Sunbird Flies In To Fire Gas, But Caution Prevails

BMI View: The utilisation of greater volumes of gas in power generation appears to be gaining traction in South Africa, with a number of gas-fired projects in the pipeline and plans to start importing LNG currently under consideration. While South Africa will remain heavily dependent on coal for power generation to the end of our forecast period, Sunbird Energy's plans to advance work on South Africa's biggest undeveloped gas field could provide upside to our forecasts. Yet, while we note that gas-fired capacity will be needed to diversify the country's energy mix and support intermittent renewables generation, we remain cautious - with delays a constant threat, even as the country attempts to encourage greater numbers of IPPs.

As South Africa looks to diversify its energy mix so as to reduce its heavy reliance on domestic coal and expensive imported diesel, news that Australian gas developer Sunbird Energy will proceed with p lans to develop the Ibhubesi offshore field could help gas gain greater traction as an alternative source of fuel for power generation. While a final investment decision (FID) on the field is not due until 2015, this lates t development also aligns with South Africa's plans to build more gas-fired generating capacity and ramp-up imports of liquefied natural gas (LNG) . Yet, while there is a clear rationale for the project, implementation will be key; with BMI adopting a cautious approach due to previous delays to power sector development and the operational and b ur e a u cratic inefficiencies that plague many of South Africa's parastatals.

We have long highlighted that South Africa's power sector is in a parlous state. With the country's capacity margin currently very tight, any disruption to the power network or electricity generating facilities often leads to widespread blackouts - a major hindrance to social and economic growth. While traditionally the country has relied on coal for over 90% of electricity generation, this has become an increasingly contentious issue due concerns about climate change, while deficient infrastructure and labour unrest at the country's mines have curbed output - with state-owned utility Eskom regularly being reported as looking at exporting more electricity from South Africa's neighbours to help meet demand.

Gas Boom To Brighten The Gloom?
South Africa - Electricity Generation And Consumption, 2013-2022

While BMI's Mining team expects a reversal following five years of stagnant domestic coal output, based on a ramp-up in project starts by a number of large mining companies ( see 'Coal Turnaround On The Horizon', July 30), the government remains keen to increase domestic electricity generation capacity using a diverse range of resources - with gas that can be sourced domestically rather than imported holding particular appeal. Such moves complement South Africa's Integrated Resource Plan 2010, which outlines plans for the expansion of gas-fired generation so that it accounts for 11% of total supply by 2030 (as opposed to around 2% currently). Furthermore, gas holds appeal as the best option as a back-up to new intermittent solar and wind projects, as gas-fired facilities can be brought online at relatively short notice to meet surges in demand. With South Africa outlining a strong projects pipeline for renewables, this will be an important consideration as solar and wind projects come online ( see 'Renewable Energy IPP Programme To Advance, Slowly', May 13).

Ibhubesi Could Create Upside

To this end, the development of the Ibhubesi field, located 380km north-west of Cape Town, would certainly help progress the country's expansion plans, with Sunbird (with a 76% stake in the project) due to work with state-owned oil and gas company PetroSA and US-based consultants MHA Petroleum. Creating upside to project realisation, it is notable that Sunbird has also received US$700,000 grant from the US Trade and Development Agency (USTDA) to support the sub-surface development plan, which will include an environmental impact assessment and commercial analysis of the field. Interestingly, we note that US financial support, while providing backing to US company MHA, also aligns with President Obama's rhetoric on supporting investment in more environmentally friendly projects abroad , especially in Africa - with cleaner-burning gas preferable to coal from an environmental perspective (see 'Obama Bolsters US Green Credentials, July 9 and 'US Pledges Funds To Power Africa', July 3) .

Gas Consumption Outstripping Supply
South Africa - Gas Production and Consumption, 2010-2022

Perhaps more importantly, we note that the field is the largest undeveloped gas field in South Africa, with estimated reserves of 5.9bn cubic metres (bcm). This is a particularly pertinent issue at a time when gas demand in South Africa is set to grow based on many of the reasons outlined in this article. One example is the planned 780MW Gourikwa gas-fired power plant, which has been mooted by Eskom and could require 1.18bcm of gas per year - a project that would prove costly with regards to imports and will be likely supplied by a PetroSA LNG import terminal, if it comes online as scheduled in 2019 ( see 'LNG Imports Solve Needs But At A Cost', July 24). Furthermore, interest in tapping South Africa's potentially lucrative gas reserves is growing amongst major oil and gas companies, as they look to replicate offshore success in Mozambique and Tanzania, and tap shale gas and coal-bed methane (CBM) deposits.

In addition to many of the factors mentioned above, we have also seen greater efforts to draw in private investors and independent power producers (IPPs) in recent months - which could bolster the case for gas-fired capacity construction (assuming an IPP model is used). To this end, we highlight that international banking and asset management group Investec announced in August that it would finance two gas-fired power plants in the country. Investec is reported to be coordinating the investment as part of a syndicate of six lenders that will finance the 335MW Dedisa plant in Eastern Cape and the 670MW Avon gas plant in KwaZulu-Natal (due online in 2015 and 2016 respectively). The projects will be developed by French utility GDF Suez and are being advanced under South Africa's US$933mn IPP programme. Yet, while this is certainly a positive development and lends upside to our gas-fired generation forecasts, we continue to expect progress under the broader IPP scheme to be slow and remain wary about including some of this new planned capacity in our forecasts until venture advance further along the project pipeline, especially when the operating environment in South Africa can be testing. Furthermore, concerns about the reliability of transmission and distribution infrastructure and the bureaucratic hurdles involved in signing power purchase agreements (PPAs) with state-owned Eskom generate further uncertainty and necessitate this cautious approach.

This article is tagged to:
Sector: Oil & Gas, Infrastructure, Power, Renewables
Geography: South Africa

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