Energy Stakeholders Meeting: Assessment of Upstream Sector in oil and gas industry

Energy

19 February 2014
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Committee arranged a meeting with stakeholders in the energy sector to assess the upstream in the oil and gas industry. The aim of the gathering was to allow stakeholders from across the sector to express their views and air comments more freely than at public hearings, and all comments would be fed into the legacy report for the Fifth Parliament. It was note that South Africa was seized with formidable challenges of ensuring accessibility, transformation and sustainability to the energy stream, and had to ensure that whatever was already in existence was refined and improved. Oil and gas had the potential for huge influence and change.

PetroSA described its mandate to be to operate as a commercial entity, create value for its shareholders and South Africa at large, advance national objectives in the petroleum industry and complement, and promote Government policy and strategic thrust.

The company cited the definition of Security of Supply from the Energy Security Master Plan (2007) ensuring that diverse energy resources, in sustainable quantities and at affordable prices, are available to the South African economy in support of economic growth and poverty alleviation, taking into account environmental management requirements and interactions among economic sector.

The two major blocks with oil and gas discoveries on the South Coast of South Africa were outlined, and its involvement with other players on West Coast Blocks was also outlined. The basins in South Africa, although large, were relatively under-explored, and there was no deep-water drilling. The potential of shale gas, although estimates had recently been downwardly revised by the US. E.I.A. to be 390ctf, could be huge, and positive spin-offs would include job creation, taxes and royalties, services sector development, technology development, increased foreign exchange, as well as manufacturing of petrochemicals and fertilisers.

PetroSA would be empowered by a designation as the carrier of the state’s interest in the MPRDA. Such carry should be free to allow risks to be carried by foreign investors.

Localization withl local beneficiation as its core, and the current skills development initiatives were described.

The Petroleum Agency of South Africa (PASA) set out how oil and gas exploration was regulated, under the Mineral and Petroleum Resources Development Act (MPRDA), and the four current functions of PASA, in the regulatory, monitoring, data archiving and resource evaluation fields were described, although it was also noted that the MPRDA amendments would move the regulatory functions to the Department of Energy (DoE) and other functions to public entities. In regard to future prospects, PASA noted that about 20 companies were presently involved in production and exploration, with about 67 concessions on shore by local and international companies. Onshore, the interest in the Karoo was largely in “unconventionals”, in the coal-bearing areas, including biogenic gas, in Virginia and Evander areas and shale gas, which were explained. Numbers for production and estimated production were quoted and the distinction was made between prospective resources (where there was no proof of existence yet) and contingent resources (discovered, but yet to show commercial viability). It was stressed that exploration carried significant risk, with exploration success rates at only about 25%, and risks ranging from the yield, to the regulatory regime, stability of that regime and the countries, markets, and engineering and technological capacity to be found. If a large gas discovery was made in South Africa, this would result in revenue streams from company taxation and production royalties, an increase in the security of supply, and a change in the energy mix, to move away from reliance on coal, as well as the potential for increased infrastructure development.

The South African Oil and Gas Alliance (SAGOA) Alliance said that as yet, South Africa did not really have an upstream and midstream industry, in the sense that there was no directly established industry, but passing trade from rigs and ships, and although a number of engineering, aviation, security and manufacturing firms did provide services and products, these were into East and West African countries. Although many overseas companies based themselves in South Africa, where the infrastructure was stronger, they were actually preferring to invest in other regional areas. South Africa did not manufacture rigs, or the cement going into the well or casing. Oil and gas exploration provided limited opportunities for BBBEE involvement and the risk to skills development was that should exploration activities yield no results, people with skills would move elsewhere. At the moment, there was not much of a local market for gas, and it comprised only about 2% of the energy mix, with a major limiting factor being the absence of a distribution network. South Africa’s upstream work at this stage was small in comparison to production and reserves globally. Although there was potential for future activities, this would depend on confirmation of commercially viable oil and gas.

The Department of Energy (DoE) said the key challenge for government was how to achieve the right balance between lowering consumer prices, deal with high input costs, achieve security of supply and meet the empowerment needs of Historically Disadvantaged South Africans (HDSA). There was also a need to look at the new industries, which might in themselves challenge the technological and economic advancements. The history behind, and current ambit of the Gas Act and the Petroleum Pipelines Act were described, and the work at Mossel Bay and the Sasol / Mozambique pipeline were outlined. It was accepted that government would have to play a major role in transmission, but cooperation with other players was needed. The Petroleum Products Act might need to be amended, and there was also consideration being given currently to a Gas Amendment Bill, which would try to promote more HDSA-owned companies, and promote equity throughout the value change, with development of competitive markets also for gas and gas services. The main challenges in regard to infrastructure related to wider access. There would be a need to ensure proper synchronisation of legislation and convergence of energy and resources. It was accepted that the high risk and capital nature of projects was stalling development, and the DoE recognised that regulatory certainty was key to investment, whilst the diagnostic report on the White Paper had also highlighted the role of the private sector, infrastructure needs and links between discoveries and installation of pipelines.

PetroSA was asked why it had not achieved its mandate of providing one quarter to one third of crude oil, but PetroSA thought the question should instead be posed to the Ministry (Department of Energy), and it was also asked to explain how a strong NOC with sizeable resource base could drive down prices. The Chairperson asked for an overview of whether there were prospects for upstream and midstream industries, and emphasised the need for synergy between public and private sectors. PetroSA asked SAOGOA to explain why it thought that the potential was low, and pointed to the degree of investment already. An Anardarko representative spoke to this company’s experiences in Mozambique, including the spend in that country and South Africa, and outlined what exploration companies and investors were seeking, emphasising a certain regulatory environment, that would allow for a reasonable rate of return, with stability. Badino Gas Managing Director noted the problems facing new players, and emphasised the lack of understanding, on the part of both the DoE and the financiers, of essential correlation between capital and exploration rights, emphasising also the need for  predictability and certainty. SAOGA expanded on its points, in answer to question raised about the potential of the upstream industries, and noted developments in Saldanha Bay. A representative of ArcelorMittal in that area indicated what this company was looking for and said that timing was crucial. Other players from petroleum companies and banks said that investors were significantly more wary of investing at the moment, noted that a major uncertainty was the route for gas to market, the proposed amendments to the MRPDA. A member of the Committee said policy should not act as a disincentive and perhaps more positive incentives were needed, as well as better allocations to gas. A Sasol representative emphasised the need for integration and set out what Sasol saw as the five key pointers for success. Sunbird Energy expressed some surprise at the degree of under-exploration, given the size of blocks, and PetroSA believed that the right environment to deliver the gas to the market would act as a trigger. Another commentator urged that people should not “fall in love with numbers”, emphasised the huge risks and costs of exploration and also emphasised that the investment climate had to be stable, although he believed that there was currently sufficient stability in South Africa. The Chairperson expressed his gratitude for the inputs, hoped that the Fifth Parliament would continue these types of engagements, noted the challenge of information asymmetry and lack of inter-departmental input, and urged DoE to strive to meet targets to increase the gas uptake in the industry.
 

