South Africa As An Oil Services Hub? An Interview with Petroleum Agency SA

Interview with Dave van Der Spuy, Resource Evaluation Manager of Petroleum Agency SA

South Africa’s oil reserves are relatively modest (around 15 million barrels compared to 37 billion barrels estimated in sub-Saharan Nigeria), most of which is located off the southern coast of the Bredasdorp Basin and off the west coast Namibian border. There is also the little explored offshore Orange Basin in Namibia which is one of the most interesting in the eyes of many industry observers. Can you tell us about its potential?

Sure. I don’t necessarily think the Orange Basin is exclusively of interest to international explorers. The Orange Basin occurs offshore both in Namibia and in South Africa and goes almost all the way down to offshore Cape Town. It is a very large basin and only has forty wells drilled in the South African section at the moment. Of those, there has been a small oil discovery which is really unpraised at this moment and also a couple of gas discoveries including a small oilfield which is currently in the process of moving towards development. What must be stressed is that the basin is very large and even with those forty wells in the South African section it is basically unexplored. It is only the shallow water that has been explored; the deep water section is really unknown and so that is what is coming in the future. We have acreage licensed at the moment to some very large multinational companies who are going to be putting resources into exploring that area. We have quite a few companies that have collected multi-client seismic surveys recently over those. Hopefully that should reveal new, exciting prospectivity. It is really the deep water that holds a great deal of possible prospectivity. In the shallow water there is still a great deal of probability for further gas discovery and that is yet to be looked into as well.

There have been a number of gas discoveries as you mentioned in the Orange Basin, one of which is the Ibhubesi, which is being developed by PetroSA. The production was expected in 2016, is it on schedule?

The main developer is actually a company called Sunbird which has Australian shareholders but is a company active here. It is South African registered and they hold around 76% of the interest in that field. Their plans are to bring that gas on shore to use as power generation to supplement the electricity supply. Currently we have a couple of turbines operating in a town called Atlantis on the west coast that are operating on diesel and they could quite easily be converted to natural gas and that may be part of the development plan. What is holding this development back at the moment is investment. I think Sunbird and PetroSA, who are the two partners in it, would like to acquire a partner who has the financial clout to pull what is really a project that would get things moving on our west coast because that is the first hurdle.

South Africa is known in the industry as having very strong environmental safeguards and it expects a lot from its oil and gas operators.

Petroleum Agency is also currently promoting a number of other locations with exploration potential. Can you elaborate on this?

Basically I would have to describe the entire country because that is our mandate! Offshore, we have spoken about the Orange Basin, but to the south of the country, offshore we have what is known as the Greater Outeniqua Basin and that has smaller basins within it, one of which is the Bredasdorp which is pretty well explored. Our only commercial oil and gas discoveries have been in that basin but the production of both from that basin is declining rapidly at the moment. There are a few other smaller basins within the Greater Outeniqua, including the Platmos, the Algoa and the Gamtoos and then the Southern Outeniqua itself. Once again it is the deep water section of that which has not yet been explored and we are very lucky to have attracted Total to large areas of the acreage in that basin. They have identified what we hope will be a very large world class oilfield in part of that and they are moving towards drilling that target. On our east coast, offshore we only have four wells drilled in that area; it is a very large area that is also completely unexplored and unknown. We have managed to attract ExxonMobile to that area and they have already acquired seismic activity and what we have seen seems extremely encouraging. Of course it is early days. Generally for the entire offshore we have 3 out of the 5 world´s largest exploration companies active and also a group of really well qualified and competent international companies all really concentrating on looking at mid to deep water prospectivity.

Onshore it is quite an interesting situation, it is really nonconventionals that are important onshore and there are some really interesting issues onshore. There is coal bed methane in the north and east of the country, obviously where our coal occurs, and that is being looked at by some smaller companies and some of them have been very successful so far in their initial efforts. Then of course there is the issue of shale gas which is in the south central section of the Karoo Basin. The potential of that has yet to be determined. There have been a number of desktop studies by international organisations and by us that have demonstrated the possibility of very large resources.

PetroSA has also been developing the F-O fields for project Ikhwezi in an attempt to sustain gas supplies to the GTL facility. How is production currently running on that?

The original plan was to drill five production wells in that project. They have drilled three which are tied back to the platform and are producing. The fourth well was suspended. These wells have been technically extremely difficult. The reservoir itself is known as what is called a very tight reservoir and these wells have very long horizontal sections, one of them I think is over 1.5km long, which is a record both for South Africa and for PetroSA in its own activities. The wells that have been drilled are producing very well. Unfortunately because of PetroSA’s situation, they have suspended activity there.

There are other nearby formations to prolong production in this area, is that right?

