In the midst of a war in Ukraine and soaring gas prices, South Africa wants to urgently secure access to vast amounts of natural gas.
The Central Energy Fund (CEF) released a tender last month, looking for a gas aggregator to help secure liquified natural gas (LNG) for various gas-to-power projects planned for the Coega special economic zone in the Eastern Cape.
A gas aggregator is a wholesaler who imports LNG in bulk and sells it to smaller customers.
AmaBhungane has confirmed that SOCAR, the state-owned oil company of Azerbaijan, and Gazprombank, which is owned by Russia’s state-owned natural gas supplier Gazprom, are contemplating bids. Shell, which was expected to be a front-runner for the gas aggregator tender, has confirmed that it will not bid.
The tender is potentially lucrative: “[T]he average Gas Demand could be more than [200 million cubic feet per day]*. Such volumes can be managed through multi-billion rand contracts per annum. It would be recommendable to consider aggregating supply … so as to maximize the benefits of economies of scale,” the tender documents explain.
This translates to over 75-million MMBTU per year, the common unit of measure for natural gas when it is sold on the global market.
Before the Russian invasion of Ukraine, 1MMBTU was priced at roughly $26. At the beginning of March, 1MMBTU hit a record-high of $52. Even at pre-Ukraine prices, that would put the size of the potential contract at $2-billion (R29-billion) a year.
Gas aggregators are not unusual in the energy sector; Singapore has appointed several — including Shell and Exxon — to bring LNG into the country.
What is unusual, is that CEF wants to partner with the oil and gas industry to set up a new state-owned gas trading entity to aggregate these multi-billion rand contracts.
“Since CEF has not been trading gas, there is an acknowledgment of a lack of capacity, systems, and processes. There is also an appreciation of the gas supply agreements’ complexity as they can be multi-year and multi-billion contracts with material risks,” the tender documents read.
“Therefore, for these reasons, CEF seeks to appoint a gas aggregator partner that will support CEF in establishing and capacitating a state-owned gas trading entity.”
This new state-owned entity “must start trading in the current year (2022)”, CEF added.
CEF is leaving it up to bidders to suggest a business model that will work, with the successful oil and gas company either taking an equity stake in the business, or merely providing technical advice to the new state-owned gas trading entity.
CEF also wants the gas aggregator to arrange a bank facility of up to R20-billion to fund day-to-day trading. The gas aggregator will also “assist in sourcing, negotiating, and concluding gas supply agreements” and develop hedging strategies to offset the volatility of the rand/dollar exchange rate.
Despite the size and complexity of the tender, CEF initially gave bidders just three weeks to respond.
The deadline for the gas aggregator tender has now been extended until the end of March but industry sources who amaBhungane spoke to were divided on how to interpret the tender: one felt that CEF was merely “fishing” for information; another described it as “pie-in-the-sky”; but two more warned that the contract could give one company backdoor access to supply, not just Coega, but the entire country.
Backdoor or backwater?
On paper, the gas aggregator contract looks like a goldmine. But the volumes of natural gas are not guaranteed — part of the aggregator’s job will be to find buyers for the LNG it imports — and closer inspection of the tender documents reveals that none of the potential customers identified in Coega are ready to start buying natural gas.
For instance, the beleaguered 450 MW Karpowership Coega project is identified as one of the gas aggregator’s potential customers, despite the fact that the project was refused environmental authorisation. CEF also identified a planned 1 000 MW gas-to-power project as a potential customer, even though it would first need to win an allocation in the upcoming gas-to-power tender.
This uncertainty is responsible for some of the scepticism in the market as some worry that the gas aggregator will be stranded in the backwaters of the Eastern Cape, eagerly waiting to supply vast volumes of natural gas to projects that never materialise.
Minerals and Energy minister Gwede Mantashe has made it clear that he wants Coega to be the first gas import hub in the country but it faces competition from Richards Bay where the Transnet National Ports Authority has embarked on its own process to develop a gas import hub.
