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    South Africa Gas Trade Forecast


    September 19, 2022 - Fitch Solutions Sector Intelligence

     

      • Oil & Gas
      • South Africa
      • Industry Forecast
      • Fitch Solutions

      South Africa Gas Trade Forecast

      • 16 Sep 2022
      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Key View: Limited upstream investment means South Africa's natural gas imports will continue to grow over the coming decade, underpinned by favourable demand and supply dynamics in the region, particularly in terms of key import partner Mozambique which is attracting major investment to its fledgling offshore sector. While plans for future LNG infrastructure investment in South Africa provide upside risk, we remain bearish on factoring them into our forecast since the country has consistently struggled to pursue LNG import infrastructure projects in the past. As a result, pipelines remain the only form of gas imports throughout our 10-year forecast period.

      Latest Updates
      • South Africa's gas imports will increase by 3.4% in 2022 to 4.8bcm, supported by positive economic growth and robust demand from industry and CTL production. Further growth over the course of our 10-year forecast period to 2031 will take gas imports to a total of 6.8bcm in 2031.
      • While plans for future LNG infrastructure provide upside risk, we remain bearish on factoring them into our forecast since South Africa has consistently struggled to pursue LNG import infrastructure projects in the past. As a result, pipelines remain the only form of gas imports throughout our 10-year forecast period.
      • In a Bloomberg interview in April 2022, Sasol’s CEO Fleetwood Grobler confirmed that the company was no longer considering a gas supply from the African Renaissance Pipeline (ARP) project, which is a proposed USD6bn 2,600km pipeline that would transport gas from Mozambican offshore gas fields within the Rovuma Basin, to South Africa's Gauteng province. Having abandoned its plans to invest in the ARP, Sasol will now have to consider the alternatives for sourcing additional gas in South Africa. Its preferred option appears to be importing LNG by tanker from Mozambique via a new import facility at the port of Matola.
      • In February 2022, the state-owned Central Energy Fund (CEF) released a request for proposal for a partner to help build CEF's capacity to trade gas. The partner would support CEF in various aspects of trading, including assisting with a gas-price mechanism to developing currency exposure protection and hedging.
      • In November 2021, the CEF issued a request for information to assess the potential for building an LNG import and distribution terminal at the Ngqura deepwater port in the Eastern Cape. Development of LNG infrastructure would boost South Africa's gas imports significantly, but the tendering process for the construction of the import infrastructure has been facing multiple delays and the timeline remains unclear.
      • In September 2021, Sasol and the CEF signed a memorandum of understanding (MoU) to collaborate on developing South Africa's gas industry. A core objective is to develop multiple gas import locations, which could include the construction of LNG import terminals in order to improve gas supply to the country.
      • In December 2020, ExxonMobil and Vopak signed an MoU to conduct a feasibility study of an LNG regasification terminal in South Africa. The two companies seek to promote the use of LNG for power generation.
      • In October 2020, Transnet authorised Delta Natural Gas Energy (DNG) to begin LNG bunkering operations in the Port of Coega, in the Eastern Cape. DNG plans to commission a 125,000cm capacity floating storage unit (FSU) in Q122 to enable offshore LNG bunkering for international trading ships. According to reports in November 2021, the company has also completed terminal infrastructure at Algoa Bay, as DNG seeks to eventually deliver LNG to commercial customers via roads and pipelines.
      • Further upside for LNG-to-power projects in South Africa comes from the government's Risk Mitigation Independent Power Producers Procurement Programme (RMIPPPP). In March 2021, Karpowership SA was named as a preferred bidder for three projects run on LNG that will provide 1,220MW of electricity over a 20-year contract period. It was announced that Shell will supply the LNG to run the powerships. However, we currently do not factor any LNG imports into our forecasts due to significant risks of delays. Further delays into late 2021 were attributed to a legal dispute regarding Karpowership's bid, which was dismissed in January 2022.
      Structural Trends

      South Africa's gas imports will increase by 3.4% in 2022 to 4.8bcm, supported by positive economic growth and robust demand from industry and CTL production. Over the course of our 10-year forecast period to 2031, gas imports will total 6.8bcm.

