Africa Institute of SA & Standard Bank: Investment Flows for Change

Energy

23 August 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Africa Institute of South Africa (AISA) and Standard Bank briefed the Committee on the potential for energy and the investment flows on the African Continent. The Chairperson remarked, in his introductory remarks, that the Committee had asked for specific plans for at least 1 000 megawatts of renewable energy and although many of the plans showed more than this amount, the Committee wanted to see how the interest in the sector translated into investment. The presenters emphasised that South Africa’s energy issues were shared by other countries on the continent, and Africa offered many attractions to energy investors, including the fields of hydrocarbons and renewable energy. It was imperative for the government and private sector to work together. The oil and gas industry had grown substantially over the past ten years, including in places not known in the past for these resources, such as East Africa. Expansion in energy findings created a need for expansion of infrastructure, especially in landlocked areas. Production was still not equal to consumption. In the SADC region, there had not traditionally been an emphasis on gas infrastructure, because of the availability of coal, but now that additional reserves had been discovered, including shale, there was a need to debate how it would be used in future. Four possible scenarios for South Africa were outlined; a West Coast plan, an East Coast scenario that would include Mozambique and Tanzanian finds, which would then also include a possible pipeline increase,  shipping of East Coast gas to existing South African infrastructure, including a possible new pipeline, and shale gas use, if it was economically viable to convert it in the Secunda and Mossel Bay plants. There was insufficient production, in South Africa, of Liquid Petroleum Gas (LPG). The gas disclosures in East Africa and Mozambique were significant, and it was likely that Mozambique would export the bulk of it. Liquefied Natural Gas (LNG) could also be beneficial, with new plants likely to come on line in March 2018. In the biofuel sector, maize biofuels were successful in the USA, but there had been reluctance to pursue this in South Africa. Other possible options were algae, waste oil, soybeans (although not enough were produced locally), ethanol and use of biomass, using paper pulp steam to power generators. Standard Bank believed that both the sugar and paper industries could add to Eskom’s production. The presenters noted a renaissance of interest in nuclear power, with some setbacks after the Japan disaster, but also noted that there was still public mistrust, a high initial cost for investors, tariff issues arising from the fact that most African countries had to get foreign investment, and the lack of skills and technology. Although South Africa initially had the skills many years ago, they had been lost. The energy mix must be balanced against the problem of emissions. Geothermal energy was being used in Kenya and Rwanda, but in South Africa it would be expensive, compared to coal, because of the depth of the resources, although some mining companies were considering it, on a small scale. It was important that projects on the continent be aligned and that sufficient support be given to them, once they were implemented.

Members wanted more detail on how South Africa could secure gas, and at what price, and from which countries. They questioned the possibilities around a regional grid, and the potential for hydro and geo-thermal power in the country. One Member was impressed with the potential for biofuel but had concerns around the short shelf-life and the need to change other technology, such as car engines. He commented that he would have liked a more balanced presentation on the nuclear possibilities. Greater clarity was sought on waste oil,maize as a biofuel, what investment would be needed to upgrade refineries, and the implications of nuclear power for South Africa. Members also requested more detail on the shale gas potential, but noted that equipment questions would be debated at another meeting.

Meeting report

Chairperson’s opening remarks
The Chairperson noted apologies, and said it was unfortunate that the Department of Energy briefing on nuclear energy updates had been postponed, noting his own regret if anyone was attending specifically to hear that briefing.

He noted that the Africa Institute of South Africa (AISA) would be giving a presentation on investment flows and challenges, and he was pleased to see a large delegation from Standard Bank. He hoped there would be broad discussion. It was important to empower the public and for the committee to have an understanding of investment trends. An investor’s conference had recently been held. The business sector was appealing for increases in renewable energy, to fill the needs, and this Committee had asked that plans be presented for at least 1 000 megawatts of renewable energy. He was pleased to note the vested interest from investors and the private sector, as plans were already in excess of that. It would also be necessary to upgrade current fuel refineries to comply with new standards. Business was showing interest, but he would like to see this translated into investment.  but all the plans they received were for at least three times that. The Chairperson said that this showed a vested interest from. He said that the same was with Liquid Fuels and it was necessary to upgrade current refineries to comply with the new standards. He said that businesses were showing an appetite for this but he was curious to see the investment interest.

