Synthetic fuels aiding South Africa to advance its world energy role

Sasol's synthetic fuels plant, also shown on the Table of Contents page, at Secunda covers 13 sq km and produces a wide range of liquid fuels and petrochemicals from 42 million tons of low grade coal mined by Sasol each year. (Both photos courtesy of Sasol.)

Former President F.W. de Klerk removed bans on South Africa's liberation movements in 1990, starting a process that led to democratic elections in 1994 and appointment of President Nelson Mandela.

Under the apartheid regime, South Africa's government policy was aimed at survival in the face of worldwide condemnation and sanctions. The country's use of natural resources was organized for the benefit of the ruling minority.

South Africa's massive coal reserves were the cornerstone of its survival plan during apartheid. Government-owned companies, since privatized, were set up to develop coal to liquid fuel and gas to liquid fuel technologies.

Coal is expected to be South Africa's leading fuel for at least the next 10 years. Improving living standards for the bulk of the population is seen as a more pressing need than improving environmental performance.

In the meantime, South Africa's three main petroleum companies, Sasol Ltd., Soekor (Pty.) Ltd., and Engen Ltd. are emerging as international players, while all petroleum companies operating in the country are waiting on government decisions on future legislation.

Turnaround

Colin McClelland, chief executive of the South African Petroleum Industry Association (Sapia), said that the apartheid government's aims were self-sufficiency and sanctions-busting.

All decisions, including the formation of Sasol to manufacture liquid fuels from coal, and development of the Mossgas project to convert domestically produced natural gas to liquid fuels, were made in secret. "Now we are back in the world," said McClelland, "with no sanctions and no more secrecy. The new government's priority is upliftment and development of the people of South Africa. A massive turnaround in thinking is required."

This rapid change in priorities has created immediate changes in fuel demand. For example, paraffin has become a high priority product, even more so than gasoline or diesel at the moment, because it is a fuel used by the rural poor.

International Energy Agency, Paris, said coal accounts for more than 70% of South Africa's primary energy demand and almost a quarter of final energy consumption. More than half the commercial energy is used in energy and a quarter in transport.

Coal burning accounted for 34% of South Africa's commercial energy consumption in 1995, and is the main fuel for generation of electricity, synthetic fuels and synthetic gas.

Power generation accounts for 60% of coal used in South Africa, equivalent to 35% of the country's total coal production.

"Prices of commercial forms of energy are in general quite low by international standards," said IEA. "However, the majority of the population has no access to electricity and generally cannot afford oil products.

"Biomass, and especially wood, dominates energy use by rural households, generating health and safety problems, as well as concerns about the sustainability of wood supplies."

South Africa's government has instigated the Reconstruction and Development Program, giving priority to: electrification of households, schools and clinics; policies for traditional fuels, such as sustainable forestry products; development and supply of low-smoke coals; and energy conservation and efficiency.

Besides new demands, South Africa's energy industry also has a legacy of problems created by years of isolation. Because of the comparatively high costs of synthetic fuel compared with crude oil products, tariffs and controls were applied by government and still affect the marketing sector.

The need for restructuring of South Africa's energy industry, and the removal or updating of obsolete tariffs and controls is generally accepted. Until government makes its intentions clear regarding energy industry, though, the oil and gas industry will remain wary of major investment.

White paper

The IEA was asked by the South African government to produce a report on the country's energy industry and policies. This was to be used as a basis of a white paper setting out new energy industry legislation. The report, Energy Policies of South Africa, was published by IEA in 1996.

An IEA official told OGJ the agency has been asked to comment on two drafts of the white paper, and has participated in a number of workshops on various energy industry issues in South Africa.

The official said the white paper is expected to be presented to the South African cabinet in the next couple of months. However, recent changes in government make its content and timing uncertain.

After the Mandela government was elected in 1994, the Department of Minerals and Energy was left in the hands of the existing minister, Pik Botha, a survivor of the apartheid government. Botha retired last summer.

In June 1996, Penuell Maduna, a powerful figure within Mandela's African National Congress party, was appointed Minister of Minerals and Energy. Little progress has been outwardly apparent since then.

