African Energy Journal - Hydrocarbons could be game changer in SA

With the latest iteration of South Africa’s Mineral and Petroleum Resources Development Act expected to be completed soon, and the Integrated Energy Plan nearing completion, South Africa is set to leverage its largely unexplored and underdeveloped oil and gas sector to re-ignite growth able to drive broad and inclusive participation across the entire economy.

“Draft policy analysis, especially how government intends to structure hydrocarbon investment to support transformation, holds the potential to successfully unlock growth while deepening participation across the entire economy,” says Khwezi Tiya, head of Oil and Gas South Africa at Standard Bank.

Khwezi Tiya Standard Bank

Khwezi Tiya, head of Oil and Gas South Africa at Standard Bank.
Image credit: Standard Bank

The depth and cost of both offshore and on-shore hydrocarbon exploration in South Africa means that it is expensive to undertake, since, historically, few exploration wells have been dug in South Africa. The country “remains relatively under-explored, exhibiting much more closely the characteristics of a frontier hydrocarbons market,” says Tiya.

To date, potential investors have only commissioned more easily and cheaply produced seismic tests, avoiding investment in much more conclusive — and costly — drill data from exploration wells. That said, the seismic data that South Africa has assembled to date points to vast potential, especially in the Outeniqua Basin in the south-eastern Cape and shale in the Karoo. Both the eastern and western seaboards also present large hydrocarbons potential, which is potentially relevant across the country. This has important implications for broad economic inclusion, especially among the historically disadvantaged communities and regions excluded from meaningful economic participation.

“For investors to invest properly in more expensive drill exploration, however, they require policy certainty. Encouragingly, the impending finalisation of the Mineral and Petroleum Resources Development Act looks set to provide exactly this kind of certainty,” says Tiya.

In anticipation of the passing of the amended Act and given the scale and complexity of the investment required, corporate activity is already seeing the ‘farming in’ of both local and global capital and resources in anticipation of what is likely to be a game-changing moment in the history of South Africa’s development. 

The sense of expectation is palpable in the industry. “Although South Africa is still at least three years away from the start of even the initial build, global majors such as ExxonMobil, Statoil of Norway, ENI of Italy, and Total, for example, have already entered into partnerships to explore and develop South Africa’s oil and gas potential,” says Tiya.

While the Mineral and Petroleum Resources Development Act could not come at a better time for South Africa’s low-growth economy, it also demonstrates just how important policy is in creating the conditions for the kind of growth that will also drive socio-economic transformation. “Since the historic exclusion of most of South Africa’s people from the formal economy has weakened the ability of many South Africans to benefit from growth, getting more South Africans invested and employed in the country’s emerging hydrocarbons sector is a critical and non-negotiable element of growth,” says Tiya. Making inclusive growth a key element of policy will allow the investment that South Africa’s hydrocarbons industry is likely to attract “to reverse the current low growth and investment cycle resulting from high concentration and no confidence, by including a broad swathe of the South African population in meaningful economic participation,” he adds. 

The logic is unassailable

South Africa’s refined petroleum needs are currently being met by a combination of limited domestic refining capacity, complemented by imports. South African policymakers are yet to decide whether to support the expansion of the domestic refining industry, or look to longer-term supply and offtake agreements with global centres of refining excellence in the Gulf, India, and Southeast Asia, for example.

Whether developing a domestic refining and distribution network, or enabling the global sales and export of bulk hydrocarbons and the re-import and distribution of refined product, “The state is well positioned to empower black industrialists to participate in partnership with international investors in whatever infrastructure build and facilities operation that the development of this industry will require,” explains Tiya.

For the time being, “We are projecting more than R4-billion of investment in the development of storage facilities over the next four years, which are likely to be black-led projects with international partnerships,” says Tiya. In time, complemented by hydrocarbons extraction, refining, or export and re-import, the state’s capacity to drive growth in a way that includes previously economically excluded South Africans in the country’s hydrocarbons industry is vast.

Oil and gas drilling, production, storage, distribution, and retail, for example, solve many growth and social development issues. More than just security of supply, investment in storage facilities provides banks and other supplier industries in South Africa with a viable new destination for capital and investment, with the potential to put South Africa’s R1.3-trillion corporate cash pile to work.

Global-scale investment across downstream and upstream will bring new skills, require new capacities and technologies, create new secondary and service industries, and bring new infrastructure investment into the value chain. This has huge potential for a mix of skilled — and especially unskilled — job creation across the country.

The scale and diversity of the infrastructure, suppliers, and services demanded by hydrocarbons creates opportunity for a very broad range of investment. Beyond initial investment capital, “Storage assets are popular with private equity investors, for example, as they generate income consistently over time. They are very long-lived assets,” explains Tiya.

The development of a hydrocarbons industry is so broad, costly, and complex that it, inevitably, requires many partnerships. This has huge implications for new combinations of capital, skills, investment, and technology to increase, and revitalise, South Africa’s struggling industrial economy. Drilling platforms, port facilities, storage units — or refining capabilities, pipelines and retail, financing, supplier and support systems — draw in skills and create relevance and opportunity for almost all sectors and segments of the economy.  

The convergence of growth and transformation represented in drafts of the Mineral and Petroleum Resources Development Act seen to date recognises the potential that South Africa’s hydrocarbons sector holds to develop a more sustainable economy.

“The Act might just be the key for South Africa to begin unlocking growth in other sectors, driving economic transformation and inclusion through sustainable local and global investment that drives long-term job-creating growth across skills sets, includes multiple sectors, and is spread widely across the country,” says Tiya.

Click below to read the March/April 2018 issue of African Mining



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