Meeting report

Chairperson’s opening remarks
The Chairperson noted that the meeting would conduct a brief assessment of the upstream sector in the oil and gas industry. He had chosen this topic because he had been approached by a number of stakeholders on legislation, policy and the need for certainty. There was evidence of increased uptake in oil and gas exploration as attested to by the Petroleum Agency of South Africa (PASA) could attest to that.

The National Development Plan (NDP) and related instruments made reference to the importance of energy so this Portfolio Committee was obliged to be creative from time to time. During his term as Chairperson, the Committee had mostly been exposed to the Department of Energy (DoE or the Department) submissions, although there had been engagement also with the on and off shore petroleum associations and other key players. This meeting was an opportunity for further exposure and the comments and points made would be fed into the legacy report of this Committee to the Fifth Parliament. Part of Parliament’s function was to initiate debate, and public participation was a vital component.

He set out the context, saying that South Africa was seized with formidable challenges of ensuring accessibility, transformation and sustainability to the energy stream and to ensure that whatever was already in existence was refined and improved. He referred to comments on how the dynamic of oil could influence and change the political and economic development in countries.

PetroSA’s role in the South African Upstream Petroleum Sector: PetroSA presentation
Mr Bongani Sayidini, Regional Manager: East Africa, PetroSA, tabled apologies from the Chief Executive Officer and introduced Mr Andrew Dippennar as Vice President for New Ventures Upstream, Ms Zama Luthuli as Vice President – Corporate Affairs and Schared Svervices, Mr Bonga Zungu – Government and Stakeholder Relations Manager and John Messiahs as Strategist: Business Intelligence.

He noted that the mandate of PetroSA was to operate as a commercial entity and create value for its shareholders and South Africa at large, to advance national objectives in the petroleum industry and complement and promote Government policy and strategic thrust. He noted that the PetroSA strategy needed to be adoptive to the evolving policy landscape of RSA.

PetroSA viewed Security Supply in the context of Energy Security Master Plan (2007) definition as “Ensuring that diverse energy sources, in sustainable quantities at affordable prices were available to the South African economy, in support of economic growth and poverty alleviation, taking into account environmental management requirements and interactions among economic sectors.

From an upstream perspective diversity implied oil and gas across a geographic spread.

He described that two blocks oil and gas on the South Coast of South Africa and tabled maps (see attached presentation) showing Block 9 with assets of oil and gas, and Block 11a, the first gas discovery offshore with several more gas discoveries. There was potential for future gas development here.

On the West Coast, PetroSA are involved with other companies, including Sunbird Energy, Anadarko and Cairn India. Comparing the South African and other basins, he noted that the basins in South Africa were relatively under explored, although larger. There had been good success in the Outeniqua Basin but this had included some non-commercial discoveries. There was no deep-water drilling in South Africa. There were large upside potential remains. He compared South Africa’s basins with those of prospective petroleum provinces elsewhere in Africa and the number of wells drilled in the various basins, relative to discoveries made.

The advent of shale gas has made South Africa realise its potential fortune in shale. South Africa was ranked eighth in the world by the US Energy Information Administration (US. EIA.)  with 390 trillion cubic feet of technically recoverable gas reserves. Shale gas could have positive impact on the economy through job creation, taxes and royalties, services sector, technology development and increased foreign exchange as well as spin offs to petrochemicals, fertilisers and related industries.

He noted that designating PetroSA as the carrier of the state participation interest in the MPRDA would empower the National Oil Corporation (NOC) and would allow the State to participate from exploration phase, based on a free carry, to develop technical and commercial knowledge and appreciate the risks. The exploration risks, including geological and financial risks, would be carried by foreign explorers.

Localization should ideally entail local beneficiation, Broad Based Black Economic Empowerment (BBBEE), supplier development and human capital development.

He reiterated that the spin offs of localization would be positive balance of payment, since substantial dollars entering the country would remain in the country. Oil companies would benefit though a smoother flow of suppliers, increasing efficiencies and driving down costs, reliable local supply and harmonious stakeholder relations and reduction in operation costs by keeping expatriate staff to the minimum.

Key considerations to localization would be an assessment of the technological, financial and human resources in the country, identification of the types of services that could be performed by local companies, and the types of goods and services that could be developed in the country. The financial investment required to develop the local goods and services and skills required would also need to be assessed.

Setting out the skills scenario, he said that PetroSA had been at the forefront of development of core skills, including reservoir engineers and petro-geoscientists. In the past 10 years, the company focused on the development of black South Africans through overseas scholarships secondments and on the job training. There was a Memorandum of Cooperation with Schlumberger to explore setting up shale gas technology centre in the country to carry out further research in shale gas. He pointed out that Schlumberger already operated in ten of the largest shale basins in USA.

Regulatory Framework of Oil and Gas: Petroleum Agency South Africa (PASA) presentation
Ms Lindiwe Mekwe, Acting Chairperson, Petroleum Agency South Africa (PASA) introduced her team, and noted that the presentation by PASA was in two parts. Oil and gas exploration and production was regulated by the Mineral and Petroleum Resources Development Act (MPRDA) currently, although it had been regulated in general since 1969. This Act set out terms and conditions of exploration, production rights in respect of matters finding origins in Liquid Fuels Charter such as the Upstream Training Trust, state participation, good practices and standards. The MPRDA sought to promote economic growth and development through optimal exploration and production, ensured that production right holders contributed to socio economic development and ensured development in an orderly and ecologically sustainable manner.

