The South African Gas Sector

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Mr. Muzi W. Mkhize Chief Director : Hydrocarbons Policy E-mail: muzi.mkhize@energy.gov.zaTel: 012 406 7570/1

Scope

The Department of Energy seeks to brief the Committee on the South African Gas Sector focus on the following subjects:oKey challengesoResource endowmentoPolicy and regulatory framework oWork in progress oSummary and Way Forward

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Key challenges

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Security of Supply

HDSAEmpowerment

Affordability (Lower Consumer Prices

& Input Costs)

A difficult balancing act

Trilemmas: Energy-Water-Food and Energy-Water-Environment nexus

Resource endowment forms the basis• South Africa’s current diversified primary energy mix: Coal ~65.7%, crude oil ~21.6%, biomass ~7.7%, Gas ~2.8%, nuclear ~1.9% and

hydro ~0.2%

• Whilst Southern Africa is richly endowed with oil and gas resources, South Africa’s has limited oil and gas resources

All crude refinery feedstock is imported from the high seas save for ~4,000 barrels per day of indigenous crude oil from PetroSA’s offshore Oribi/Oryx Oil Field

There is a need to supplement the dwindling indigenous natural gas feedstock for the gas-to-liquids (GTL) facility in Mossel Bay – owned by the national oil company, PetroSA

South Africa is the largest market of natural gas in the region: 45,000 bpdoe GTL plant; Petrochemicals production through Sasol’s plant in Secunda; Thermal needs of commercial customers; Reticulation to households; and Gas-to-power potential

Notwithstanding recent activity on our shores

• Shale gas: Potential game changer Shale Gas Report; National Development Plan recommendations; Monitoring

Committee tasked with developing the appropriate regulatory framework

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Based on data assessment by the USEIA , SA has ~485 trillion cubic feet (tcf) of technically recoverable shale gas resources in the Karoo Basin. Although this figure has since been revised down to ~390 tcf, even a proven 10% of this resource would be a game changer for SA.

Gas value chain

FieldsTransmission

GatheringDistribution

Transmission Power Station/Bulk User

Large Industrial

Small Industrial

Domestic

Market

There is a need for an anchor customer - security of demandTransformation throughout the value chainGas Utilisation Strategy under development by DoE

Key South African gas infrastructure

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Source: Gas Strategies

Policy setting• Pre-2001 gas industry was not regulated whereas the downstream

petroleum industry was regulated through the Petroleum Products Acts, 1977 (Act No. 120 of 1977)

• South Africa’s energy policy in the current democratic dispensation is founded on the White Paper on Energy Policy of 1998

Ensuring energy security through diversification – An energy mix with natural gas featuring strongly

• Energy position responds to global, continental, regional, national, provincial and local position

Geopolitical influence on oil and gas matters (e.g. Sanctions on Iran; Syrian civil war, Westgate Mall attack in Nairobi, Kenya; Partial US Government shutdown, piracy)

Perceptions / sentiment vs reality / fundamentals (e.g. speculations; different perceptions regarding a similar event in an African country vs a Western country)

• PESTEL environment Integrated planning taking due regard of the situation on the ground, including the country’s

international commitments and its national imperatives.

• Environmental scanning Sober judgement of what one can influence

• Continuous improvement Planning-do-review” tempered with regulatory certainty

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The White Paper seeks, amongst others, to: ensure security of energy supply through diversification (broadening the energy mix); Increase access to affordable energy services; Stimulate / improve economic development; Improve the management of energy-related environmental, health and safety issues; and Enhance energy governance.

Regulatory Framework• Upstream legislative framework on oil and gas is covered by the Minerals

and Petroleum Resources Development Act, 2002 (Act No. 28 of 2002) [MPRDA]. Administered by the Department of Mineral Resources (DMR) The promotion aspects are under the Petroleum Agency SA (PASA)

o promotes exploration for onshore and offshore oil & gas resources and their optimal development o.b.o Govt.

o ‘regulates’ exploration and production activities (through the processing and recommendation of application rights and permits); and

o acts as the custodian of the national petroleum exploration and production database.• Downstream regulatory framework on gas is covered by the Gas Act, 2001

(Act No. 48 of 2001): Administered by the Department of Energy (DoE) Regulated by National Energy Regulator of SA (NERSA), through licensing.

