Renewable energy is increasingly on insurance leaders’ agenda. During a recent presentation, Chris Bredenhann, PwC Southern Africa energy leader, explained the findings of a report entitled The Gas Equation, issued by the professional services firm PwC.
Although South Africa does not have significant proven gas reserves, the potential for indigenous natural gas reserves being found remains a possibility, according to the report.
“The introduction of more natural gas into the energy mix in South Africa could lead to a reduction in greenhouse gas emissions. Furthermore, natural gas has been proven to cost less than nuclear energy, as well as all types of renewable energy currently available,” says Bredenhann. However, Bredenhann noted that the dominance of coal in the South African energy mix and relatively low cost of coal will prevent natural gas from taking a larger share of the total energy mix.
While the debate about hydraulic fracturing for shale gas in the Karoo continues to grab the spotlight, the broader discourse about the role of gas in South Africa’s energy mix needs to continue. The recently released report of the National Planning Commission also highlights the need to capitalise on the benefits and opportunities of natural gas for the South African economy and growth prospects.
PwC’s publication, The Gas Equation, investigates the current state of the natural gas industry in South Africa and evaluates the potential for its future development. The report assesses the legal, regulatory and energy-planning landscape. The research also provides a contextual understanding of the industry through interviews held with selected participants in the local natural gas industry.
The findings of the analysis show that there is significant interest in exploring for and developing a natural gas industry in South Africa. This finding is based on the extent of actual and proposed on- and offshore exploration activity, the number of licence applications being submitted to the gas regulator and the specific energy needs of South Africa.
The study uses United States (US) academic Professor Michael Porter’s five forces model as a framework to understand the gas industry in South Africa. Porter’s five forces framework is a widely used approach that helps to illustrate the dynamics within an industry in terms of its suppliers, buyers, potential competitors, substitutes and the existing competition. The collective strength of these forces determines the intensity of the competition and the profitability of the industry as a whole.
Competitive forces in the South African natural gas industry:
Barriers to entry
The research findings show that there are significant barriers to the development of a natural gas industry in South Africa. “Some of these barriers may be overcome, while others may prevent the industry from developing,” says Bredenhann. The analysis suggests that this may be overcome by importing natural gas, either by way of a pipeline (as is the case with Mozambique) or shipping in liquid natural gas. However, the difficulties associated with liquid natural gas, and using imported gas for establishing the industry, are that the country would be exposed to both commodity and exchange rate risks.
If the barriers associated with the supply of natural gas can be overcome, then the lack of infrastructure – import facilities, regasification terminals, transmission, distribution networks and gas-fired industrial equipment – must also be addressed.
Another key barrier, unrelated to infrastructure or reserves, is the lack of a credible and constructive industry development plan for natural gas. The government has stated that it is supportive of increasing the share of natural gas in the total energy mix. However, this is not supported by any form of incentives, tax breaks, industry support or development plans.
Furthermore, the Gas Act of 2001 is aimed at encouraging the development of a gas industry. “The government needs to take the lead and encourage investment in this sector,” says Bredenhann.
South Africa also operates mineral ownership regimes that see the mineral resources of the country belonging to the state and not to landowners. This is different to the position of other jurisdictions, such as the US, where landowners also own the mineral rights. Bredenhann says this leads to an incentive for landowners to allow for exploration and production activities on their land. “The same incentive for landowners does not exist in South Africa, resulting in a further barrier to development.”
South Africa’s licensing regime was identified by some participants as potentially encouraging speculative applications for gas licences. However, the National Energy Regulator of South Africa (NERSA) as the industry regulator gives careful consideration to all applications to prevent speculative applications that may result in sterilising the market and preventing other players from entering.
Power of suppliers
For a natural gas market to develop in South Africa, certainty of supply is required. The country’s energy landscape is largely dominated by coal. There is significant, although unproven, potential for indigenous natural gas reserves, mostly in the form of shale gas in the onshore Karoo basis, according to recent studies. The impact of coal-bed methane gas should also not be underestimated. Furthermore, offshore discoveries in Mozambique, Botswana and Tanzania may provide additional gas resources. Bredenhann says South Africa should investigate the potential for diversifying its energy mix to include natural gas.
“Alternatives for gas supply should be considered, such as liquid natural gas.” The closest source of liquid natural gas to South Africa is the Gulf of Guinea, and there are also developments in Angola which could provide another regional supply source. The extent of recent natural gas reserves proven in Mozambique creates prospects for even closer regional supply sources.
Power of buyers
The bargaining power of buyers in the current market in South Africa is reduced by the strong position of suppliers, where Sasol dominates the market. The report states that the industrial development nodes offer the biggest opportunities for buyers in terms of demands for energy. The natural gas demand opportunities are located in the Western Cape, KwaZulu-Natal, Gauteng and the Eastern Cape. Ankerlig in the Western Cape also provides a source of demand. In the Eastern Cape, the Coega industrial development zone has been established.
The report states that the demand for natural gas will be influenced by carbon constraints, with it becoming increasingly difficult for organisations to obtain funding for coal-fired power stations due to the high levels of associated greenhouse gas emissions. “This will more than likely lead to an increased demand for natural gas and renewable energy,” says Bredenhann.
Threat of other substitutes
While natural gas can be seen to be more environmentally-friendly and economically competitive than other hydrocarbon-based energy sources, there are a number of substitutes in which committed capital projects are already under way. This, combined with the barriers to entry in the marketplace, leads to the conclusion that pressure from substitute products will have a negative effect on the development of the local natural gas industry, states the study.
Competition in the market
“Given that the natural gas industry is immature and not significant in South Africa, there is not a large amount of rivalry within the industry,” says Bredenhann. This can mainly be attributed to the lack of indigenous supply and the dominant position that Sasol has in the local market. This position is also protected by way of the Gas Act, which gives Sasol exclusivity for the importation of natural gas from Mozambique until 2014.
Furthermore, because there is insufficient competition in the market, NERSA sets minimum and maximum prices to protect customers. “This is a further admission that the level of rivalry in the industry is low.” Another factor affecting competition is the capital intensity of the natural gas industry. Bredenhann says significant capital investment is required to build pipelines and other gas-processing facilities.
“The number of licence applications and proposed exploration activities in progress confirms that there is much interest in the natural gas industry. Whether or not this interest can be converted into profitable operations for these participants, is still subject to debate as the number of the proposed exploration projects requires further confirmation that economically recoverable reserves exist.
“Although unproven, there appears to be significant potential in the development of the industry, which with the right incentives and further pressure to reduce greenhouse gas emissions will make it possible for natural gas to make up a larger share of the total energy mix in the country,” concludes Bredenhann.
Full acknowledgement and thanks are given to Gas Equation, issued by PwC, for the information given to write this article.
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