The looming ‘gas cliff’ in SA, and the solutions …

The effective monopoly that exists in South Africa is seen as a source of underinvestment, excessive prices, and looming supply problems in three provinces.

Sasol and Eskom have signed a memorandum of understanding (MoU) in new efforts to address a looming ‘gas cliff’ in South Africa. This was announced at a media briefing on Friday (20 September) addressed by Energy and Electricity Minister Kgosientsho Ramokgopa, Eskom CEO Dan Marokane, and Sasol CEO Simon Baloyi.

The MoU is one the first public signs of serious and concerted efforts by government, Eskom, Sasol and the private sector to address the looming gas supply cliff facing industrial gas users in Mpumalanga, Gauteng and KwaZulu-Natal (KZN).

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A gas supply cliff would have significant socio-economic and job-loss implications and would threaten key industrial sectors that rely on natural gas and methane-rich gas, including steel, glass, ceramics, automotive, food, beverage, pulp and paper, among others.

According to the Industrial Gas Users Association – Southern Africa (IGUA-SA), a gas supply cliff would put approximately 60 000 direct jobs at risk as many industries that depend on gas could face operational shutdown.

There are also indirect impacts on other small, medium and large businesses such as logistics, agriculture and construction.

IGUA-SA also says South Africa would risk a significant decline in its industrial competitiveness, both regionally and internationally. Higher operational costs and fuel-switching to more expensive and environmentally damaging alternatives would increase consumer prices and strain the broader economy.

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Without swift action, the manufacturing sector may suffer irreversible damage from a gas supply cliff, posing a serious threat to South Africa’s economic stability.

Gas supply in Mpumalanga, Gauteng and KZN

The Pande-Temane gas fields in southern Mozambique are owned by the Sasol Petroleum Temane (SPT) joint venture. The shareholders of SPT are Sasol (70%); Empresa Nacional de Hidrocarbonetos (ENH), Mozambique’s national oil and gas company (20%); and the International Finance Corporation (IFC), a branch of the World Bank Group (10%).

Sasol is the developer and operator of the gas fields.

The natural gas from the Pande-Temane gas fields is exported to South Africa through the Republic of Mozambique Pipeline Investment Company (Rompco) pipeline, and also used for power generation and other purposes within Mozambique.

The shareholders of Rompco are iGas, a subsidiary of South Africa’s Central Energy Fund (40%); Companhia Mocambiçana de Gasoduto (CMG), representing ENH (40%); and Sasol (20%).

Sasol is the operator of the Rompco pipeline.

Sasol has a gas trading licence from the National Energy Regulator of South Africa (Nersa), and Sasol buys all the natural gas from SPT that is exported to South Africa along the Rompco pipeline.

Read: ‘SA can become an oil and gas exporter’ – CEF chair

Sasol uses most of the natural gas from Mozambique for its own process needs in the production of synthetic liquid fuels and petrochemicals, and some for power generation at its site in Secunda. Sasol sells the balance to traders and industrial gas users in Mpumalanga and Gauteng.

Transnet, through its Transnet Pipelines division, owns and operates the Lilly gas pipeline between Sasol’s Secunda site and Durban. The Lilly pipeline primarily carries methane-rich gas, a by-product from Sasol’s own operations in Secunda, which Sasol sells to gas traders and industrial gas users in KZN.

Thus, other than a couple of small indigenous land-based natural gas producers, Sasol has an effective monopoly in the supply of natural gas and methane-rich gas to industrial gas users in Mpumalanga, Gauteng and KZN.

Sasol share price

The maximum gas price in South Africa is (poorly) regulated by Nersa and comprises a fixed “use-of-system” component covering the pipeline infrastructure, and a variable energy component covering the volume of gas used.

Tail-end of supply from Pande-Temane …

It has been known for several years that the gas supply from the Pande-Temane gas fields is reaching end-of-life, and that Sasol will need all the natural gas from the tail-end of this declining resource, as well as all of its methane-rich gas byproduct, for its own use.

In August 2023, Sasol formally announced that as from the end of June 2026, Sasol would no longer supply natural gas and methane-rich gas to industrial gas users and traders in Mpumalanga, Gauteng and KZN.

This awakened some panic by industrial gas users and traders in the affected regions in respect of the socio-economic consequences of the resulting gas cliff to their businesses, their workforce and South Africa.

It also ignited efforts by industrial gas users and traders to look for alternative sources of gas, including liquified natural gas (LNG) from proposed LNG gas import terminals and regassification plants at Matola in southern Mozambique, and at Richards Bay in northern KZN.

Read: PetroSA targets Mozambique gas in new sales deal

In addition, government and industrial gas users initiated intensive engagements with Sasol in efforts to extend the cut-off date of June 2026 for the supply of natural gas and methane-rich gas.

Subsequently, in August 2024, Sasol announced that ongoing efforts for life-extension of the Pande-Tamane gas fields could extend their life to June 2027, and possibly even further to June 2028.

This could provide temporary relief of an additional two years for industrial gas users, while sources of imported LNG-based gas are put in place to avoid the envisaged gas cliff.

Plans to aggregate LNG-based gas demand

A fundamental challenge faced by imported LNG-based gas projects is to find enough long-term off-takers to meet the economies of scale needed by LNG projects.

Industrial gas users came to understand that they themselves needed to take matters into their own hands to aggregate their gas demand, and that of other potential LNG-based gas users, who together could benefit from and facilitate offtake from one or more LNG import terminals and regasification plants.

