PetroSA Mossgas Gas Field Project, declining feedstock and new gas feedstock reserves: briefing

Meeting report

The Chairperson reported that there was an apology from the Minister. 

Briefing by PetroSA
Mr Everton September, Acting Chief Executive Officer (CEO), PetroSA, introduced the delegation.  PetroSA was producing approximately 5% of the country's fuel requirements.  It was also active in three other countries.  The Energy Master Plan was one of its main drivers.  From time to time it had to answer if it was fulfilling its mandate. 

The company's core business was the production of petroleum and gas.  Synthetic fuel was one of the company's main products.  This was done at the gas-to-liquids (GTL) refinery in Mossel Bay.  A major challenge was to find a sustainable amount of gas.  It strove to improve operational efficiency and effectiveness.

It was important to sustain the GTL refinery at Mossel Bay.  It employed about 1 800 people in the Southern Cape and contributed indirectly to 5 000 jobs.  It contributed to the country's fuel security.  The domestic gas in Block 9 was found in accumulations spread around the block.  The FA platform was about 80km out to sea.  This platform was surrounded by various gas pockets.  Over the last few years, PetroSA had successfully exploited the known resources.

The sustainability of the GTL refinery was based on three legs.  One was the optimisation of current gas deposits.  PetroSA was now able to access deposits that were unreachable previously due to technological limitations.  PetroSA was looking at further deposits in the area but were also looking in other areas such as off the west coast.  PetroSA was also looking at liquefied natural gas to sustain the operations for at least twenty years.

Gas was discovered in Block 9 in the 1980s.  The FA Platform had been built during the 1990s.  By 2000 the EM Fields had been tied back.  In 2007 a South Coast Gas project was initiated.  By 2013 another known gas discovery in the FO area would be exploited.  This would ensure sustainability until 2019.

All the known fields were being supplemented by new areas.  He gave a graphic presentation on the distribution amongst the different sources in the area of the FA platform.  There were additional deposits.  The amounts might still be unknown and more work was needed to determine the size of the deposits.  There were activities on the west coast.  The Kudu Gas Field was the best known.  PetroSA was currently working in five areas.  He focused on the Ibhubesi Gas Field.  PetroSA had a 24% stake in this field.  This was in Block 2A.  PetroSA was busy with its partners in a five year marketing period.  PetroSA needed to determine the marketability.  There was not enough to justify building a pipeline at present.  This might be an option if more deposits were discovered.

Mr September explained what was happening on the upstream front.  PetroSA would focus on areas with high reserve potential.  The goal was to diversify income streams.  The GTL should not be the only source.  The target was to add 20 million barrels by 2020.  PetroSA would be working in Africa.  There were already ventures in Equatorial Guinea and Nigeria amongst other countries.  PetroSA worked with various other companies, both national and international.

PetroSA was a major partner in an offshore venture in Equatorial Guinea.  There were known deposits but exploration to date had been unsuccessful.  There were signed agreements with Venezuela.  There were two areas to be explored in that country.

A large amount of petroleum products would still have to be imported to ensure security of supply.  Some refineries were ageing and PetroSA would be able to develop its own refinery capacity.

Mr September said that the majority of imported oil was refined at points in Cape Town, Gauteng and Durban.  A new refinery at Coega would reduce the gap between production and requirement.  By 2020 there would be significant imports.  The refinery spread would be such that PetroSA's project would address the growing demand for diesel.  The Mthombo refinery would focus on diesel.  Coega was an ideal location for the refinery.  The port could accommodate tankers bearing both crude and refined petroleum products.

The Mthombo refinery would have a range of benefits including job creation and skills development.  It could be used to process crude oil from other African countries, especially Angola.  A huge number of jobs would be created during the construction of the plant.  There would be opportunities for local companies to bet involved.

Discussion
Mr K Moloto (ANC) said that the Mthombo initiative was most welcome.  However, some concerns had been raised in the media.  He asked what the costs would be especially in the light of the government involvement mentioned during the presentation.  He asked about strategic stock cover.  He asked how much stock there was at present especially with the current unstable situation in the Middle East.  He asked what the risks were with the offshore operations.