PASA was designated to perform the following functions:
- regulatory, by processing applications for rights and permits
- undertaking monitoring of operations
- data archiving, for it acted as the custodian of all petroleum data and promotion
- resource evaluation, promoting, evaluating and quantifying onshore and offshore acreage.

The latest amendments to the MPRDA envisaged that the regulatory functions would be undertaken in future by regional managers in the Department of Mineral Resources whilst PASA would be dissolved. The data archiving function would be done by a public entity and promotion and resource evaluation would be done by another public entity to be appointed by the Minister.

The current draft Technical Regulations would augment gaps in the current framework and prescribe good construction standards.

She began to go through the following slides, which described the licensing regime for the various permits (see attached presentation), but the Chairperson stopped her at this point, saying that all stakeholders were aware of their rights and it was not necessary to take the Committee through those slides.

Mr David van der Spuy, Resource Evaluation Manager, PetroSA, moved to the second presentation on oil and gas exploration and resources in SA. In view of the short time remaining, he said he would concentrate on the future prospects on oil and gas resources, but referred Members to the slides on current activities.

The Chairperson noted that the slides were not numbered, and said this would have helped the Committee.

Mr van der Spuy said that interest in South Africa had become very high recently and about 20 companies were involved with production and exploration rights. Onshore was also represented well, with about 67 concessions on shore and local and international companies. He illustrated the changes over the past five years (see attached presentation), noting the differences over that period between licenses, shown in green, and applications, shown in brown, which displayed that in five years there had been significant work commitments of several million rands. The slides illustrated that the investors would be attracted through changes to the legislation that gave investment clarity, the PASA promotions, sustained relatively high oil prices, the need to find alternatives to the unstable Middle East and improvements in technology, as well as successes in other East Coast African countries.

He tabled slides showing what was happening on exploration in South Africa, and the companies involved on the East and West costs (see maps for details). Onshore, the interest in the Karoo was largely in “unconventionals”, in the coal-bearing areas, including biogenic and shale gas. All of this was supported by data availability. The seismic coverage maps and data were shown on the next slide. There was also data on offshore wells; from 1969 there had been about 300 drilled offshore, with the concentration around Mossel Bay and Port Elizabeth.

Mr van der Spuy noted that the systems under which the numbers were quoted were taken from the official system of the SEP and World Drilling Council, who plotted a range of uncertainty in terms of size, against the degree of product development or status. The areas in blue marked “prospective resources” had no proof of existence, and here the statistics were based on geological interpretation, modelling and analogies. “Contingent resources” were described as those that had been discovered, but where there were no approved commercial development projects. The production column showed reserves, where there was work. He noted that he would also explain the horizontal figures.

The next map showed production in the Block 9 referred to by the previous presenter, and he said that there were about five million barrels of oil being produced per day. The Ibhubesi was a contingent resource. Block 9 was also contingent resources, and looking at reserves already being operated, there were estimates of 0.64 trillion cubic feet (TcF) and 20 million barrels, for gas and oil respectively.

The rest of what he would speak to were prospective resources, with no proof that they were there. He tabled a map of prospective resources on the West Coats, with best estimates of about 10.2 billion barrels. For South Africa, he explained that the estimates for gas were 27.7 TcF and in respect of oil, about 9.5 million barrels. Coalbed methane showed the coal basins that he had already touched upon in earlier slides.

Biogenic gas was discovered in the Virginia Area and Evander, with 2.3 billion standard cubic feet.

The Chairperson asked for an explanation of biogenic gas.

Mr van der Spuy said that most gas was produced by thermogenic activity, where heat and pressure in the rock combined to produce gas. Biogenic gas, on the other hand, was produced by bacteria living underground that metabolised organic material, so to that extent it could perhaps be regarded as a resource that would not run out. It was small in comparison to other gas, at only 23 billion standard cubic feet, although a groundbreaking discovery.

He moved on to describe the shale gas in the Karoo. The US. EIA had previously reported that this was estimated at 485 TcF, but now the figure had been reviewed to 390 TcF. This was part of a worldwide study looking at many countries with not much concentration on detail from one country to another. PASA had done its own detailed study and believed that the resource was more likely to be 40 TcF in recoverable resource. This might be smaller than the numbers produced by the EIA, but it was still a significant amount of gas.

He noted that there were several risks faced in relation to gas and oil discoveries. The North Sea had yielded significant reserves, although only after 21 oil wells were drilled was the source discovered. The current exploration success rates for conventional resources were around 25%, based on geological and not commercial finds, and that was quite a sobering statistic in relation to the cost. Commercial success usually required further drilling. The major risk for unconventional discoveries was the ability to produce economically. Some other factors increasing the risk were the regulatory regime, stability of that regime and the countries, markets, and engineering and technological capacity to be found.

The question was asked how a large gas discovery would benefit South Africa. Currently, under the current legislation, an oil and gas exploration company would have to apply for production rights which would then require state participation, BBBEE participation and social development commitments. There would be a revenue stream to the state from company taxation and production royalties, an increase in the security of supply, and a change in the energy mix, to move away from reliance on coal, as well as the potential for increased infrastructure development.

South African Oil and Gas Alliance (SAGOA) presentation
Mr Ebrahim Takolia, Executive Director / Chief Executive Officer, South African Oil and Gas Alliance, explained that the Alliance (SAGOA) was ten years old, and had moved from its origins in the ship repair industry to a national organisation. It implemented its strategy through a number of task teams – for instance, its Ports Cluster looked to development in Cape Town harbour and was looking at other ports to service Africa and South Africa.

He said that the first question was whether South Africa had an upstream and midstream industry, and his answer to this was that there was no direct industry, but one based on passing trade of rigs and ships, and a number of engineering and other firms based in South Africa provided services and products into East and West African countries. The local work had been limited largely to Mossgas and the mid-stream work to PetroSA’s new work, and, since the current refineries were built long ago, to maintenance of those refineries.

He noted that the past focus areas of SAGOA were noted on its website, and he skipped over slide 7 to focus on slides 8 and 9, which outlined the future focus.

Mr Takolia said that the oil and gas value chain was based largely on risks and skills. At the early stages, it could cost upwards of R20 billion to do offshore exploration. South Africa did not manufacture rigs, or the cement going into the well or casing. It could supply some of the services but it cost US$500 000 a day to run the rig, and USD$1 million a day to do the drilling. In South Africa the opportunities for rig work was limited to case equipment and crew, and there were limited opportunities for locations. 