McClelland said the white paper was expected this year, but the drafts had been prepared for Botha and were now having to be re-done for Maduna.

The new minister is also looking to appoint a new director general to head up the ministry, a post which is now vacant, and this too may lead to a change in policy.

Because of these changes in the ministry, said McClelland, "The energy industry is moving into the new South Africa 2 years later than the rest of the country."

Theunis Burger, director of transport and energy at Department of Minerals and Energy, said that whether or not government will opt for energy deregulation or reregulation is the million-dollar question right now.

So far, the department has produced an "internal draft" white paper on future policy, said Burger, and this is being worked into an official draft document.

"This will possibly be released for public comment," said Burger, "but it will still be some time before we arrive at a white paper which explicitly states government policy."

Liquid fuels

South Africa currently consumes about 450,000 b/d of liquid fuels, of which net imports amount to 255,000 b/d. The remaining 195,000 b/d are manufactured from coal by Sasol and from natural gas by state-owned Mossgas.

To protect Sasol against imports after international sanctions were lifted, government introduced a subsidy that cut in once the crude oil price fell below a certain level, initially $23/bbl but later reduced to $18/bbl.

Sasol's survival as a synfuel producer has been related to the company's continuing major contribution to the country's economy, but increasingly the company is looking to be a competitive international player.

In 1993, the government set up a task force to investigate pricing problems and the synthetic fuels protection subsidy. The task force commissioned Arthur Andersen & Co., London, to recommend what level of protection, if any, should be given to Sasol.

Andersen concluded that Sasol's synthetic fuels operation contributed more to the economy, through foreign exchange savings of more than 5 billion Rand ($1.12 billion)/year, than the cost of continued subsidies.

But Andersen also said there was scope to reduce the subsidy and phase it out over a number years. The government decided in December 1995 to reduce protection in stages; by July 1999, Sasol will receive no subsidy.

This subsidy is a sore point with commercial oil companies, represented by Sapia. Sapia members are Shell South Africa (Pty.) Ltd., British Petroleum Co. plc, Total South Africa (Pty.) Ltd., Caltex Oil (SA) Pty. Ltd., Engen of Cape Town, and Zenex, a new local petroleum company, which is intending to sell out to a black investment group.

"Sasol's synfuel plant has been built and is profitable," said McClelland. "Sasol has the largest pre-tax profit of any single industrial company in South Africa, yet it still gets a state subsidy."

It is not clear yet whether or not subsidies will be kept in the white paper, said McClelland. Botha was in favor of retaining them, he said, but Maduna may decide to scrap them.

McClelland said: "Sasol is quite comfortably off for now. It has some ability to expand synfuel production capacity, and feedstock costs are low, if the plant is run at full tilt."

As no surprise, Sapia is not against an agreement between synfuel producers and conventional oil companies, which protects the market share of synfuels but sets wholesale and retail margins on products and fixes retail gasoline prices.

However, Sapia complains that the government has recently looked at this margins' guarantee and has hinted at change; it has frozen the margins of commercial fuel marketers.

Sapia has agreed to negotiate, but McClelland said government is thought to view the margins guarantee as an unwelcome reminder of "the old ways."

Gas sector

The Mossgas gas-into-liquid fuels plant is reckoned to have been a partial technical success and a financial failure.

The Mossgas company is owned outright by the government's Central Energy Fund, to which its directors report.

Mossgas converts as much as 4.9 million cu m/day of gas and 3,000 b/d of condensate, which arrive through a 90-km pipeline from F-A gas field in Mossel Bay, into gasoline, diesel fuel, kerosine, and liquid petroleum gas.

Plant output is sold to oil companies at prices related to exports, as the volumes are surplus to local market requirements. Mossgas output prices are also protected by an arrangement similar to Sasol's synfuel subsidy.

The Mossgas plant began operation in 1993. It was originally designed to have throughput capacity equivalent to 25,000 b/d of crude oil, but during construction the capacity was raised to 45,000 b/d equivalent.

