Political Certainty and Policy Discipline, a Way Forward for South Africa

AOP talks to Niall Kramer, Chief Executive Officer of the South African Oil & Gas Alliance (SAOGA), an official partner of AOP, about the key trends for the oil and gas economy in Southern Africa for 2018.

SAOGA is dedicated to promoting the upstream and midstream sectors of the oil and gas value chain, primarily in South Africa and regionally in Southern Africa. The organization operates as a partnership between public and private sectors, receiving public funding to carry out a range of industry development activities and working to promote the interests of member. It is overseen by an independent volunteer board of directors from industry and a number of other key stakeholders.

What are the key trends for the South African oil and gas and power sectors for 2018?

South Africa is now gaining more political certainty, which will be good for investors, however, the key things I see happening this year are the revitalization of the Mineral and Petroleum Resources Development Act (MPRDA) and the challenges around commerciality as well as substantive and procedural correctness which will need to be addressed. I am anticipating the publishing of the Integrated Energy Plan, which I suspect will be received with much contestation because it has not had adequate airing on what the potential energy mix could be (especially regarding nuclear interests, which appear to be displacing renewables and gas). The IRP could then flow from that at some point. With those fundamentals correctly in place, there will be potential for the South African oil and gas economy to get more clarity on LNG imports, and we are certainly lobbying for that because LNG is the catalyst for establishing a gas economy.

What are the possibilities for greater regional cooperation in midstream and downstream activities this year?

I see great potential for cooperation and integration, specifically with Mozambique. The country holds opportunities in several areas including exploration, LNG and the floating facility offshore Mozambique following the recently approved $7 billion (private) investment. Other possibilities of cooperation are in the skills area, where South Africa has the capacity to offer assistance until its industry takes off. There could be future cooperation in the ways forward once LNG becomes available, for instance how the transport process (pipeline and/or shipping) would take place from Mozambique into South Africa.

In terms of concrete activity in 2018, it is more likely to be on the small projects; the big projects such as the LNG projects are going to need a lot of planning and ‘work shopping’ to ensure that the private inward, job creation and investment can start flowing.

What are the impacts of LNG projects in Mozambique and Tanzania on Africa/Southern Africa?

The impacts could be characterized as exciting and partly disappointing: Exciting when people say there is a find and the resultant optimism, and disappointing when investments, activities, services do not flow quickly enough, resulting in business opportunities and jobs not materializing. This has certainly been the case in Mozambique, where programmes after big proven finds have been slow but, like oil prices, these things are cyclical and you have to take a long-term view on large complex projects. They are extremely complex – financially and technically, and have many moving parts.

The long-term impacts are going to be good because Africa is a new oil and gas frontier. The populations of Africa will probably double by the middle of the century resulting in massive groups having more access to jobs, education, skills and spending power. Their living standards will be rising and they in turn become customers. My hope is that where oil and gas in the past might have been exported to other parts of the world, it can now be Africa to Africa trade; African commodities, value added within Africa, delivered to African customers. That could have a huge economic development impact where it really matters.

What are some of the factors for potential foreign investors to consider when looking at South Africa? Are we ready to accommodate a growing E&P industry?

The first factors they always look at are policy certainty, which I think is starting to unfold. The other factors are things like commerciality, contract sanctity, logistics capacity, local technical and personnel, communications, infrastructure, systems; a well understood and shared language and a skilled and employable population. We have to retool many of the skills, but we are well placed to capitalize on that incoming investment. Those are some of the things an investor would be looking for but right now after many false starts they would be looking for policy certainty. Once there are positive below ground indicators, which realistically must come as soon as possible from local exploration drilling data, they will de-risk on legal, environmental, social, economic and other criteria. Different investors will have different strategic and portfolio needs therefore, instead of second-guessing these as a potential host country; we should focus on making our market commercially attractive to reputable investors and a place that is easy to do business with. All the reputable ‘A Team’ explorers have global options and we must compete realistically for their investment dollars.

Our theme this year is Energy Coalitions: Are there any prospects of South Africa expanding more into the African context?

There are certainly prospects of expanding with partnered projects in places like Mozambique, Tanzania, Uganda and Botswana; those are some of the private company coalition opportunities. The others are more in the government-to-government area.

Large amounts of gas will become available from Mozambique but it is currently a relatively small economy, therefore South Africa’s relationship with Mozambique could help them to allocate us a portion of that gas as opposed to exporting it in exchange for development projects like building fertilizer plants and re-exporting fertilizer back into the region. There could be shared energy power plays between the two countries so, yes there are unquestionably opportunities for coalition, it just needs strong government-to-government relationships first. The Department of Trade and Industry is the lead department for this.

What are some of the topics you are looking forward to hearing about at AOP 2018?

We have not heard enough from North Africa, and Egypt is a very analogous market to South Africa. It came out of a place of great uncertainty but has developed a thriving oil and gas industry on the basis of certainty and government forming good and trusted relationships with investors. This is something we can learn from them, in both how to treat investors and form partnerships with them, not forgetting that pragmatism and speed are essential. They have an industry in drilling oil and gas, LNG is being produced and imported, they have now started producing the giant Zohr field – there are clear lessons we can learn from them and apply to South Africa. Ghana is another pragmatic country we can learn from and in terms of what we want to hear about; I think it’s the coalitions and the pragmatism. It’s an orientation to action we need.

A final message from SAOGA

South Africa is in a very good space in regards to refreshed leadership and securing certainty, this momentum is what is crucial in moving forward. Some of the challenges are going to be in bridging from the past into a more certain future, with the most important things being providing certainty on the LNG programme and putting a commercially attractive MPRDA in place and the issuing of licenses. My guess is that the LNG programme will be first, we also need the RFQ, clear timelines and clarity for consortia when an anticipation of when the first ships will be turning up. Of course, there are many years between the two points; however, investors need that certainty in order to do deals. Companies in the services value chain are correctly and hungrily waiting to position themselves.

The South African economy is growing, it might (once the numbers have been finalized) grow at 1percent – which is up but it is not near enough. The world is growing at 3.5; maybe 4 percent and we need 6-7 percent to adequately address unemployment. What is absolutely necessary is having economic growth ahead of population growth. Oil and gas can provide something that fundamentally changes South Africa for the better with large inward investment and revenue from finds or, ironically, the worse. Oil and Gas could well be the silver bullet we need, and we need to attract the investment to unlock that. We see countries like Norway that have harvested resources with discipline into a trillion dollar sovereign fund. We also see countries that have done the opposite. And it’s all about leadership. And about the choices SA Inc. makes and I am optimistic that we may now be on the right track.

September 5-7, 2018 Cape Town International Convention Centre