Established in 2005 by the Energy Regulator Act of 2004, which provides for the:o Regulation of the petroleum pipelines and gas industry through licensing – HDSA

empowerment being a key aspect thereof; ando Approval tariffs and prices.o Decisions based on published Government Policy

The Port Authority also weighs in on port infrastructure

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Downstream oil/petroleum regulatory framework is covered by the Petroleum Products Act, 1977 (Act No 120 of 1977) as amended by Act No. 58 of 2003 & Act No. 2 of 2005 – the latter covering only technical changes

Integrated (Energy) Planning• Convergence of energy carriers demand integrated planning• Interlinking: energy plans and other national plans - National

Development Plan; New Growth Path; Industrial Policy Action Plan; Ports, marine and land transport plans; etc.

National Development Plan adopted by Cabinet in August 2012 for implementation and refinement

• Strategic Infrastructure Projects (SIPs) for Energy - each SIP comprises a large number of specific infrastructure components and programmes - undertaken as part of the Presidential Infrastructure Coordinating Committee (PICC)

• Integrated Energy Plan (IEP) IRP 2010, GUMP, etc. will be subsets of the IEP

• Environmental / Climate change matters SA is a coal-based economy – hence the need for Greenhouse Gas (GHG)

emission reduction

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SONA 2014 calls for radical changes

Integrated Resource Plan (IRP) 2010• South Africa requires ~43,000MW of new electricity generation capacity by 2030.

• The envisaged new electricity generation capacity is shared roughly as follows:

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IRP 2010 (contd.)• Contribution of Gas ~9% Open-cycle gas turbines (OCGTs); and ~6% Imported gas (LNG).

• LNG for power plants Gas imported from the high seas and neighbouring countries

o Complemented / supported by gas for PetroSA’s GTL facility in Mossel Bay - development of an LNG offloading facility

IPP OCGTs for Durban (near Shakaskraal) ~670 MW & Port Elizabeth (Coega IDZ) ~335 MW o Diesel for first ~7 years and conversion to gas thereafter

~2,400 MW CCGT power plant planned Current Eskom OCGTs (Gourikwa & Ankerlig) are run on diesel in the absence of gas

• CNG considerations by companies like Novo Energy

• Sasol’s ~140 MW gas to power plant in Sasolburg operational

• Shale gas potential

• Gas Infrastructure Development Framework

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Poverty alleviation, job creation - incl. through upstream project services

Work in Progress• The development of the Gas Utilisation Master Plan (GUMP)• The Amendment of the MPRDA• The Amendment of the Gas Act, 2001 to, amongst others:

incorporate changes in the gas industry landscape in redefining “gas” to include unconventional gas (like shale gas) & other modes of transporting gas in the form of liquefied natural gas (LNG) and compressed natural gas (CNG);

enhance the regulation and governance of the gas industry through appropriate empowering provisions for NERSA to effectively and efficiently execute its mandate; and

The Draft Gas Amendment Bill has been discussed at the National Economic Development and Labour Council (NEDLAC) and has been revised for onward transmission to the Office of the Senior State Law Advisor for final pre-certification.

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Work in Progress (contd.)• The drafting of of Technical Regulations for Petroleum

Resource Development under the MPRDA The Report of the Inter-department Task Team Hydraulic Fracturing

for Shale Gas in Karoo recommended, amongst others, the establishment of a Monitoring Committee to develop an appropriate regulatory framework for the development of the shale gas opportunity in SA

Draft Regulations were published for public comment on 15-Oct-13 DoE continues has engaged DMR (on the MPRDA and the Draft

Regulations), taking due regard of inputs from SOCs reporting to it. Public hearings on the Draft Regulations scheduled to take place in

the Northern Cape (13th), Eastern Cape (20th) and Western Cape (27th) in September 2014

• Gas Commission Meetings Last Mozambique-SA Gas Commission meeting held on 3 to 4-Jul-14

in Tshwane.• “Plan-Do-Review” cycle as part of continuous improvement

supported by and in response to evidence-based analysis.

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GUMP• The Gas Utilisation Master Plan (GUMP): To provide a long

term roadmap to 2050 for strategic, policy and institutional decisions based upon which investment can be fostered, designed and implemented in a fully coordinated manner for development of natural gas for South Africa’s energy security and economic development.

• Four broad sectors feedstock for PatroSA’s gas-to-liquids (GTL) refinery; fuel for existing open cycle gas turbine (OCGT) power plants

earmarked for conversion from diesel; fuel for new build closed cycle gas turbine (CCGT) power plants;

and new industrial/commercial applications and residential use.• Two phases of development

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Estimated maximum total gas demand of 6.6 million tons per annum (mtpa) equiv to 9.1 billion cubic meters (Bcm) in the 10 years of supply.

