SOUTHAFRICA`SRETURNTO international trade and industry after years of isolation was sparking petroleum activity in the southern part of the continent in 1997.
Under the former apartheid regime, South Africa developed a unique fuels industry based on conversion of coal and natural gas, plus surreptitious imports.
With the advent of democratic government, South African companies began expanding into other markets, while foreign firms entered the country in search of upstream and downstream opportunities.
The country`s three indigenous petroleum companies worked to expand outside South Africa in a trend expected to benefit other countries on the continent.
Sasol Ltd. was created by the apartheid government to operate the country`s synthetic fuels industry. In 1997 Sasol was promoting proprietary synthetic fuels processes for international projects.
Most interesting of these was a natural gas to diesel fuel process, which Sasol reckons can allow companies to develop gas fields far from markets and make use of gas currently flared.
This process was seen as an alternative to liquefaction for utilization of gas. One advantage was said to be its smaller unit size and therefore smaller minimum capital outlay (see related gas-to-liquids feature).
Among other business developments, integrated petroleum company Engen Ltd., Johannesburg, floated off its exploration and production and production assets into Energy Africa, a company in which it holds a 60% interest.
The move was seen as a way of bringing in foreign capital to help the company fund growth in upstream projects outside South Africa.
In the early post-apartheid period Engen took shares in a number of international projects, including developments in the U.K. North Sea, Norway, and Oman.
The company later withdrew from most of these to concentrate on building a portfolio of exploration and production assets throughout Africa.
Energy Africa early in 1997 clinched a deal to take shares in 28 of Gabon`s exploration and production projects.
A new company called Energy Africa Gabon SA was formed, owned 25% by Gabon`s government and 75% by a 50/50 joint venture of Energy Africa and an African investment group.
This new unit has a stake in six potential developments. Energy Africa said the deal will involve it in most of Gabon`s exploration successes, including deepwater licenses, which hold considerable potential.
Southern Oil Exploration Corp. (Pty.) Ltd. (Soekor) was formed by the apartheid government to undertake onshore and offshore oil and gas exploration in South Africa.
Soekor developed F-A offshore gas field to provide natural gas to the Mossgas gas-to-liquids plant in Mossel Bay and brought the country`s first oil field, Oribi, on stream in May 1997.
With Oribi producing, Soekor worked to appraise other oil finds in the Oribi vicinity with a view to developing them as subsea satellites. Soekor expected to be privatized under the government`s restructuring program.
It intended when privately owned to follow Engen in seeking overseas projects. Until then it was limited to South Africa by legislation.
In the long term, South Africa`s re-emergence could benefit the Southern African Development Community (SADC), an inter-governmental group working to establish mutually beneficial strategies.
One of SADC`s ideas was to link oil, gas, and electricity grids in countries south of the Sahara Desert. South Africa`s petroleum companies could be a main driver in developing the continent`s energy sector.
SA industry
Susan Shabangu, South Africa`s deputy minister of mineral and energy affairs, said hydrocarbons in 1997 met 33% of the country`s final energy demand.
"To poor households, which constitute the majority," said Shabangu, "illuminating paraffin-kerosene-is an indispensable source of light and heating. Kerosene could be called the fuel of the poor. It is important because only about 45% of our people have access to electricity.
"South Africa`s liquid fuels industry is the major pillar of the country`s energy economy. In 1994, the wholesale turnover of the industry was more than $6.5 billion (U.S.).
"Oil refining and fuel-from-coal operations saved the country over $1.5 billion dollars in foreign exchange. In total the industry employs 110,000 people.
"As the economy modernizes, the liquid fuel consumption is increasing by 2% above the economic growth rate, as the living standards of our citizens improve. These growth trends will require expansion of our refining capacity and/or imports of refined products by about the year 2000.
"Economics will decide which course we will follow. This opens the door for newcomers in the form of joint ventures and strategic equity partnerships based on a system of open competition."
Shabangu said South Africa is hampered by having a strong coal culture rather than gas, and coal is the cheaper alternative. But with improved technology the price gap between the two should shrink.
"Gas has an important role to play in the development of our SADC subregion," she said. "It is a far more environmentally friendly form of energy. Besides, expanding into the utilisation of natural gas will help to diversify primary energy sources.
"Our gas industry is not regulated at present. However, we are developing a gas policy based on the principles of maximum competition and minimum regulation, avoidance of monopolies, and international and regional cooperation."
About 34% of liquid fuels consumed in South Africa are synthetic fuels made from coal and gas. Sasol is a world leader in converting coal into gas, oil, and petrochemicals. The company was established in the early 1950s but was subsequently privatized and was listed on the Johannesburg Stock Exchange in 1979. In 1997, Sasol employed more than 27,000 people.
