South Africa’s First Dedicated Development in the Oil and Gas Services & Marine Repair Sector

Interview with Laura Peinke, Executive-Business Development at Saldanha Bay

Since we were last here the Saldanha industrial licensing company bill has been finalized. How much of a milestone was this?

It’s been very important for us. Since we were designated by the minister of trade and industry in October 2013 it was something from provincial and national treasury that we needed to accomplish. From a governance perspective the main reason for that is that it enables us to spend our infrastructure budget in terms of the financing that we receive from national and provincial government and that infrastructure budget relates to how we provide enabling infrastructure for our investors.

The development of Saldanha Bay IDZ forecasts 53.4 billion rand cumulative contribution to the Western Cape geographic and gross product by the end of 2020 with an approximate 8.2 billion rand in cumulative taxes by international fiscus. What will this mean overall to the development of the West Coast districts economy and its contribution to the overall Western Cape GDP?

It’s important to state that while a lot of those numbers look at the Western Cape and the West Coast, the Saldanha Bay IDZ licencing company is primarily focused on achieving an economic mandate first and foremost for the West Coast community. It has to be said that we could attract investment and we could be as successful as we expect from the numbers that you just mentioned. But unless we have a sustainable impact on the local community from both upliftment in skills and training as well as procurement and use of suppliers from the local community the question would still be have we really achieved our mandate? So it’s vital for us that those numbers directly mean something to the local business community, to the individuals within the West Coast area both under the Saldanha Bay municipality and the West Coast district municipality but of course that always translates into a national imperative which is making sure that citizens of South Africa are given opportunities and can make the most of opportunities from investment into their economy and we believe that this sector, the upstream oil and gas services and marine repair and fabrication, the sector we are focused on, really enables us to  be able to achieve that economic mandate. The investment that we envisage and that we have already seen going into the community and the West Coast area means that we are running with a number of economic programs to enable our skills and training and supply development initiatives and we have actually established local partnerships with the community to be able to do that. Apart from that there are a lot of other initiatives around such as corporate social responsibility initiatives and corporate social investment initiatives. But it doesn’t just mean investment into the upstream oil and gas services sector. It also translates into many other sectors as well such as the business and financial services sector and the accommodation and hotel industry sector. There is a lot more spinoff that we see from this industry than just direct investment into the upstream oil and gas services.

Unless we have a sustainable impact on the local community from both upliftment in skills and training as well as procurement and use of suppliers from the local community the question would still be have we really achieved our mandate?

The Saldanha Bay IDZ has claimed in a standing committee hearing recently that the opportunities for the zone will create up to forty-thousand jobs in South Africa. The majority of these jobs are expected to be high skilled and well paid creating around 550 million dollars in US cumulative taxes and contributing up to 5.3 billion dollars GDP to South Africa and 3.4 billion in GDP to the Western Cape. How credible are these statistics and what methodologies were used to estimate those sorts of projections?

That is a question we often get asked. Obviously you need to take into account that a lot of those numbers were done through national treasury approved economic models in late 2012 and early 2013. We have actually relooked at some of the economic numbers around the industrial development zone with specific relation to the fact that the upstream oil and gas industry isn’t the same as what it was two to three years ago. We have to take that into account. Interestingly enough we have gone back to all of the investors that currently have draft lease agreements with us or permanent lease agreements and none of them have said that they don’t want to invest anymore or that the market is too tough or that they have no money to expand. The reason that they have indicated an interest or signed agreements with us into the Saldanha Bay IDZ is very much because they have a long term strategy when looking at Africa. Most of them are based  in West Africa or have operations in West Africa and now have a much bigger focus moving towards east Africa and they are servicing that market from their traditional headquarter operations. From The United States, The United Kingdom, the Middle East and south East Asia to a large extent. The problem is that logistics costs and the security of moving goods around the continent of Africa is becoming a lot more challenging and a lot more risky. So they’re saying they need to actually have a central point on the African continent whereby they can store equipment and we service that equipment or we fabricate equipment if that is a long term or phase investment approach. So our investors tend to be more sustainable than just the current commodities cycle or the downturn in the current commodities cycle. We do see those numbers still being fairly realistic however I must caution that we are probably looking at a two to three year delay. We are probably not looking at 2020 and to some extent we’ve almost revised those numbers to say; let’s not look at actual dates, let’s say this is year 0 of operations. We are currently in our infrastructure program rollout. We have almost completed half of our 330 hectare footprint which means that in the next eight to twelve months we should start seeing construction by our first charge of investors. Some of those investors need a more long-term infrastructure with respect to the port infrastructure, the port developments, new quaysides and all of those projects are actually in the pipeline at the moment and mostly run by Transnet and we are working with them on it.

