Acting CEF group CEO, Siphamandla Mthethwa explains that there are a number of initiatives under way to redevelop and reinvigorate South Africa’s much-discussed energy sector.
In last month’s budget speech, Finance Minister Pravin Gordhan detailed how the government would spend R865.4 billion on public sector infrastructure, over the course of the next three years. He said that investment in energy will amount to R70 billion in 2016 and over R180 billion over the next three years, as construction of the Medupi, Ingula and Kusile power plants is completed. This followed on from President Zuma’s State of the Nation Address (SONA) when the government reiterated its commitment to resolving the country’s energy challenge as part of the nine-point plan for economic development that was detailed in the SONA of 2015.
But the energy industry in this country is an extremely complex environment, facing many challenges in both the short and long term.
Government is regularly announcing its support for various projects coal, renewable, nuclear and gas initiatives yet the growing demand for energy continues to outstrip the pace of growth of supply.
Two organisations at the heart of South Africa’s energy conundrum are national oil company, PetroSA and its parent company, the Central Energy Fund (CEF).
Enterprise Africa speaks to acting CEF group CEO, Mr Siphamandla Mthethwa to find out more about plans for the future and how PetroSA will fit into the energy mix in a country which is desperate for secure, stable, safe supply.
“For me, the target is to stabilise the business amidst the downturn in the economy and make sure that we preserve cash and find a long-term solution for PetroSA from a sustainability perspective.
“We’ve got a number of pipeline projects. We are investing in the renewables space, especially in solar power stations, together with our department of course. We are also looking at coal mining expansion and we’re also looking at increasing the pipeline capacity from Mozambique – through our company iGas, we jointly own a company called ROMPCO together with Sasol and the Mozambique government.
“It’s a diversified energy portfolio. The primary mandate is around security of supply and to give assurance to the ministry, especially with liquid fuels, that there is an effective entity in place to supply fuels to the market,” says Mthethwa.
Currently acting group CEO, Mthethwa has been with the company for two years. After working previously with Eskom, he joined CEF and took the role as group CFO. He has been in his current position for around one year.
CENTRAL ENERGY FUND
The CEF, which reports to the Department of Energy (DoE) and minister Tina Joemat-Pettersson, operates right across the energy sector value chain and has subsidiaries including the aforementioned PetroSA, Strategic Fuel Fund (SFF), iGas, African Exploration Mining and Finance Corporation (AEMFC), the Petroleum Association of South Africa (PASA) and two minority interests in two small renewable energy ventures. CEF also manages two funds – the Equalisation and the Mines Health and Safety funds. Renewable energy activities are managed through the Energy Projects Division (previously the Clean Energy Division).
“We were established in 1977 and today we have around 2000 employees,” explains Mthethwa.
PetroSA, something of a notorious SOC in recent times, is the biggest operation managed by CEF and has witnessed extremely difficult times recently, partly due to the global drop in oil and commodity prices and also thanks to largely depleted fuel for its GTL plant in the Western Cape.
“Our biggest challenge has been with the refinery we own in Mossel Bay through PetroSA,” explains Mthethwa. “It’s a GTL refinery and we also have gas fields offshore which we use but the feedstock is almost depleted so we have invested in a project to get more gas from the surrounding area and that project was not successful so we had to write down around R14 billion.”
That project, named Project Ikhwezi, was a five-well gas drilling programme designed to augment dwindling hydrocarbon reserves feedstock. It was expected to deliver 242 Billion Cubic Feet (BCF) of commercial gas reserves but by the end of 2015, had only delivered 25 BCF of commercial gas reserves from three wells. The project spanned four years but PetroSA said that it “did not derive the anticipated return from its investment”.
“In our business, the falling oil price has had a major impact – especially for PetroSA. The oil price fell from almost $110 to around $45 per barrel and that had a significant impact on our revenue and margins. It also contribute to the write down of our assets,” says Mthethwa.
Another plan to boost fortunes at the refinery were quashed when plans to build a floating liquefied natural gas (FLNG) import terminal were scrapped in December. A feasibility study found the location to be technically and commercially problematic with meteorological and oceanographic conditions described as ‘severe’, potentially increasing the logistical and gas supply costs of the project.
Despite all of this this, the company is forging onwards and concentrating on the positives. On the financial side of the business, PetroSA was able to repay and refinance an interest bearing debt of R1.5 billion in 2015. There was also an increase in cash generated from operations, from R2.8 billion in 2014 to R3.5 billion in 2015.
The company also succeed in advancing transformation in the oil and gas industry. In 2015, the company recorded total procurement spend of R8.7 billion on Broad-Based Black Economic Empowerment companies, which equates to 103.1% of discretionary spend. The company also spent R10.3 million on Corporate Social Investment initiatives to uplift historically disadvantaged individuals and communities, bringing the total spent on community develop projects since 2002 to R348 million.
There has also been a focused drive around sustainability and the company embarked on a drive, dubbed BillionPlus, to contain and optimise operating costs, setting itself a target to save R1.25 billion in recurring costs. At the 2015 year-end, savings of R1.1 billion were achieved.