Africa Institute of South Africa (AISA) & Standard Bank: Investment Flows for Change

Mr Thokozani Simelane, Chief Research Specialist: Science and Technology Unit, Africa Institute of South Africa, said his briefing would cover energy issues not only for South Africa, but the rest of the continent. It was important to discuss what South Africa must do to maintain itself. Energy was the single most important factor common to all countries on the African continent, there had been an energy transition period in Africa, and it was important to look at the players. Africa offered many attractions to energy investors, including the fields of hydrocarbons and renewable energy. He proposed that the mandate of energy in South Africa should be broad. Because it was slightly difficult for the Africa Institute (AISA) to report on investment issues alone, because it was not so much involved in that aspect, he had suggested that Standard Bank also accompany the delegation, as it was dedicated to South Africa and the Continent. He believed that it was imperative for the government and private sector to work together.

Mr Ntlai Mosiah, Director: Power and Infrastructure, Standard Bank, thanked the Committee for the invitation. He outlined a brief history of Standard Bank, which had been in existence already for 150 years and hoped to maintain this record into the future. It was the largest Bank in Africa and focused primarily on sub-Saharan Africa, and saw new areas of opportunity, leading to the opening of branches, in Angola and South Sudan. Its extensive branch network was important for broad access. The bank, although based in Johannesburg, was a truly African company, with branches around the continent. 

Mr Nicholas Green, Oil and Gas Analyst, Standard Bank, provided a brief introduction to the oil and gas industry, noting major growth over the last ten years. Some of this growth had occurred in places not typically known for having oil and gas, such as East Africa. This expansion in energy findings was creating a similar need for expansion of infrastructure, which was very important for production, especially in landlocked areas such as the Great Lakes Region of Uganda. Production had increased there, but it was not equal to consumption, and international demands were requiring an increase in production.

Mr Green turned to the gas infrastructure in the SADC region, noting that this was historically poor, because energy needs had, in the past, been met by coal resources and important hydrocarbons. Limited gas was discovered, but now the new discoveries had changed the situation, including the discoveries in Namibia and the Angola shale discovery in South Africa. This led to questions such as how and where the gas would be used, the necessary infrastructure requirements, whether South Africa should become a gas-based country, and whether gas to liquid technologies would be used.

Mr Green noted that there were four possible scenarios for South Africa. The first was a West Coast plan that would incorporate fields off the west coast of South Africa and Namibia. The route to marketing would likely be to pump the gas on to shore, and thence to facilities. The second possibility was an East Coast scenario, which included existing fields in Mozambique, and other new discoveries. The total available gas resource here was between 77 and 120 trillion cubic feet (TCF), and he put this in perspective by saying that a resource of 3 TCF was considered to warrant the building of infrastructure. There had also been discoveries in Tanzania. The route to market there included a potential for increased pipeline capacity to South Africa, and for shipping to the European or Asian markets where the price was highest. The third scenario would be to ship the East Coast gas to existing South African infrastructure, and perhaps to build a pipeline. The fourth scenario was use of the shale gas, but this might not be economically viable. The Secunda plant could be used to convert it, as well as the Mossel Bay plant, both of which were potentially losing out on their feedstock.

In the Liquid Petroleum Gas (LPG) market, he noted that although globally there was a surplus of LPG, there was not enough production in South Africa. The import capacity in South Africa was not sufficient for more than 3 600 tonnes of LPG. One of the by-products of LPG was condensate. In answer to a question for clarity from the Chairperson, he explained that condensate was a by-product of the LPG process, which could be used for other things.

Mr Green noted that there were some incredible gas disclosures in East Africa, and that Mozambique was ranked tenth in the world for resources, as its gas disclosures went, in the past five years, from 5 TCF to 160 TCF. He explained how the gas disclosures were procured. He noted that Mozambique did not actually need the gas, so it would make more sense for it to export it.

Mr Green then dealt with Liquefied Natural Gas (LNG) and described the ways in which LNG could be beneficial across a wide spectrum in the future (see attached presentation). He outlined the future timelines for different key developments in the LNG industry. Citing data from Anadarko, he said that new LNG plants would begin to come online in March 2018, with construction having commenced in 2010. New Pipelines would be completed in 2020.