The activity of the IDZ is the result primarily of partnerships between the Western Cape government, the local municipality, Transnet and the national department of trade and industry. We understand that to date there have been some twenty Nda’s that have been signed with local and international letters. How much actual concrete interest are you seeing from the private sector? It’s still a Greenfield site after all.

Yes it is to a large extent although as I have stated nearly half of the 330 hectare footprint’s infrastructure is basically completed. We are finalizing our primary road based infrastructure, keeping in mind that a lot of our infrastructure offering to the investors is bespoke for their facility. We don’t want to have an industrial park where you have to take a ready setup unit. What we want to have is a site that is zoned, has environmental impact assessment, records of decision, has primary transport infrastructure and all the internal engineering services that a company would need to set up. And then essentially develop their site or their infrastructure whether it be just a general laydown area, an under roof warehousing facility or offices. Bespoke to that specific investor. A lot of our sites are fully serviced in terms of bulk utilities and the primary road infrastructure. A lot of the dedicated infrastructure, a road infrastructure for this specific company, security on their site and the actual topside structure would be done for that investor down the line. You mentioned the twenty non-disclosure agreements and that is typically how we start our negotiations with companies although it’s not a prerequisite. It’s to start the discussions and get a better understanding of what they want in terms of that bespoke infrastructure and then we start moving into what we call a draft leasing agreement or heads of agreements in respect to an infrastructure program so that there is no misunderstanding on when they want to start operations and how long the construction program would take. As from the end of our financial year which was the 31st of March 2016 we currently have thirty-four investor agreements signed. Some of those are still non-disclosure agreements but quite a few of those have actually moved into draft and final leasing negotiations. That is why I think that even with our infrastructure program on the 330 hectare footprint only approximately half completed we should in the next eight to twelve months start seeing that first tranche of investors with their bespoke infrastructure on site.

Are you at liberty to disclose who any of those investors are?

I am not and that is mainly because it is their responsibility to make those announcements. We will plan those press releases with respect to those investors but until they have finalised their construction contracts we don’t want to put anything out into the market that could be detrimental to the company itself.

Obviously the overwhelming natural advantages of Saldanha are notable, to say the least. The ports of Durban, Cape Town and Port Elizabeth can fit comfortably into it. Is it the largest harbour port in the whole of Africa and possibly even the world?

I can’t say if it’s the largest in the world but certainly in terms of its natural depth and natural draft in the port it might be. We certainly are very competitive in terms of Africa. There’s a lot of projects in Africa on-going at the moment to expand ports and to grow ports with respect to the upstream oil and gas services and the general marine engineering sector but we don’t need to do as much of the dredging and environmental impact assessments that other ports would need to do. From a capital investment perspective the port of Saldanha offers a lot more than some of our competitors in Africa.

Can you elaborate for us on how well placed the facility is to service the oil and gas industry companies exploring the West Coast of Africa?

Here are some of the statistics that have come out recently with respect to a lot of the companies who are bidding for the contracts on repair and maintenance works for the vessels operating in west Africa which are basically any vessels south of Nigeria on the West Coast of Africa, any rig, semi-submersible, trawl ship, anything sitting south of Nigeria. Our biggest competitor would be Los Palmos in southern Europe but we are a day’s shorter sailing time from Nigeria than Los Palmos so you can imagine as we move further south especially from Angola we are actually almost five to six days shorter sailing time than our closest competitor. if you look at the opportunity costs of a vessel that is not offshore, you are looking at approximately five-hundred thousand US dollars per day in opportunity cost lost, though that can vary between different vessels. That essentially means that we are saving the client six times five-hundred thousand US dollars and that means that our labour costs in South Africa, which are often considered expensive, do not matter. We are securing one out of every two vessels that are operating on the West Coast from Nigeria southwards.