GROWTH WITH ESKOM
After seeing something of a small change in fortunes in recent times, following the appointment of experience leader Brian Molefe, Eskom is on a growth path, looking to make load shedding and unstable supply a thing of the past. With the (seemingly) imminent completion of the Ingula Pumped Storage Scheme and Medupi and Kusile Power Stations, stakeholders are hopeful.
But CEF is not happy to rest on its laurels and while the development of Eskom is welcome, from a business perspective, the organisation is also keen to expand its reach.
“Eskom is our biggest customer through the Gourikwa and Ankerlig power stations which currently run on diesel – we supply a lot of diesel there. We also supply a lot of coal to Eskom from our mining company, AEMFC.
“Obviously, our intention is to supply beyond just Eskom, to the broader market. We do have expansion plans to supply more coal to other customers including exports possibly,” says Mthethwa.
The company’s position, despite recent results from PetroSA, remains strong and it is well placed to breed success in the sector.
“We are a state-owned entity which gives us our own unique position,” Mthethwa says. “Talking about our competitive edge, I would say it’s our people. Also, in certain businesses, the technology sets us apart – we have the only GTL plant in Africa (the first in the world and now the third biggest on earth) and we’re looking to expand capacity of our pipeline form Mozambique.”
But growing the business will take a big effort, especially from marketing, as the image of energy in South Africa has been damaged in recent times because of mismanagement and interruption of electricity supply.
“We don’t market the company like we should. It’s something we have been doing but not in an aggressive way,” says Mthethwa.
ENERGY DEVELOPMENTS
The DoE has long been searching for new and alternative energy solutions to bolster its portfolio; it aims to generate 30% of energy from clean, renewable sources by 2025.
In a recent statement, leading global solar energy conference organiser and CEO of Solarplaza, Edwin Koot said that South Africa has now become an example to follow when it comes to s sustainable government policy on solar power.
“Europe has suffered especially as some governments have unpredictably withdrawn or taxed their incentive schemes. While Spain, Germany, Belgium and Italy have all encountered turbulence and turnarounds in the last 12 months, SA has shown commitment in setting up its solar industry currently moving into round four, maintaining its incentives, and successfully getting projects off the ground. In our recent trip to Dubai, South Africa came up as the case study to follow,” he said.
“In this economy, we are learning that it’s not about size – Suntech, the former world leader, and LDK are now battling – while previously smaller players like Jinko Solar are soaring. It has shown that timing is critical and right now South Africa’s timing is excellent.
“Solarplaza has been witness to the immense positivity and growth in South Africa. There is high energy here and you can enter the market even if there aren’t incentives. From what we’ve seen, it really can be one of the world’s huge markets, as long as the government stays the course after the next election,” he added.
And then there’s the huge opportunities that exist in the shale gas industry. After booming in the US and proving to be a reliable source, South Africa has investigated its options which are reported to be huge in the Karoo.
The government has already said that it is ready to regulate and monitor companies that have expressed an interest in exploring shale gas in the country.
“The draft regulations, once finalised, will result in a regulatory framework that ensures safe extraction of gas, which will contribute to diversification of South Africa’s energy mix, energy security supply, significantly boost South Africa’s economy and have positive effects on the Gross Domestic Product,” said Thibedi Ramontja, the Director-General of the Mineral Resources Department in December.
“Currently South Africa is a net importer of energy sources such as crude oil, refined petroleum products and natural gas. It is estimated that the Karoo shale gas resources would mean South Africa has the 5th largest reserves, estimated at 485 trillion cubic feet (Tcf).
“We however take a conservative view of a 30 TcF economically recoverable resource, which is equivalent to 30 times the size of the Mossgas plants,” said the Minister for Mineral Resources, Mosebenzi Zwane, in January.
Before making any decisions on awarding exploration licenses, the department is undertaking studies and consulting with local communities and businesses, mainly the SKA Project, to ensure that no disruption is caused should any licenses be granted.
In other energy news, the Burgan Cape Terminals fuel storage project in Cape Town was launched in December and is set to be completed in 2017 creating hundreds of jobs and have a storage capacity of 118,670 m3. In December it was also announced that Oiltanking MOGS Saldanha had been given environmental authorisation for the development and construction of a R2 billion commercial crude oil blending and storage terminal in Saldanha Bay. Initial reports suggest that the facility will have a total capacity of 13.2 million barrels, comprising twelve 1.1 million barrel in-ground concrete tanks.
These developments and agreements all form part of a wider strategy put in place by the DoE, a strategy that CEF and PetroSA are very much a part of, and will help to address employment, transformation and secure energy supply.
It is PetroSA’s vision to be ‘the leading African energy company’ by ‘becoming the leading provider of hydrocarbons and related quality products by leveraging our proven technologies and harnessing our human capital for the benefit of all our stakeholders’ and as long as it remains focused on its strengths and sticks to a turnaround strategy, which is set to be tabled in the near future, it will likely achieve this and drive South Africa’s wider energy industry forward.