Mr Takolia pointed out that oil and gas exploration also provided limited opportunities for BBBEE involvement; because there was such low certainty on recovery of funding, there was consequently not much opportunity for BBBEE entrepreneurs to access funding, and any BBBEE partners would have to put in equity themselves. There was potential for skills development but the risk was that offshore exploration might not yield the results expected, in which case those who had undergone the training would look for opportunities elsewhere in the world and those skills would move to other countries. However, this was one aspect worth investigating further.

He noted that as projects moved into later stages, the risks and funding aspects changed. The upstream area was one involving “a calculated roll of the dice” and he cited that Mozambique, Kenya and Tanzania had all secured exploration resources. If South Africa were to get to that stage, it could then look at how to bring products onshore and into the markets.

He noted that at the moment, there was not much of a local market for gas. Only 2% of primary energy in the country was derived from gas, and there was not a distribution network, except for one combined power station. The lack of such network was a limiting factor. He said that there was a need to look at developing a gas market, so that primary energy supplied by gas could rise to the levels of other countries, where it was currently around 20%.

Moving to slide 12, he said that there were some areas where it was possible to look for fabrication, but it would have to be specific. For instance, South Africa manufactured pressure vessels. However, in respect of offshore explanation, and to some extent hydraulic fracturing, it did not have the technology, or it would take too long to build up skills and expertise to manufacture those high-technology components.

Mr Takolia then touched upon the future of oil and gas. South Africa had significant upstream activity, based on what was happening in South Africa, but it was small in terms of production and reserves on a global basis. Africa had 27 million square kilometres, and there continued to be more discoveries. Engineering and other firms working elsewhere in Africa often based themselves in South Africa, because this country had infrastructure that they found to be useful. There were some major projects – mostly upgrades of crude and gas refineries- but the main project was the plant in Mozambique. Some other activities were due to increase. The main point was to look at planning, participation, local infrastructure and skills challenges. Speaking to some engineering firms, SAGOA had discovered that there were already bottlenecks in terms of lack of skills and lack of technical expertise. They had noted that, regionally, there were a number of new companies that were set up to service the African oil and gas industry and potentially also South African industries, should there be a move to significant onshore and offshore exploration.

He noted that the slides shown did display the current and potential future for activities. However that could happen only if there was confirmation of the existence of commercial oil and gas. There was economic activity in oil and gas projected over the next few years, but this was dependent on exploration being successful in South Africa. With East Africa there would be exports into Asia, and potentially also more exports into the region. There were positive developments in West Africa as well.

Discussion
The Chairperson asked stakeholders present at the meeting for questions of clarity at this stage, and asked that comment and input be reserved for a later stage until the representatives of the Department of Energy (whose representatives had not managed to get on the earlier flight, and who were consequently delayed) had been able to give their presentation.

A foreign Ambassador to South Africa (the country was inaudible) asked why PetroSA had not achieved its mandate, despite being in existence for over ten years.

Mr Sayidini asked for clarity as to what aspect of the mandate it was said not to have achieved.

The Ambassador said that PetroSA was expected to provide one quarter to one third of crude oil that was expected to be imported.

Another Regional Manager from PetroSA thought that any questions relating to the NOC and the mandate should be addressed directly to the Ministry. He was not whether such questions could be addressed in this meeting, without consulting with the Minister and the question was not clear as to what part of the mandate is being referred to.

The Ambassador asked what proportion of crude oil was currently imported to South Africa via PetroSA

Mr Sayidini said that the mandate was for PetroSA to procure 30% of all crude consumed, in line with the Energy Security Master Plan of 2007. The refineries using crude already had systems in terms of their procurement of crude and some supplied themselves, such as BP. This new mandate had to be further developed and there would have to be work done between PetroSA and the companies. That level of alignment was not yet achieved.

The Chairperson was quite shocked to hear that the question could not be answered here. He did not want to create dialogue, but pointed out that the mandate was a public position.

Another representative from PetroSA added that the 30% procurement remained part of PetroSA’s plans and that the NOC continues to work closely and consult the Department of Energy on the strategic stock petroleum policy, which is still in draft and yet to be finalised.

Mr John van Blerk, a stakeholder, asked PetroSA to explain its statement that a strong NOC complemented by a sizeable resource base could drive down prices.

Mr Sayidini said that there were some highly prospective countries who had implemented internal programmes in subsidising, in relation to safer fuels, and such subsidies could drive down prices for the ultimate consumers. The country must be prospective in terms of resources, however, for this to happen.

The Chairperson said that there were clearly plans for the upstream and mid stream oil and gas in South Africa, but wanted an overview of whether there were indeed prospects, and, if so, the size.

Mr Takolia responded that his understanding of “upstream” was exploration happening domestically. The only current stream in South Africa was through Mossgas, which was the reason why he had questioned whether there was enough of an upstream industry. Much of the current upstream industry work, such as the rig work, actually related to regional activity in other areas, mostly in West Africa, but also South Asia. That was why he had said that there was not really an upstream industry and why it was not growing in significant numbers in terms of people engaged in the activity. There were some engineering and pipeline firms who were building pipelines and pressure vessels, but this was not a really significant industry at the moment. The largest part of the industry was from Africa, not South Africa. The engineering firms did work from South Africa, but for the rest of Africa, and he repeated that they preferred to locate in South Africa because of limited infrastructure in other countries in Africa.

The Chairperson said he was going to ask for which market the upstream industry was doing work, and asked if Africa did pose a local market.

Mr Takolia said that the current industry for engineering and pipeline and construction maintenance and support was worth about R20 billion, and that could be expected to grow to about R80 billion in South Africa. He repeated, however, that this came mostly from servicing other projects in Africa. Whilst there was some domestic activity, mostly from refinery upgrades, final decisions whether to proceed with major upgrades had not yet been made. In the main, it was engineering and support services that were offered to the upstream industry.

The Chairperson commented that so far, there had been very little engagement from stakeholders, compared to previous stakeholder meetings where there had been robust discussion. He pointed out that these stakeholder meetings differed from public hearings in that public hearings were quite restricted to discussing only the topics (usually legislation) at hand, but here he would like to see everyone asking questions. The comments and points raised could be fed into other systems and would form part of the Parliamentary records.