      Natural gas is currently imported from the Temane and Pande gas fields in Mozambique, via an 865km pipeline. In 2017, Sasol and the Mozambican and South African governments invested USD210.0mn to add an additional 127km loop line to the existing pipeline, which provided an additional 12.5% of gas import capacity. Concerns are mounting that gas production at Southern Mozambique's gas fields, which currently feed the Rompco pipeline to South Africa, is slowing. This slowdown has the potential to pinch before Mozambique's northern fields come online, resulting in an export shortfall to which South Africa could be very vulnerable in the medium term. Over the longer term, Mozambique has the capacity to significantly ramp-up its exports to South Africa, as it brings its vast offshore reserves online.

      The bulk of imported gas is consumed by the CTL plant at Secunda and the petrochemicals industry. The remainder is fed to commercial and other industrial users in the Free State, Gauteng, Mpumalanga and KwaZulu-Natal provinces.

      The African Renaissance Pipeline

      In March 2016, SacOil announced a proposal for a USD6.0bn, 2,600km gas pipeline to deliver gas from the Rovuma Basin in Mozambique. The project was set to be led by the China Petroleum Pipeline Bureau, a subsidiary of the China National Petroleum Company, accompanied by a consortium of Mozambican private investors, in addition to SacOil. However, we note significant risk to the project, given the lack of prospective gas offtakers in both Mozambique and South Africa. Building a 2,600km pipeline is expensive and will have to have considerable capacity in order to deliver the required economies of scale. Typically, projects of this nature demand anchor offtakers - buyers which offtake the majority of capacity in order to guarantee sufficient returns. Gas-based industries in both South Africa and Mozambique are critically underdeveloped and no such offtaker currently exists. The pipeline's future has been clouded even more after SacOil decided to hold off from signing a joint venture agreement for the construction of the pipeline in April 2016.

      In 2020, Sasol announced it was considering buying a small interest in the ARP project, in order to secure gas supplies for its petrochemical operations in South Africa and reduce the company’s reliance on coal. However, in a Bloomberg interview in April 2022, Sasol’s CEO Fleetwood Grobler confirmed the company was no longer considering a gas supply from the ARP. He cited concerns that being tied to a large-scale fossil fuel infrastructure investment for 30-40 years was not in line with the company’s ambitious climate targets. As one of South Africa's largest emitter's of greenhouse gases, Sasol is seeking to massively reduce its carbon emissions, by reducing the use of coal in its operations and switch to gas instead. Sasol has ambitious climate targets, including a 30% reduction in greenhouse gas emissions by 2030, and net-zero emissions by 2050. At present, the majority of South Africa’s natural gas supply is imported from the Sasol-operated Temane and Pande gas fields in southern Mozambique, via the 865km Rompco pipeline which Sasol has a 20% operating interest in. The bulk of imported gas is then fed to Sasol’s Sasolburg integrated manufacturing facility and its 160,000b/d Secunda coal-to-liquids (CTL) plant. However, coal – which is a far more carbon-intensive fossil fuel than gas - accounts for approximately 90% of the feedstock used at the Secunda CTL facility, with natural gas making up the remaining 10% feedstock. Sasol seeks to dramatically increase the use of gas within its South African operations in lieu of coal, as although it is still a key emitter of carbon, gas can act as a bridge fuel while the company develops lower-carbon energy solutions over the longer term, such as green hydrogen and renewable energy.

      Having abandoned its plans to invest in the ARP, Sasol will now have to consider the alternatives for sourcing additional gas in South Africa. Its preferred option appears to be importing LNG by tanker from Mozambique via a new import facility at the port of Matola, We expect that Sasol’s comments regarding the stranded asset risk of the ARP will do nothing to help move the multi-billion-dollar project forward, which has already faced significant delays in recent years. As of mid-2022, there have been very few updates on the project’s progression and it still awaits a final investment decision – as such, we remain bearish on construction being completed by the original target date of 2026.