GUMP (contd.)• Phase 1: to develop a preliminary view of the GUMP,

including the opportunities and challenges and a directional view of how these might be addressed, for discussion with key stakeholders; Phase 1 Report completed and will be published for public

comment pending Ministerial approval• Phase 2: to analyse the opportunities and options in

greater depth, to evaluate feasible options and to develop and propose a framework for decision making, plans for further engagement with stakeholders and actions to support development gas demand, supply and associated infrastructure. Technical work on Phase 2 started while finalising Phase 1• Project work streams: Demand; Supply; Infrastructure;

Fiscal and Regulatory; and Environmental and Socio-economic.

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Shale gasShale gas could be plenty but is expected to be more expensive than it is in North America (US and Canada):•High production costs (e.g. costs of supply water and treatment of waste water);•Capital and operating expenditure on new infrastructure. NB: Local, National, Regional and Continental context–

Local: Local Spatial / Infrastructure / Economic Development Frameworks; National: National Development Plan (NDP); Presidential Infrastructure Coordinating Committee (PICC);

Regional: SADC Declaration on Infrastructure Development signed on 18 August 2014, in Victoria Falls, Zimbabwe;

Continental: The New Partnership for Africa’s Development (NEPAD); Programme for Infrastructure Development in Africa (PIDA) and the Presidential Infrastructure Championing Initiative (PICI) aimed at expediting projects identified under PIDA.

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Shale gas and economic development in USA: Overall contribution of ~ $238 billion and 1.7 million jobs in 2012; and Oil prodn. has risen by ~65% in the past 5 years boosted by horizontal drilling and fracking of shale formations.

Shale gas (contd.)• Water consumption and possible contamination of fresh water acquifers

Fracturing fluids: > 99% water and sand (propants) handled in self-contained systems. 5-15 Million litres for drilling and fracturing fluid into typical single horizontal fracking well (equiv. to about 50-150 domestic swimming pools, Vaal Dam ~25 Trillion litres)

Although waterless fracking remains a dream, less water and with a high salinity of 60-80 g/l (NB: seawater salinity ~35g/l) due to technological improvements.

Washington-based World Resources Institute (WRI): A new analysis shows 38% of the world’s shale resources in places such as China, Mexico and SA face high to extremely high water stress or arid conditions.

SA ranks as the 30th most arid country; Freshwater aquifers are protected by multiple layers of protective steel casing

surrounded by cement. Injected into well under high pressure (480-850 bar) to initiate new fractures or open existing ones.

Out of 6500 wells, the incident rate of casing and well problems in unconventional gas well in Pennsylvania bet 2008 & 2013 is 1-4%, mostly due to poor cement.

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Shale Gas (contd.)• Trucking and its impacts:

1000s of trucks, with dusts, noise, potential of accidents Social service needs for truckers Will not be in perpetuity – will only last as long as fracking in that area

continues Multi-well drilling pad site, with multiple (up to six or more) horizontal laterals,

helps to minimise surface disturbance but concentrates industrial activity

• Gas (methane) emissions More potent than carbon dioxide (CO2) as greenhouse gas (GHG)

Together with backwater treatment, this still remains a manageable challenge.

• Concern that micro-seismicity could lead to earthquakes, disturb deep groundwater reservoirs and flush out rock and fracking chemicals Sometimes it’s a matter of which report one has read Disclosure of fracking chemicals is an imperative

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Some Observed Differences• Differences in geology, hydrology, demographics, economics, politics and

history – e.g. dolorite intrusion in SA• US, Canada and Australia – countries that are well ahead in the shale gas

game – have a Federal System as opposed to SA and most European countries’ non-federalism

Commonwealth has shared environmental responsibility with states & territories Individual states & territories responsible for day-to-day regulation of industry Advantageous for SA from regulatory framework standpoint

• USA land and mineral rights ownership by private citizens vs. land ownership by private citizens with mineral rights ownership by the state on behalf of its citizens in SA and most of Europe.

The SA farmer: “What is in it for me?” as opposed to the one in the US

• Low population densities in shale gas development areas in US, Canada and Australia vs. high population density in EU countries

“Not in my backyard” syndrome.

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Frontrunners have well-established upstream exploration and productions operations and regulatory regimesSA’s history of exploitation by industry players (ongxiwankulu) and other socio-economical challenges need a different approach.