At this point, the Chairperson noted that Mr Mkhize, from the Department of Energy, had arrived at the meeting and asked him to proceed to his presentation.

Department of Energy presentation
Mr Muzi Mkhize, Chief Director, Hydrocarbons Policy, Department of Energy, said that his presentation focused on creating an enabling environment, and he would thus set out the role of government, and of the private sector and what the future might hold.

The key challenge for government at the moment was the need to achieve a difficult balance between lowering consumer prices, and high input costs, achieving security of supply and meeting the empowerment needs of Historically Disadvantaged South Africans (HDSA) and the BBBEE requirements. Security of supply was key, but the challenge was that there was a need to balance higher costs of energy in generating liquid fuels, in comparison to the past system, which contributed to higher consumer prices. Most of the “improvements” made were actually increasing prices. There were also new industries, and he stressed the need to look at new initiatives differently from a transformation viewpoint. The DoE said that sometimes new initiatives could have the potential of undermining technological and economic advancements. Those who had been disenfranchised in the past were often not benefitting from the successes and prosperity in the country.

He set out the background to the oil and gas industries, noting that before 2001, the gas industry was not regulated, but the downstream petroleum industry was. The White Paper on Energy of 1998 was then adopted, and this, amongst other aims, sought to ensure security of energy supply, and said that the oil and gas industries must be transformed through a statutory framework. The upstream legislation framework was done under the MPRDA. Promotion was done by PASA, and regulatory aspects by DMR. He described the different subsections in section 79. He noted that section 39 required Environmental Management Programmes (EMP), with Environmental Impact Assessments, and provision of financial security for rehabilitation.

The DOE dealt with the downstream gas regulatory framework. This was covered by the Gas Act of 2001. This Act sought to promote efficient, effective, sustainable and orderly development and operations, and to facilitate investment.
 
The gas value chain comprised fields, gathering, transmission, and then distributions to the markets, large and small, industrial and domestic. There was a resource for gas to liquid conversion at Mossel Bay. There was gas from Mozambique coming to Sasol, but the Integrated Resource Plan (IRP) indicated that 15% of new electricity generation capacity was to come from gas. The “anchor customer” for the gas would be the gas-fired power stations and there was a need to look into gas feeding into the facilities. Transmission was one area where government would have to play a major role. Cooperation would be required to make this possible. There would have to be transformation throughout the value chain. Government was currently looking at a gas utilisation strategy and there would be attention paid to sources of gas. He noted that there were substantial resources in Mozambique, and South Africa was in discussion with Mozambique, through the Gas Commission, and there was already trade between the two countries.

The regulation of oil downstream was covered by the Petroleum Products Act (PPA), which provided for licensing of manufacturers, wholesalers and retailers. It modernised the old Act, and prohibited certain actions relating to petroleum, and looked at the balance of power between retailers and wholesalers. It was to give effect to the Energy Charter, through licensing. He noted that the Energy Charter had been a pioneering action that was then “legalised” through annexing it to this particular legislation. The Minister was required to make regulations, including the fuel specifications, which had been done previously through the product source, but which were now brought under the Minister. This Act also allowed for information to be provided. The challenge was that the Regulator in the past had less information than ideally needed to affect the intended consequences.

He noted that at present, the DoE was looking at amending the PPA, but this was still a matter under discussion being dealt with internally.

He showed a diagram of the oil supply chain, depicting the number of activities taking place between exploration and the commercial markets. There were many technological advances – such as shale gas - and these different technologies had their own challenges, both in regard to exploration and in regard to the onshore and offshore drillings.

The Petroleum Pipelines Act sought to promote competition in the construction and operation of petroleum pipelines. There were some commonalities across the Gas and Petroleum Acts – such as ensuring safe, efficient, economical and environmentally-responsible transportation, loading and storage. The main infrastructure challenge was around access. If a wider range of people were to play a role in the industry, they must get access to infrastructure; otherwise the goals would not be achieved. There was a major challenge of having uncommitted capacity on its own, but it was difficult to deal with that, because people had to be able to participate. Most of the short-term challenges were around the energy infrastructure.

Mr Mkhize said that the National Energy Regulator of South Africa (NERSA) was established in 2005. It regulated the industry, through licenses, attempted to ensure HDSA empowerment and approved tariffs and prices. The Gas Amendment Bill of 2013 sought to promote companies in the industry that were owned or controlled by HDSAs, and set gas sector-specific requirements, promoted equitable provision of gas transmission, storage, distribution, trading, compression, liquefaction and regasification services, and also promoted skills development and BBBEE in the gas industry and development of competitive markets for gas and gas services. This Bill was still being discussed at National Economic Development ad Labour Council (Nedlac), and there had also been public consultations. It should shortly be take to Cabinet for approval.

Much had been said about the MPRDA amendments, mostly in relation to the principle of state free carry, and other matters were raised about the designation of strategic minerals.

He noted that the Petroleum Products Act would also be reviewed and the preparation of a new Bill was being discussed. The Petroleum Pipelines Act would follow the normal process of getting public participation before formulating the policy.

There were overall challenges in formulating an integrated approach to deal with structural issues, and there was a need for concurrent jurisdiction, through a streamlined framework. This would involve consideration of the Ports legislation, the Petroleum Pipelines Act, and there was a need to synchronise discussions and to work with NERSA and ensure that reserves were well coordinated across different segments of energy. Another challenge was the convergence of energy and resources. There were two gas-powered electricity generation plants that were currently using diesel. It was necessary also to look at diesel or gas vehicle propulsion and power generation. The planning had improved, with more focus. That should lead into the value chain. There were entry barriers to the capital intensive industry, namely the development, update, maintenance and access to infrastructure, of projects involving high risk offshore exploration and production. Some of the advancements that should ideally be happening were not in fact occurring, because of the high risk and capital nature of these projects. The DoE had to ensure regulatory certainty, which was recognised as key to investment. The diagnostic report on the White Paper had noted that the private sector had not come to the fore to the extent originally envisaged and there was a need for infrastructure. Pipelines were needed but again, these posed a huge investment and the question was whether to instal the pipelines in anticipation of the product, or to wait for the gas before embarking on the project. There was a need for the DoE to work with the private sector and investment community to get the projects moving.