Richards Bay has the logistical advantage of being close to Transnet’s Lilly pipeline which can carry natural gas to existing buyers in Gauteng. Sasol currently supplies these buyers with natural gas from Mozambique but has told them it cannot guarantee supply after 2023. While building a link from Coega to the Lilly pipeline is possible, it is estimated to cost R50-billion.
However, question marks about Coega do not appear to have killed all interest in the gas aggregator contract. With CEF positioning itself to take on a major role in the energy sector, some international oil and gas companies are seeing the strategic advantage of being by their side.
Prospective bidders have been warned not to speak to the media, but SOCAR, the state oil company of Azerbaijan, has publicly said that it would participate in any tender aimed at “establishing LNG capabilities” in Coega.
In September, SOCAR opened an office in Johannesburg and appointed Tumelo Motsisi, founder of Kopano Ke Matla, COSATU’s investment arm, as one of its directors.
Gazprombank is also likely to bid: “We are evaluating the potential participation in the gas aggregator tender issued by CEF, given the group’s extensive experience in the gas sector,” the Johannesburg branch told amaBhungane in a written response.
“We are unfortunately unable to currently confirm the form of participation, negotiations are ongoing in this regard.”
Surprisingly, Shell will not bid.
Shell not only has access to natural gas, but plenty of political capital: the Batho-Batho trust, which funds the ANC, owns 13% of Shell’s downstream business via Thebe Investment Holdings. In addition to this, Shell and Thebe co-own two local oil-trading entities: Stisa and Sekelo Oil Trading.
The gas aggregator tender is intended to be adjudicated using 80:20 scoring, meaning that a company’s B-BBEE scorecard will play an outsized role in who gets the contract. And a bid from Sekelo Oil Trading, which is 57% owned by Thebe, might be difficult to beat.
But last week, a spokesperson for Shell South Africa told amaBhungane: “I can confirm that neither Shell nor any of its related companies have an intention to participate in the gas aggregator RFP.”
Vitol, the Dutch commodity trader that was widely expected to bid, declined to say if it would participate in the tender, but amaBhungane understands that it will also sit this one out, leaving SOCAR and Gazprom in a strong position.
For South Africa, agreeing to award a new multi-billion rand gas deal to Gazprom or Gazprombank could be geopolitically risky.
Gazprom is one of the few Russian state-owned companies to escape sanctions following Russia’s invasion of Ukraine. The US and UK governments have imposed some transaction limits on the group, but European countries have continued buying €2-billion of natural gas per week from Russia, and remain too dependent to shut off the tap.
However, President Cyril Ramaphosa’s refusal to condemn Russia’s invasion of Ukraine has already cast him in a poor light. The damage to his credibility would be even greater if it turns out that while trying to mediate the Ukraine conflict, CEF was negotiating a discount gas deal from Russia.
Russian companies have made repeated bids to secure natural gas deals in South Africa via CEF and its subsidiaries.
In 2017, PetroSA signed a $400-million (R6-billion) deal with Rosgeo, the geological exploration arm of the Russian state, to carry out seismic surveys and drill exploratory wells off the south coast.
PetroSA needed to find gas for its gas-to-liquids (GTL) refinery in Mossel Bay as its own wells were predicted to run dry by December 2020.
But the proposed deal “stalled”, and in 2019, the Department of Mineral Resources and Energy (DMRE) told Parliament that a meeting had been arranged in an attempt “to revitalise the relationship” between PetroSA and Rosgeo.
By this point, South Africa had a new Integrated Resource Plan (IRP) that called for 3 000MW of gas-powered projects to be added to the grid by 2030. It also had a new energy minister who strongly favoured fossil fuels — if not coal, then natural gas.
In February 2020, PetroSA signed a new memorandum of understanding, this time with Gazprombank — now run by Rosgeo chief executive Roman Panov — to “co-operate with each other and jointly evaluate the development, construction and operation” on a natural gas import hub in Coega.
