South Africa’s Plan for Power Generation

AOP talks to Dave Wright, Secretary General of the South African National Association, about market stability, the potential of the South African oil and gas sector and the opportunities it can bring if better utilized.

What do you see as the key trends for the oil and power sectors in Africa in 2018?

It is difficult to answer that question for Africa as a whole. In different regions and in different countries, the important trends will be very different.

In simple and broad terms, I do not see oil making a big price jump. I think shale oil production out of the U.S. will keep a lid on the price, and oil producers are going to continue to battle. I do not see oil prices rising to the extent that oil companies want, oil-dependent countries will still be under economic pressure because they will not be getting their expected incomes.

In regards to gas, the industry is still very much in a developing phase and I do not think we will see much activity other than continued development there. But on power, I think renewable energy will take off a lot quicker than it has been, particularly solar and wind to some extent.
Another interesting aspect going forward is the Russian involvement in trying to put nuclear energy in Africa, like in Nigeria.

In South Africa, one of the major themes moving forward will be a revised Integrated Resource Plan and moving forward as far as power generation is concerned.

Do you think the development of the gas industry in Africa will be suppressed because of its dependence on oil and gas prices?

I am very much under the impression that there has been a strong de-coupling between the oil price and the gas price, and I think that trend will continue. We are starting to see on a global basis the same kind of interactions from a supply and demand perspective in the gas sector that we see in the oil sector. Putting that a lot more simply — there is an awful lot more supply of gas than there is demand, on a global scale, so I think gas producers are actually managing the supply side in order to prevent the oil price from collapsing completely.

Going forward, this de-coupling between oil and gas pricing is going to be a very real thing, especially as there are more and more energy off-takers coming onto the market. And once there is the ability to move a lot of volume of LNG around the world, I think gas will develop its own market and be completely de-linked from oil.

Do you predict 2018 will be a year of recovery for the markets? If so, to what extent?

I would say it is going to be a year of stabilization. I do not think there will be great increases in the oil and gas prices, but I do see the markets stabilizing, because I do not see a dramatic drop on the horizon. I think the supply side of the game is going be managed very carefully in order to prevent another price collapse.

What opportunities do you see for the oil and gas sector in 2018?

From a South African perspective, I think if we can come to an agreement that we do need power generation based on gas, in order to balance or offset the intermittency that renewables put into the system, then I think we will start to see the development of LNG and port facilities. Once we get a power generation system based on gas that will provide a base load. As soon as gas comes in for power, I think it is going to start being used in a broader industrial sense, as well. I think one of the opportunities in the South African market is capitalizing on gas and bringing LNG into the sector. That is a fantastic opportunity.

If we are able to get the Mineral and Petroleum Resources Development Act sorted out and oil prices haven’t collapsed, then the possibility of oil and gas exploration off the South African coast may come back again. The fact that we have a lot of available acreage that hasn’t been explored fully yet presents a good opportunity, provided the regulatory environment is sufficiently attractive.

What challenges do you predict the industry will face in 2018?

The age-old challenge for Africa is still the regulatory environment — in creating a stable regulatory environment to attract investment and keep it in the country. The solution lies in governments recognizing there must be a win-win relationship between governments and companies. To be fair, companies must also recognize that there needs to be a win-win relationship, but usually it is the governments wanting more than the companies are prepared to give. And since it is the companies that are the taking the risk, governments need to price the risk factor into the set up.

Do you see a region or a country in Africa that is creating that attractive regulatory environment?

I think the Mozambicans have put a lot of effort into creating a fair, balanced regulatory system and where they are at the moment is that companies are comfortable to come in and make the investment. But other than that, I really cannot think of another country that stands out at the moment.

If you would have asked me that question this time last year, I would have pointed to South Africa’s IPP program as a really good model to use for renewable energy or Independent Power Producers.

But our utility put a spanner in the works by refusing to sign the last round of Power Purchase Agreements (PPAs) and has done exactly what we say you should not do — you should never change the rules halfway into the game. To be fair, former Minister David Mahlobo had said that the PPAs would be signed. This has not been done yet and has caused uncertainty and will make investors think twice about investing in energy projects in South Africa unfortunately.