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FUTURE ROLE OF GAS IN

SOUTH AFRICA’S POWER AND INDUSTRIAL

DEVELOPMENT MIX

Commissioned by Delta Natural Gas (Pty)Ltd

September 2015

ECONOMETRIX

www.econometrix.co.za

ANALYSIS

Rob Jeffrey

MODELS & FORECASTING

Dr Johannes Jordaan

DATA AND TECHNICAL SUPPORT

Tina Koziol

Ilse Fieldgate

Monique Levine

Commissioned by Delta Natural Gas (Pty) Ltd

Copyright ©2015 Econometrix (Pty) Ltd

No portion of this document may be reproduced in any manner, electronic or otherwise, without written approval of Econometrix

(Pty) Ltd.

CONTENTS

OBJECTIVES AND ABSTRACT ......................................................................................1

Objective ............................................................................................................................... 1 Abstract ................................................................................................................................. 1

CHAPTER 1 ................................................................................................................................. 3

FUTURE OF ELECTRICITY AND ENERGY IN SOUTH AFRICA ............................................................................................... 3

Introduction ........................................................................................................................... 3 The key issues ...................................................................................................................... 3 South Africa’s primary objectives .......................................................................................... 6

Future electricity generating capacity .................................................................................... 7 Electricity generation mix ...................................................................................................... 8

Planned generation mix by 2030 ....................................................................................... 8 Recommended generation mix by 2030 .......................................................................... 11

CHAPTER 2 ............................................................................................................................... 14

OVERVIEW OF NATURAL GAS IN SOUTH AFRICA ........................................................................................................... 14

Introduction ......................................................................................................................... 14 Potential gas developments ................................................................................................ 15

South Africa’s natural gas reserves ................................................................................. 15

Potential locations for gas-fired power stations and gas-related suppliers ...................... 18 Benefits of development of gas industry in identified locations .................................... 19 Challenges in developing gas industry in identified locations ...................................... 20

CHAPTER 3 ............................................................................................................................... 21

IMPACT OF NATURAL GAS DEVELOPMENT IN SOUTH AFRICA ...................................................................................... 21

Introduction ......................................................................................................................... 21

Benefits of developing a natural gas project in South Africa ............................................... 21 Impact on electricity supply .......................................................................................... 22

Infrastructure ................................................................................................................ 22 Environmental impact .................................................................................................. 23

Other benefits .............................................................................................................. 24

Impact on upstream and downstream industries ................................................................. 24 Downstream impact ......................................................................................................... 25

Gas for OCGT .............................................................................................................. 25 Shale gas ..................................................................................................................... 26

Downstream and upstream economic impact .................................................................. 26

Construction and operational phases........................................................................... 27 Challenges in developing a natural gas project in South Africa .......................................... 28

Customer base ............................................................................................................ 28 Infrastructure ................................................................................................................ 28 Lack of large-scale construction experience ................................................................ 28

Risk to Square Kilometre Array (from fracking ............................................................. 28

Dangers of fracking to the Karoo community ............................................................... 28

Potential economic impact of increased electricity generation ............................................ 29 CHAPTER 4 ............................................................................................................................... 31

CONCLUSION .................................................................................................................................................................. 31

Objectives & Abstract

© Econometrix Page | 1

OBJECTIVES AND ABSTRACT

Objective

This summary report focuses on the essential role that gas could play in the power mix when considering South Africa’s

key economic, political and social objectives and the growth rates required to meet these objectives. Econometrix has

used previous research and/or conducted reports as the basis for this summary.

The major objectives of the country, namely poverty alleviation, reducing levels of unemployment and raising standards

of living, considered when making recommendations regarding alternative power generation mixes. The report took into

examined the economic impact of using various alternative energy sources for electricity generation that are readily

available for use in the South African economy, namely coal, gas, nuclear and three renewable sources, namely wind

power, solarCSP and solarPV. The costs of currently available dispatchable electrical power generation sources that can

be used to supply South Africa’s electrical power demand in a stable and sustained manner determine the electricity

prices that should be set for both business and domestic use in South Africa and in turn affect sustainable economic

growth. The report has taken into account variability and/or intermittency costs and all hidden costs. External costs have

been excluded. In the case of renewables, intermittency and hidden costs raise the real cost of sustainable dispatchable

power substantially.

By adopting this approach, one can actually cost the structures for locally currently available dispatchable electrical power

generation options that can supply South Africa’s time-of-day electrical power demand curve in a stable and sustained

manner on an equal cost basis. From this basis, one can later move to consider other considerations, objectives, opinions

and personal preferences regarding alternative assumptions that can be made for the various externality, environmental,

climate change and other costs that may or may not exist. Other expert opinion can be obtained to take the matter

further.

It is anticipated that the study could make an important contribution to the major decisions being made regarding

electricity, energy policy and planning issues in South Africa.

Abstract

This report has investigated South Africa’s electricity needs for the future with particular reference to its base load power

requirements. The analysis has taken into account the primary political, social and economic objectives of the country,

the cost of the various electricity generating technologies and the country’s future economic requirements in order to

meet its primary economic objectives. The analysis concludes that South Africa cannot economically afford to move

rapidly and extensively towards expensive, variable and unpredictable energy technologies such as renewables.

