Report of the Portfolio Committee on Energy on the Energy Stakeholder Meeting, scheduled on 20 February 2014, dated 12 March 2014

Theme: “Assessment of Upstream Sector in oil and gas industry

 

1. Opening remarks by the Chairperson, Hon SJ Njikelana

 

The Chairperson noted that the purpose of the meeting was to get a brief assessment of the upstream sector in the oil and gas industry. The Chairperson indicated that he was approached by a number of stakeholders on legislation, policy and the need for certainty. The Chairperson said that there is evidence of increased interest in oil and gas exploration as attested to by the Petroleum Agency of South Africa (PASA).


The National Development Plan (NDP) and related instruments makes reference to the importance of energy so this Portfolio Committee is obliged to be creative from time to time. The Chairperson did indicate that the Portfolio Committee had a previous meeting on the downstream sector, but the need arose to address issues on the upstream sector as well. This meeting was thus an opportunity for further exposure and the comments and points made will be fed into the legacy report of this Committee to the Fifth Parliament. He further highlighted that part of Parliament’s function is to initiate debate, and public participation is 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 is already in existence is refined and improved. He further commented on how the dynamic of oil could influence and change the political and economic development in countries.


2. Members present and stakeholders

 

Members included Mr SJ Njikelana (Chairperson of the PC on Energy), Mr L Greyling (Member of the PC on Energy) and Mr Letmer (Member of the PC on Mineral Resources)

 

Stakeholders who were invited included: Department of Energy, PetroSA, Petroleum Agency of SA (PASA), SA Oil and Gas Association (SAOGA), Shell, SASOL, Engen, BPSA, Anadarko, Cairn India, Chevron, SAPIA, Falcon Oil, Kinetiko Energy, SacOil, Sunbird Energy, Total, Trafigura and also representatives from various international accounting firms (Deloitte & Touche, Bowmann Gilfillian, KPMG and Edward Nathan Sonnenburg.)

 

2. Presentations

 

2.1. Overview by the Department of Energy (DoE)


Mr Muzi Mkhize, Chief Director, Hydrocarbons Policy, Department of Energy, stated 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 is 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 is key to South Africa, but the challenge is that there should be a need to balance this with higher costs of producing liquid fuels, in comparison to the past system, which contributed to higher consumer prices.

 

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 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.


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 is gas from Mozambique coming to Sasol, but the Integrated Resource Plan (IRP) indicated that 15% of new electricity generation capacity is to come from gas. The “anchor customer” for the gas will be the gas-fired power stations. Transmission is one area where government will have to play a major role. Cooperation will be required to make this possible. There will have to be transformation throughout the value chain. Government is currently looking at a gas utilisation strategy. He noted that there are substantial gas resources in Mozambique, and South Africa is in discussion with Mozambique, through the Gas Commission, and there is already trade between the two countries.


The regulation of the downstream sector is covered by the Petroleum Products Act (PPA), which provides for licensing of manufacturers, wholesalers and retailers. It modernised the old Act, and prohibited certain actions relating to petroleum, and aims to address the balance of power between retailers and wholesalers.


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


Mr Mkhize stated that the National Energy Regulator of South Africa (NERSA) regulates the industry, through licenses, attempts to ensure HDSA empowerment and approved tariffs and prices. The Gas Amendment Bill seeks to promote companies in the industry that are owned or controlled by HDSAs, and sets gas sector-specific requirements, promotes equitable provision of gas transmission, storage, distribution, trading, compression, liquefaction and regasification services, and also promotes skills development and Broad Based Black Economic Empowerment (BBBEE) in the gas industry and development of competitive markets for gas and gas services. This Bill is still being discussed at National Economic Development and Labour Council (Nedlac), there has been a public consultation and the bill should shortly be taken to Cabinet for approval.


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


2.2. Presentation by the PetroSA

 

Mr Bongani Sayidini, Regional Manager: East Africa, PetroSA, pointed out that the mandate of PetroSA is 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 needs to be adaptive to the evolving policy landscape of RSA.

 

PetroSA views security of supply in the context of the Energy Security Master Plan (2007) definition as “Ensuring that diverse energy sources, in sustainable quantities 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 sectors.

 

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


On the West Coast, PetroSA is 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 are relatively under explored, although larger. There has been good success in the Outeniqua Basin but this includes some non-commercial discoveries. There is no deep-water drilling in South Africa.


The advent of shale gas has made South Africa realise its potential fortune in shale. South Africa is 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 a 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 Company (NOC) and will 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, will be carried by the 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 a positive balance of payment, since substantial dollars entering the country would remain in the country. Oil companies will 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 market, would also need to be assessed.


Setting out the skills scenario, he said that PetroSA has 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 is a Memorandum of Cooperation with Schlumberger to explore setting up a 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.

 

2.3. Presentation by the Petroleum Agency of SA (PASA)

 

Ms L. Mekwe, Acting CEO, said that oil and gas exploration and production is regulated by the Mineral and Petroleum Resources Development Act (MPRDA). 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 seeks to promote economic growth and development through optimal exploration and production, ensuring that production right holders contribute to socio economic development and ensured development in an orderly and ecologically sustainable manner.


Mr D. van der Spuy, Resource Evaluation Manager, PASA, said he would concentrate on the future prospects on oil and gas resources, but referred Members to the slides on current activities.