Through the IGUA-SA, intensive efforts have been underway since Sasol’s announcement of the looming gas cliff to establish an aggregator company. This company would be supported and financed by about 30 of the larger industrial gas users themselves.

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While Sasol’s gas demand for its own process needs in the production of synthetic liquid fuels and petrochemicals in Secunda cannot be met by imported LNG-based gas because of the economics, Sasol may have a demand for LNG-based gas for on-site power generation, estimated at between 20 to 30 PJ/a.

IGUA-SA, therefore, hopes that Sasol would also join its aggregator initiative, contributing additional LNG-based gas demand of about a third to half of the 60 PJ/a demand from IGUA-SA members.

Potential independent power producers (IPPs) and Eskom gas-to-power plants in coming years could extend LNG-based gas demand in Mpumalanga, Gauteng and KZN to 100 PJ/a, or more.

The latest MoU between Sasol and Eskom

The Eskom and Sasol MoU announced on 20 September also appears intended to facilitate, expedite and aggregate demand for imported LNG-based gas to mitigate the looming gas cliff for industrial gas users and to unlock gas-to-power in South Africa.

In the first instance, it was stated at the media briefing that Sasol and Eskom’s efforts would focus on facilitating and expediting the Matola LNG project near Maputo in southern Mozambique, followed thereafter by locally based LNG import and regassification infrastructure at Richards Bay in South Africa.

It is hoped that the MoU is not simply an effort by Sasol, with the tacit support of Eskom and government, to kill off the initiative by IGUA-SA and industrial gas users, and to extend the current Sasol monopoly in the supply of natural gas to include the supply of imported LNG-based gas to customers in Mpumalanga, Gauteng and KZN.

It is further hoped that collaboration between Eskom and Sasol through the MoU will also include collaboration with the efforts to date by IGUA-SA and its members to consolidate demand, and to establish one or more multiple-customer-owned aggregator companies.

The objective should be to consolidate demand and contract with the LNG-based gas suppliers in Matola and Richards Bay, and at a government-to-government level, in a way that avoids the negative impacts of a Sasol gas supply monopoly and secures the least-cost of LNG-based gas to customers.

The Matola LNG project

The most promising and far-advanced project for the supply of gas from imported LNG is recognised as the Matola LNG project in southern Mozambique, planned by a consortium comprising the Gigajoule Group, TotalEnergies and the Matola Gas Company (MGC), which could supply gas into the Rompco pipeline by June 2028, at the earliest.

It is estimated that to make this project viable, an aggregated gas demand from industrial gas users of greater than about 40 PJ/a would be required.

Industrial gas users, excluding Sasol, currently have a demand for about 60 PJ/a, and clearly, the greater the aggregated demand, the more viable and the lower the price of LNG-based gas would become.

Further gas demand could come from a few potential gas-to-power projects along the Rompco pipeline in terms of the current Gas IPP Procurement Programme (GIPPPP) of the IPP Office.

In addition, there may be some future LNG-based gas demand from Eskom gas-to-power plants on the sites of old, decommissioned or converted coal-fired power plants in Mpumalanga. There are, however, some question marks around the economics of this.

On the face of it, the Matola LNG project in Mozambique therefore appears viable, and the project is relatively well-advanced in terms of its design, statutory authorisations and development.

The Transnet imported LNG and regasification project

Another project for LNG-based gas supply is a planned Transnet LNG import terminal and regasification plant at Richards Bay.

Anchored by a planned 3 000MW Eskom gas-to-power plant in Richards Bay, the project already has environmental authorisation and could connect to the Rompco and Lilly pipelines to deliver LNG-based gas in the years post-2030.

However, development is currently embroiled in litigation by environmental civil society NGOs opposing the project, with the legal challenges still to be heard before the Supreme Court of Appeal.

At the media briefing announcing the MoU, it was explicitly stated that the Transnet imported LNG and regassification project is a longer-term initiative, and that the initial focus would be on aggregating demand to facilitate and expedite the Matola LNG project.

Restructuring the gas supply monopoly

The effective monopoly that currently exists in the supply of natural gas and methane-rich gas in South Africa is seen as a source of underinvestment, excessive gas prices, and the looming gas cliff in Mpumalanga, Gauteng and KZN.

One positive opportunity that may arise from the looming gas cliff is the restructuring of the gas supply industry to avoid this monopoly from being extended to the supply of imported LNG-based gas to customers as the supply of natural gas from southern Mozambique comes to an end.

This could be achieved by establishing one or more, multiple-customer-owned aggregator companies to consolidate demand from industrial gas users, licensed traders, Sasol, IPPs and Eskom, for contracting of longer-term offtake agreements with LNG-based gas suppliers, and securing lower prices.

A customer-owned aggregator company should only recover its own operating costs, and pass through the cost of the gas molecules directly from the LNG-based gas supplier to the off-takers, in order to ensure the most efficient and least-cost supply of gas to customers.

The ownership of the gas supply, the ownership of the gas transmission pipelines, and the operation of the pipelines should be separated from the aggregation of customer demand and the trading of gas molecules.

This would avoid the current monopoly arrangement where the aggregation of demand and the importing and trading of gas molecules is conducted by a single, dominant commercial business that operates for profit, and that is also a major owner of the gas supply, and an owner and operator of the gas transmission pipelines.

With some regulatory reform, this could significantly reduce the cost of LNG-based gas to customers in South Africa for the benefit of customers, the economy, the country and its competitiveness.

Chris Yelland is managing director of EE Business Intelligence.

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