Feasibility Study for the Western Cape Integrated Liquefied Natural Gas Importation and Gas-to-Power Project: briefing

Meeting report

DEDAT: Western Cape gas importation studies

Mr Ajay Trikam, Director: Energy, Department of Economic Development and Tourism (DEDAT), said the Western Cape Government was actively promoting the importation of natural gas into the West Coast of the Western Cape. There would be socio-economic benefits derived from gas-based industrialisation. Industries would be able to switch from dirtier fuels -- coal, heavy fuel oils and diesel -- to natural gas, thus reducing the Western Cape’s carbon footprint. Natural gas would help achieve the goal of a low-carbon, energy-secure future. It was also seen that gas-to-power worked well with solar and wind energy, as it provided flexible dispatch.

He took the Committee through a list of studies that had been done for this project:

Pre-feasibility report on the importation of natural gas into the Western Cape, with specific focus on the Saldanha Bay-Cape Town corridor;
Environmental screening and safety study for the proposed liquefied natural gas (LNG) terminal at Saldanha, and associated pipeline infrastructures to Atlantis and Cape Town;
Preliminary assessment of the marine environmental conditions for LNG shipment and transfer operations for an area within the Port of Saldanha;
Preliminary assessment of the  marine environmental conditions for LNG shipment and transfer operations for an area within the West Coast of South Africa;
Liquefied natural gas importation: Evaluating the risks.

Mr Trikam pointed out that these studies had focused on:

Gas market demand analysis;
Socio-economic impact analysis;
Techno-economic-financial analysis;
Risk analysis;
Legislative and regulatory analysis;
Contracting models and term sheet templates;
United States sources of supply;
Decision support model

Talking on the perspectives of gas demand, he said the investment prospects would be overtaken by growing industry demand within 10 years. New industries would crop up as a result of gas demand. Marine bunkering could be significant, but that would all be dependent on how SA positioned itself for the Convention for Prevention of Marine Pollution from Ships (MARPOL) in 2020. Passenger transport would only be for captive fleets.

On contractual models of development, he indicated that there was a bundled approach, and an unbundled one. Regarding the bundled approach, gas supply and power generation would all be bundled and various industrial users would have to purchase LNG from an international supplier. A gas company and a power company would be a single integrated company. Gas price regulation would be avoided, but the price of the electricity would be subject to price regulation. Concerning the unbundled approach, the domestic sale of gas would be done through a gas company. The gas project was a self-standing one, and Eskom would be one of the gas company’s customers (the anchor customer). This approach would allow for a situation in which the gas aggregator (GasCo) and the electricity generator (PowerCo) were independent of one another, and would reduce the concern over Eskom’s conflict of interest as a vertically-integrated company involved in the generation of electricity.

Mr Trikam also touched on small scale ecosystem development. He said the small scale market was not tied to heavy large infrastructure, and numerous developers would be emerging for Risk Mitigation Power Procurement Programme the (RMPPP) and the Renewable Energy Independent Power Producer Procurement Programme (REIPPP). The industry would be exploring resilience – pricing, power reliability and carbon emissions - and the potential opportunity for aggregators. Proposed actions involved undertaking stakeholder engagement, developing insight into gaps and demand, and identifying market development opportunities and systemic issues.

Going forward, they would continue with lobbying and advocacy for LNG importation by seeking clarity on the Integrated Resource Plan (IRP) 2019 implementation, including determinations for gas and the gas independent power producer (IPP) programme, liaise with project developers on opportunities from IRP2019, such as the RMPPP, and lobby for Saldanha to continue to be included in the gas IPP programme.

They would also carry on working with Transnet. DEDAT had a Memorandum of Cooperation with Transnet to develop the project further. The intent was for Transnet to submit an application to the Development Bank of South Africa (DBSA) for European Union (EU) funds for following up on development work. Transnet’s focus had been on undertaking infrastructure development work at Richards Bay through their transaction advisor.

Lastly, they would keep on working with Eskom by undertaking an analysis to support LNG importation and conversion of the Ankerlig power station to take up LNG, and this would include potential opportunities for a phased approach to large scale LNG infrastructure development.

Discussion

Ms N Nkondlo (ANC) wanted to find out if the type of projections and challenges that were being presented would be realised post-Covid-19, more especially when one looked at the current economic environment in the country. She asked what the implications were for local companies and local content, seeing that the US was financing the study and the project, and enquired if space would be opened up for other foreign countries. What were the current plans of Eskom and the Department of Public Enterprises, seeing that Ankerlig was going to be converted to LNG? Lastly, she wanted to establish if a skills audit had been done to meet the demands of the new project, and how much funding was needed to train for the required skills, because the presentation was talking of 13000 jobs that would be created by the project.

