BMI View: While we expect South Africa to remain heavily dependent on coal for electricity generation, we have highlighted that upside to gas-fired generation is growing as the country looks to diversify its energy mix and install more generation capacity. Yet, while the lifting of a moratorium on hydraulic fracturing (fracking) and continued exploration across the offshore Ibhubesi gas project underpin our view that gas will ultimately play a greater role in the energy mix, we note that the government has recently been criticised for overlooking proposals to source pipeline gas from neighbouring Mozambique. With Mozambique holding the world's fourth largest gas reserves, the prospect of South Africa building more pipeline-fuelled gas-fired capacity in order to help utility Eskom put an end to power shortages appears to have its merits, subject to heavy scrutiny of some aspects of the project.
To put this criticism of the South African government in context, it is first important to point out that the debate about importing pipeline gas from Mozambique has been driven by Johan de Vos, the CEO of Pretoria-based company Gigajoule. Notably, Gigajoule, which manages the distribution of natural gas in Mozambique, has a great deal to gain should South Africa look to source gas from its neighbour. However, that is not to say that de Vos does not have a point when he claims that South Africa's revised Integrated Resource Plan (IRP) 'shockingly' ignores the vast Rovuma Basin gas find in Mozambique. The IRP outlines a strategy for managing electricity demand and supply in South Africa through to 2030 - ignoring the prospect of establishing the pipeline known as Gasoduto do Norte ao Sul de Moçambique, or Gasnosu.
|Gas And LNG Infrastructure|
Indeed, while we believe there are some questionable assumptions that the government would need to challenge with regards to piping gas from Mozambique, Gigajoule is moving to back up its claims that importing pipeline gas is workable - with the company reportedly completing technical and feasibility studies that indicate a 2,450km pipeline from Cabo Delgado in northern Mozambique to Richards Bay in South Africa would be viable. The company claims that this is predicated on the construction of two power plants with a combined capacity of 5,000MW at Maputo and Richards Bay - with the total price tag for the pipeline and new facilities put at US$10bn. Notably, de Vos claims this would be cheaper than pursuing new coal-fired facilities - the approach favoured by the government under the revised IRP, which indicates a preference for pursuing a third coal-fired power plant (known as Coal 3) in addition to the much-delayed Medupi and Kusile coal-fired facilities.
In our view, it is in reference to these two aforementioned coal plants that de Vos' argument gains traction. We have long highlighted that South Africa's power sector is in a parlous state - with the country's struggling utility Eskom issuing its latest warning about an emergency in the power sector in November 2013 ( see 'Views Play Out As Power Emergency Declared', November 20 2013).
This warning came about because of an ever-widening electricity supply gap - which is in part due to delays to the provision of new power stations such as Medupi and Kusile. In this context, any plan to introduce a feasible source of power generation with a secure fuel supply does hold some appeal. Indeed, with gas-fired capacity generally more efficient, less polluting, and more flexible than coal-fired facilities in terms of supporting intermittent renewables ( see 'Significant Interest As Auctions Progress', December 16 2013), it could be part of a solution to South Africa's energy woes. Gas-fired power plants can also be built fairly quickly, in a period of three to four years, and may prove more cost-efficient than bringing online new nuclear - considering the huge sunk costs that involves.
Furthermore, we also highlight that, although we are wary of accepting such claims about pipeline and infrastructure costs at face value (delays to gas extraction from the Rovuma Basin, for example, could spike costs), we do note that in 2004 South African energy and chemicals company Sasol commissioned an 865km pipeline from the Pande and Temane gas field on Mozambique that now delivers gas to its synthetic fuels plant in Secunda, South Africa. Even though this was much smaller than the volumes that would be delivered from Rovuma, it does appear to have proven viable - perhaps indicating a bigger project could gain traction.
Other Options In The Pipeline?
That said, while we believe this is an opportunity that could be explored further, we do emphasise that the issue is not clear cut, and there are certainly some drawbacks that may have resulted in the South African government discounting Rovuma gas. In our view, perhaps the biggest is that, although exploration in Mozambique is progressing at a rapid clip and attracting interest from a host of countries who hope to take delivery of LNG ( see 'Japan Intensifies Official Efforts For Gas', January 16), no final investment decisions (FIDs) have been made. Although Mozambique hopes to start exporting LNG to mainly Asian markets from 2018, our Oil & Gas team note that such FIDs and LNG contracts will need to be signed to make extracting and piping offshore gas from source to land (where it can be loaded onto ships for LNG export to Asia ) viable. In our view, while we are positive that such developments would occur, it would be difficult for the South African government to produce an electricity generation plan when so much uncertainty still exists around Mozambique gas.
|Pipeline Gas Would Spur Diversification|
|South Africa - Electricity Generation By Type, Twh|
Furthermore, we also note that the issue of energy security is likely to loom large. With South Africa currently relying on its domestic coal reserves, it may prefer to continue to draw on these rather than concede some of its energy mix to gas power that is dependent on supply from a regional neighbour (regardless of the problems with bringing new coal capacity online). In a similar vein, we also note that South Africa has recently registered an uptick in offshore gas exploration ( see 'Upside For Ibhubesi As Eskom Investigates Gas Use', December 30 2013), and has registered progress in the field of shale gas and coal bed methane (CBM) development - with shale permits likely to be issued in Q114. The government may wish to consider these domestic (and therefore more secure) options further before committing to more expensive pipeline imports - something that would clearly be preferable (and cheaper) if volumes could be secured and indicating to us that although there is an argument to be made for pipeline gas, there are many factors to consider.