      Increasingly Reliant On Gas Imports
      South Africa - Gas Net Exports Forecast (2020-2031)

      e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions

      More substantial upside to imports lies in LNG. While plans for future LNG infrastructure provide upside risk, we remain bearish on factoring them into our forecast since South Africa has consistently struggled to pursue LNG import infrastructure projects in the past. As a result, pipelines remain the only form of gas imports throughout our 10-year forecast period.

      LNG Import Plans Slowly Materialising

      The South African government is planning a tender for a floating storage and regasification unit, which will be the country's first LNG import facility. They are also planning a new gas-to-power plant. It originally called for bids on integrated gas-to-power projects to be submitted by February 2017, but this timeline has faced severe delays. In November 2021, the CEF issued a request for information to assess the potential for building an LNG import and distribution terminal at the Ngqura deepwater port in the Eastern Cape. Development of LNG infrastructure would boost South Africa's gas imports significantly, but the tendering process for the construction of the import infrastructure has been facing multiple delays and the timeline remains unclear.

      In September 2021, Sasol and the CEF signed a memorandum of understanding to collaborate on developing South Africa's gas industry. A core objective is to develop multiple gas import locations, which could include the construction of LNG import terminals in order to improve gas supply to the country. A company announcement drew attention to the example of India, who have successfully constructed a number of LNG terminals to support its burgeoning gas industry.

      In October 2020, Transnet authorised DNG to begin LNG bunkering operations in the Port of Coega, in the Eastern Cape. DNG plans to commission a 125,000cm capacity FSU in H122 to enable offshore LNG bunkering for international trading ships. According to reports in November 2021, the company has also completed terminal infrastructure at Algoa Bay, as DNG seeks to eventually deliver LNG to commercial customers via roads and pipelines.

      These proposals underscore South Africa's ambitions to develop its gas economy. However, with limited production domestically, it has struggled to match supply and demand. Industry has been reluctant to gear itself towards the use of gas, in the absence of a long-term secured supply. In turn, investors have shied away from large-scale capital outlays on import and transport infrastructure, due to the lack of sufficient offtake. Gas-to-power projects can effectively sidestep this barrier, with power plants providing an anchor for demand and industrial consumers off-taking the surplus LNG.

      South Africa was among the markets in Sub-Saharan Africa that we flagged as the most attractive for LNG, given the large size of the domestic power market and a push to diversify away from coal. However, given the large investment in infrastructure needed, pricing and volume risk were material concerns. One issue is a lack of correlation between prices in the global LNG and domestic power markets, which can easily squeeze margins on an integrated project. Demand uncertainties were also a factor, given the take-or-pay structure typical of LNG term contracts.

      In its LNG IPP programme, the government has largely offset these risks. The projects will be underpinned by 20-year power purchase agreement(PPA)s with state utility Eskom. The creditworthiness of the company has deteriorated in recent years. However, the South African government has agreed to give explicit guarantee to the PPAs, which will reassure investors and should help lower funding costs for Eskom itself. In addition, the tariff paid for the power will comprise both fixed and variable components. Crucially, the variable component includes the cost of fuel which will limit the impact on margins of an increase in LNG prices. As LNG is US-dollar denominated, and offtake will be paid for in rand, this will also be important to offsetting FX risk. Given the extent to which the PPA structure will de-risk the project, we expect to see significant private sector interest in the LNG tender.

      The LNG-to-power projects could provide an anchor for the wider use of gas in the South African economy. A requirement of the project is that companies allow for third-party access to infrastructure, which will allow for the import of gas to supply other power plants or for use in the industrial, commercial, residential and transport sectors. In addition, companies are required to supply a small part of the import total (around 5%) to other users. We note upside risk to South African gas consumption forecasts, which are currently constrained by domestic production and pipeline imports.