Once gas production began, Mossgas discovered that reservoir pressures in F-A field were insufficient to support the higher throughput. The development requires additional subsea well completions and installation of compressors on the platform to prevent reservoir pressure tailing away.

IEA recommended to government that it should seek an independent assessment of the lowest cost, most beneficial configuration of the Mossgas plant and the best use of its feedstock.

The government is expected to try to find a buyer for the plant, but will first need to inject cash for upgrade work to make it an attractive investment.

The cost of closing Mossgas has been estimated at 1.3 billion Rand ($290 million). Upgrading the gas field's subsea development and compression facilities has been estimated at 850 million Rand ($190 million).

"Mossgas has been an unmitigated disaster," said McClelland. "It has cost a fortune to build, and is only cash positive on a per-month basis. Now government is having to find another 1 billion Rand ($225 million) to extend the life of the gas field."

Other than in fuel production, gas plays a small part in South Africa's energy industry. But Mozambique's Pande gas discovery and Namibia's Kudu find are seen as potential sources of pipeline gas.

McClelland said South Africa is the logical market for Pande and Kudu gas, but the country still has a coal-driven economy. It would be 2005 or 2006 before gas from these fields enters the market, he said.

IEA also estimates South Africa may have potential to produce 60-100 billion cu m of coalbed methane, and could have undiscovered offshore natural gas reserves amounting to 40-60 billion cu m.

But there is uncertainty about the potential for expanding gas demand in South Africa, plus an abundance of cheap coal, so gas use is not expected to take off as in developed countries in the immediate future.

Sasol

Sasol was created by the apartheid-era government to mine coal and produce liquid fuels and petrochemicals from coal-derived feedstocks. It also processes imported crude oil.

Though still protected by subsidies, Sasol claims to have been a prime mover in the plan to phase them out. In the last few years, the company has created a strategy to make it competitive in the global market.

While the oil and gas industry views synthetic fuel production as an expensive process, Sasol is keen to promote application of synfuel processes to new applications.

For example, last year the company joined forces with Haldor Topsoe AS, of Lyngby, Denmark, to market a process which converts natural gas to diesel fuel.

A typical plant based on this process could be built for $300-400 million, said Sasol, and could produce 10,000 b/d of diesel from 85 billion cu m/year of gas feedstock.

The process is seen as having potential for producing valuable liquid fuel where significant volumes of gas are currently flared or where a large gas discovery has been made far from a potential market.

Sasol has also begun to replace Synthol reactors at its Secunda synfuels plant, under an 860 million Rand ($190 million) program designed to bring production costs down towards refining cost levels.

Sasol said the first of the new reactors is expected to be in operation by May 1998, and that by 2000 the plant will have reduced cash operating costs by $1/bbl.

Soekor

Southern Oil Exploration Corp. (Pty.) Ltd. (Soekor) was created by the apartheid government in 1965 to undertake onshore and offshore oil and gas exploration in South Africa.

Soekor subsequently relinquished its onshore exploration rights in 1992, after drilling 68 wells of its own and seeing 104 wells drilled mainly by local companies and individuals.

The onshore exploration program discovered hydrocarbons, but only in small and non-commercial quantities.

Soekor subleased some offshore blocks up to 200 m deep to international companies after a licensing round in 1967. In all, 252 exploration and appraisal wells have been drilled by Soekor and other companies.

So far, only F-A gas field has been brought into production, as a source of feedstock for the Mossgas gas-to-liquid fuels plant at Mossel Bay.

Soekor is currently nearing completion of the country's first oil field development (see related story, p. 26).

Soekor currently claims 10 oil discoveries and 20 gas finds in the Bredasdorp basin, and once Oribi oil field is brought on stream, it plans to test nearby finds using Oribi's production semisubmersible rig.

A Soekor official said the company is undergoing commercialization at the moment, and is hoping for privatization, though the government has not set a schedule.

The Department of Minerals and Energy appointed a new board at Soekor within the last 2 months, and given the fact that the department itself has also had a new minister appointed recently, the company's immediate future is unclear, though the management is optimistic that privatization will go ahead in the long term.