Mossgas, South Africa`s fuel-from-gas project, began commercial production in January 1993. An offshore platform supplies gas and condensate by pipeline to the onshore synthetic fuel plant 90 km away at Mossel Bay. This produces 7% of the country`s liquid fuel requirements.
"Although cash-positive," said Shabangu, "Mossgas has not been economically successful when interest on its original capital loans is taken into account. There are a number of proposals which have been put on the government`s table for consideration to turn around this investment."
Restructuring plans
Riaz Jawodeen of South Africa`s Institute for Policy & Social Research (IPSR), explained that the rise and development of South Africa`s liquid fuels industry was shaped by a unique and strange brew of factors.
"The regulatory mechanism which evolved to govern the industry," said Jawodeen, "was dictated by political factors as much as economic factors. This created a highly regulated industry that served apartheid well but currently acts as a fetter on the development of the industry in accordance with the economic priorities of the new South Africa.
"These economic priorities are a need for economic growth of at least 6% by the turn of the century, job creation, and a better life for all. This also means delivery on the basis of the Reconstruction and Development Program for the vast majority of South Africa`s people which were excluded on racial grounds from legitimate economic activity."
Jawodeen noted that the restructuring of the liquid fuels industry in relation to the new economic priorities had not occurred: "The problems facing restructuring the liquid fuel industry are rooted in the apartheid era".
During apartheid oil was classified as a strategic commodity. Self-sufficiency in energy enabled the apartheid regime to defy a United Nations trade embargo.
South Africa replaced imported petroleum products with synthetic fuels derived from coal. Hence the country has a unique level of experience of synthetic fuel production and a technical knowledge that is providing a lever for international expansion now that South Africa has returned to world markets.
For the domestic fuels industry, apartheid-era secrecy legislation has been removed, yet the series of subsidies that enabled the synthetic fuels industry to exist have proved more difficult to remove.
"The process to restructure the liquid fuel industry began in 1993 with the formation by the then National Economic Forum of a Liquid Fuel Industry Task Force," said Jawodeen.
"The task force initially came into existence to reduce the price of liquid fuel as a result of enormous community pressure on the previous regime. The terms of reference of the task force were expanded to investigate the restructuring of the liquid fuel industry.
"A number of processes were instituted by the task force in conjunction with the Department of Mineral & Energy to ensure broader participation in the policy debate. This was a definite attempt at democratizing the policy process but had a number of limitations.
"The task force still technically exists but is defunct in a de facto sense. It has been unsuccessful in achieving the aim of restructuring of the liquid fuel industry. The task force only resolved two issues, namely the reduction in the gasoline price and the Sasol subsidy scheme."
Jawodeen said the task force was organized on an ad hoc basis and had little vision and a restricted program. It represented vested interests, with the exception of labor, and had little inclination to transform legislation. "Moreover," said Jawodeen, "the Sasol synfuel study led to the walkout of the bulk of the oil industry from the task force, which in effect rendered the structure powerless to continue or to have the necessary credibility of a tripartite arrangement. Black participation in the task force was virtually nonexistent."
The task force and the Department of Minerals & Energy tried several ways to resolve the policy impasse in relation to the restructuring of the industry.
These initiatives merely captured the interests of concerned sectors without spelling out what the interests mean in specific policy terms for a new system of governance for the industry.
But the fundamentals of future policy were beginning to appear in 1997, according to Jawodeen, and were expected to take shape in the much-delayed final draft of a government white paper setting out new fuels legislation.
Domestic production
In May 1997 South Africa began its first commercial oil production, from Oribi field off Mossel Bay, where Soekor is operator.
Oribi, with estimated reserves of 20 million bbl of oil, was developed with a converted semisubmersible rig producing oil into a dedicated shuttle tanker.
Oribi is owned 80% by Soekor and 20% by Energy Africa. Oil began flowing from Oribi on May 12 and reached 20,000 b/d by late 1997.
Oribi was expected to produce 6% of South Africa`s crude oil requirement at peak. Soekor was looking to develop six other finds in the Oribi vicinity, with combined reserves of 15-40 million bbl of oil.
In August 1997 Mossgas (Pty.) Ltd. selected two contractors to enter a design competition for development of the E-M gas discovery in Mossel Bay.
The field will be developed to extend by about 6 years the supply of feedstock gas for Mossgas synthetic fuel plant, which currently receives gas from F-A field.
E-M, 49 km west of F-A platform, was intended to be brought into production in September 2000. Kvaerner Oil & Gas Ltd., London, one of the contractors chosen for the design, said Mossgas took a novel approach by giving the competitors raw reservoir data at the outset of their studies. The competition was expected to be completed by December 1997, with E-M engineering work slated to begin in first quarter 1998.