Mr Trikam responded that changes had been made to the projections. The challenge had been on how to offset the demand that had been existing with the one that was coming in. Discussions had been held with Saldanha’s major players, and the indication was that there would be significant investment coming in. Many investors had been assessing the impact of Covid-19 in the region. Adjustments would be made accordingly.

Regarding supply chain processes, there were requirements that had to be noted. Leveraging would be done on existing local experience and skills. The study had focused on areas where the foreign companies could help develop local ones.

On the conversion of Ankerlig to LNG, he said that Eskom had requested information on the matter. The information was available. The focus now was on the study, particularly the logistical requirements and opportunities on the conversion of Ankerlig. This would involve a virtual pipeline in the form of moving trucks and storage. That kind of work would be done with Eskom, and would include the facilitation of the conversion of the gas.

Concerning infrastructure-led growth and development, he said that in terms of the study, the consultants had looked at the skills gap analysis. Technical skills had been found to be lacking, but they would be developed. The gap skills analysis had been incorporated into the study.

Mr A Westhuizen (DA) commented that the presentation had not mentioned ArcellorMittal, which had also operated in the Saldanha region, even though other major players had been consulted. ArcellorMittal would be interested to know about energy saving costs. He asked if LNG would represent energy saving costs over electricity. For steel manufacturers, electricity seemed to be one of the cost drivers. He also wanted to know the extent to which other partners could be found to collaborate with Transnet on this project, because it appeared that Transnet was the major player. To what extent could the Western Cape government take the next step in the design of the pipeline for an environmental impact assessment? He asked if it would not be wise to consider the Infrastructure Development Act, Act 23 of 2014, because it provided for the facilitation of public infrastructure development and the bringing together of role players in a high level committee. How might this Act be of benefit to this project?

Mr Trikam replied that AccelorMittal was using LPG, and a specific type of gas. They could have replaced that with the use of LNG at the time, but due to closure, all the demand had fallen away. They had been approached by an independent consortium, but the initiative had not come to fruition. With regard to the involvement of other parties, engagement with various stakeholders had taken place to explore which parties would provide financial guarantees for infrastructure development, and they would have to make applications to Treasury for this scale of work. Through this engagement it became clear Transnet had developed a strategic direction for gas, hence the memorandum of understanding (MOU) of cooperation with Transnet was in place.

There was significant interest in the project in terms of the design and logistics, which was why the Department was working with Eskom for the provision of logistical operations in order to determine how to slowly feed gas into the Western Cape. His understanding was that the Infrastructure Development Act led to strategic infrastructure projects like Operation Phakisa, and through Operation Phakisa the fast-tracking process had been the strategic environmental assessment which had been specific to LNG pipelines, and this had been finalised after a year-long process where it was considered there should be a pipeline from Saldanah to Atlantis, and from Atlantis to Cape Town.

The Chairperson asked what could be done to fast-track the importation of the LNG gas, because the project had been the priority of the Western Cape government, especially when one considered the budget. What had been the progress so far when looking at the effects of Covid-19? She wanted to know how LNG could be beneficial for domestic use and how municipalities could be assisted in this regard. Was there a figure that had been given on indirect impact jobs? Which stations in the Western Cape could be quickly converted to LNG? She enquired if there was another source of funding for the project besides Transnet, and if there was a need for further legislation to be developed for the conversion of Ankerlig. How was the MOU with Transnet coming along, and how would the importation of LNG revitalise tourism and rail transportation in the project area? She also wanted to know if Eskom and Department of Public Enterprises had approved the submission regarding the conversion of Ankerlig to LNG.

Mr Trikam responded that their approach was to work on an anchor customer to be converted to gas, and that was what they had been doing to fast-track the process.

On domestic use opportunities, the City of Cape Town had undertaken a study to see the opportunities LNG could offer from a gas utility point of view. The opportunities came from a reticulated gas infrastructure, but it offered a diversity of fuel options. Aside from liquefied petroleum gas (LPG), it had LNG as an alternative. That supported greater diversity, which encouraged greater energy security. LNG was less pricey than LPG. LNG was naturally available, and could be extracted and transmitted.

Regarding the impact of jobs, the same model that was used had looked at both direct and indirect jobs. The 13 000 jobs to be created were both direct and indirect. More information would be sent to the Committee.

Concerning other stations to be used, in terms of Eskom’s request for information (RFI), they had looked Gourikwa, at gas operations in the Eastern Cape and KwaZulu-Natal (KZN), and two other power plants that were in private-public partnerships (PPPs) under the Department of Mineral Resources and Energy that could potentially be converted, and others that could be filled with LNG.

