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22 March 2018 21:54 (South Africa)
Opinionista Dirk de Vos

The decline of oil, the rise of gas – a viable response for SA

  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions ( out of Cape Town.

Any dramatic shifts in the global energy sector are often hard to discern because of the stupendous size of the sector. Any change happens first on the outer margins and takes some time to work its way through. But we are heading slowly but surely out of the age of oil and into a new age dominated by gas and through gas, electricity.

It is hard to describe the scale of the modern global oil industry. Last year the world consumed 91 million barrels of oil per day or nearly 1.5 billion litres of the stuff. Oil has powered the global economy for over 100 years and accounts for a third of humanity’s energy supply and almost all transportation of any kind is powered by oil. Oil accounts for about 40% of all seaborne freight. The amount of oil that is moved by sea per year is much higher than the total fish biomass in those oceans. Very little can move faster than 40km/h without oil-based fuel and it is inconceivable to think of our modern world without keeping the oil flowing. Without it, modern civilisation would collapse within weeks. Against global oil consumption, renewable energy is still a rounding error.

Oil and access to oil has shaped modern global politics, and is the proximate cause of many wars, particularly in the Middle East, where the biggest oil reserves are to be found. It has shaped or possibly defined our global political realities. South Africa’s main involvement in the Second World War in North Africa was to secure the Allied oil supply, and our biggest company, Sasol, was founded using a chemical technology developed by Nazi Germany that could convert coal into oil-like fuels – a result of being cut off from those North African supplies. Sasol was a response to Apartheid South Africa being cut off from global oil supplies.

Every now and again, the concept of Peak Oil, the idea that we have passed or are about to pass the physical peak of oil production, comes back into fashion. But that is unlikely - for the foreseeable future, anyway. Enormous amounts of money are being invested into exploring and extracting more oil to meet new demand, principally from Asia. But these, such as the Alberta tar sands in Canada, will be permanently high-cost sources. Oil that can be extracted at less than $60 per barrel is being depleted and is almost only found in OPEC countries. New finds have a supply cost of as much as $80 per barrel, requiring a market oil price of around $95 barrel to compensate for the required risk-adjusted returns to invest in extraction. The result is that oil is getting too expensive. The veteran Saudi oil minister, Sheikh Ahmed-Zaki Yamani, saw the risks when he said in 2000, “The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

Price is not the only determinant. Reducing oil demand by the early 2020s is essential if we are to limit climate change to two degrees Celcius, which is a commitment made by 193 countries in the 2010 Cancun Accord. There is every reason to be cynical about the climate change debate. The prices of the major oil companies depend on their stated reserves. The higher these reserves are, the higher the share price. But according to the International Energy Agency (IEA), the stated fossil fuel reserves are three times the agreed carbon budget allowed in the Cancun Accords. Other reports have existing private sector oil companies (not the national oil companies of petroleum producing countries) committing investment amounting to $1 trillion to develop new sources of oil. However, governments all over the world, either convinced of the dangers of climate change or seeing new opportunities to raise new taxes (take your pick), are introducing carbon taxes. And so is South Africa.

Gas, or methane (CH4) is about to take centre stage, pushing oil off its perch and even shoving coal aside. Because of its chemistry, gas burns far cleaner than coal, emitting about half the carbon dioxide than the coal equivalent. Gas is already an important source of energy in Europe. We have recently seen how constrained Europe is to respond to Russian aggression in Crimea and eastern Ukraine because it is utterly dependent on Russia’s continued supply of gas. Russia, in turn, derives 80% of its own revenues from exporting to Europe. This is why the recent deal signed with China is important for Russia but also why Europe will need to diversify its own sources of gas. Because of its physical state, gas is inherently a domestic fuel. It must be transported through pipelines to get it where it needs to be.

Gas prices in Europe are determined, by agreement, using the global oil price as a proxy but, in reality, the geology and mechanics of gas supply is entirely independent of oil. In the USA, the flood of gas entering that market due to exploitation what is known as tight gas or shale gas released via hydraulic fracturing (fracking) gas prices are about $4/MMBTU or roughly $24 per barrel of oil equivalent, but Asian prices can be as high as $15/MMBTU or $90 per barrel of oil equivalent.

Gas can only be transported over the oceans if it is first liquefied as Liquefied Natural Gas (LNG) and then put onto special LNG tankers to be delivered to ports that can store gas in its liquid form and re-gassify the fuel and pipe it to where it is needed. In liquid form, gas compresses to one 600th of its gaseous volume and contains almost the same energy as ethanol; 64% of that of petrol.

LNG is still a very small part of the global market for gas, but this is changing. Oil too was once a regional product before the advent of giant oil tankers. It is estimated that in the early 1950s transport costs amounted to a third of the cost of Persian Gulf sourced oil in the USA. Twenty years later, after huge investments in infrastructure and oil tankers, this had dropped to just 5%. The same thing is now happening with gas.

