amaBhungane: SA is pursuing a major gas deal – and Russia wants in | Fin24

• The
  Central Energy Fund is rushing to conclude a tender that will help it secure
  natural gas for the country for the next five years.
• Government
  wants a private company to not only help source natural gas but help establish
  and run a new state-owned gas trading entity.
• Gazprombank,
  owned by Russia’s state gas supplier Gazprom, confirms it is likely to bid for
  what is potentially a multi-billion rand deal – which, if awarded, would raise
  questions as to whether South Africa’s stance on Ukraine is being influenced by
  its thirst for gas.

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 75mmillion
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.

But that depends on the gas
aggregator finding willing buyers. In Coega these would be independent power
producers (IPPs) who will burn natural gas to generate electricity. Coega
currently has no gas-to-power projects but hopes to secure a portion of the 3
000MW gas-to-power IPP programme which is scheduled to be rolled out later this
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.

The bidders

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 overtures

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.

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.

READ | The battle for gas is far from
over

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.

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.

The AmaBhungane Centre for Investigative Journalism is an independent non-profit
organisation. We co-publish our investigations, which are free to access, to
news sites like News24. For more, visit us on www.amaB.org