With regard to funding, the conversation with Transnet had been on identifying and securing the areas of work that were required in order to determine the amount of funding needed. He was not aware of anything that would be required in terms of developing a provincial piece of legislation. There had also been a good engagement with Transnet about the MOU, and the Department was paying attention to the study undertaken in order to look at the gaps.

On whether LNG would revitalise tourism and rail, he said it depended entirely on Transnet.

Ms Jo-Ann Johnston, Deputy Director-General: Economic Coordination and Stakeholder Engagement, DEDAT, said that when it came to procurement, there would be an open, transparent and fair process when the project was developing. There would be conditions on skills transfer in order to localise jobs. LNG was a direct energy source. It was about efficiencies, not only costs. It had properties that electricity did not have. There was potential to develop new industries that had not been existing in the province by having LNG. For example, ceramics needed boilers that could switch on instantly, something which one could not do with electricity, because it took longer to warm up.

It was projected the 13 000 jobs to be created would be a result of having LNG in the province, and the numbers would be much higher than currently reflected.

Ms Kaashifah Beukes, Chief Executive Officer (CEO): Saldanha Bay Industrial Development Zone (IDZ), said they were supporting the demand validations the presentation had talked about, and were looking at energy-demand analysis as the major focus over the next year and a half.

Mr Avi Singh, General Manager: Eskom, wanted to know what the timeframes were for the implementation of the Saldanha-Atlantis-Cape Town pipeline project. He also asked if there were any plans about developing Mossel Bay, seeing that Gourikwa was in that area, and wanted to know the timeframes for the completion of the of the whole LNG project in terms of fitting into Eskom’s plans. He commented that in terms of the open cycle gas turbines (OCGTs) that Eskom currently has, both Ankerlig and Gourikwa had installed duel-filled burners, and the turbines had been upgraded and could be operated on gas. What they had done was to identify who the role players were so that the plant could receive the gas. Currently, they were developing a business case to look at sourcing gas.

Ms Sue Lund, General Manager: Growth & Diversification, Transnet, said Transnet was still very committed to the project and was familiar with the study, which was viewed in the wider context of LNG demand. Transnet had been working on inter-port solutions for identifying the least-cost infrastructure configurations for port infrastructure development. LNG would be available to the end user at a low cost. Infrastructure costs were key to LNG, and it was important to keep the costs efficient. Once LNG started circulating in the market, the uptake would be significant. The LNG prices were competing with diesel and LPG.

Transnet was working closely with the Department of Mineral Resources and Energy (DMRE) to find solutions, and the port authorities had port development plans which reflected the importation of LNG to Coega, Richards Bay and Saldanha. In terms of project preparations, it was important to have a verified demand in order to design a commercial solution. She said Transnet socially supported the efforts of the Western Cape government to work with Eskom on Ankerlig, and in terms of gas to power, the DMRE was busy developing a plan on this project which the Committee needed to be updated about.

Regarding the port authority and the regulatory environment, the port authorities were currently working on a competitive bidding process on licensing rights to develop an LNG port terminal and concession agreements. Another area of concern was involved the National Energy Regulator of South Africa (NERSA) in terms of gas regulations, so there were moving parts on the regulatory front both in terms of DMRE’s gas to power determinations, and NERSA’s provision of gas storage and transmission, and the work of port authorities on regulations and awarding of port rights. So there was a renewed focus by all parties involved to try to ensure LNG landing was in the SA economy in the foreseeable future.

Concerning engagement on funding options, Transnet was continuing to explore options for project preparations.

On LNG revitalising the rail sector, she said that virtual pipelines would be an important part of the LNG uptake in the economy. This meant the movement of gas in containers, either by road or rail. This had been extensively used in Europe. This was an efficient way to get LNG to areas that were not on the pipeline route. From a rail point of view, they had identified there would be an opportunity to move LNG containers on rail. In Transnet’s port planning for LNG, they were making sure there would be sites where truck loading on to rail would take place from the terminal to the port.

With regard to LNG as an energy source for rail, there was work internationally on using LNG on locomotive traction, but it was not a widely used technology and there were no plans to use LNG as an energy source for rail traction. However, it could not be ruled out as a future potential.

Mr Jabu Sithole, Executive Manager: Growth and Diversification, Transnet, commented that Transnet was busy with the Richards Bay project, and looking at inter-port solutions. The scope of work had been updated to bring LNG to all three identified ports that required gas -- Coega, Richards Bay and Saldanha -- to ensure the gas landed in SA at the lowest cost, because diesel and LPG were very expensive.

Transnet had looked at 12 scenarios. With the environmental challenges and carbon tax that was coming in, coal would start becoming more expensive, because if one was using coal one had to come up with ways of dealing with one’s carbon footprint. LNG, on the other hand, was the lowest carbon footprint energy source in terms of fossil fuel.