Discussion
The Chairperson said that there was still some room for improvement, but he thought that this had been a helpful presentation. Parliament had to get a sense of what the thinking was. He noted that the PetroSA presentation had been thought-provoking, particularly when it spoke to the need to classify the industry. If the policy regime was being fine-tuned, then surely responses were needed to note the matters that should be covered. This was a common platform. He would like to hear more on the take on the investment planning. For a long time, South Africa had been concentrating on the downstream industry, and the character of investment changed in the whole oil and gas sector. Public/private synergies were being established, but there was a need also to consider where else they could be usefully made. He raised the question of Saldanha Bay, where there were emerging models for an oil and gas association. Rig maintenance as an industry was emerging there, for the West and East Coast of Africa.

He asked participants at the meeting to indicate their levels of satisfaction, dissatisfaction or to suggest areas that needed to be fixed up. The new Bills mentioned by the DoE would come to Parliament. This Committee did not want to look at the Bills in a mechanical way, but understand the context and environment in which the Bills would be operating. Some of the realities around black economic empowerment had to be understood, and the question had to be asked whether the aims were in fact realistic.

The Managing Director of Anardarko, South Africa, had the sense that these presentations had tried to focus on the possible spin-offs and flow through into the economy. He could speak to experiences of Anadarko in Mozambique, where the largest gas discoveries had been made. This company moved into Mozambique into 2006 and had discovered reserves of about 100 TcF, and it was trying to make a decision on the plants based in Palma. The local spend in South Africa, with the exploration project, was R550 million, and he emphasised that this was the only spend in South Africa that flowed over directly to this country from what was being done in Mozambique. From that figure, it was possible to assess the spend from other projects. A lot of the spending was with local companies who were providing heavy engineering services, security services, aviation services and others. In the last year, 2013, there had been R515 million spent also in supporting local businesses in Mozambique, but that came off quite a low base. The industrial base in Mozambique was smaller, but this was meaningful spending, and it would grow. In every country in which Anadarko operated, it would also spend on corporate social responsibility, including training, supporting health services, and other environmental matters. The project in Mozambique would mean, for the country, that Anadarko was looking at four trains of 500 million per annum of  gas and oil export, exports of 20 million tonnes per annum, or 400 000 tonnes of crude per day, and that was roughly equivalent to what South Africa was importing every day.

He then wanted to speak to what companies would require, in order to work in South Africa. The largest companies were mainly concerned with operating in countries where there was a reasonable regulatory environment, to allow them to achieve a reasonable rate of return, with stability. The projects lasted for about 30 years, and the whole continuum was looked at, not individual phases. That meant that, over the long term, there had to be certainty and stability, and assurances were needed of reasonable and potentially good returns There had been numbers mentioned in terms of the investment required, and he reiterated that no exploration company was assured of success at the start of its journey. 

Mr Don Ncube, Managing Director, Badino Gas, said that this gas company was a “new mover” that had started fairly recently, from scratch, although he himself had had experience of 35 years and more in the mining industry. He had listened with interest to the presentations but “could not believe” some of the things that had been said. It was important to have the introduction of the MPRDA, in 2002, because it allowed for a new industry regulation and particularly aimed to allow HDSAs to participate and play a role. Some HDSAs had decided to do this but found themselves facing serious constraints, which included a lack of understanding as to the barriers and obstacles facing the new players. These were local and domestic players, so they should have been seriously considered. He was not necessarily speaking only of HDSA players, but all new entrepreneurs. The whole idea was to allow new business to contribute to the GDP of the country. If a system was looking for investment, fresh ideas, and fresh capital to flow into the country, certain things that had to be embraced, and that included the need for predictability and certainty. He saw a lot of changes in the policy areas that were creating uncertainty and flight of capital. Many of the new players did not have capital because the financial players did not understand the gas sector. Those from outside the country could go to capital markets in Australia and Canada, to raise their capital, and would end up buying out the smaller players and continuing to dominate in this environment. He was surprised to hear that “in the near future”, which he said was a misnomer anyway for that implied “now”, there would be some other bills introduced and said that this would create even more uncertainty and more flight of capital – he had thought that there was supposed to be one piece of legislation to reform everything. He repeated that given this kind of regulatory environment that was changing, movers such as his company would have even more problems in raising capital and technology. He said that the three questions asked when a person wanted to apply for operational rights were whether the person was HDSA, BBBEE involvement and whether there was access to capital, but said that there was a misunderstanding in that the link between rights and capital were not better understood by market financiers. He was prepared to engage further with the DoE so that it could get a broader understanding of the problems that active participants in the sector faced.

Mr van der Spuy wanted to address some of the remarks made by Mr Takolia during his presentation. He said that Mr Takolia’s presentation assumed that there was no upstream industry, and he hoped that this was intended to suggest “no significant service industry arising out of the upstream industry”. The presence of so many stakeholders from various companies in this room demonstrated that there was a vibrant upstream industry. Over the last four years there had been more than nine seismic acquisition programmes offshore, which surely qualified as very active upstream industry. There had been commitment of over R5 billion in ongoing exploration programmes already in place, and companies had spent tens of millions in a well in quarter 2 or 3, representing an investment

Mr Takolia wanted to stress that his own answer to the question “Is there an upstream industry?” had been “No, not really” and not “No, there isn’t any”. He agreed that the seismic surveys were significant but when speaking to an industry servicing South Africans, there was actually not anything significant. He understood that billions of rands were being spent, but pointed out that there was far more activity in servicing Africa, than South Africa. By order of magnitude, for every rand spent in South Africa, there were about five to ten being spent outside of South Africa. In terms of the investment climate, there was a need to separate South Africa from Africa. Many of the companies who had set up in South Africa were looking to the rest of Africa as a significant market, although South Africa had been endowed with good infrastructure, so it made more sense to locate field service professionals and their families to South Africa, from a schooling and access point of view, than to, for instance, Palma. He felt that South Africa’s industries were facing major risks. He noted that Ghana – an English-speaking country – was investing heavily in oil and gas, and so was Dar-Es-Salaam. The real challenge was that South Africa had to ensure that it continued to be favourable, as a destination for fuel service companies, and to leverage its infrastructure opportunities to leverage the country. However, it would also help if it could have more significant exploration facilities. If there were perhaps five to ten rigs drilling for oil, that could spur a proper upstream activity based. There should be land rights for prospecting for shale, and all of that would make it more viable for countries to base themselves in South Africa. In terms of the current servicing by South Africans, he had spoken to engineers, field service and helicopter charters and security companies, and they did not have much view on South Africa other than to say they were waiting to see. They did not believe much was happening in the next 18 to 24 months, in terms of significant activity for shale or offshore gas. He hoped this would answer the investment questions.