Mr van der Spuy said that interest in South Africa has become very high recently and about 20 companies are involved with production and exploration rights. Onshore is also well represented, with about 67 concessions on shore, of local and international companies.


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.


According to PASA, biogenic gas was discovered in the Virginia Area and Evander. PASA explained that biogenetic gas as follows: most gas was produced by thermogenic activity, where heat and pressure in the rock combine to convert biomass to gas. Biogenic gas, on the other hand, is produced by bacteria living underground that metabolises organic material, so to that extent it could perhaps be regarded as a resource that would not run out.


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 is still a significant amount of gas.


He noted that there are several risks faced in relation to gas and oil discoveries. The North Sea 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. Commercial success usually requires further drilling. Factors increasing the risk are 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 will then require state participation, BBBEE participation and social development commitments. There will 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.

2.4. Presentation by the
SA Oil and Gas Association (SAOGA)

 

Mr Ebrahim Takolia, Executive Director / Chief Executive Officer, South African Oil and Gas Alliance, explained that the Alliance (SAGOA) is ten years old, and moved from its origins in the ship repair industry to a national organisation. It implements its strategy through a number of task teams

 
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 provides services and products into East and West African countries. The local upstream work is limited largely to Mossgas and the mid-stream work to PetroSA’s new work and, since the current refineries was built long ago, to maintenance of those refineries.


Mr Takolia said that the oil and gas value chain is 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 is limited to case equipment and crew.

 
Mr Takolia pointed out that oil and gas exploration also provides limited opportunities for BBBEE involvement; because there is such low certainty on recovery of funding, there is consequently not much opportunity for BBBEE entrepreneurs to access funding, and any BBBEE partners will have to put in equity themselves. There is potential for skills development but the risk is 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.


He noted that as projects moves into later stages, the risks and funding aspects changes. The upstream area is 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 can then look at how to bring products onshore and into the markets.


He noted that at the moment, there is not much of a local market for gas. Only 2% of primary energy in the country is derived from gas, and there is no distribution network, except for one combined power station. The lack of such network is a limiting factor. He said that there is a need to look at developing a gas market, so that primary energy supplied by gas can rise to the levels of other countries, where it is currently around 20%.


Mr Takolia stated that there are some areas where it is possible to look for fabrication, but it will have to be specific. For instance, South Africa manufactures pressure vessels. However, in respect of offshore exploration, and to some extent hydraulic fracturing, it does not have the technology, or it will take too long to build up skills and expertise to manufacture these high-technology components.


Mr Takolia then touched upon the future of oil and gas. South Africa has significant potential for upstream activity, based on what is happening in South Africa, but it is small in terms of production and reserves on a global basis. Africa has 27 million square kilometres, and there continues to be more discoveries. Engineering and other firms working elsewhere in Africa often base themselves in South Africa, because this country has infrastructure that they find to be useful. There are some major projects – mostly upgrades of crude and gas refineries- but the main project is the plant in Mozambique.


3. Discussions

 

 

4. Closing remarks by the Chairperson

 

In closing, the Chairperson expressed his gratitude that so many stakeholders had again proven the value of these stakeholder meetings and will welcome inputs in future. He hoped that the Fifth Parliament will continue with this type of valuable engagement.

 

He proposed that the DoE needed to take several matters further. Departments such as National Treasury 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 was invited to attend but it was under substantial pressure itself and that they were unable to attend. It would have also been helpful to have had representatives from the Department of Environmental Affairs present in the meeting as well.

 

He said that the Committee observed how other countries build their industries through synergy. Good working relations are very important and he noted that there is a huge challenge, in South Africa, of information asymmetry and ancillary matters include job creation. Various pointers to the need to remedy the challenges have been made. The investment climate for infrastructure is an important point, and he hopes that the sector will be robust enough to continue its engagement.

 

For the gas sector, the Chairperson is optimistic that there will soon be discoveries that will be a game changer. The DoE, on behalf of government, is engaging with Tanzania and Mozambique to tap into the gas industry and he hopes to see gas as an energy source taking 20% of the energy sector, and urged the industry to strive to this target, by considering also how to take up 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 need to be more involved. He appreciated the frankness shown on all sides.

 

5. Recommendations

 

 The Minister of Energy:

·         Organises a colloquium on how to facilitate synergies for investment and promotion of the upstream oil and gas sector in the 5th Parliament as a matter of urgency;

·         Further addresses concerns raised by the industry especially regarding legislative constraints, policy uncertainty, BEE challenges, etc.;

·         In conjunction with the Minister of Trade & Industry, Minister of Finance, Minister of Higher Education and Training and the Minister of Economic Development, facilitates opportunities on industrialisation including various aspects of localization in the upstream oil and gas sector;

·         Ensures legal and regulatory certainty , stability and predictability regarding the oil and gas sector is galvanised;

·         In partnership with various stakeholders especially relevant government departments together with the oil and gas industry, promotes SA as an investment destination through creation of, inter alia,  a conducive investment climate that will be coupled with appropriate incentives  as well as use the opportunity to promote gas including raising capital for locals; 

·         Addresses concerns about MPRDA Amendment Bill as articulated by the oil and gas industry;

·         Ensures government is consistent in employing an integrated approach in promoting and advancing the oil and gas industry.