In early May 1997 Phillips Petroleum Co. signed an exclusive agreement to explore 14.5 million acres off the east coast of South Africa in the Indian Ocean. It was the first such agreement South Africa had made with a foreign oil company in 20 years.
Under the agreement, Phillips and its partners were to gather 1,500 line-km of 2D seismic data and drill at least one exploration well during 4 years. Phillips is operator of the venture and holds a 40% interest.
Exploration potential
Steve Mills, commercial manager of Soekor, noted a considerable increase in the number of areas under active investigation for licensing or actually licensed.
Phillips and its coventurers, Energy Africa, PanCanadian, and Sasol, took out a license over Blocks 17 and 18 in May 1997. A number of other companies were interested in west and south coast areas and were in discussions for licenses.
Soekor is operator of Blocks 9 and 11a in the Outeniqua basin off South Africa. Following first oil from Block 9 Oribi, said Mills, Soekor began seeking farm-in partners.
Soekor`s aim was to appraise the oil fields discovered in Block 9 and to use the Oribi floating production facility to develop and produce those fields that warrant it.
The company will also assess gas discoveries on Blocks 9 and 11a with a view to supplying the rapidly growing industrial and power generation markets in the Western Cape.
The F-A gas field and its satellites were included in a mining lease granted to Mossgas. The field delivers about 200 MMcfd of gas and 10,000 b/d of condensate to the plant refinery at Mossel Bay for conversion into diesel and gasoline.
"To address the growing interest in natural hydrocarbons," said Mills, "the South African government has embarked on a review of mineral and energy policies.
"From this will flow a new framework of terms and conditions for petroleum exploration and production that is competitive in the international arena and is attractive to investors.
"The government`s commitment to constructive negotiation is demonstrated by the signing of the sublease with Phillips. The commercial discoveries off the south coast-F-A gas field and Oribi oil field-demonstrate the existence of active petroleum systems in this basin."
Open acreage on the south coast totals 75,000 sq km and offers opportunities for the discovery of large oil and gas fields. Although a number of prospects have been drilled in the shallow-water area (less than 300 m) a number of promising plays remain to be tested.
The most important prospects are on Block 7, said Mills. The area comprises the up-dip inshore portion of the Bredasdorp basin that contains the F-A and Oribi fields.
"Recently mapped closures in this sector have estimated oil-in-place volumes in the 200-800 million bbl range," said Mills. "In addition, we are very excited by the possibilities of the very big untested frontier area of the Southern Outeniqua basin, seaward of the 300 m isobath. Here individual mapped structures have estimated oil-in-place volumes of 300-1,000 million bbl."
Mills said Soekor`s drilling and seismic data show that good quality oil-prone source rocks are present at a number of stratigraphic levels within the synrift and drift sequences across the entire area.
"We have mapped prospects that are favorably placed to draw on oil generated in, and migrated from, these shales," said Mills. "The two principal plays that have yielded commercial developments in Block 9 are applicable throughout the Outeniqua basin.
"For the west coast our data shows a major gas province with large prospect fields of multi-tcf size in a variety of play types. Market surveys show that there is a growing demand for gas in southern Africa.
"The government realizes the importance of natural gas as an alternative energy source and has already produced the first draft of a downstream gas act. The time is ripe for pursuing gas as an exploration target. Terms and conditions are negotiable and will take into consideration the special risks and requirements that are associated with the development of gas fields."
Also on the west coast, Mills said, there is "very real potential" for large oil discoveries. Drilling data show that thick oil-prone lacustrine shales are present in the rift basin.
The A-J1 well, drilled as a stratigraphic test hole, produced oil at the rate of 200 b/d. This success was not followed up, and the potential of the rest of the 5,000 sq km graben play is untested.
"Clearly there is a viable petroleum system to be explored here," said Mills. "In addition, results from DSDP 361, Kudu, and wells closer inshore show that good quality oil-prone shales are consistently present at a number of stratigraphic levels in the drift succession.
"The deepwater frontier areas of the west coast are enormous-about 100,000 sq km-and extend for 800 km from the Namibian border to south of Cape Town. A large number of leads and prospects have been identified here."
International E&P
As Energy Africa clinched its deal for shares in much of Gabon`s exploration licenses, Sasol signed a memorandum of understanding with Mozambique`s state oil firm, Empresa Nacional de Hidrocarbonetos de Mozambique (ENH).
Thus Sasol acquired rights to negotiate a production sharing agreement for Mazenga Block onshore Mozambique, about 250 km north of Maputo. The block covers 45,000 sq km of the Inhambane and Gaza provinces.
In June 1997 Energy Africa announced that its Energy Africa Gabon affiliate had secured a production sharing agreement for Ofoubou Block onshore Gabon.
