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South Africa is only beginning to catch on to the potentially transformative impact of a serious move to gas, with the first deliveries of bulk liquefied petroleum gas (LPG) making landfall at Saldanha and planning well under way for the commissioning of liquefied natural gas (LNG) import facilities, initially earmarked for Richards Bay.
It is not difficult to make the economic case for gas. An abundant and cheap natural gas resource has the potential to revive previously stagnant industrial sectors and develop new industries – if the price is right.
The stand-out case is the US, where cheap shale gas has contributed to a dramatic revitalisation of wide swathes of the manufacturing economy after decades of decline.
Gas production in the US has soared 20% in five years. The country now has an enormous commercially recoverable gas resource that will last generations.
Rising production has seen natural gas prices decline by 75% since 2008, while electricity prices have also dropped dramatically.
As a result, a “re-shoring” trend is under way as steel, chemical, fertiliser, plastics, tyre and other companies have moved production back to the US or expanded existing facilities, while many foreign firms, including Sasol, have invested in new plants in the US.
Another example, and of great interest as a case of extremely rapid ascent to developed-world living standards, is Qatar.
In 2001, when the first LNG trains came on-stream in the country, Qatar had a GDP per capita of $28 000. By 2016, this had increased to $59 330, according to World Bank data.
Notwithstanding the developmental, political and cultural differences between the US and Qatar, both examples clearly demonstrate the strategic importance of leveraging domestic resources for economic development.
From a South African point of view, the wider regional dimension is critical.
The Southern and East African region has a combined natural gas resource potential estimated at 600 to 800tr cubic feet (tcf), almost as much as Qatar’s deep resource of around 990tcf. (By comparison, PetroSA ran its Mossel Bay gas-to-liquids refinery for more than two decades on gas production of 1tcf.)
It should be a no-brainer for regional policymakers to focus on understanding exactly what is needed to leverage these resources to drive regional industrialisation, generate employment and stimulate economic growth.
On offer is the potential the natural gas industry has already demonstrated to develop deep forward, backward and lateral linkages from domestic resources, avoiding the notorious “resource curse” that has plagued many oil- and mineral-rich African countries for years.
The challenges facing our region are significant. Unlike in the US, where gas markets and gas infrastructure have been developed over many decades, gas markets and associated infrastructure in southeastern Africa are at a very early stage of development.
How the resource is leveraged off a low developmental base will be crucial. It will require a carefully crafted cooperative regional strategy that looks beyond extraction and raw export, focused on maximising the multiplier effects of natural gas usage in the productive economy.
The financing challenge will also require careful planning and coordination of various financing sources, including domestic and regional governments, international and donor funders, and South African and regional private capital.
This should ideally be done on a step-by-step, project-by-project basis, to ensure that the learnings from preceding projects are incorporated into the execution of successor projects.
This implies an important strategic role for the state, or combinations of states.
Left solely to market forces, natural gas resources run the risk of being liquefied and developed only for export offshore where they would fetch higher prices, as evidenced by the recent final investment decision (FID) on the Coral South floating LNG project in Mozambique.
The Coral South project reaching FID is good short-term news for Mozambique.
But in terms of beginning to monetise its resource, it makes the importance of coordinated sequencing for deeper onshore developmental outcomes all the more evident.
The Mozambican government has demonstrated awareness of this issue, and has taken the first steps towards developing an appropriate industrial and infrastructure strategy aimed at determining how gas can find its way into the domestic economy.
There is, however, no way around the fact that Mozambique is cash poor. This means that the entire Coral South project’s output will flow into BP’s gas portfolio, and will most likely be sold in Asian markets.
The hope is that it will then begin to be possible to redirect a portion of the much-needed inflow of forex to kick-start a modest first wave of downstream gas industrialisation.
The unintended consequences of not having an industrial and infrastructure strategy to create onshore value are illustrated in Australia.
Paradoxically, Australia, primed to become the world’s largest LNG exporter, is now considering importing LNG, to both have access to global markets and create competition in the domestic gas market.
A prerequisite for the successful execution of an industrial strategy is a highly collaborative framework that brings together a coordinated and disciplined government and an equally coordinated and disciplined private sector, united behind a clearly articulated and shared vision.
In our regional context, the critical first step will be to make such a collaborative model “common sense” to all.
Kishan Pillay is director of oil and gas at the department of trade and industry.
This article originally appeared in the October 2017 edition of Collective Insight, which appears in the 19 October edition of finweek. Buy and download the magazine here.
