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- Amid Stage 6 load shedding and calls for the president to declare an energy emergency, government’s Central Energy Fund is investing billions to open a “gas bridge” to Mozambique.
- Two deals – the creation of a new state-owned gas trading entity and the acquisition of part of Sasol’s stake in the Rompco pipeline – will incentivise government to burn more gas even as numerous studies warn against the economic and environmental costs of “big gas”.
- Eskom said it wants to see up to 6 000MW of gas-fired power urgently added to the grid, including plants that could run up to 12 hours every day, not unlike the controversial Karpowership projects.
The announcement, in March this year, that South Africa had secured a gas deal from Mozambique went largely unnoticed:
“The only thing I can confirm is that discussions … between our Minister of Mineral Resources and Mozambique are quite advanced,” Deputy President David Mabuza told members of Parliament in March. “[But] I can safely say that we’ve reached an agreement.”
It is no secret that Mineral Resources and Energy Minister Gwede Mantashe had been making regular visits to Mozambique with the hopes of securing a gas deal.
Minister Mantashe’s working visit to Mozambique. The Minister’s meeting with Mozambique’s Minister of Mineral Resources and Energy, H.E Ernesto Max Tonela, to discuss Govt to Govt relations and how the two countries can complement each other on energy related issues @DMR_SA pic.twitter.com/rh3NLObr4H
— Department of Energy (@Energy_ZA) February 25, 2020
Two years ago, Saliem Fakir, executive director of the African Climate Foundation, warned that Mantashe was quietly building a “gas bridge” to Mozambique, starting with the 2 000MW risk mitigation programme, that looked designed to favour gas.
“[T]he ‘invisible hand’ of Gwede Mantashe slowly opening the gas tap … [I]f you put the pieces together, it is hard not to conclude that a gas strategy is taking shape,” he concluded.
Six months later, as Fakir predicted, the bulk of the risk mitigation programme was awarded to Karpowership’s gas-fired ships.
Now, following unprecedented levels of Stage 6 load shedding and calls for President Cyril Ramaphosa to declare an energy emergency, the “gas bridge” to Mozambique appears to be opening.
A state-owned gas trader
Last month, the state-owned Central Energy Fund (CEF) told amaBhungane that it is in the process of establishing a new gas trading entity, part-owned by CEF and part-owned by its counterpart in Mozambique, Empresa Nacional de Hidrocarbonetos (ENH).
This state-owned gas trader will source gas, initially from Mozambique, and import it via the existing Rompco pipeline.
To begin with, the volume of gas imported by the state-owned gas trader will be modest: just two petajoules (PJ) of a gas a year, compared to the 170 PJ a year that already flows to Sasol from the Pande and Temane gas fields in Mozambique.
The initial 2 PJ a year – valued at roughly R280 million – will be supplied by ENH. However, Sasol appears to have offered the state-owned gas trader a jumpstart.
As part of its strategy to move away from coal as a synthetic fuel feedstock, Sasol needs to secure an additional 40 – 60 PJ of gas by 2030. With volumes from the Pande and Temane fields in central Mozambique declining, Sasol’s most viable option is to import liquefied natural gas (LNG) at Matola (Maputo) and feed it into the Rompco pipeline.
“Sasol, ENH and CEF are currently concluding negotiations of a memorandum of cooperation to pursue importing additional gas to South Africa,” Sasol told us in a written response, while CEF described it as a “tripartite agreement”.
Sasol has provided cryptic and sometimes contradictory responses to our questions. Asked if it intended to import LNG from the from the state-owned gas trader, Sasol initially said: “That is correct”. But later backtracked.
For now, Sasol is continuing negotiations with an undisclosed LNG supplier alone: “Once the joint venture company is formally incorporated, the various negotiations and agreements are to be managed jointly with ENH and CEF,” Sasol said.
It is unclear what benefit any of the parties will get from this structure. Normally, a gas trader would expect to earn a through-put fee or margin on all the gas it supplies, but Sasol stressed that the state-owned gas trader will not earn any fee or margin on Sasol’s gas.
But, it said, “[t]here is benefit to all partners involved, as well as the governments of Mozambique and South Africa.”
A cynical appraisal suggests Sasol appears to be slowly divesting from the gas business while encouraging government to bet big on gas – thus transferring to the state some of the of risk of supply shocks and of stranded assets.