The concession area, 40 km west of Rabi-Kounga field, covers 328 sq km. Occidental Petroleum Corp. was said to have drilled a well on Ofoubou in 1992, which cut a 70 m oil column but was not tested.
License partners are operator Energy Africa Gabon 60%, Gentry International (Gabon) Inc. 35%, and Thomson & Van Eyck International (Gabon) Pty. Ltd. 5%.
John Bentley, managing director of Energy Africa told a Mauritius conference the company was active in six countries in western and southern Africa and sought opportunities elsewhere on the continent.
"I don`t need to tell any of you," said Bentley, "that the increase in the level of activity in the industry throughout Africa has been extraordinary over the last year or so.
"We looked at a total of 50 possible deals in 1996-97 and successfully concluded five. This level of deal flow can only come through building up and maintaining close relationships with prospective partners in the industry, national oil companies, and host governments."
In South Africa the company entered into an exploration license offshore Durban, taking a 20% interest with Phillips as operator.
In Côte d`Ivoire the firm took a 24% interest in license C1-102 with Ranger as operator, and in Gabon it took the 60% stake in its onshore exploration permit with Gentry and Thomson & Van Eck.
"In Africa, said Bentley, "only a few countries have stock markets which are sufficiently developed and active to provide appropriate financing. We are fortunate that in South Africa the Johannesburg Stock Exchange does have the size to raise capital locally and the prestige to attract international institutional investors as well.
"In fact, we estimate that of the 40% of shares in Energy Africa representing the free float, about 75% are held by investors outside South Africa. For the moment though Energy Africa is the sole oil exploration and production company listed in Johannesburg.
"Elsewhere one has to be more imaginative at finding ways in which local investors can play a part. In Gabon we have structured participation with government and investors to form a joint venture company, Energy Africa Gabon, in which the government has a 25% stake. As part of the deal the government contributed its direct working interests in six marginal discoveries into the joint venture company."
Bentley said Energy Africa`s alliances provide 14,000 b/d net oil production, up from 6,700 b/d in fiscal 1996, and an exploration program which is as active as many of the major players in the region.
"In 1996," said Bentley, "six out of 10 exploration wells drilled were successful, and this of course leads to field development. It is probable that we will be committing to the development of up to eight new fields-three in Angola, three in Gabon, one in Congo, and Kudu gas field offshore Namibia.
"All this activity will require funding. We estimate that our exploration spending will average about $25 million/year, whilst development expenditure will be more than double that.
"In total therefore we are planning to spend upwards of $150 million in Africa on new projects over the next 2 years. This represents a major commitment to the development of the continent for a company with a total market capitalization of $450 million."
Foreign firms
International petroleum companies already operating in South Africa saw dramatic change as inevitable and were concerned about how the country`s realignment with worldwide practices was to be achieved.
Kevin Mulder, supply and trading manager of Caltex Oil-South Africa, told a conference the Durban government had two major energy sector constituencies: the public, which expects readily available, fairly priced products, and the oil industry, which expects a fair return for investments.
"What is needed," said Mulder, "is that the investor, the refiner, the marketer, and the government work together with the express purpose of developing our region.
"This is not to advocate that investors must give up returns but maybe a longer time horizon on returns should be considered. The way forward may not be a big bang deregulation of the South African energy sector.
"The key idea, which seems to be accepted as a concept whose time has come, is that governments and industry in Africa must work together to develop each area to its full potential. The starting point must be in the energy sector."
Phillippe Liétard, director for oil, gas, and mining, International Finance Corp., said that except in South Africa the continent has not yet shared in the huge growth in private capital investment flows.
But Africa has done a lot to help itself in the recent past and is starting to be recognized as an attractive region for business. Average economic growth in 1996 was well over 4%/year, with nearly 30 of the region`s countries growing by 3% or more. Nineteen ninety-seven was expected to be even better.
"The beginning of the boom in the development of African natural resources reflects a powerful combination of Africa`s rich resources, of reform-oriented governments, and of no real shortage of potential investors. This is a major cause for optimism about the prospects for sustained resource development in the continent. The efforts of governments to reform and liberalize their economies, and in particular encourage investment in their resource sectors, should be recognized, but at the same time, more needs to be done to ensure that Africa is internationally competitive."
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Operator Soekor and license partner Energy Africa expected to begin production from Oribi offshore field in April 1997. Initially, two producers and a water injection well were to be tied back to Orca, a converted semisubmersible rig. Once the field was on stream, Soeker planned to tie in nearby oil finds. (Photo courtesy of Energy Africa.)
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Sasol`s synthetic fuels plant 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. (Photo courtesy of Sasol.)
