Department of Minerals and Energy on the Gas Bill: briefing

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The aim of this report is to summarise the main events at the meeting and identify the key role players.  This report is not a verbatim transcript of proceedings. 

Economic affairs select Committee
23 October 2001
DEPARTMENT OF MINERALS AND ENERGY ON THE GAS BILL: BRIEFING

Chairperson: Mr M. Moosa (ANC)

Documents handed out:
Gas Bill [B 18B 2001] (Department of Minerals and Energy)
Gas Bill: Comments on Submissions: Chapter One (Department of Minerals and Energy)
Gas Bill: Comments on Submissions: Chapter Two (Department of Minerals and Energy)
Gas Bill: Comments on Submissions: Chapter Three (Department of Minerals and Energy)
Gas Bill: Comments on Submissions: Chapter Four and Schedule One (Department of Minerals and Energy)

SUMMARY
The Select Committee met for the presentation and discussion of the Gas Bill.  The representatives from the Department of Minerals and Energy were Mr T. Surridge, Departmental Director of Coal and Gas, and Mr A. Dykes, Departmental Consultant.  Mr Surridge presented the Bill's background and rationale, and he and his colleague took questions from Committee members.  The Committee agreed to examine the Bill in more detail the following week.

MINUTES
The Chairperson briefed the Select Committee on the Gas Bill, saying that it had been in Parliament for some time, and there had been a series of public hearings.  He reminded the Committee that the Bill had been controversial when debated in the National Assembly.  He then asked for the meeting to commence with a presentation by the Department of Minerals and Energy and invited members to interrupt the presentation at will with questions and comments on specific issues.  The Chairperson then introduced Mr Surridge, Director of Coal and Gas for the Department, and Mr Dykes, Departmental Consultant.

Presentation on the Gas Bill
Mr Surridge began by stating that he was presenting on behalf of Dr Crompton, Chief Director of Hydro Carbons, Department of Minerals and Energy.  The Gas Bill had been under consideration and construction since 1994.  He explained the overarching rationale of developing a bill to regulate South Africa's natural gas industry and, accordingly, the specific make-up of the Bill being tabled.  Mr Surridge remarked that the South African energy market was dominated by coal, with 75% of the country's energy being coal-based.  The natural gas development in Mossel Bay, South Africa's largest natural gas reserve, only comprised a small percentage of the national figures.  He emphasised that, according to these numbers and in light of maintaining a long-term energy supply, it was essential to look at diversifying South Africa's energy industry.  He explained that existing gas infrastructure was primarily in the northeast, in Gauteng Province.  The industry was suggesting the development of pipelines down from Maputo, Mozambique, and in the west, down from Kadu, Namibia.  These were only preliminary proposals, but, if they were pursued, there would be no government regulation in place.   

Mr Surridge explained that the Gas Bill was divided into four parts.  He stated that the broad objective of the Bill was to promote orderly, sustainable development in the gas industry.  The Bill established a Natural Gas Regulator for industry oversight.  In addition, the Bill designed a system for licensing energy industry actors, activities (i.e. construction/conversion, operation, trading) and facilities, and defined the exceptions to the rules.  Mr Surridge noted that the Department was still developing the part of the Bill that dealt thoroughly with the rules and regulations.  He then spoke briefly on Clause 36, regarding the Mozambique Pipeline Agreement.  According to this Clause, the Gas Regulator was bound to the pipeline until ten years after gas was first received from Mozambique.  Mr Surridge informed the Committee that the Department expected gas to be received in 2004. 

Mr Surridge said that his presentation had been only a quick run-through of the Bill.  He suggested that he could either proceed to go through the Bill clause by clause, or the Committee could pose specific questions.

Questions and Clarification
The Chairperson asked for clarification on the regulations. 

Mr Surridge responded that distributors had to register; reticulators and small-scale consumers in rural areas that were not on the national grid did not.

The Chairperson asked him to explain his answer the other way around.

Mr Surridge reiterated that the only people required to register were those who wished to transmit, store, distribute, or trade in natural gas.  He added that the processes of liquefaction and regasification also required registration. 

The Chair asked which currently operating companies would need to register.

Mr Surridge said that Sasol and Petronet would need to register. He also noted that registration requirements would apply to natural gas importers.  He explained that, according to past laws, local authorities regulated reticulators.  These laws typically affected only households, bakeries, and other small businesses that relied on natural gas energy.  The Bill proposed by the Department focused solely on the transmission of gas, defined as the movement of bulk gas from one place to another. 

A Committee member asked Mr Surridge what he meant by saying that natural gas was not commonly used, what the significance of that was and how long licenses would last.

Mr Surridge responded that South Africa relied heavily on energy from coal and the only significant natural gas trader was Mossel Bay.  He noted that Sasol converted coal to natural gas, but this was a different situation.  He also noted that the Department was aware of potential oil and natural gas fields offshore of the Western Cape, however these were not proven.  To put the size of the fields in perspective for Committee members, he explained that the Mozambique field that was attracting South African industry put out 120 million kilojoules per year, equaling less than 4000 megawatts, only 2000 of which were usable.  This amount was half the size of a major power station.  In answer to the question on the duration of licenses, he responded that licenses would be current for 25 years.

A member asked Mr Surridge to speak on methane gas. 

Mr Theron (DP) asked Mr Surridge to expand the price capping mechanism.

The Chairperson asked whether it was practical to forge European partnerships in natural gas trade, considering the plummeting value of the Rand. 

It was asked what the lifespan of a pipeline was.

Mr Surridge responded that methane extraction was really a mining issue.  He proceeded with the other questions by saying that scientists should ascertain what the lifespan of a natural gas field might be and, in turn, whether the field would be worth developing. 

The Chairperson asked if, for example, the lifespan of a field was 25 years, what would happen to the investment after that time expired.