CEF also declined to discuss any details, saying our questions were commercial in nature.
Betting on gas
If the state-owned gas trader goes ahead, it will be Sasol’s second gas deal with government. At the end of June, Sasol completed the sale of 30% of the Republic of Mozambique Pipeline Investments Company – which owns the Rompco pipeline – to CEF and ENH subsidiaries for R5.1 billion.
With these two deals – the creation of a state-owned gas trader and the Rompco sale – Sasol is steadily transferring its investment in gas and associated risks to state-owned entities.
Sasol will continue to use gas as it weans its Secunda operations off coal, but only for as long as it is profitable to do so.
In the short-term, the financial risk to CEF is low as Rompco has been one of CEF’s few profitable assets. The far bigger risk is taken by South Africa Inc. Having state-owned entities heavily invested in the gas value chain creates an unwelcome incentive for government to use more gas than is economically or environmentally prudent.
The more gas the country uses, the more money CEF and its subsidiaries make.
And considering that PetroSA, the largest asset in the CEF group, is technically insolvent with liabilities exceeding assets by R7 billion, the temptation for government to put its foot on the gas is high.
A gas strategy
Expanding the use of gas is unashamedly part of CEF’s strategy. In its annual corporate plan, presented to Parliament in May, CEF laid out an ambitious growth trajectory that would see it triple its revenue from R12.8 billion in 2021/22 to R34.7 billion by 2025, driven by a “projected increase in production and sales in the oil and gas sectors”.
To do this, CEF is making investments in all parts of the oil and gas value chain: extracting, refining, trading and transporting.
Aside from the Rompco deal and the creation of a state-owned gas trader, CEF has investments in upstream oil and gas exploration, including in Mozambique and South Sudan; and is in negotiations to buy the Durban Sapref oil refinery from Shell and BP. In the long-term, CEF wants to expand into electricity generation.
CEF’s strategy is closely aligned with that of its shareholder, the department of mineral resources and energy (DMRE) and its minister – Mantashe.
On Friday, Ramaphosa disclosed that ANC was considering a proposal floated by Mantashe to establish a second state-owned power utility to compete with Eskom.
“It’s an idea that we have been throwing around for the past two years but it’s the first time I get it catching fire,” Mantashe told the Sunday Times.
Unlike Eskom, which reports to the department of public enterprises and Minister Pravin Gordhan, Eskom 2.0 would report to Mantashe and DMRE.
READ | Mantashe wants new state power company to report to him
“[W]hat we are suggesting — it’s not a decision yet — is let’s have a second generation company of the state and that generation company must focus on baseload and there must be a build programme for power stations.”
CEF, with its growing interests in gas, increasingly looks like it could be part of that play.
Karpowership … only bigger
At the heart of the DMRE’s masterplan for the gas industry is the belief that the electricity sector should provide the initial demand for gas in South Africa.
“A challenge in developing the gas sector is to bring gas demand and supply on stream at the same time … One way of breaking this impasse is to create significant ‘anchor’ gas demand through the development of a gas-to-power programme,” the preliminary base case report, published by DMRE in December, reads.
How much gas South Africa’s electricity sector needs is the subject of increasingly bitter debate. Among energy analysts, the consensus is that the country likely needs a small amount of gas, or an alternative fuel, to play a balancing role in the next three decades as 100 000MW of cheaper renewables come online.
READ | The battle for gas is far from over
But with 2022 delivering record-breaking load shedding, Eskom has signalled that it is considering using gas on a larger scale.
In June, chief executive André de Ruyter said Eskom needs 3 000MW to 6 000MW of new gas power. That appears to be in addition to the 3 000MW of gas power the independent power producer programme plans to start procuring in October.
“The Medium-term System Adequacy Outlook” – Eskom’ annual projection of energy supply versus demand – “indicates a base-load gap in demand and supply of up to 5 000MW in 2026”, Eskom explained in a follow-up email.
The debate is not actually how many gas turbines we install, but how many hours we keep them burning. The problem with the notorious Karpowership projects was that they would burn gas for a minimum of 12 hours a day, thereby not only replacing more expensive diesel but crowding out cheaper options like coal and renewables.
Eskom said it had modelled the country’s anticipated energy demand up to 2030. “Modelling indicates an anticipated annual shortage of up to 60 terawatt-hours (TWh), this against a requirement of ±315TWh. We therefore do not just have a demand (MW) problem, there is also a significant energy shortfall.”