Yes. There are parts of the Bredasdorp Basin that remain to be explored. There are known smaller gas deposits within the Bredasdorp Basin that have not been exploited and to the east of the F-O field there is further prospectivity that has been identified that looks of a similar size to the F-O field itself.

What can you say regarding the possibility of having an additional, sizeable unconventional energy source that generates the most international interest in the natural gas sector, particularly talking about the presence of shale gas in the Karoo Bay which will give South Africa the eighth largest technically recoverable gas reserves in the world? Do you believe that the shale gas in the Karoo Bay has the potential to transform the nation’s entire energy mix and make a significant contribution to South Africa’s economy?

It is possible. Those very large resource figures that we have seen in the press and out in the public come from a number of different organisations, some of them are extremely large, their figures are over 400TCF and 300TCF etc. These are based on very broad, brash, desktop studies that have been conducted of countries all around the world, all in one go. So there is some kind of justification for those figures within the boundaries and the structure of those projects. We ourselves have looked at what we think the potential is and have come up with a smaller order of magnitude. Nonetheless it still remains a very large amount of gas. I’m not sure I can give you the exact figure at the moment but we have a group that is working specifically on this project and they have moved around between 39 to 50TCFs or so which is for gas in place. Nonetheless as I said that is still a very large amount of gas for a country like South Africa. If it could be economically exploited, and there are issues around that because of water supply, distance from infrastructure, and others, then yes it could very well change the energy of South Africa.

It could well be instrumental in meeting South Africa’s energy demands.

It could go a long way towards that but I don’t think it will be the only thing that does that; we have great opportunities ahead for coal bed methane and also for conventional gas offshore. We certainly have the potential to still discover large amounts of conventional gas offshore.

Your acting CEO Ms Lindiwe Mekwe confirmed recently that there are two players in South Africa’s natural gas arena: Rhino Resources and Cairn. Will you be tendering for a permit in the future?

Well currently we don’t work on a license round system at the moment but that is going to change. These players have been attracted to the country through direct negotiation with us, perhaps having met us at a trade show and then visiting us directly to look at data here. That is how we have attracted explorers in the past but in the future it will be different when the MPRDA (Mineral and Petroleum Resources and Development Act) is amended, which is the act that comes into play for all oil and gas exploration as well as hard mineral exploration in South Africa. There are certain amendments for this act and one of which is that oil and gas acreage going forward will only be made available through license rounds or invitations to bid. So we would need to wait for the finalisation of that before we did any further work in that area.

We touched on this briefly but there have been some concerns raised about water. It is a relatively arid region and there is possible competition with agriculture for water resources as well as issues of toxic waste water and environmental effects to ground water and the water table. How would you answer these concerns from environmentalists?

That is one of the big concerns around the entire oil and gas industry in South Africa. As the public has become more educated, they have become more concerned. I think what this organisation needs to do is make the provisions of NEMA which is the National Environment Management Act, more known. I believe we need to exert some effort in making this more widely known so that the public can be assured that there is legislation in place under which these things occur and that it is very strict and tight legislation. In fact, South Africa has a reputation in the oil and gas industry for it being particularly difficult from an environmental point of view to even acquire a license to begin exploration activity. So issues around toxic waste water are all dealt with under the provisions of this act. When there are activities, they are monitored both by the Department of Environmental Affairs and also by us. Any company that does not behave will have their operations brought to an end immediately and will be penalised. Also, any company exploring in South Africa whether it be for conventional or unconventional has to put down an extremely large deposit for environmental rehabilitation and that money goes towards correcting anything that may go wrong. It is there as a guarantee and they are very large amounts. I think the whole process of acquiring a license in South Africa accommodates this from the very beginning. Companies that wish to carry out any kind of exploration activity in any part of the country whether it be onshore or offshore, are required to consult with the public in general and make it very clear what they intend to do and gather comments that come from the public, whether it be from environmental organisations, lobby organisations, the man in the street etc. and all of those have to be addressed and they have to satisfy us and the Department of Environmental Affairs that they are being truly addressed before any license is granted. Any issues around environmental degradation and so on will bring activity to a dead stop immediately.

So it is quite a stringent environment.

South Africa is known in the industry as having very strong environmental safeguards and it expects a lot from its oil and gas operators.

Obviously there has been a sharp decline in the oil prices over the last year, resulting in a lot of questions being raised about the wisdom of South Africa’s aspiration to pursue being an oil services hub. What is your stand on that?

Well I think older people will realise that these things are cyclical. There is always going to be a need for energy. We don’t know if it is necessarily going to be low for much longer. In my career I have lived through periods of low for long and also high for long and it is cyclical and I believe there is an enormous number of people on the planet all of whom have aspirations towards living a sort of middle class western lifestyle which requires a great deal of energy. Until alternative sources of energy and renewable sources of energy become economically sustainable I think oil and gas will have a role to play, certainly gas particularly.

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