The Sunday Times, which broke the story, reported that Gazprombank had offered to fund the project, estimated to cost at least R7-billion. The stumbling block, according to one former CEF executive, was that the project could not be awarded without a competitive bidding process.
When asked about the proposed PetroSA and Rosgeo deal, Mantashe told the Sunday Times: “I have no allergies to the Russians. If they want to invest in a project that we think will add value, let them invest … There is nothing suspicious with the Russians, they have money and they want business.”
Five months later, in October 2020, PetroSA issued a tender for the “supply and delivery of LNG feedstock” for the GTL refinery at Mossel Bay. That tender came very close to being awarded in May last year when the PetroSA board was asked to approve the award to a consortium led by DNG Petroleum and supplied with gas from Gazprom.
In a “cautionary note to management”, PetroSA’s internal audit division questioned why DNG was not buying LNG directly from Gazprom but through a series of intermediaries: “The … agreement appears to accommodate numerous second and third party companies in the supply of LNG between the source (being Gazprom) and DNG which poses the risks of escalated gas price increases (avoidable mark-ups) along this supply chain.”
Sivi Gounden, the chair of the HolGoun Group, one of the intermediaries in the bid, told us that his company only became involved in the PetroSA tender because the volumes of natural gas were too small to tempt the big players. “That created a space for traders [like HolGoun] to step in … The bigger boys didn’t see this as attractive, hence we were able to put a price on the table,” he said
Before entering the private sector, Gounden served in government and briefly as a director of the ANC funding vehicle Chancellor House.
Gazprombank told us that it was not directly involved in the PetroSA tender and was left in the dark about the outcome: “We have been approached by several local organisations which enquired regarding possible supply of LNG, but without any further specifics … We are not aware of the tender outcome or PetroSA’s plans.”
It added: “It is challenging to participate in this kind of tender because of the lack of LNG infrastructure in South Africa.”
This brings us to November last year when CEF issued a request for information (RFI) looking for a gas aggregator and the infrastructure necessary to import LNG into Coega.
So far only the gas aggregator role has advanced to a request for proposal (RFP), but CEF has said it will soon issue a second tender to secure gas infrastructure.
“It is important to note that the development of LNG import into … Coega … will be developed in 2 parts: gas supply (via the gas aggregator) … [and] infrastructure,” CEF told potential bidders in response to questions about the gas aggregator tender.
“[An] RFP for infrastructure will follow in due course… Suffice to highlight that this RFP is about the molecules, i.e., the sourcing and trading of gas.”
All of this could be good news for the oil and gas industry, but ironically Russia’s actions have now put the entire rollout of natural gas in jeopardy.
From $3 to $34
CEF could not have picked a worse time to announce a multi-billion rand deal. Two weeks after the RFP was issued, Russia invaded Ukraine, sending natural gas prices into the stratosphere.
For the ultimate buyers — you, me and Eskom — the question is, can we afford to buy electricity sourced from natural gas?
Eskom does not currently have any gas-to-power projects, but DMRE plans to issue a tender for up to 3 000 MW later this year, in line with the recommendations of the 2019 IRP.
But this plan is, by the DMRE’s own admission, out of date; and there is little agreement on what the updated plan should look like. Energy progressives would like to see more renewables and battery storage, with the rollout of natural gas delayed or bypassed completely, while the DMRE and some in the private sector would like to see natural gas replacing coal as a fuel source for mid-merit or baseload power.
Last year, the Turkish-led Karpowership consortium predicted it could deliver electricity, powered by burning natural gas, at between R1.47/kWh and R1.67/kWh, as part of the Risk Mitigation Independent Power Producer Procurement Programme (RMI4P).
This was more expensive than Eskom’s own fleet, which generates power for 95c/kWh, but cheaper than the diesel-fired peaker plants that, in 2020, delivered emergency power at R6.87/kWh.