Mr Surridge responded that, while the lifespan of a particular field might be 25 years, pipelines would last 50 to 60 years.  Because the infrastructure was expensive, it was expected that infrastructure from one field would be transferred to another.

Mr Dykes interjected that pipelines could easily last 60 years, and it was cost-efficient to transfer the infrastructure from one location to another.  Regarding prices, he continued, there were two options: to follow a market pricing system or to cap prices.  The proposed Bill accommodated both methods.  Market prices would reflect those of the six European partners mentioned in the Bill.  Mr Dykes said that this was important because it would be a healthy and competitive environment for the South African industry.  In turn, because of the exchange rate, the “capping� method would rise quite a bit, depending on the value of the Rand relative to other currencies.  The “cap� would therefore also be dependent on the market price of gas.  He reminded the Committee that the price cap would be the highest price that the producer could ask for.

The Chairperson said that he was concerned.  Why should Parliament support the exploration and utilisation of other energy sources when South Africa had energy that could be priced outside the international market?

Mr Dykes acknowledged that the Chairperson's suggestion would be good government policy, however, he reiterated that oil would not compete with South Africa's coal industry.  Where it would compete, moreover, would be in markets that were already linked to the US Dollar. 

Mr Surridge explained that, if South Africa were to discover oil, it would have to be more than South Africa could consume. 

Mr Setona (ANC) said that price capping had been an issue for South Africa before.  The point of closing the “top� was for ensuring access to a product.  There was, in fact, a point to creating the cap.  Regarding the use of outside pricing mechanisms, the member commented that South Africa has had to use import-based prices, and, if South Africa made better contributions to the market, it could affect the consumer price on its own. 

It was asked whether the domestic gas price would be the equivalent of the export price.

Mr Surridge stated that South Africa was not likely to export gas.  At most, gas was intended to supplement South Africa's energy supply, not replace it.

Mr Dykes explained that gas was moved in two ways: by pipeline and by ship.  Both methods were too expensive for the South African industry. 

The same member apologized for misunderstanding but asked the presenters to return to the issue of domestic versus export pricing.

The Chairperson explained the situation for the member.  He used an analogy, pretending export gas was doughnuts.  He then repeated his own question to the presenters of why South Africa was capping the price of gas in European terms?  Why was the cap not linked to a market value pricing system?

Mr Surridge said that if South Africa was able to produce its own oil, the scenario would be completely different.  However, as it was, the country did not have proven reserves of the natural resource.

Mr Dykes added that gas-on-gas competition required pipelines to be linked.  This was possible for the United Kingdom, for example, but not for South Africa.

A member asked for someone to explain the difference between LPG and natural gas. 

Mr Dykes responded that LPG was another gas, propane.  Natural gas could not be converted to a liquid form like LPG; therefore, one would not necessarily be able to sell natural gas if it were priced higher than LPG.

The Chairperson asked for the Committee to move on.  He asked what the implications of the Gas Bill would be for the electricity industry, Eskom in particular, and what the possibilities were that South Africa would be able to shift substantial energy consumption to gas.

Mr Surridge answered that the last few years had witnessed vibrant developments in the natural gas industry.  He thought that gas would supplement other energy sources in the country.  He explained that Eskom had some of the least expensive electricity in the world because it had excess capacity.  As its excess capacity ran out, electricity prices would naturally rise.  The Department predicted this to happen later this decade, in 2007-08.  The Eskom plant, in turn, would expire and have to be replaced in 2020.  At that point, the industry would take a nosedive.  Mr Surridge stated that there was no clear-cut answer to the dilemma.  However, although it might compliment the uses of petrol or heavy fuel, gas alone could not replace coal.  He added that people would shift to gas where it offered unique environmental benefits.  There were “niche areas� that gas could penetrate.  Also, there was the possibility that new industries could develop because of the option to utilise natural gas. 

The Chairperson interjected that Sasol should note and act on the fact that pricing was not the only issue at stake.  Key players in the industry should also be aware of the criteria for sustainable development.  He then asked the presenters to speak on nuclear energy.

Mr Surridge informed the Committee that South Africa would not see another Pebble Bay Modular Reactor (PBMR).  While the country took pride in its only nuclear power plant, it would not see another one like it for some time.  He explained that it would be ten more years before PBMR was even certified to run.  He reminded the Committee that, according to the Kyoto Protocol, South Africa was not under obligation to cut down on greenhouse gas emissions.  In addition, the price of carbon had gone down.  This was a result of both the United States pulling out of the Protocol and the recent introduction of a less expensive carbon cleaning mechanism.

Mr Dykes explained that having gas on the market would not cause a decline in the coal industry, though it may cut growth.  He reiterated that natural gas had multiple uses and unique qualities such as clean emissions which coal did not.  He asked the members to compare South Africa's natural gas use to overseas consumption which hovered between twenty and twenty-two percent.  In some areas of South Africa, he noted, it was already expensive to purchase coal.  He stated strongly that he felt there was a great future for natural gas in South Africa.

Mr Setona said that, returning to the issue of price, it was actually quite complicated.  If members did not address it properly they might end up having the wrong argument.  Mr Setona said with feeling that South Africans wasted electricity because they had too much, and that was an important issue to think about.  Playing devil's advocate, he stated that it also did not make sense to workers who were not hired because an employer said “Not now, later.�  Coal miners would inevitably lose jobs.  It was essential to look at it from this angle, and to simultaneously be able to anticipate the future.  In this case, when coal finished, then what?  At the end of the day, South Africa should be able to say what the best option was for everyone.

The Chairperson stated that the Committee needed to examine the Bill thoroughly, and they would set up a meeting for early the next week, on Tuesday 30 October or Wednesday 31 October.  The meeting was adjourned.       

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