Bastion Oil and Gas South Africa (Pty) Ltd (“Bastion”) is a South African empowered company committed to finding solutions for South Africa’s energy deficit by exploring for and producing indigenous onshore gas.
In this second article I regularly refer to the white paper published by Wärtsilä in 2022 titled Flexible Gas: An enabler of South Africa’s energy transition. This paper represents, in my opinion, a balanced view as to South Africa’s future energy pathways[i]. I urge all to read Wärtsilä’s white paper.
The energy supply challenges in RSA are years in the making and will take years to resolve. The solution to South Africa’s energy crisis, not exclusively electricity crisis, lies not within the realm of government or state-owned institutions only. Our country must change to an open but competitive free market economy with light touch regulation that is limited to energy security, affordability, environmental sustainability and socio-economic development issues that the market may not be able to deal with on its own or adequately. The private sector must be incentivised to be power self-sufficient and sustainable. Current centralized energy supply chains are fraught with challenges and burdening the country and its citizens with more debt to solve this crisis is not a sustainable solution. Furthermore, the skill sets required to solve and implement solutions no longer fall within the public sector only more so in the private sector. GDP growth requires reliable, cost effective and sustainable energy. This can only be provided by fossil fuels for dispatchable power in the short to medium term. Citizens and businesses who can afford the upfront costs must be encouraged and incentivised to install solar with back up battery or generator systems with grid feed-in incentives. The majority of South Africans and businesses who cannot afford self-generation solutions will remain dependent on power at the plug of their municipalities and Eskom.
Oil and gas exploration companies must be encouraged to explore domestic energy sources which RSA undeniably has in abundance[ii]. Unnecessary regulatory stumbling blocks for gas exploration must be removed. Regulatory certainty for gas exploration must be assured. Environmental authorisation/approvals and processes must be accelerated. With private sector power generation, power purchasing must be decentralized to municipal levels, Eskom is responsible for transmission infrastructure with independent regulatory and financial oversight.
The Petroleum Agency SA[iii] estimates, on an unproven potential basis, that there is 200TCF of shale gas, 22TCF of coal bed methane and 1,5TCF of biotic gas onshore South Africa. It is common cause that South Africa requires 5GW to end load shedding and approximately 50 GW over the next ten years to replace coal power plants that are scheduled for decommissioning and a new build programme to enable and match SA’s economic growth.
In simple terms, 1,2 TCF of proven gas reserves can provide the gas to power a 1GW power station for 20 years or 10 power stations at 100MW. It costs between US$130 to US$150 million to build, full turnkey, a 100-MW gas fueled power station and this can be built in less than two years from financial close. I checked this number with Wärtsilä. Gas fueled power stations are capable of providing the peaking, mid-merit and baseload power South Africa requires. It can also be operated at mid merit or lower levels to support the integration of large scale solar. The ideal solution would be gas combined with solar PV.
In 2021 a study[iv] was done in South Africa on a 54-MW solar PV facility without any battery storage. The study determined that such a facility would yield 126 826 MWh/year degrading to 117149 MWh/year in year twenty. In comparison, a 50-MW gas facility would yield 3 942 000 MWh/year. Over the lifespan of a 20-year term contract, the solar facility will deliver a total of 2 439 753 MW/h while the gas facility would generate 7 840 000 MW/h at 90% efficiency. For the solar PV facility that is a 26,5% energy availability factor over 20 years. Therefore combining gas to power and solar PV makes perfect sense, especially where battery storage would be more expensive or less reliable than gas power.
What would a 100-MW onshore gas development cost, assuming that all exploration costs are treated as assessed losses and carried forward until income is generated? Here we are using estimates in the public domain based on a coal bed methane gas development to supply gas to a 100MW gas to power facility. To generate 100-MW/h per day the power station will require approximately 16 800 MMBtu/day or 122 640 000 MMBtu for 20 years. The gas exploration company must have independently verified proven gas reserves of not less than 122,6 bcf (billion cubic feet) or 0,1226 tcf (trillion cubic feet). Field development capital costs and contingencies are estimated to be R1,73 billion with annual operating costs (including replacement wells) of approximately R260 million per annum excluding financing and cost of financing.
It is important to note that in South Africa there are special tax concessions provided to gas exploration companies under Schedule 10 of the Income Tax Act. Exploration capital expenditure is subject to a 100% uplift and production capital expenditure is subject to a 50% uplift. In addition, royalties are payable to the state based on gas production in terms of the Royalty Act.
For their modeling exercise in 2022, Wärtsilä used US$15 MMBtu as a realistic gas price assumption of delivered gas at a power station in South Africa. With the abovementioned inputs, using US$15 MMBtu as an indicative gas price, together with the tax concessions, it does not take very long to work out and model the net present value (NPV) and internal rate of return (IRR) over a 20-year gas sales agreement. The results are positive and significant however, the important point to be made here is that IRRs and NPVs remain positive and significant at sub US$10 MMBtu gas prices with capex and opex cost savings if upscaled. Investment in onshore gas exploration and production in South Africa makes good business sense as onshore gas exploration has been significantly de-risked by companies such as Kinetiko Energy Limited[v] and Renergen Limited[vi].
This leaves us with one simple question: Why are South African investors not investing in gas exploration in South Africa? Offshore gas exploration is certainly high risk/high reward but onshore gas exploration is cheaper, less risky but with the same potential high reward.
As Bastion continues to de-risk its onshore gas opportunities through intelligent exploration, we look forward to partnering with like-minded companies, development finance institutions and industry as joint venture partners, financiers, contractors and gas off-takers who like us consider this a worthwhile endeavour.
For more information please contact the undersigned at barrisford@bastionoil.com or info@bulwarkoil.co.za
Barrisford Petersen
Founder and Managing Director
Bastion Oil and Gas South Africa (Pty) Ltd
Bulwark Oil And Gas Sa (Pty) Ltd
Rockit Energy (Pty) Ltd
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[i] https://www.wartsila.com/docs/default-source/whitepapers/wartsila_southafrica_final.pdf?sfvrsn=e2bb2e43_2
[ii] https://www.bastionoil.com/rsa-onshore-gas-keep-the-reasons-for-onshore-gas-exploration-simple/
[iii] https://www.petroleumagencysa.com/
[iv] A cost-benefit analysis of implementing a 54 MW solar PV plant for a South African platinum mining company: A case study by S.S.S. Barnard; A.M. Smit; S.L. Middelburg and M.J. Botha,
[v] https://www.kinetiko.com.au/
[vi] https://www.renergen.co.za/
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