But crucially, Karpowership’s bid was based on April 2020 prices when natural gas was trading at roughly $2.85/MMBTU. This week, natural gas was trading at $34.12/MMBTU.
At that price, the LNG alone would cost R1.75/kWh, almost double Eskom’s current all-in cost to generate electricity. Add shipping, regasification and infrastructure costs, and one is potentially looking at electricity that costs over R3/kWh.
Karpowership has acknowledged that “globally gas prices increased significantly … especially after the Russian/Ukrainian crisis”, but in a statement added: “It is widely known that commodities, and their corresponding prices, are cyclical in nature. Neither Karpowership SA nor any credible institution see the current gas prices as sustainable in the medium or long term.”
In the long-term, Karpowership expects LNG prices to “return to single digits”, although futures contracts still put the price at around $20/MMBTU at the end of 2023.
Even a swift end to the war in Ukraine may not drastically change natural gas prices: the European Union plans to cut imports from Russia by 80% this year, replacing Russian natural gas with imported LNG.
South Africa, which has plenty of theoretical reserves but little natural gas coming out of the ground, would likely be competing to buy the same product — unless we opt for Russian LNG, which we are likely to be able to secure at a discount.
For now, CEF is not asking bidders for “the actual and final price of the gas”, but pricing mechanisms (formulas): “[T]he final gas price will include an infrastructure tariff (for storage, regasification and pipeline transportation, etc.).”
Appointing a gas aggregator on a five-year contract is one thing but spending billions to build gas infrastructure in Coega is a 20-year commitment that relies on natural gas being more than just a transition fuel between coal and renewables.
It is a gamble that CEF and its minister are willing to take, even as Ramaphosa and Eskom move in the opposite direction.
Betting on oil and gas
In 2020, CEF laid out a turnaround strategy that would pivot the loss-making group into a vertically-integrated oil and gas company.
Capitalising on low oil prices and South Africa’s ratings downgrade, CEF announced it would embark on a buying spree: “[C]ompanies have a growing need for capital to meet their debt requirements and some are planning to divest and/or dispose assets due to mounting financial pressure. As part of its growth and financial sustainability strategy, the CEF Group has identified various assets as potential targets for acquisition.”
Since then, CEF has spent R1.3-billion to increase its stake in the ROMPCO pipeline which supplies natural gas from Mozambique; it has also put aside R800-million to revive a controversial oil refinery project in South Sudan; and appears close to making an offer for the Sapref oil refinery.
In January, Transport minister Fikile Mbalula announced that the Strategic Fuel Fund, another CEF subsidiary, would build a $1.5-billion (R22.7-billion) onshore regasification plant in Coega — the natural gas infrastructure project that Gazprombank and others have been eyeing.
Mbalula’s spokesperson however backtracked when questioned why there had been no tender for this project, saying that the project was merely under consideration.
Currently, the group generates revenues of around R10-billion a year. But its annual budget, submitted to Parliament last month, shows that CEF believes it could triple its revenue in 2022/23, to R32-billion. CEF says this additional revenue will come from “increased oil and gas production”.
CEF had initially asked Parliament to consider giving it 25% of the R80-billion/year fuel levy in order to fund its ambitious turnaround strategy, but has also proposed other funding models, such as strategic equity partnerships and the use of government guarantees.
Partnering with the oil and gas industry would give CEF the financial leg-up it needs. But giving a private company that much influence over our energy sector could be dangerous, particularly if that company is a Russian state-owned entity like Gazprom.
Correction: AmaBhungane wrote that SOCAR, the state-owned oil company of Azerbaijan, opened an office in Johannesburg in September last year and appointed Tumelo Motsisi, founder of Kopano Ke Matla, COSATU’s investment arm, as one of its directors.
A spokesperson for SOCAR said that the company had no legal entity in South Africa and that Motsisi, although he has a historical association with the company, does not have a current active contract with the company.