It added: “[T]he current energy gap is significant and we urgently need base-load capacity towards 2030 … This gap can be filled with gas generation, and specifically mid-merit, to complement the increasing renewable roll-out, and is urgently required, not in the future, but now.”
Eskom is not alone in its assessment that we urgently need to add more electricity to the grid. Energy analysts were sounding the alarm, even before the country was plunged into stage 6 load shedding.
But few believe that large-scale gas – which is expensive and still a fossil fuel – is a good idea.
The example Eskom gave us was that a 3 000MW combined cycle gas turbine, running for 11.5 hours a day, would will generate 12.6TWh of electricity a year, which would go some way towards closing the supply gap.
In short, what Eskom is considering is another Karpowership, only bigger.
The Komati gas experiment
Last month, Eskom embarked on an information gathering exercise to work out what it would cost to deliver gas to Komati power station outside Middelburg for a smaller 500MW peaking plant and a 750MW mid-merit plant.
Komati will be shut down in September this year and repurposed for solar and potentially gas. The Rompco pipeline passes within a few kilometres of the power station, making it a viable testing ground for a grand gas-to-power experiment.
Based on the request for information, these gas turbines would start operating in May 2025 and run for between one and 11.5 hours a day on average, burning roughly 22 PJ of gas (valued at R3-billion) a year.
During one of his working trips to Mozambique last year, Mantashe told journalists: “We are deactivating coal-fired power plants and have taken a concrete decision to replace these plants with gas technology, and that will increase the amount of gas we expect Mozambique to supply us with… This is an opportunity for Mozambique to seize.”
As recently as May, Eskom said gas-to-power at Komati was “not cost competitive at this stage”. But despite global gas prices rising, Eskom now appears to be revisiting this assumption, saying that the prices provided would feed into a feasibility study on the gas-to-power opportunity at Komati.
“This is a clear signal that fuel switching from coal fired power at existing sites, to gas fired power is now nearing reality,” a recent Standard Bank presentation concluded.
“We expect additional coal-fired power stations (Grootvlei, Hendrina, Camden) within close reach of the existing Rompco gas pipeline to also possibly fuel switch to gas fired generation in time.”
Converting dying coal power plants to run off gas would generate demand for an additional 70 PJ a year, according to Standard Bank, which is good news for Rompco, good news for the state-owned gas trader and good news for their government shareholders.
It would, however, be bad news for everyone else.
Generating electricity from gas is only marginally better – in price and environmental impact – than burning diesel. And while a small amount of gas for balancing power has virtues, running gas turbines for 12 hours a day is what UN secretary-general António Guterres has described as “moral and economic madness”.
However, none of these projects will be feasible without access to affordable LNG.
Which is perhaps why government’s push for gas appears to be breathing new life into domestic gas projects thought to be dead and buried.
Last week, Searcher Seismic said it would reapply for to permission to conduct seismic surveys off the West Coast after its previous ocean survey was blocked by activists and communities who applied to the Western Cape High Court.
Meanwhile, the Department of Water and Sanitation kicked off a first round of public hearings in the small town of Theunissen in the Free State on “using water for unconventional gas activities” – unconventional gas is industry shorthand for fracking.
The declaration of an “energy emergency” could also play into the hands of Karpowership: its three projects, with a combined 1 120MW of gas-fired power, were stopped after they were denied environmental authorisation from the Department of Forestry, Fisheries and the Environment (DFFE).
But section 30a of the National Environmental Management Act contains a get-out-of-jail-free card: in an emergency, companies can apply for an exemption from these stringent environmental permits.
In June 2020, Karpowership tried to use this tactic by claiming that its floating gas-fired powerships were needed to tackle the Covid-19 pandemic. An exemption was initially granted then withdrawn and investigated after DFFE concluded that “there was in fact no emergency situation”.
That would be harder to sustain if Ramaphosa declares an actual “energy emergency”. As seasoned energy commentator Hilary Joffe warned this week, be careful what you wish for.
AmaBhungane is a nonprofit centre for investigative journalism. We co-publish our investigations, which are free to access, to news sites like News24. For more, visit us on www.amaB.org.
SOURCE:
amaBhungane | Sasol, CEF to open new ‘gas bridge’ to Mozambique | Fin24 (news24.com)