He said the 13 000 jobs to be created were related to infrastructure. The fact one was bringing in gas also created a multiplier effect in the economy, because one could move the gas through the virtual pipeline across the country, and the fact that one had got diesel running to Ankerlig, the LNG would help with fuel costs and the electricity tariffs that would be paid.

On whether Transnet would go alone, he indicated that they were planning to collaborate with the private sector. Some of the technologies had not been implemented in SA, which was why there was a need to collaborate, because these technologies had been used in other parts of the world, and this would also help in the development of skills in SA in order to grow the economy of the country.

Ms Johnston said DEDAT supported the work that was being done by Transnet and the development that had been added to Mossel Bay by Eskom. She stressed that LNG as an energy source was more effective than LPG and coal. This would give rise to industries and make them more sustainable because of LNG efficiencies as an energy source. LNG as an energy source was an anchor tenant for electricity. Having LNG would strengthen the manufacturing sectors, especially if located in Mossel Bay and Saldanha Bay, if they were the preferred ports.

Mr Trikam explained that the three ports had been identified because they were deep sea ports, among the other reasons presented, because they would be able to accommodate LNG vessels.

Regarding time frames, he said that when the study was undertaken in 2018, it was anticipated the project would be completed by 2024, but that had been ambitious. The development path for the projects and pipelines was part of the work they wanted to explore with Eskom. The volumes that were required at an operational profile for Ankerlig at a certain period of time would start changing the amount of gas and infrastructure changes required for that amount of gas.

Mr Van der Westhuizen remarked that with regard to the uptake of LNG by Ankerlig, Eskom had gone to great lengths to predict the amount of power that would be needed. He therefore wanted to know what the predictions would look like when switching over to LNG when considering the future of Ankerlig, and what had been taken into account when the study was undertaken.

Mr Trikam said the feasibility study had looked at under-utilisation factors, including fuel-cost savings from Ankerlig’s point of view. The information on this matter was in the public domain.

Ms Nkondlo commented that in projects of this nature, it became important for the government to quantify the jobs created. More clarity was needed on the socio-economic benefits and challenges. It was important to know the stakeholders involved in this project, and what the preferred model was between bundled and unbundled approaches. She wanted to know the difference between the two studies that had been carried out by the City of Cape Town and Western Cape government. She further wanted to establish who the lead implementer or agent was, driving the verification demand.

Mr Trikam said the preferred approach was the one that got the gas quickest to the market. The combination of the two models was being pursued at the moment. The unbundled approach was the preferred approach, but a provision would be also made for the bundled approach. He said the verification demand was largely dependent on the existing studies within Eskom and Transnet.

The lead implementer for Ankerlig would be Eskom, and it also depended on when Eskom would release requests for proposals (RFPs). Transnet would be the lead implementer for the large scale infrastructure solution, which was the inter-port solution. He added that the study from the City of Cape Town was premised on the idea that gas would come from Ankerlig. It had looked at the benefits of utilising LNG and had pointed to some existing diesel generators and turbines.

Mr Singh said Eskom had been embarking on a commercial process, but the information was sensitive and could not be divulged to the Committee. Eskom had concluded the move from diesel to LNG.

Ms Lund indicated Transnet’s approach had been for an unbundled approach to supply multiple offtakers. A significant anchor was necessary.

The Chairperson wanted to find out how the Saldanha IDZ would assist in the provision of the high skills that would be needed in this project, because the IDZ had indicated to the Committee it had been struggling with the sector education and training authorities (Setas), and wanted to know progress regarding this matter.

Ms Beukes said the Saldanha IDZ had been playing a role in the marine and gas skills set, but not in the engineering ones which were in demand. Artisan skills could be provided. Innovation technology had been introduced to some colleges, even though the IDZ still had to engage with some high schools regarding the proposal made to the Department of Basic Education concerning the revision of the maths curriculum. She also pointed out there had been delays in implementing programmes targeted for the first quarter. Because of the lockdown, co-funding was still required and engagements with the government would continue.

Mr Trikam added that there was a considerable need for skills to be developed. There were some pockets of excellence that exised, but the demand for more skills was great.

Committee resolutions

The Committee resolved to undertake oversight visits to engage with stakeholders like PetroSA, MossGas, and Gourikwa, and to be briefed on skills development in maritime and gas infrastructure in the Western Cape. It was also decided the DMRE should be invited to brief the Committee on IPPs. The Committee would also undertake an oversight visit to Atlantis to see the GreenCape initiatives, and to see the place where development was going to happen at Ankerlig.

The meeting was adjourned.