Mr Green gave an overview of liquid biofuels, stating that maize had been very successful in the United States, but the manufacture of a maize biofuel had been banned initially in South Africa for other considerations. The maize possibility was intriguing, not least because of the possible job creation in such an industry, but he noted the current international corn shortage problem, combined with other environmental concerns. Use of algae was being researched as a viable energy source, but that question still remained open. Waste oil was another possibility that was being investigated. Soybeans had also been considered, but there were not enough of them in the country for this option to be viable. Mr Green emphasized that in order to have a sustainable biofuel, there must be stable feedstock. Since the industry was new to South Africa, the plant cost for biofuels was unknown. Government had done research into the biofuels market, as well as into the possibility of government investing in a bio-ethanol plant. Another possible additional biomass would be the pulp which was a by-product of paper, and it was suggested that biofuels should not be pursued, and that instead biomass be used. He explained that the pulp was put into boilers, which then generated steam to power generators. Sugar was already being used in some production. Standard Bank believed that both the sugar and paper industries could contribute to Eskom’s production.

Mr Mosiah noted that although Mr Green had essentially outlined the position in South Africa, similar challenges and possibilities applied to the rest of the continent.

Mr Mosiah moved on to speak about nuclear energy and the challenges involved with that technology. He stated that there were few new plants in the world, and even nuclear-experienced countries like France had had design complexities that created delays and extra spending. There was public mistrust of nuclear plants, and this could contribute to under-performance. It was necessary to find a way of dealing with events such as the recent disaster in Japan. A large debt was created because the plants tended to have a lifespan of 60 years, and he noted that the Initial Duration of Construction (IDC) was another very important element, pointing out that it took about five to seven years to construct a plant.  Many countries in Africa could not afford nuclear plants without foreign investment, and that gave rise to tariff issues. Nuclear plants were something of a challenge to promote, because at the moment African countries had so many other sources of energy. The State needed to be able to support this form of energy, but in reality many countries were overstretched. There were several possibilities for funding, including government loans, as used in the United States, export credit, infrastructure bonds, but he pointed out that carbon credits were not appropriate. Around the world there had been a renewal of interest in nuclear energy. In France, government played a strong role, but China had used country partnerships. In South Africa and the African continent, the key was localisation. Nuclear technology had to be created, and South Africa did not currently have the proper technology. Renewable energy was key also. South Africa was the tenth largest emissions producer in the world, and it was important to meet the requirements of the Integrated Resource Plan (IRP) 2010. The quality of the resource, whether wind or solar, must be shown to be viable.

Mr Green then moved to outline geothermal energy, which, in the Kenyan Rift Valley, could produce 2 000 to 3 000 megawatts. Kenya’s history of using this type of energy dated back to the 1960s and 1970s, but the cost of the technology had dropped, making it more feasible to access the information on the amount of energy store in Kenya. Currently, 15% of Kenya's power was geothermal, and government hoped that it would rise to 30% by 2030. Rwanda was doing feasibility studies but had some funding problems, and another challenge was the shortage of people in the region with the necessary practical skills to run the plants. South Africa had looked at the technology as well, but was not implementing it, because coal was still relatively cheap. The geothermal energy sources in South Africa were very deep, which would make access very expensive. Some of the mining houses were looking at it, because of their existing deep mines, but he said that if it were to be used, it would be on a much smaller scale than in Kenya or Rwanda, who shared similar geographical features.  

Mr Mosiah spoke briefly on projects in other countries, including an African Union project in Zambia and projects in Mozambique. He noted that some countries were running too many projects and giving insufficient support to each of them. It was important that projects should integrate.

Discussion
Mr L Greyling (ID) said that he was very excited to see how the regional picture had changed in the last two years. There were issues around the building of infrastructure and how South Africa could secure gas, and for what price. He was curious to know if other countries were interested in supplying to South Africa. He asked if Japan was interested in African energy, and how South Africa would secure its energy needs in the long term. He also wanted to know what the country’s needs were around the grid, and if it was possible to build this from abroad. He also asked about the Hydro potential for energy in the Congo.