According to statistics there are about a hundred and twenty rigs that pass by the South African coast line each year. How well positioned is the industrial development zone to service these rigs and all the other service vessels operating out of the West Coast and even the east coast of Africa?

The right answer to that would be to give you this example. In 2014, because of the demand of vessels coming past the coast of South Africa with specific relation to offshore supple vessels such as drilling rigs, we had to turn away fourteen vessel contracts that were available at the time. That’s taking into account not just Saldanha but Cape Town and the port of Kouga in the Eastern Cape who were also full at the time. Now if you look at the opportunity cost lost for the country, it’s a substantial amount. That would be approximately a thousand jobs per vessel contract and approximately three hundred to seven hundred and fifty million rand per rig repair contract that we’ve lost as a result of not being able to accommodate those vessels. That number of a hundred and twenty vessels passing our coastline is a very flexible number. It’s not always a hundred and twenty per year. But we have actually started seeing an increase in interest in a number of additional contracts coming from vessels on tow from south East Asia to contracts in the west. They want to be serviced. They want to be fitted for purpose or fitted for the contract and they are looking at South Africa to do a lot of that work. South America, particularly the country of Brazil, has a lot of vessels in the Gulf of Mexico region at the moment and they don’t have enough ports to service that and we’ve started taking some additional contracts from that market. So it’s not just our original target market, West Africa that we are seeing now. We are seeing a lot of growth in other areas as well.

We understand from an interview earlier this week with Niall Kramer, newly appointed CEO of The South African Oil & Gas Alliance (SAOGA) that exploration efforts are also progressing near Saldanha Bay with fourteen oil and gas exploration licenses having been issued for blocks off the coast. It’s hypothetical at the moment but to what extent could discovery and drilling in the area help to fuel the on-going development committed by IDZ?

The production side of any licence offshore is more important for us because that means a more sustainable onshore activity. But even the exploration licenses that are currently prevalent on the West Coast of South Africa mean that for every well drilled, we are seeing approximately eighteen to twenty-four months of onshore support activities. Together with Transnet we have undertaken a fairly in-depth market study with all of the companies on the West Coast of South Africa to get a better understanding of their work programs. Obviously those work programs are managed by the petroleum agency of South Africa, the official regulator and licencing authority. It’s important for us to be able to respond efficiently and appropriately to what those companies are going to be requiring. Now we know that there are a couple of companies that have announced environmental impact assessments which is a precursor to their drilling programs and what many people don’t realise is that with the downturn in oil and gas prices currently, exploration programs are a lot more affordable for many of these companies. Companies that would typically have only been looking at a single well under their working program are now looking at possibly drilling five or six wells which is better for South Africa. We have a better chance of looking at finding a sustainable discovery and a sustainable oil and gas find and we do have a company on the West Coast called Sunbird Energy that has a production licence and we see a number of additional wells being drilled there again which will result in some onshore activity to support the offshore production but at the same time pipeline fabrication and just general logistic support.

It would be difficult to overestimate the effect that this might have for Saldanha Bay as a catalyst for oil and gas services and marine engineering.

The whole Saldanha Bay IDZ concept is very interesting because it is based on a market that is not South African even though it’s a South African based investment area. This is quite contradictory to how you look at most countries and their offshore support service developments. If you look at Nigeria and Angola, it was the offshore industries that catalysed the development and then the onshore support like the port infrastructure came along afterwards. We are talking about doing it the other way around. That’s natural because I think that despite what a lot of people talk about in terms of the challenges such as skills and suppliers in Africa, South Africa has a much bigger skills base and a much bigger supplier base. In fact, if you look at a lot of the countries operating in West Africa, they are using subcontractors or skills from South Africa right now. It might be contradictory but at the same time our market is the ports and it goes without saying that if our own offshore market came online we would be looking at much more exploration activities and production activities down the line. It could be a bigger catalyst than we expected.