      Power Crisis Provides Upside Risk For LNG Imports

      Further upside for LNG-to-power projects in South Africa comes from the government's RMIPPPP. Sustained power shortages and the slow development of new capacity have meant South Africa has been facing an energy crisis for over a decade, leading state-owned Eskom to implement periods of load shedding and power cuts across the country. In March 2021, the Department of Mineral Resources and Energy announced the preferred bidders of eight projects that will provide power to South Africa’s national electricity grid under the RMIPPPP. Karpowership SA – a joint venture between Karadeniz and Powergroup, was named as a preferred bidder for three projects run on LNG that will provide 1,220MW of electricity over a 20-year contract period. It has been announced that Shell will supply the LNG to run the powerships. Two 450MW floating power plants will be deployed in Coega and Richards Bay, while the other 320MW plant will be placed at Saldanha Bay. Karpowership is expected to start providing electricity by August 2022 and the company has indicated that its floating power stations and their accompanying FSRUs are immediately available to be deployed in South Africa.

      However, we currently do not factor any LNG imports into our forecasts due to significant risks of delays. The company’s bid remains subject to various agreements being made, including with state-owned Eskom. A recent obstacle appeared on June 24 2021, when Karpowership SA’s applications for environmental authorisation of its three projects were refused by South Africa's Department of Forestry, Fisheries and the Environment. The company's environmental impact assessment process had been suspended earlier in June by the government, following a formal complaint by an environmental non-governmental organisation that a study of the project’s ecological impact on Saldanha Bay had been inadequate. Further delays into late 2021 were attributed to a legal dispute regarding Karpowership's bid, which was dismissed in January 2022. According to media reports in April 2022, Karpowership remains committed to its South African operations, despite the headwinds that it has faced in recent years. While the proposed project provides substantial upside risk to South Africa's gas consumption, we await further updates regarding the government-imposed deadlines before including it in our forecasts.

      Gas Net Exports (South Africa 2020-2025)
      Indicator 2020e 2021e 2022f 2023f 2024f 2025f
      Dry natural gas net exports, bcm -4.4 -4.6 -4.8 -5.0 -5.2 -5.4
      Dry natural gas net exports, % y-o-y 1.7 4.3 3.4 3.4 4.5 4.4
      Dry natural gas net exports, USDbn -0.9 -1.6 -1.8 -1.8 -2.0 -2.2
      Pipeline gas net exports, bcm -4.4 -4.6 -4.8 -5.0 -5.2 -5.4
      Pipeline gas net exports, % y-o-y 1.7 4.3 3.4 3.4 4.5 4.4
      Pipeline gas net exports, % of total 100.0 100.0 100.0 100.0 100.0 100.0
      LNG net exports, bcm 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, % y-o-y 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, % of total gas exports 0.0 0.0 0.0 0.0 0.0 0.0
      e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions
      Gas Net Exports (South Africa 2026-2031)
      Indicator 2026f 2027f 2028f 2029f 2030f 2031f
      Dry natural gas net exports, bcm -5.5 -5.7 -6.0 -6.3 -6.5 -6.8
      Dry natural gas net exports, % y-o-y 1.5 4.6 4.5 4.5 4.5 4.4
      Dry natural gas net exports, USDbn -2.2 -2.3 -2.4 -2.5 -2.6 -2.7
      Pipeline gas net exports, bcm -5.5 -5.7 -6.0 -6.3 -6.5 -6.8
      Pipeline gas net exports, % y-o-y 1.5 4.6 4.5 4.5 4.5 4.4
      Pipeline gas net exports, % of total 100.0 100.0 100.0 100.0 100.0 100.0
      LNG net exports, bcm 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, % y-o-y 0.0 0.0 0.0 0.0 0.0 0.0
      LNG net exports, % of total gas exports 0.0 0.0 0.0 0.0 0.0 0.0
      f = Fitch Solutions forecast. Source: EIA, Fitch Solutions
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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