Mr E Lucas (IFP) said that he had understood that the problems around gas essentially arose in relation to the transport. He thought that Mozambique was doing itself no favours by not having plants at source, since its major problem also related to costs. He was impressed with the potential of bio-fuels but was worried that bio-diesel had a short shelf life. He also mentioned that Brazil had to change its entire car engines to accept biofuels. He noted that ethanol was long-established. He would have liked to hear a more balanced presentation on nuclear energy. He wondered about South Africa’s potential for geothermal energy from the country’s hot springs.

The Chairperson asked if South Africa would be interested in Gaz de France (GDF) gas resources and the potential to export, from Middle East and South America. He was interested to hear more about the benefits, given the growing appetite in certain private sectors. He also questioned what the challenges would be in getting equipment locally produced in South Africa. He felt that the notion of investment was often taken for granted, but asked if South Africa was getting investment into the field. He felt that more information was needed on the use of waste oil, and the economic sustainability of maize as a biofuel, as well as details of the financial investments that would be required to upgrade the refineries. He asked what exactly were the implications around the renaissance of nuclear power. Finally, he requested more information on grid parity.

Mr Mosiah said that he would address the issue of grid parity first. The Eskom Multi-Year Price Determination was now public, and he showed a graph relating to the tariffs, which noted the costs against what the consumer would be paying, and said that grid parity would be reached by 2014. Competitive prices would then drop. Investors were interested in the internal rate of return (IRR) statistics.
Operations and Maintenance (ONM) was another major factor, and it was shown that this was something that was not readily affordable from within the country, so investors were being sought to support these operations. In Mozambique, he indicated that the cost of the wells was more than the entire GDP of the country, so the operators had a clear strategy to target investors from the Asian countries. Asian energy prices were five or six times those of the USA. South Africa could well negotiate with Asian countries.

In relation to transmission, he said that discussions with Eskom had led to agreement that a sub-Saharan super grid was a necessity.  Both an economic community and a power community were desirable, and investments must be sought. The Grand Inyan in Congo was viable, but there was also hydro potential in other areas.

Mr Green stated that the biggest driver was the East. Japan and South Korea were large importers. There was, however, a need to be realistic about the fact that countries would not sell to South Africa for less than the sales to other nations. Gas prices in the USA had hit rock bottom, at only US$2 per gallon.

Mr Green noted that in relation to the West Coast project, a decision was needed on whether a pipeline was required.

Mr Green expanded on some of the other projects. In order to be viable, the temperature for geothermal must be at 150 to 300 degrees Celsius. Waste fuel was simply old oil that could used to power things, and he gave the example of a car that had been made to run on previously-used chip-frying oil. In respect of maize, the question of surplus was a problem. He explained how oil reserves were calculated and maintained that they were a statistical probability. In relation to crude oil, he said that all countries had that potential.

The Chairperson asked what was happening with shale gas.

Mr Mosiah responded that there had been a lot of activity initially, but at the moment things had gone quiet as nobody quite knew which way the matter would move. Over a period of time, it could be viable. However, significant infrastructure was needed. He also stated that Gas to Liquid sources needed further investment and there had to be more research into the potential of its by-products, such as fertilizer.

Mr Simelane interjected that this might add to the debates, and that it was necessary to see the triggers of industrial development, so that a direct link could be established.

Mr Mosiah stated that there were also challenges around equipment.

The Chairperson suggested that this issue be left over for debate at a subsequent meeting.

Mr Mosiah responded to questions on nuclear power. Countries who were looking seriously to reducing their emissions had to look at the nuclear option.  There had been a renaissance of nuclear interest recently, in terms of a number of new plans made, largely in countries to the East, but then the impetus was slowed by the Japanese disaster. South Africa had had the necessary technology during the apartheid years, but had then lost it. It did, however, still have the technology to use nuclear cycles and produce isotopes, but the world market had been reduced.

The Chairperson noted that the Committee needed to look at the broader options, and told Mr Greyling that the Committee would be looking into the question of hydro power in more detail. He would be inviting other role players also to debate the issues. A financial report and an investment report would be given to the Committee. He reminded the Members of a meeting to discuss the challenges of locally produced equipment.

The meeting was adjourned.

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