Mr September assumed that the concerns were those raised in the press.  One of these was that the cost was too much.  Mthombo would produce diesel with a low sulphur content.  This would comply to international standards.  The cost would be about $11 billion.  It would produce 365 barrels per day.  On strategic stock cover, another organisation, the Strategic Fuel Fund (SFF) was responsible for stock levels.  The PetroSA refineries complied with the 30 day stock standard.  There were risks with developing offshore fields.  There were three categories of risk.  The first was subsurface.  Science determined what the geology of the reserves were.  The second was the risk of execution.  There was a strategy on the readiness to execute the projects.  The first step was a feasibility study followed by engineering plans.  The third risk was exogenous.  This related to commodity prices and the exchange rate.  While PetroSA had no control over these factors it did have a plan to deal with the risks.

Mr L Greyling (ID) noted that all major projects would create jobs.  However, money needed to be spent wisely given the massive infrastructure backlog.  The Committee had been told that R2 billion had been lost on exploration in Egypt and Equatorial Guinea.  He questioned the wisdom of continuing with such exploration where there seemed to be little benefit for South Africa.  He asked what the commitment was to clean energy.

Mr September said that it was true that the country had spending priorities.  Government did have constraints.  It was up to PetroSA to demonstrate the financial and other benefits.  They were open to engage on what social benefits would be provided.  The nature of exploration was risky.  Risks were calculated based on available information.  If exploration was successful the oil or gas could be added to PetroSA’s capacity to provide oil or gas.  Even if they did not come to South Africa the profits generated came back to the country and went into projects designed to improve the country's fuel reserves.  He was proud of the fact that PetroSA produced some of the cleanest fuels.  This was partly because the process was based on gas.  He hoped that PetroSA was not misleading the public on this aspect.

Mr D Ross (DA) said that there was a considerable saving to be achieved by mixing ethanol to petroleum.  Money spent on gas exploration could be better spent on local renewable energy projects.  Maize was an option.

Mr September said that the ethanol option had been used as an additive.  He was not qualified to comment on the practical and commercial viability.  It was a generally accepted view that a country like Brazil used a lot of ethanol and this was possible.  It was not really PetroSA's business.

Mr S Motau (DA) asked what was being done to appoint a permanent CEO.  The business case for Mthombo was getting weaker by the day.  He asked why the project should continue according to its original concept.  Mthombo would refine crude oil which was not a clean fuel.  A big concern was on the sustainability of the GTL refinery.  There was a move to push the country towards gas, which was a cleaner fuel.  Now there was concern over the lifespan of gas reserves.  He asked when there would be results on newly discovered products.  Household users of gas were being “scalped”.  The price was becoming prohibitive.

Mr September had been in his post for a week.  He hoped that a new CEO would be appointed as soon as possible.  There was also an Acting Chairperson.  The Minister had announced the name of the new chairperson the previous day.  This should lead to a period of stability.  He thought that PetroSA believed fundamentally that the viability of Mthombo was the ever-increasing gap between supply and demand.  Costs were being contained through value analysis.  They were now in the front-end engineering phases.  Costs were currently being defined.  PetroSA was making progress in finding supplies in new explorations.  Some supply would come from PetroSA's own resources and some from other suppliers.  Processes had to be respected.

Mr Nkosemntu Nika, Chief Financial Officer (CFO), PetroSA, said that PetroSA was not an expert in the processing of crude oil.  PetroSA would need a partner.  The project cost would be between R10 billion and R11 billion.  Government support needed would be in the form of guarantees.  PetroSA would liberate debt to cover the costs of Mthombo.

Mr E Lucas (IFP) said that it was fortunate that gas deposits were still available.  The original projection was that the reserves would be depleted by 2011.  Reserves were being exploited further and further from the coast.  He asked if pipelines were still the best way to transport gas.  He was also concerned with Mthombo.  He welcomed the project, but was concerned that jobs might be destroyed in another province such as KwaZulu-Natal.  The Durban refinery was built for sweet crude.  It would be a plus if Mthombo could process all grades of crude.  The problem with local diesel was that it contained too much sulphur.  SASOL was providing a cleaner form of diesel.

Mr Nika said that said that there were different specifications of fuel.  Europe used a higher standard of fuel.  One could notice it standing on the streets of Europe compared to South Africa.  PetroSA would try to reach these standards.

Mr September acknowledged that more gas was needed.  Projects had been costed against a best practice model.  Plans were being evaluated.  Time-lines could not be shared with the public.  More gas had been found since 2011.  The further from the coast, the more expensive the costs of recovery were.  Current sources would be optimised.  Over time the crude oil price had been increased.  This made exploration for gas relatively cheaper.  When PetroSA started in 1992 it was more expensive to develop the gas relative to the oil price.  Assessments would be done over time.  The company's history was to use local sources in preference to imports.