It is hard to say exactly how much liquefaction, shipping, and re-gasification costs but some industry estimates put this at $20-$30 per barrel of oil equivalent. Even at these levels, the vast difference in regional gas prices show that there is a significant price incentive to build the facilities.

Hardly a month goes by without some fresh announcement of new gas finds. On the east coast of Africa, oil firms Anadarko and Eni have invested billions of dollars to explore one of the largest untapped natural gas resources in the world off the coast of Mozambique, where there is only a small local demand. Mozambique plans to have a natural gas pipeline that connects the offshore fields to LNG plants on the continent. Statoil and Exxon, both major energy companies, are working off Tanzania’s coast on large gas discoveries, also a region where there is very little local demand. These too will be developed for LNG. Nigeria, already the fourth largest exporter of LNG in the world, captures only a fraction of the gas extracted by its oil industry. Large amounts of gas are still being flared off. Africa’s economic integration depends on South Africa sourcing more from the continent to balance out what we already supply to it.

South Africa should become part of this revolution, but we need to put our focus on exploiting our own reserves aside for a moment. There is some hope here. The Department of Energy is due to release a gas utilisation master plan for public discussion from the middle of 2014. Indications are that gas generation would be via public private partnerships similar to the renewable energy programme, and the allocation is large enough to draw interest: 3,000MW. While the Department of Energy has a firm eye on developing South Africa’s local resources, including Karoo shale gas, it accepts that LNG will be a key element of any future plan to introduce gas as an energy source.

Of course gas is still a hydrocarbon and burning it does contribute to global greenhouse emissions, but optimists see gas as a transition fuel to a future dominated by renewable energy sources. It does so in two ways. Firstly, it is a flexible fuel. Gas fired power stations can be turned on and off quickly so it integrates with variable renewable sources like solar and wind providing a stabilising effect for the grid so that increased use of renewable resources becomes possible (think about the difference between a charcoal and gas braai). Secondly, gas is best utilised for electricity generation and electricity is gradually taking over as the power of choice for final use. Electricity storage is still under-developed but huge strides on this front are being made. Electric cars appear to be the driver of this. Once electric cars with their batteries reach a critical mass, oil is displaced as the main transport fuel.

There is another immediate benefit for South Africa’s carbon-intense economy. As much as a third of Eskom’s power supplying South Africa’s economy is wasted due to transmission losses from the coal fired power stations of Mpumalanga and Limpopo to our coastal regions. Gas fired power stations built in the Industrial Development Zones of Saldanha, Coega, East London and even Richards Bay, co-located with LNG storage and re-gasification plants, could make our coastal provinces effectively independent of coal fired power, which in turn could service just the inland provinces - dramatically reducing transmission losses. By building this infrastructure, we can also be sure that we emerge as a buyer in a market about to be flooded with supply. What’s not to like about that? DM

Approximate Conversion Factors

The metrics used in the Gas Market differ from oil prices. The metric measurement used for gas is gigajoules (GJ). In the US, the measurement used is Million British Thermal Units (MMBtu). These measurements are roughly equivalent ( 1 GJ = 0.95 MMBtu)

  • There are roughly 35,31 trillion cubic feet (Tcf) in 1 cubic meter (TCM) of gas
  • A barrel of oil (bbl) equals 42 gallons or nearly 160litres of oil.
  • 1 tonne of LNG equals 52MMBTU
  • There is approximately 6 MmBtu or 6 GJ of natural gas in a barrel of oil equivalent
  • A barrel of oil (bbl) is 42 gallons or 160 litres of oil.
  • A barrel of oil renders approximately 1.7MWh.
  • 1 tonne of LNG renders approximately 15.2MWh
  • 1 tonne of LNG equals 9 bbl of crude oil
  • 1 mtpa of LNG equals 130MMBTU/day or 1.37 Billion cubic metres (Bcm)
  • Current Combined cycle gas power plant use roughly 7 000 MmBtu to produce 1GWh of electricity.
  • 1mpta of LNG is sufficient to supply a 1 GW Combined Cycle Gas Plan running at a load factor of 90%
  • Theoretically, If SA replaced all its coal fired power stations with combined cycle gas stations, it would consume nearly 1.4tcf of natural gas per year.
·       Mozambique generated 16 963 GWh of electricity in 2009 (World Bank) of which majority exported to SA ·       Eskom has a total generating capacity of roughly 38 000 MW of which more than 90% is from coal fired power stations and consumes over 90 million tons of coal per annum to generate about 196 308GWh of electricity per annum

Read more:

Gas Pipelines

  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions ( out of Cape Town.

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