South Africa pursuing a major gas deal

The Central Energy Fund (CEF) released a tender last month, looking for a gas aggregator to help secure liquified natural gas (LNG) for various gas-to-power projects planned for the Coega special economic zone in the Eastern Cape.A gas aggregator is a wholesaler who imports LNG in bulk and sells it to smaller customers.AmaBhungane has confirmed that SOCAR, the state-owned oil company of Azerbaijan, and Gazprombank, which is owned by Russia’s state-owned natural gas supplier Gazprom, are contemplating bids. Shell, which was expected to be a front-runner for the gas aggregator tender, has confirmed that it will not bid.The tender is potentially lucrative: "The average gas demand could be more than 200 million cubic feet per day. Such volumes can be managed through multi-billion-rand contracts per annum. It would be recommendable to consider aggregating supply so as to maximize the benefits of economies of scale," the tender documents explain.This translates to over 75 million MMBTU per year, the common unit of measure for natural gas when it is sold on the global market.Before the Russian invasion of Ukraine, 1 MMBTU was priced at roughly US$26. At the beginning of March, 1 MMBTU hit a record-high of US$52. Even at pre-Ukraine prices, that would put the size of the potential contract at R29 billion a year.But that depends on the gas aggregator finding willing buyers. In Coega these would be independent power producers (IPPs) who will burn natural gas to generate electricity. Coega currently has no gas-to-power projects but hopes to secure a portion of the 3 000MW gas-to-power IPP programme which is scheduled to be rolled out later this year.Gas aggregators are not unusual in the energy sector. Singapore has appointed several – including Shell and Exxon to bring LNG into the country.What is unusual is that CEF wants to partner with the oil and gas industry to set up a new state-owned gas trading entity to aggregate these multi-billion-rand contracts.Capacity"Since CEF has not been trading gas, there is an acknowledgment of a lack of capacity, systems, and processes. There is also an appreciation of the gas supply agreements&#039; complexity as they can be multi-year and multi-billion contracts with material risks," the tender documents read."Therefore, for these reasons, CEF seeks to appoint a gas aggregator partner that will support CEF in establishing and capacitating a state-owned gas trading entity."This new state-owned entity "must start trading in the current year, CEF added.CEF is leaving it up to bidders to suggest a business model that will work, with the successful oil and gas company either taking an equity stake in the business, or merely providing technical advice to the new state-owned gas trading entity.CEF also wants the gas aggregator to arrange a bank facility of up to R20 billion to fund day-to-day trading. The gas aggregator will also "assist in sourcing, negotiating, and concluding gas supply agreements" and develop hedging strategies to offset the volatility of the rand/dollar exchange rate.Despite the size and complexity of the tender, CEF initially gave bidders just three weeks to respond.The deadline for the gas aggregator tender has now been extended until the end of March but industry sources who amaBhungane spoke to were divided on how to interpret the tender: one felt that CEF was merely "fishing" for information; another described it as "pie-in-the-sky"; but two more warned that the contract could give one company backdoor access to supply, not just Coega, but the entire country.On paper, the gas aggregator contract looks like a goldmine. But the volumes of natural gas are not guaranteed – part of the aggregator’s job will be to find buyers for the LNG it imports – and closer inspection of the tender documents reveals that none of the potential customers identified in Coega are ready to start buying natural gas.For instance, the beleaguered 450 MW Karpowership Coega project is identified as one of the gas aggregator’s potential customers, despite the fact that the project was refused environmental authorisation. CEF also identified a planned 1 000 MW gas-to-power project as a potential customer, even though it would first need to win an allocation in the upcoming gas-to-power tender.SupplyThis uncertainty is responsible for some of the scepticism in the market as some worry that the gas aggregator will be stranded in the backwaters of the Eastern Cape, eagerly waiting to supply vast volumes of natural gas to projects that never materialise.Minerals and Energy minister Gwede Mantashe has made it clear that he wants Coega to be the first gas import hub in the country but it faces competition from Richards Bay where the Transnet National Ports Authority has embarked on its own process to develop a gas import hub.Richards Bay has the logistical advantage of being close to Transnet’s Lilly pipeline which can carry natural gas to existing buyers in Gauteng. Sasol currently supplies these buyers with natural gas from Mozambique but has told them it cannot guarantee supply after 2023. While building a link from Coega to the Lilly pipeline is possible, it is estimated to cost R50 billion.However, question marks about Coega do not appear to have killed all interest in the gas aggregator contract. With CEF positioning itself to take on a major role in the energy sector, some international oil and gas companies are seeing the strategic advantage of being by their side.Prospective bidders have been warned not to speak to the media, but SOCAR, the state oil company of Azerbaijan, has publicly said that it would participate in any tender aimed at "establishing LNG capabilities" in Coega.In September, SOCAR opened an office in Johannesburg and appointed Tumelo Motsisi, founder of Kopano Ke Matla, COSATU’s investment arm, as one of its directors.Gazprombank is also likely to bid: "We are evaluating the potential participation in the gas aggregator tender issued by CEF, given the group&#039;s extensive experience in the gas sector," the Johannesburg branch told amaBhungane in a written response. - Fin24/Bloomberg

South Africa pursuing a major gas deal

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