As the country seeks to reduce its dependence on coal fired power how much emphasis is there on shifting its energy mix over onto natural gas?

It’s a good question that many people in South Africa are asking right now. In 2010 the South African government through the department of energy released the integrated resources plan which said we want to have a more diversified energy mix. Gas was included in that plan but there was not a lot of clarity around what source of gas. How would that gas be supplied? There were a lot of questions around it at the time. As part of the sustainable move to relieve our dependency on coal resources, gas has come to the forefront again. After deliberation and uncertainty in the market in May last year the government came with a request for information from the private sector and they referred back to that integrated resources plan from 2010 which stated that if we look at a program it would probably be an initial or first phase allocation of just under 3,200 megawatts from gas to power or gas sources.  A lot of dialogue and discussion with investors and the department of energy and even the IPP office who liaise with the private sector have taken place. We are confident at the moment that the ports of Kouga, Saldanha Bay and Richards Bay have been earmarked as the three ports where gas to power could take place. In a fairly interesting statement from the IPP office more recently, they do actually want a project in each of those three ports in the first phase. That’s to insure that infrastructure development takes place in all three ports. That the possible further phases with respect to gas to power have infrastructure available and therefore reduce the cost of energy at the end of the day. It does make for a very interesting scenario. You mentioned earlier that the port of Saldanha is substantial in size and the great thing about that is that we can accommodate a lot of different pieces of infrastructure. In fact, we are starting to see a lot of synergy between the companies looking at new build for rig repairs and servicing, also being technology providers for the gas to power. It creates a lot of synergies for us and it’s important for us. We do have a memorandum of agreement with the department of energy and the IPP office and at the moment it is to insure that we play an enabling role for both private sector and public sector with respect to infrastructure roll out, the technology available and the best case scenario for both sides.

Saldanha IDZ is part of an overall national initiative under operation Phakisa which is intent on unlocking all the oceans potential around South Africa. How do you insure that all the spheres of government are working in concert?

It’s an important question that’s had to be addressed as a result of operation Phakisa. When you look at the oceans economy there are many government departments that have various roles to play. All are important in terms of achieving the economic mandate that was dated from operation Phakisa. What has happened is that there have been two levels of government involvement that have been set up to insure that this hurry up concept, which is what Phakisa means does take place and also that decisions are reached and made fairly effectively. The first being an inter-ministerial committee, an IMC, which means ministers from the various departments who may not otherwise be speaking to each other on a consistent basis, are now actually doing that. They’re meeting once a month. They’re talking about the necessary decisions that need to be made and they’re speaking between departments which is very important when it comes to implementing their mandates but also the mandate of operation Phakisa. Then the second, more practical branch of that is the implementation task team. This is spearheaded by the department of environmental affairs and the department of planning, monitoring and evaluation. Those two departments head that up. They appointed two implementation steering committee individuals that now make sure that on a bi-monthly basis all of the initiatives and the subsequent action items are actually being addressed. I must say that often it is not realised that it can be scary to attend a task team if you haven’t achieved what your action item was. It’s not something to be laughed at. A lot of the task teams have made progress though admittedly some haven’t but I think that it’s always going to be a mixed bag. One of the more positive areas is that we should see the request for proposals for the infrastructure programs under initiative two of the marine transport and manufacturing lab go out to the market for concessions within the next thirty days. We are running a little bit behind schedule but putting out the right documentation into the market is important and we want to make sure that it is something that the market can respond to. Transnet together with us and the inter-ministerial committee have been engaging with the private sector, both internationally and domestic. Given the nature of the market and the macro environment globally, obviously some of the companies have come back to us and said no. But we have had very positive meetings with a number of companies both internationally and domestically so as a result we have structured our RFP to make sure that we can attract the markets and the investments.

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