CLEAN ENERGY: An extension of the giant gas field offshore Mozambique. Gas is far more efficient and cleaner than coal: while coal-fired stations operate at 30 percent efficiency, combined cycle gas-fired power stations operate at efficiencies of double that, says the writer.

Dirk de Vos

The 60-day public consultation process for the Saldanha Bay Industrial Development Zone (IDZ) that was launched by Alan Winde, Western Cape MEC for Finance, Economic Development and Tourism on November 19, ends this week. This was a necessary formality before the creation of the Saldanha Bay IDZ can be gazetted in terms of legislation governing IDZs.

Becoming an IDZ simply creates a customs-free area. The purpose of this IDZ is to encourage the creation of an engineering and logistics services complex, serving the needs of the upstream exploration and production service companies operating in oil and gas fields in sub-Saharan Africa.

The current upstream focus in the Saldanha Bay IDZ application has potential benefits – after 20 years, it is projected that a minimum annual return of R11 billion for the economy will have been generated and more than 25 000 sustainable jobs would have been created.

However, all of these figures should be treated with some circumspection. If granted IDZ status, Saldanha Bay will join Coega, East London, Richards Bay and OR Tambo International Airport as existing IDZs.

The experience so far is that none of the aforementioned fulfilled their potential for promoting investment and job creation.

A report by the Centre for Development and Enterprise suggests that the lack of a discernible impact may be because there is nothing particularly special about IDZs. For example, there are no special tax incentives nor can one depart from, say, the labour law.

An effort to address identified shortcomings in the IDZs comes in the form of a new piece of draft legislation known as the Special Economic Zones Bill. But there is another problem for new industrial zones – Eskom’s electricity is now no longer cheap and we face considerable supply constraints.

The problem with it is this: the focus required to secure an IDZ, namely the focus on the upstream gas and oil sector might well miss out on a much bigger opportunity. In the gas and oil industry, an upstream activity refers to exploration, extraction and production of crude oil and natural gas. Midstream activities include primary distribution and refining. Sales and retailing of refined products constitute downstream activities.

Moving all the way downstream is what should now be occupying our attention.

A combination of heightened awareness of reducing greenhouse gas emissions, the never-ending increases in Eskom’s electricity tariffs and the proven gas reserves off the coasts of the African continent will require a re-examination of all our long-term planning as a region. Merely providing specialist engineering and logistics services to the upstream oil and gas sector in sub-Saharan Africa is not enough; Cape Town and, frankly, every other coastal industrial zone in the country should prepare the ground to become consumers of this new abundance of natural gas.

Should we not look to Saldanha Bay as a prospective destination port for imported gas in the form of Liquefied Natural Gas (LNG) and as a location for gas-fired power plants generating baseload electricity?

Saldanha Bay is one of South Africa’s deepest natural ports and looks likely to have the capacity to deal with LNG tankers. There are compelling reasons why this ought to be considered if we want to develop a growing and green economy.

Other than the Koeberg nuclear power station with its two turbine generators and a total capacity of just 1 800MW, the Western Cape (and every other coastal city in South Africa) gets its electricity from Eskom’s coal-fired power stations in and around Mpumalanga and also the Waterberg in Limpopo.

The electricity consumed in coastal provinces has to travel enormous distances. By the time electricity is “delivered” to, say, Cape Town, as much as a third is lost in transmission. That is a terrible waste on its own, but it is more particularly so since Eskom is one of the worst emitters of CO2 per kilowatt-hour produced.

Further, beyond the environmental impact of coal-mining itself, Eskom consumes 1 433 litres of water per megawatt-hour fed into the grid. The new Medupi power station in the Waterberg will have to pipe water in from Gauteng which in turn, gets much of its water from the Lesotho Highlands project. Gas is far more efficient and cleaner: while coal-fired stations operate at 30 percent efficiency, combined cycle gas-fired power stations operate at efficiencies of double that.

Also, coal is effectively 100 percent carbon so if you burn one ton of coal you produce 3.67 tons of CO2. For the same amount of energy released, natural gas or methane requires 0.69 tons and will produce 1.8975 tons of CO2. The US has substantially decreased its CO2 emissions by replacing coal-fired stations with gas-fired power plants.

There is another benefit: gas- fired power stations, being smaller and easier to adjust output, work better in concert with renewables that can’t provide baseload power.

Saldanha Bay and its environs have one of the best wind measurements in the world. Already just short of 300MW of wind-powered capacity have been approved in the surrounding areas and plans for another 900MW are in advanced stage. These wind-powered power plants will be feeding electricity into the grid at 90c/kWh, less than Eskom’s new proposed tariffs.

The scale of the gas finds off the east coast of Africa is a game-changer: Mozambique has proven natural gas reserves of 100 trillion cubic feet (tcf) and its northern neighbour Tanzania, another 30 trillion cubic feet. This is just the start: a recent study by the US Geological Survey predicts that the region has 440tcf of natural gas. On the face of it, these natural gas resources will render efforts at fracking for shale gas in the Karoo perpetually uneconomical. The recently published Natural Gas Master Plan for Mozambique, an initiative funded by the Petroleum Governance Initiative (PGI), a bilateral collaboration between the government of Norway and the World Bank shows how these resources could be exploited. Most of it will need to be exported.

Already Sasol imports 450mcf (thousand cubic feet) annually to its Secunda plant via a gas pipeline. Transporting gas is a problem. You either need pipelines or it needs to be liquefied to become LNG and transported in special LNG tankers and sent to places with LNG import facilities (re-gasification facilities). It would be a great pity if the Saldanha IDZ did not at least make provision for these sorts of facilities. The requirement of LNG tankers means that there is an additional opportunity to rebuild South Africa’s maritime industry.

Having to import gas in the form of LNG adds a cost to the resource. An MIT lead study tried to model the cost of the full cycle of liquefaction, shipping and re-gasification using US market metrics and found that this adds $4 (R35) per million British thermal units (MMBtu) to the well price. Other studies put the figure lower, at $2.78. Given the size of the resource though, we can expect that gas prices will remain low for another generation.

More interestingly, gas-fired power station have different economics. The International Energy Agency’s (IEA) own benchmark study shows that coal-fired power plants cost between $1 000 in non-Organisation for Economic Co-operation and Development (OECD) countries to $2 500/kW in OECD countries and take about four years to build. The price of coal is a determinant depending on whether coal had to be imported: levelised costs (or the all-in price of electricity from a project over its lifetime, including operating expenses) for coal-fired electricity generation range from $25 to $80/MWh.

Nuclear is much worse. Nuclear’s budgeted capital expenditure costs start way too high, but completed projects invariably overshoot budgets – by far. This explains why nuclear’s order books remain very slim. The IEA’s benchmarks show that the construction costs of a gas-fired plant range between $400 and $800/kW and are completed within just over two years. Gas-fired plants can be smaller and their operations and maintenance costs are significantly lower too.

The much lower capital costs associated with gas-fired power plants also allow greater scope for attracting private investment in the sector. Templates for this already exist. The Department of Energy’s now abandoned gas Peaker Plant programme could be repurposed to this end. The current renewable energy independent power producer procurement programme (REIPPPP) provides a ready-made template for attracting private capital into the sector.

Cheap and abundant gas will be a game-changer on a global scale. Servicing the upstream requirements of the gas and oil sector should be just one part of how we respond. Gas can power the Saldanha IDZ and do so for all the other IDZs as well.

l De Vos runs a Cape Town-based consultancy specialising in telecommunications, renewable energy and other infrastructure-focused investment. In the renewable energy programme currently under way, De Vos consults to 4th Sector Management, a broad-based empowerment manager.