Engen

The predecessor of Engen was formed to take control of international companies' assets when international trade embargoes were instigated against the apartheid government in the 1960s.

The company changed its name to Engen in May 1990, when the bulk of its assets were the Durban refinery and a chain of gasoline stations taken over from Mobil Corp. when the major pulled out of South Africa.

Now Engen's major source of income is its 105,000 b/d capacity refinery and 1,350 service stations, of which 1,266 are in South Africa and 84 in Botswana, Namibia, Lesotho, and Swaziland.

The refinery was recently upgraded and expanded from 95,000 b/d capacity, providing an ability to process larger quantities of heavier, cheaper crudes.

In March 1996, Engen created an exploration and production subsidiary, Energy Africa, from its upstream assets, and it floated the shares on the Johannesburg stock exchange.

Engen retained 60.5% of the Energy Africa shares, and the company has been building up a portfolio of assets on the African continent, including stakes in Nkossa oil field off the Congo and Soekor's Oribi development.

Recently, Energy Africa forged a deal with the government of Gabon to take a 37.5% interest in 28 exploration and development projects (OGJ, Feb. 3, 1997, p. 31).

In December 1996, Energy Africa sold Eagle Energy (Oman) Ltd. to Heritage Oil & Gas Ltd. for $7.4 million. Eagle holds a 10% stake in Bukha gas and condensate field off Oman.

The deal includes further payment, if West Bukha discovery is brought into production. Energy Africa said the Oman interest was no longer of strategic value, and funds will be put towards growth in Africa.

In mid-1996, Malaysia's state-owned Petroliam Nasional Bhd. acquired a 30% stake in Engen, for $436 million. The sale is expected to help fund Engen's expansion plans and provide a joint growth platform in Africa and the Indian Ocean rim.

Outlook

McClelland said the multinational petroleum companies already operating in South Africa are enthusiastic about the country's prospects, but they want to know what the rules of the game will be.

Sapia has suggested to Maduna that he move to a free market policy. McClelland said Maduna apparently supports deregulation, but other ministers say the government should reregulate to achieve its objectives.

"The crunch issue for the petroleum industry," said McClelland, "is decisions by refiners on expanding capacity. The local market is short on gasoline and long on middle distillate: refiners need to increase gasoline production by 25,000 b/d to meet demand.

"There is more than 600,000 b/d total capacity now, but a new refinery of say 200,000 b/d capacity would swamp the market. The most likely option is that each refiner would look at its own kit and squeeze out more.

"We expect refiners to upgrade and increase crude distillation capacity at their existing sites. At the moment they are hanging back, largely because of the hiatus on marketing margins."

A Shell South Africa (Pty.) Ltd. official said: "We can operate in either a deregulated market or a reregulated market; we just want a clear direction from government."

The Shell official said the company is optimistic about deregulation, following talks with the new minister. Maduna was said to be focused on particular industry issues, while Botha was working toward broad legislation.

Shell and BP increased capacity by 30% to 165,000 b/d at their Durban refinery 3 years ago, and are planning a further 30-40% capacity increase based on current 78% market growth.

While privatization or partial priva-tization of government assets are seen as prospects if the deregulation route is chosen, the issue is being handled initially by the government's Office of Public Enterprise, not the energy department.

"The energy sector will get its turn," said Burger, "but it is still early in the process of restructuring, and privatization and partial privatization are being kept in mind.

"But certain entities have been given higher priority in the restructuring process. Telecommunications restructuring is in progress, and now attention is being focused on transport. In due course, state electricity utility Eskom, Soekor, and so on will all receive attention."

Farther in the future, South Africa's energy industry may provide much impetus for oil, gas, and electricity generation developments throughout Af- rican countries south of the Sahara Desert.

The Southern African Development Community has energy industry projects on its agenda, which are expected to take place hand-in-hand with other forms of development.

As the most developed economy in sub-Saharan Africa, South Africa is seen as the logical prime mover for schemes to bring utilities to towns and poor rural areas across the southern part of the continent.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.