Southern Africa's great oil and gas opportunities

third page cooling towers oil review africaThese towers are all that remains of a coal-fired power station in Johannesburg. (Photo: Tim Abbott/Flickr)Recent discoveries of major gas and oil deposits in southern Africa could dramatically improve the overall economic prospects for the region, reducing imports, driving economic growth, and lowering carbon levels in power generation

Once upon a time, scattered pockets of natural gas off the coasts of South Africa and Mozambique were all that southern African countries seemed to offer in terms of oil and gas resources. That changed in 2010 and 2011, when a potential 500 tcf of gas was identified across Mozambique and South Africa, along with 11bn barrels of oil in Namibia. Together, these countries' gas reserves equal those of Canada or Venezuela.

These discoveries could transform the region. In this article, we examine some of the economics of oil and gas in the region, consider their possible impact, and offer recommendations for handling these resources. 

The highest-profile recent discoveries are in Mozambique, where estimates of offshore gas reserves range from 50 to 100 tcf in depths of 1,000 to 3,000m.

The largest potential reserves are in South Africa's shale beds beneath the Karoo region, estimated by the US Energy Information Administration to exceed 400 tcf. These reserves may now be extracted in an economically viable manner, thanks to hydraulic fracturing techniques.

In addition to gas, oil deposits amounting to an estimated 11bn barrels were found off the coast of Namibia in mid-2012. This discovery has spurred further exploration along the west coast of South Africa in the Orange River basin, an extension of the Namibian fields.

Yet the full potential of oil and gas in the region remains uncertain for three reasons. First, most fields are in the early exploration phase; the estimated volumes are technically recoverable resources, not proven reserves. Second, gas and oil sources have relatively high extraction costs: They're either deepwater sources, such as those off Mozambique, or unconventional gas sources, such as Karoo's shale gas and Botswana's coal-based methane. Third, new areas are opening for exploration promising even greater volumes, for instance the southern extensions of the fields off the coast of Namibia and the coal bed methane deposits in Botswana

The energy outlook

Southern Africa's economy is based on coal, and is short of liquid fuels. In 2011, South Africa imported 130mn barrels of crude oil. This high import volume exposes South Africa to both political and supply risk. The country's primary source of crude oil is Iran, followed by Saudi Arabia, Nigeria, and Angola. In June 2012 sanctions against Iran led to the cancellation of all imports from the country and a rapid search for alternative sources.

South Africa's total refining capacity is 250 mn barrels per year, or about 700,000 barrels per day. Of the daily total refining capacity, 500,000 barrels is crude oil and 195,000 barrels coal-to-liquid synthetic fuel. So with total consumption at about 24.5bn litres of fuel annually –mainly petrol and kerosene –there is a 7 per cent shortfall of 1.5bn litres of fuel per year, accounting for South Africa's need to import refined products.

Against this backdrop there have been a series of  fuel shortages due to refinery-maintenance issues. The most significant event was in January 2012 when several planned and unplanned refinery shutdowns combined with problems at the Single Buoy Mooring facility off Durban to cause widespread fuel shortages. Also, South Africa's refineries are old, an average of 43 years old, and need increasing levels of maintenance – and in some cases, significant upgrades – to keep them operational, efficient, and in line with environmental standards. With fuel prices regulated, funds for making upgrades are limited.

South Africa's general energy environment is constrained. Electricity utility Eskom operates with a very narrow reserve margin – about 17 per cent, and much lower when affected by maintenance – and depends on diesel generation to cover peak demand.3 Two open cycle gas turbines (OCGTs) running on gasified diesel started on 11 August 2012. They consume an estimated 220 mn litres (nearly 60mn gallons) annually—about 2.5 per cent of South Africa's total diesel consumption.

Southern Africa has abundant and cheap sources of coal, making it still the primary energy source; it provides 85 per cent of Eskom's total generation. The region's coal-fired power fleet is the cheapest option for producing power and at current coal production, reserves could last at least a century.

However, coal dependency for generating electricity and for conversion to liquid fuels makes South Africa one of the most CO2-intensive countries in the world. Were South Africa part of the European Emissions Trading Scheme (ETS), the Sasol Secunda plant would be the single largest CO₂-emitting site.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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