Key to the realisation of shale gas opportunity• Appropriate regulatory framework• Natural Karoo baseline – i.e. establish a pre-fracking reference

through geo-chemical forensics – equipment and capacitated people , incl. availability of independent assessors, required

• Monitoring and correcting/enhancing/consolidating – before, during and after fracking

• Challenge: Availability of equipment for effective scientific baseline and continuous

monitoring thereafter Insufficient expertise or skills, including independent assessors Transformation of the industry – mainly barrier: capital intensive gas industry

and inadequate access to infrastructure (third party access).

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Some Best Practices and Guidelines Participation in forums like the International Energy Agency (IEA)

Unconventional Gas Forum (UGForum) and others would help in preparing South Africa w.r.t. shale gas development.

Some of the guidelines for regulation and operational best practice:• The Seven IEA Golden Rules for a Golden Age of Gas

– http//www.worldenergyoutlook.org/goldenrules/

• US Secretary of Energy’s Advisory Board Recommendations– http://www.shalegas.energy.gov

• Recommended Practice on Shale Gas Development – developed by Det Norske Veritas Maritime, Oil and Gas (DNV); an independent Norwegian foundation– http://www.dnv.com/industry/oil_gas/segments/lng_natural_gas/shale_gas/

index.asp

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A social licence to frack is vital.

Way Forward• Conclude the Amendment of the MPRDA, NERA and Gas Act (and

Regulations to be made thereunder)• Complete GUMP• Revise IRP• Align of institutions for synergy

Structural issues; and Concurrent jurisdiction – streamlined framework

o Well coordinated function of various regulatory institutions over same / different segmentso Convergence of energy carriers / resources (e.g. diesel / gas -vehicle propulsion & power gen)

• Transformation Entry barriers to the capital intensive gas industry

o Development, upgrade, maintenance and access to infrastructureo Risk profile (high risk offshore E&P)o Role of the State

• Source gas – domestic opportunities & imports (international relations)

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Regulatory certainty is key for investments. Agility and adjustment of policy framework to changing landscape is an imperative.

Ngiyabonga Ngiyabonga kakhulu kakhulu Thank youThank you

Ke a lebohaKe a leboha SpasiboSpasibo

Asante sanaAsante sanaShukran gazilanShukran gazilan InkomuInkomu

Merci beacoupMerci beacoup Muito obrigado Muito obrigado

NgiyathokozaNgiyathokoza Mucho graciasMucho gracias

Vielen dank!Vielen dank! NdiyabulelaNdiyabulela

Ke a lebogaKe a leboga Tusen takkTusen takk

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ADDITIONAL SLIDESADDITIONAL SLIDES

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Natural Gas Price Comparison

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The shale gas revolution in the US / North America has reduced in the Northern American gas market (Henry Hub)

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Oil and Gas Exploration Activities in South Africa

Heightened Oil and Gas activity in the history of SA

The Seven IEA Golden Rules for a Golden Age of Gas

Measure, disclose and engage – capturing & sharing pertinent data widely to ensure stakeholder engagement and transparency.

Watch where you drill – detailed surveys and careful choice of sites i.t.o. geological formation to minimise risks;

Isolate well and prevent leaks – proper operations & reservoir management;

Treat water responsibly –a major task for operators; Eliminate venting, minimise flaring and other emissions –target should

be zero methane venting and minimum flaring of gas and other emissions.

Be ready to think big – planning ahead for expansions or further drilling; Ensure a consistently high level of environmental performance –good balance bet. prescriptive regulation and performance i.t.o. compliance and gas production.

Improve air quality throughout the production process

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The Golden Rules are principles that can enable governments, industry & other stakeholders to address possible negative environmental & social impacts of unconventional gas development (www.worldenergyoutlook.org/goldenrules)

The Seven IEA Golden Rules for a Golden Age of Gas

Measure, disclose and engage – capturing & sharing pertinent data widely to ensure stakeholder engagement and transparency.

Watch where you drill – detailed surveys and careful choice of sites i.t.o. geological formation to minimise risks;

Isolate well and prevent leaks – proper operations & reservoir management;

Treat water responsibly –a major task for operators; Eliminate venting, minimise flaring and other emissions –target should

be zero methane venting and minimum flaring of gas and other emissions.

Be ready to think big – planning ahead for expansions or further drilling; Ensure a consistently high level of environmental performance –good balance bet. prescriptive regulation and performance i.t.o. compliance and gas production.

Improve air quality throughout the production process

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The Golden Rules are principles that can enable governments, industry & other stakeholders to address possible negative environmental & social impacts of unconventional gas development (www.worldenergyoutlook.org/goldenrules)