDISIWE NCEMANE: We are quite keen to see how those options are presented in the responses, and the various iterations that would come from the respondents in terms of how we could make this particular solution work.

So no, we are not looking to outsource to a service provider. [We’d prefer] to go into a partnership that would allow us to deliver value through this solution.

RYK VAN NIEKERK: Then gas seems to be the energy source that is not getting the airtime I think it should have, or should get as one of the key solutions to our electricity problems. Earlier you said maybe there are plans to generate around 200MW of electricity with the use of gas. First of all, what do you think the role or the potential role for gas is in our energy mix, and do you think it will be able to play a meaningful role – not only through practical and logistics terms, but also due to some resistance from environmental groupings?

SANDISIWE NCEMANE: Our one marker is to confirm that gas definitely has a strategic role in the South African energy solution. I think that is also evident when you look at the Integrated Resource Plan [IRP] that we’ve seen in 2020/2019. That does make provision for gas a key part in power generation. What I think is also interesting is, when we talk [about] gas and natural gas, what it potentially looks like for South Africa, a South Africa in the context of where it sits in southern Africa with the potential unlocked already, as we see through the experiences in Mozambique and the developments that are coming about on the West Coast, if you look at South Africa going into Namibia. I think that’s an important element.

And of course the resources that we potentially have [on] our own shores – we’ve already mentioned Block 11/12, where Total is doing some work – there’s already evidence that there are strong resources in the country.

Why I say it’s interesting is that the gas conversation for me then says we talk about gas from an indigenous perspective – what we can get from our own reserves, both offshore and onshore. But I know this, you are right, in an environmental discussion it becomes one where there are great sensitivities. But I think the point is we have prospects in-country. We’ve got the neighbouring states and the reserves that are already unlocked in some of those. You’ll remember that PetroSA, being part of the CEF (Central Energy Fund) group, also through one of its sister subsidiaries would have an interest in ensuring that we are optimally utilising the Rompco pipeline from Mozambique into South Africa, where iGas currently has a 40% shareholding.

I think additionally that also starts to talk about what natural gas imported through Mozambique potentially means as we look at that Mpumalanga region and the prospects around power generation utilising gas as the feedstock.

Moving on from there, we then have the coastal opportunities over [recent] years. You may have read that the deep-water ports themselves present an opportunity where imported liquefied natural gas could potentially be utilised as well to drive power generation, but also to become a gas supply to trigger industry. Once again it goes back to the point I talk around gas being an integrated solution or integrated gas economy that we need to be building.

For me, I think in the instance of PetroSA, where we are located in Mossel Bay, already having had the experience of producing some of the offshore blocks and fields to produce gas, I think we can demonstrate some key learnings there – not just from a technical perspective, but from a community/social/economic perspective what that means for that particular region. And secondly what more gas would effectively unlock – again not just in that particular part of the country but even [more broadly].

So I’m saying when we talk about gas let’s look at it in terms of where the gas sources could be in the South African context. We could import it, import it from neighbouring countries, import it as liquefied natural gas, using the port infrastructure, as well its Total or indigenous gas. I think it’s ultimately part of that particular cake for the country.

RYK VAN NIEKERK: Just for interest’s sake, what do you think of possible mobile solutions like a power ship which can deploy a functional power plant utilising gas as a fuel source – well, in less than two years? South Africa so desperately needs electricity. Do you think that is a solution?

SANDISIWE NCEMANE: Yes, I think as a country we really need to explore all options and look at, as you say, maybe in the immediate term, what the solution provides as value, and then how it integrates into the medium-term solutions that we’ve outlined in our IRPs, that we’ve outlined as we look at unlocking our own indigenous [gas that we’ve] outlined in the regional, and I’m talking about the seismic regional gas plan. I think there’s various work that’s quite rich, as well as the South African Gas Master Plan. There are plans that are really rich, that I think provide solutions. Again for me how do you line that up?

So yes, mobile solutions. And, by the way, I mentioned the tail gas to power, and part of the options in terms of the power-generating block is to utilise a mobile generation solution, of course looking at it as a more short-to-medium term solution that would integrate into a longer-term power-generation solution.

And I think there are solutions that we could possibly look at. How do you then make [them] feasible? How do you structure [them] so that the developers are able to secure the relevant funding, as well as offtake and the necessary enablers. So for me the timing is also linked to our being able to accelerate and get more efficiencies in securing some of the environmental authorisations and permits, the generation licence, etc that would be critical in realising those solutions.

RYK VAN NIEKERK: Yes, and I think also pricing will be absolutely critical. Are you involved in potential development of shale gas in the Karoo?

SANDISIWE NCEMANE: Yes. Again, I’m going to respond to this one in the context of the CEF Group, where the Petroleum Agency of South Africa is one of the sister companies. They are the regulator for the oil and gas exploration production, but they are also playing a critical role in building awareness around the oil and gas sector. They’ve been doing extensive studies around shale gas and understanding the baseline in terms of some of the resources, including water in that region. I think it’s important work that has been done. I think our being able to unlock the potential of oil and gas through what is available in the Karoo region and other areas in the country is important.

Once again, we need to make sure that the approaches we take are sustainable but also integrated insofar as the environmental considerations that need to be applied. I think the fact that Pasa, among the key parties [is] involved in this value chain doing some of the analysis and baseline studies, is a demonstration of also the importance and commitment to ensuring that the work is done in an environmentally sustainable fashion.

RYK VAN NIEKERK: It seems really positive. It seems you have a strategic plan going forward. The proof will be in the pudding, so to speak. Are you confident you’ll be able to execute these plans and contribute towards energy security in South Africa, given the track record of PetroSA over the past decade or so?

SANDISIWE NCEMANE: You are quite frank. I like that. It’s important. And for me to be quite pragmatic is [that] sometimes we need to start in order to get to a point where we can demonstrate the plan.

So I’ve shared with you what we are planning in the long term and what we are doing in the medium term. What it has required for us, though, is to say ‘Immediately, PetroSA, what do you do to ensure that financially you are stable as a country, but also that you start to build your capacity, building towards being able to deliver on these integrated gas solutions?’ It has put us at a point where we are really bolstering aggressive growth in the downstream business through our trading and marketing arm.

Now, this is a space where the likes of Eskom becomes one of the critical customers whom we are servicing immediately through the provision of your petroleum products, including diesel – which is utilised in the open-cycle gas turbines for power generation – among other products that we are going to be making available to the likes of Eskom and other industry players, including heavy fuel oils and other black oils procurement.

So I’ve got a trading team that’s really looking at how best they execute their trading strategy in the context of the international landscape, as well as the South African landscape that we are operating in.

RYK VAN NIEKERK: You are still in an acting role. Government has promised to appoint a permanent CEO of PetroSA. Do you know when this will happen?

SANDISIWE NCEMANE: We will be guided and again… followed by the board of the organisation as well as our shareholder CEF. And I think in due course the timelines associated with this will then be communicated.

RYK VAN NIEKERK: That was Sandisiwe Ncemane. She’s the acting CEO of PetroSA.