Mr September said that the justification for Mthombo was not a case of reducing the size of the slices of the cake.  The cake was now bigger due to increased demand.  Mthombo would not take jobs from other provinces.

Mr D Morgan (DA) said that PetroSA had stopped work on an environmental impact assessment (EIA) for a floating storage facility.  He asked if this was still proceeding and what the time-lines would be.  Another company had put out tenders of fourteen liquid nitrogen gas (LNG) tankers.  This would significantly increase the transport capacity for liquid fuels.  There was no legal framework to regulate the import of liquefied gas.  He asked if this was correct.  A sound regulatory framework was needed.  He asked what cooperation there was with terrestrial gas prospectors.

Mr September replied that the floating gas project was still possible.  Costs at the time had not made it an attractive option.  There had been objections from the community on the aesthetics of the project.  The second scoping report had not being continued.  The work done to date could still be of assistance in the future.  Other offloading mechanisms had been considered.  The plan revolved around the injection of gas into the existing system.  The commercial viability of importing supply would be investigated.  On the tender for LNG tankers, he felt that there was no need at the moment.  The standard practice was that PetroSA adhered to international risk management protocols regarding the unloading of any hydrocarbon.  There was an international standard.  Suppliers would not feel safe if South Africa did not follow international standards.  Terrestrial drilling was still some way off.  There had been some onshore drilling.  Some reserves were found but these were not commercially viable.  The infrastructure would have to be put in place.  PetroSA would be happy to participate in such a project, but it would be a long term process.

Ms N Mathibela (ANC) asked if projects would still continue if Government support was not forthcoming.

Mr September said that the history of PetroSA showed that investors would be compensated.  They would comply with whatever rules were set on Mthombo.  Investment would be needed.

Mr Greyling said that any investment made should contribute to national interests.  He asked what interests were served by exploration in other countries.  There might have been some benefit, but by and large there had been no benefit.

Mr Nika said that the mandate of PetroSA was to operate as a business, paying tax and dividends as appropriate.  Many holes had been drilled with very little success.  The land had few hydrocarbon deposits hence the need for offshore exploration.  It was a very expensive and risky business.  The figure of R2 billion had been reached after some investigation.  There was less appetite for exploration.  National objectives were being served by foreign ventures.  Revenue raised would be taxed in South Africa.  Dividends would be paid to the fiscus.  If South Africa lost existing sources of crude, equity partners in Egypt or other countries could be called on to fill the gap.  Production could be taken in kind or in exchange.  PetroSA realised that exploration had not been successful and had shifted its focus to producing or near-producing assets.

Mr J Selau (ANC) said that the President had spoken on the need for job creation.  The projects presented were long term ones.  He asked what was being done to create jobs in the short term.  Mthombo would be a massive project.  He did not see any report with a set completion date.  He asked if there was any estimate.  The more it stalled the more expensive it became.  He asked if there was any study on the balance of cost and income.  In terms of clean energy production, there were broad descriptions on how these projects could contribute.  The climate change conference would be held in South Africa later in the year.  He asked if there was any element of the project that could be shown to the world as evidence of the country's commitment.

Mr September replied that by sustaining the GTL refinery in Mossel Bay jobs were being sustained even though no new jobs were being created.  There were no job losses. 

Mr Nika said that Mthombo was a massive project.  PetroSA took a staged approach to projects.  The first stage was a concept from an employee or the executive.  It then went through a gate and if viable, a feasibility study would be done.  This would be followed by front-end engineering and design.  This was a detailed study including questions of market research.  The Mthombo project had progressed beyond the feasibility stage.  It would be a commercial project with a positive cash flow.  A government guarantee would be needed for completion.  Foreign direct investment would be liberated.  Strategic partners would be needed to provide the finance.  He was not currently at liberty to give a fuller business case.

Mr Morgan was interested to know whether PetroSA contributed to the process run by the Department of Environmental Affairs and the Green Paper on climate change, and how PetroSA had contributed.  PetroSA brought hydrocarbons to the market.  Sometime in the future South Africa would be looking at drastic reductions in emissions.  This would be around 2030.  He asked what contribution PetroSA would make.  He asked if PetroSA would make any contribution to the climate change conference.  He asked if the company had made any contribution to the proposals on tax implications regarding emissions.

