Alternative energy sources

By Kieran Whyte, director, Public Sector & Utilities, Edward Nathan

Higher prices and possible supply shortages are critical issues driving the need for South Africa to investigate alternative energy sources and is leading South Africa into different areas of energy exploration. The use of Mozambique natural gas in South Africa is a reality. The $1.2bn South African venture consisted of five separate but integrated projects. They are an upstream gas field development in Mozambique, the 865km transmission pipeline from Temane in Mozambique to the Sasol site at Secunda, the conversion of Sasol’s existing distribution network, the conversion to gas of Sasol’s coal-based chemical production activities in Sasolburg and the modification of Sasol Synthetic Fuels in Secunda.

Unlike many other such international contracts, the viability of any agreement for Sasol to transport the natural gas had to be based on the final delivered price at Secunda. The more conventional method used elsewhere is to determine the final delivered price based on inter alia, the cost of the whole exploration and development, construction of the transmission pipeline and attendant infrastructure and required investor return.

Transporting natural gas at less than market-related prices would likely have left the transmission pipeline owner with an uneconomic project. The transportation agreement was premised on an agreed take or pay methodology. This allowed the integrated cross-border project to proceed on a sound economic footing.

Sasol acquired access to the Temane and Pande gasfields in Mozambique and the right to build a transmission pipeline in Mozambique. Management and ownership of the Pande and Temane gas fields are held jointly by Sasol Petroleum Temane Limited and Companhia Mocambicana de hidrocarbonetos S.A.R.L, a subsidiary of Mozambique’s state-owned oil company ENH. The natural gas would be transported by a special purpose company resident in South Africa, which would build, own and operate the cross-border transmission pipeline from Temane to Secunda.

ENH and iGas each had the right to acquire a 25 per cent equity stake in the transmission pipeline company, leaving Sasol with a 50 per cent shareholding. iGas’ rights to acquire equity in the transmission pipeline company was triggered once specifically identified completion risks were mitigated. Provision was made for black economic empowerment as well as for possible privatisation initiatives to be instituted by the government of Mozambique.

The economics of the project depended on a complex financing structure for the pipeline based on equity and debt financing taking account of the inter-dependent agreements governing the transmission pipeline, namely the petroleum production agreement, the gas sales agreement, the engineering procurement and construction contract, the shareholders agreement, the transportation agreement, the terms and conditions for an operation and maintenance agreement, and the financing agreement.

The next few years are likely to see several major gas supply projects within the national and regional arenas as exploitation of natural gas reserves uncovered off South Africa’s coast and those in Mozambique and Namibian territorial waters are brought on stream.

The South African government supports the development of natural gas projects as a means of diversifying the country’s energy portfolio, which is overwhelmingly based on electricity from coal-fired power stations deep in the heart of the country. Natural gas is often regarded as the fuel of choice in energy-intensive industries, and South Africa is currently evaluating the use of environmentally friendly natural gas from its own offshore fields and possibly from those of Namibia in addition to natural gas from Mozambique.

With due regard to the environment, opportunities using renewable energy projects will need to be more thoroughly explored. The development of power generating plant utilising flared furnace off-gases is likely, subject to the economics of each project, to become a reality in the future especially with the introduction of Independent Power Producers in South Africa.

The advent of new generation projects in South Africa will enhance the introduction of new technology into our country and facilitate the achievement of the government’s socio-economic policies of black economic empowerment, transformation and public procurement.