Mr Takolia wanted to refer also to the Chairperson’s mention of Saldanha Bay. There were some good developments there. One of the five well caps in the world had been put there, and this reduced the insurance premiums that the rig owners and exploration companies had to pay. The real potential lay in bringing gas onshore and looking at fabrication and potential assembly of perhaps land-based rigs for shale gas. There was not the technology to create them from scratch, but it was possible to look at but some degree of local assembly. There might be gas pipes being brought in from gas fields, should exploration prove economically viable, and it was possible to look at power generation offshore to alleviate the whole North/South power transfer. Saldanha Bay had been declared an industrial development zone and there was a submission for it to be a customs control area, where companies would pay 15% instead of 25% tax, with job creation rebates and a whole host of other developments. If there was domestic exploration, onshore or offshore, it would enhance viability and potential of the country. He reiterated that at the moment, all the potential was based on African, rather than South African work, with the only local activities taking place in the mining oil and gas services terminal, and the Sunshine Terminal.

The Chairperson hoped that other stakeholders could add on more on the investment climate. He said that the local focus was important, and there was no reason why it should not happen. However, he said that government, with good reason, had been quite cautious, especially in regard to renewable energy. He agreed with Mr Ncube that the issue of predictability was important and governments were sensitive when stability would be questioned. 

Mr N Adams, from a petroleum company, asked for some opinions on investment in petroleum. He was a director and founder shareholder of his company and had played a significant role in getting people to come and invest. Today, he was significantly more concerned and significantly less willing to put money in, given the current regulatory environment. He agreed that certainty was needed. Offshore exploration was already extremely high risk and it did not make sense to increase that with more regulatory certainty. He said that this was akin to a casino manager changing the rules after you had cast your bet. He was far more uncomfortable than he was five years ago, and he spent a lot of time placating other investors. He too made the point that these were projects with long timeframes. Companies may be willing to gamble small money but the further up the value chain, large amounts of money needed to be committed, for longer periods.

A Standard Bank representative said that Standard Bank was talking to other people about the potential in this sector. It was excited about the prospects, on paper, and believed that exploration could offer significant benefits to many people He would support and endorse comments made about the regulatory situation. Huge amounts of capital were needed in this sector. He noted that nobody had yet touched upon “the elephant in the room” – which was the route for gas to market. There were state owned entities, such as PetroSA and Transnet, who were supposed to be dealing with that. There were certain economic benefits to be gained overall from exploration. Standard Bank had put together its own set of data, with calculations by economists, and these projected that if South Africa were to make finds equivalent to those in Ghana, it could wipe out the whole deficit of foreign payments in one year. The shale gas blocks could, on estimate, create 210 000 jobs per block. One of the points not yet raised was the sheer scale of expenditure through exploration activities that would take place, domestically, which would create more jobs and opportunities for HDSAs.

Ms Reinet van Zyl, Energy Manager, ArcelorMittal (Saldanha Plant), said that her company, being in the manufacturing and beneficiation arena, was hungry for affordable fuel sources. It was not just having the energy that matters, but getting a fuel source that was competitive to the coal-based sources. If gas were found the opportunities would be vast, and would unlock beneficiation. The question was the time line. There was clearly some activity and movement, but the question was how long it might take before there was a commercial gas source in Saldanha. Another question related to price. She said it was necessary to consider how this might be expedited. She noted the earlier statements that an exploration company may have to drill 21 wells before finding one that was commercially viable, but noted also the lack of infrastructure as a major concern. Ultimately, these developments were seen, but South Africa was not yet positioned to take advantage of any opportunities immediately, and she felt that such positioning and preparation was extremely important.

The Chairperson suggested that everyone had to look at that point. He repeated that people tended to be ultra-sensitive when others started to point out the uncertainties, but he fully agreed that the country had to mould itself, and become prepared. This linked to the question of how the public and private sectors could work together, and he was not talking so much of creating partnerships as such, but achieving synergy in their work, and how to create local as well as international investment.

Mr Takolia wanted to speak to the question posed on timelines, and said that, both in relation to the gas sector and the MPRDA amendments, the longer South Africa delayed, the more it was falling behind, relative to other countries in the region.  There was a need to move as far ahead as possible, as quickly as possible. By 2020 the sea-borne gas market would change when the USA became an energy exporter. The market dynamics might then look very different, and the opportunity to understand the potential should be tapped into and moved forward now. If South Africa were to import energy, it might be able to achieve significant gas use in four to five years but the offshore potential would possibly only be realised in about seven years so there was a time lag in terms of having significant amounts of gas. The Sunrise Energy LPG potential was something that could happen in a shorter time, as there was a plan to import from West Africa perhaps in three to four years.

Mr L Greyling (ID) said that there was obviously huge potential, which was why so many industry players had chosen to attend this session. He thought that more than policy certainty was needed and made the point that policy should not act as a disincentive. The policy and legal environment must be right so that people were willing to put money into long term investment. The MPRDA was another “huge elephant in the room”, although he appreciated that the industry players were probably not so willing to air their criticisms as at the end of the day they had to apply for the licences. However, that was not something that he believed would be resolved any time soon, as the amendments to the MPRDA would most likely not be passed by this Parliament, and there were still many points to get right. The next Parliament should be asked to make this a number one priority, and to get the regulatory and legal frameworks right, to show benefits for industry players.

He felt that other useful aspects raised related to the issues around the Energy Master Plan and the IRP updates. The amount allocated to gas at this stage was probably too small to generate the infrastructure investment required, such as Liquid Natural Gas terminals and pipelines down the coast. He would be interested to hear if the industry felt that there was more that was needed. He was seeing huge potential, particularly since the mention of the large blocks as shown on the maps meant potential, but clearly, government had not yet achieved the right balance.