Mr September was not sure if PetroSA had contributed to the Green Paper.  He would investigate.  He was aware of the conference for later in the year.  He believed that there had been engagement on the carbon tax proposals to National Treasury (NT).  There were two types of onshore drilling.  One was the issue of shale gas.  The lesser known one was exploration in cobalt methane.  There were significant deposits in the north.  PetroSA was working with the current holders and would look at how PetroSA could contribute.  PetroSA would lend its technical support and would be more involved if deposits were viable.

Mr Lucas said that a lot of money was being spent on a short term basis.  The price of crude oil was ever-increasing and he asked how this would affect the economy.  He was a fan of gas, and he asked if anything was being studied on using gas as motor fuel.

Mr September said it was unfortunate that tiebacks of gas would last for four or five years.  Since 1992 PetroSA had remained in a position of converting gas to liquid fuel.  There were developments down the years.  As the infrastructure was developed in Block 9 all the deposits would be exploited. There was concern over the steadily increasing price of crude oil.  South Africa was endowed with many minerals, but crude oil was not one of them.  The gas deposits did mitigate against this shortage.  The justification of Mthombo was prefaced on the cost of converting crude to refined product.  The refined margin was the net income for the project in terms of cash flow.  When the price was volatile the margin could be reduced but there would always be a minimum incentive.  There was a steady refining margin that ensured Mthombo would remain viable.  PetroSA would continue to explore within South Africa.  This was evidenced by the projects on the west coast.  There were many possibilities.

Mr Motau asked what had happened in Mozambique.

Mr September said that the Department of Energy had visited Mozambique.  There had been several discoveries in the north of the country and in southern Tanzania.  PetroSA was looking at close cooperation with the owners of the gas field and the Mozambique government.

Mr Ross said that increasing the amount of ethanol would help to spread the fuel further.

Mr September did not why PetroSA should not be a part of the biofuel process.

The Chairperson asked how much had been raised from the Mozambique venture.  He reminded Members that the focus of the meeting was on the sustainability of the GTL refinery.  He was worried about the balance between serving the national interest and profit.  He asked why an office had been closed.  He asked how job creation was related to skills development.  The crisis expected in 2011 had been addressed.  He wanted an assurance on the sustainability of PetroSA.

Mr September replied that there were specific plans as to how jobs could be created.  There was mixed success with these plans.  Regarding skills development, enterprise development was lacking.  The annual spend on black economic empowerment (BEE) opportunities was more than R2 billion per annum.  New graduates were brought into PetroSA at various levels.  There were specific in-house programmes to develop skills.  There was an artisan training centre in Mossel Bay centred on the needs of the refinery.  PetroSA had addressed the feedstock need through the initiatives that had been put into place.  There were plans at both local and regional level.  Onshore exploration was planned.  He believed there was a clear path.  Costs had been determined.  Plans were now going through an approval phase.

The Chairperson emphasised that the use of green energy should always be a priority of Government.  It was good to know where PetroSA stood on this question.  Regarding the company's mandate as a public entity, he hoped that the President's policy on the renewal of state owned enterprises should be kept in mind.  It seemed that the situation was under control, but was concerned that there was an allegation of R2 billion being wasted.  The emphasis shift to production from exploration was noted.  It might be relevant to explore how international protocols had been domesticated.  PetroSA had to play a role in the environmental transformation of energy.

Mr Z Mavuso, Chief Director, Department of Energy, said that the Department was looking at the Gas Act.  This had been encapsulated within the existing regulations.  An amendment was being investigated.

The Chairperson said there would be more interaction with PetroSA.    

Adoption of minutes
He asked Members for approval of the minutes of the meeting held on 3 August 2010.  Mr Greyling moved that they be accepted, but as it seemed he was the only Member present who had attended that meeting, adoption was postponed. The adoption of the minutes of the meeting held on 24 August 2010 was moved by Mr Selau and seconded by Ms Mathibela.  The adoption of the minutes of the meeting held on 2 September 2010 was moved by Mr Motau and seconded. 
Committee reports
The Chairperson next raised the report on the study tour to Mozambique during July 2010.  Mr Ross found the report accurate and moved that it be accepted.  Mr Selau seconded.  The report on the visit to Ghana could not be approved due to the absence of involved Members.  Mr Motau proposed that the reports on the visits to France and Lesotho be accepted with Mr Lucas seconding. The other reports would be deferred to a later meeting.  Even if the reports were adopted, he would still review the documents.  There would be significant points for later deliberations.

The meeting was adjourned.