The Chairperson took the point also of government incentives. In the gas sector, there were public hearings held in late January, which had been a starting point for Parliament to hear the signals from the gas sector. Even if the Gas Act was to be amended, he hoped that the sector would make significant inputs on that amendment and on he gas strategy. These were honest and genuine attempts to ensure that the government provided leadership by refining the sector. He said that there was the opportunity and the need for a major infrastructure installation. He said that government had to talk of readiness to create a conducive environment for gas.

A Sasol representative said some valid points were made. He was pleased to see a more integrated approach, and he meant by that integration between the government departments of Energy, Mineral Resources, Science and Technology, Trade and Industry and National Treasury, to ensure that policy formulation was cohesive and made in the right context. More importantly, Mr Mkhize had said there were challenges, but that they could be overcome by involving industry earlier in the process of consultation. The right term to use was actually “collaboration” rather than “consultation”.

A good example could be with the Sasol and Mozambique pipeline, where several factors had to be taken into account. He said that there were five major issues, and if South Africa could solve these for all projects it would unlock the potential of industry. It had been ten years since the project had been started. The essence of the success was, firstly, to get all the parties round the table, and that had included the governments of Mozambique and South Africa, as well as private enterprise.  Secondly, there had been a key anchor customer identified to take the risk and project. Thirdly, lessons were taken from other international experience and the consultation with several international advisers had also helped to build confidence amongst the parties. Fourthly, there must be a plan – and in this regard DoE was well on its way to putting together a Gas Utility Master Plan - but there must be more certainty on how and where it would be utilised. Lastly, and most importantly, there should be a sound policy and fiscal atmosphere that would encourage investment.

He agreed that the MPRDA was indeed “an elephant” but pointed out that this industry was capital-intensive upstream. In respect of other work, governments had been prepared to put incentives on the table to ensure that the industries developed, and this was a discussion that still had to be held. Sasol believed that if the five principles were followed, this would achieve alignment and integration of the needs and requirements of everyone with an interest in the further development of the hydrocarbon market in South Africa.

The Chairperson quipped that Sasol had once commented on the width of the pipeline from Mozambique to South Africa but no sooner had it started than it realised that demand had increased.

Mr Kerwin Rana, Chairperson, Sunbird Energy, explained that Sunbird was developing the gas field off the West Coast. One of the graphics in the PetroSA presentation had compared the South African basin to others on the continent. He noted that the number of wells drilled and size of blocks were most interesting when compared to the work being done, and asked why there was such under-exploration. He wondered if this was a result of prospectivity or regulation. In the Orange Basic, over R1 billion had been spent, with eleven wells drilled and four had been production facilities. There was about half TcF of proven gas. Sunbird was aiming for first gas in 2018, which meant financial close roughly in 2015. he said that this Basin had been a great regulatory success for PetroSA and Sunbird. South Africa was such a mature mining environment with thousands of boreholes drilled, and this made it surprising that the hydrocarbons were under-explored.

A Regional Manager, PetroSA agreed with these observations but said that the main challenge on the West Coast was to get the critical mass to establish the infrastructure. There was potential and the Ibhubesi development was interesting. It was not fair to say the Orange Bain was comparable to the Nigerian ones, but the graphics was trying to explain that significant amounts of investment would be needed, both in effort and resources. A trigger event was needed that would get people to risk more. Once there was an environment to deliver the gas to the market, he believed that this would be the necessary trigger, to get the exploration status in gas and oil comparable to other sectors.

Mr Coleman, who said that he had 35 years experience in the exploration business, cautioned that nobody should “fall in love with numbers that were not proven”. Historically, the exploration business was not successful. He said that nothing would be proven until drilling costs and very high risk wells had been done. He too emphasised that the investment climate had to be stable, and should provide incentives for companies to take the risk and continue to do so while the numbers remained unproved.  He made the point that wells cost about USD $150 million, per well, and it took a lot of risk appetite on the part of management to agree to drill another well when the first was unsuccessful. He thought that the legislative investment climate was currently attractive enough, and it was hoped to have an exploration discovery that would benefit South Africa, and then he believed that it would be possible to speak to the other infrastructure. Until that discovery was made, there was not really a productive oil and gas industry per se. There was potential, but not much production. He welcomed the new field but said that it was still in the nascent stage of exploration.

The Chairperson was interested to hear Mr Coleman’s view that the investment climate was conducive enough. The executive had triggered the need to ensure that South Africa “upped the political climate” and notwithstanding the challenges and uncertainties raised in today’s discussions, he believed – although it was not really for him to judge – that perhaps the uncertainties were not being addressed fast enough, although he did recognise that there were significant attempts to improve that situation. He took Mr Takolia’s point that this was a highly competitive area and it took a couple of years to plan and decide. The challenge was that if South Africa “missed the boat” now, it would have to go through another full cycle before being able to take another decision. Speaking to Standard Bank’s remarks, he hoped that it would be able to persuade other banking association players to be included, and to convey their feelings back to the broader international markets. It was useful to have as many players as possible in these kinds of platforms.

In closing, the Chairperson expressed his gratitude that so many stakeholders had again proven the value of these stakeholder meetings and would welcome inputs in future. He hoped that the Fifth Parliament would continue with this type of valuable engagement. He summarised that the main issues arising from the discussions were recognition of the willingness of the industry, but their many concerns. He suggested that the DoE needed to take several matters further. Departments such as National Treasury ideally should be present in future meetings, as it would have been useful to hear comments on incentives. He noted that the Department of Mineral Resources had been invited to attend but it was under substantial pressure itself and had been unable to do so. It would have also been helpful to have had representatives from the Department of Environmental Affairs.

He said that the Committee had observed how other countries built their industries through synergy, and assessed the flavour of their work. Good working relations were very important and he noted that there was a huge challenge, in South Africa, of information asymmetry. Ancillary matters included job creation. Various pointers to the need to remedy the challenges had been made. The investment climate for infrastructure was an important point, and he hoped that the sector would be robust enough to continue its engagement. For the gas sector, he was optimistic that there would soon be discoveries that would be a game changer. The DoE, on behalf of government, was working with Tanzania and Mozambique to tap into the gas industry and he hoped to see gas as a source taking 20% of the energy space, and urged it to strive to this target, by considering also how to convert, in the form of Liquid Petroleum Gas or Liquid Natural Gas. He thanked Sasol for raising the need to find an integrated approach, and said that in future other departments needed to be more involved. He appreciated the frankness shown on all sides.

The meeting was adjourned.
 

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