In the case of nuclear power, the economic and financial difficulties of expanding the use of this proven and reliable

technology on a major scale are being underestimated, as its capital cost, however financed, is not affordable for the

country. Moreover, it has proved to be a more expensive technology than coal. Whilst each type of technology has an

important role to play, in the case of renewables, the planned substantial expansion will have costly consequences for the

country because of lower achievable future economic growth rates.

Objectives & Abstract


South Africa needs to meet its economic political and social objectives of reducing poverty and inequality and raising the

standard of living of all its citizens by maximising its economic growth rate. The analysis concludes that natural gas must

play a central, essential major role in the energy mix going forward if these objectives are to be met. It is the cheapest

alternative to coal and nuclear, offering security of supply at competitive prices to the base load power mix.

It also plays the important role of supplying a reliable source of power for peak demand periods, the periods when

renewables are not generating electricity, and adds to the country’s essential reserve capacity. It contributes to

improving grid stability whilst reducing South Africa’s carbon emissions. It is a critical existing proven technology. Gas

must play an important role in the energy mix going forward, whether South Africa goes for a policy of high carbon-low

cost-high growth technologies or for lower carbon-higher cost-lower economic growth nuclear or renewable

technologies. Gas offers considerable benefits. It is an essential technology whichever technology or energy mix option

South Africa chooses. South Africa needs to have a national gas plan to increase the use of this energy source for power

generation and to use it in many other upstream and downstream applications. It forms the basis of industrial

development in its own right. The report makes firm recommendations regarding the future use and regional

development of imported and potential gas resources.

ACKNOWLEDGEMENTS

This report is based on the research done by Econometrix (Pty) Ltd and has utilised previous research completed

by many other sources, including Econometrix (Pty) Ltd

1 Future of electricity & energy in SA


CHAPTER 1

FUTURE OF ELECTRICITY AND ENERGY IN SOUTH AFRICA

Introduction

The report analyses a number of the most important issues involved in making decisions regarding the electricity and

energy future of South Africa. This chapter will summarise certain key issues and then examine the key alternatives that

should realistically be considered if the country is to meet its primary objectives for its citizens.

The key issues

The analysis on which this summary is based drew important conclusions and made recommendations including:

There is a major structural problem in the economy where the goods-producing sectors, namely mining,

manufacturing, agriculture and agricultural processing are growing far too slowly compared to the services sectors,

namely transport, retail, community and government services.

The lack of security of supply, the higher cost of electricity and the uncertainty regarding both future supply and

price are major contributors to lack of investment and slow economic growth.

A country cannot move from being a developing country to an industrialised country through policy changes. This is

a process.

Slow growth in the goods-producing industries leads to slow overall economic and employment growth. This

primarily affects the less skilled in the work force.

The structural imbalance in sectoral economic growth will lead to continued low sustainable economic growth, low

employment growth, increasing current account deficits, continued depreciation of the Rand and higher levels of

inflation than amongst South Africa’s trading partners.

The complex impacts of unnecessary real price increases in electricity would result in a further deterioration in the

current account of the balance of payments, already at an excessively high level, and lower economic growth.

Renewables in the form of wind and solar suffer from great variability and are not predictable to any great extent.

They only supply power approximately 30% of the time.

Renewables must have full back-up electricity either in the form of CCGT, OCGT or diesel or excess power from other

sources.

At this stage of technological development, the relative costs of delivering stable dispatchable power of different

sources of energy are approximately: coal 100, nuclear 126, CCGT 143, wind 143, PVsolar 157, CSPsolar 212, and

OCGT 281.



Until storage costs come down, these relative costs are unlikely to change significantly in the near future. One

cannot put the future of the economy into such forecasts. Wind and solar are therefore not suitable for base load

power unless they are fully backed up by other power sources.

Wind and solar are considerably more expensive than coal at this stage of economic development and excessive

development of these sources of power will increase electricity prices significantly, which will further slow down

economic and employment growth.

The experience overseas supports the above arguments concerning renewable policy. There are substantial

question marks regarding the policy in other countries and Germany’s “Energiewende” is a well-documented case in

point. Electricity prices there are amongst the highest in Europe because of the move to renewables. As a result,

certain key electricity-intensive industries are considering moving to the United States.

Many other countries including India, Bangladesh, Indonesia and China have a clear focus on continuing their

industrialisation programmes. Whilst they do have renewable and nuclear programmes, they clearly focus their

major electricity generating programmes based on fossil fuel and primarily coal fired power stations. This is

anticipated to continue for the foreseeable future to 2030 and potentially beyond.

The total potential economic impact on investment by the introduction of the greater use of renewables, more

expensive nuclear, a carbon tax and their impact through higher input costs flowing through the economy is set out

below.

It must be made clear that the impact on investment includes the loss of confidence caused by various policies affecting

the business investment climate in South Africa.

With the correct policies and adequate and secure electricity growth, South Africa should have a potential sustainable

GDP growth rate of a minimum of 4.1% per annum or more. As a result of a number of policy issues, insufficient

security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables

and other investment adverse policies, South Africa’s sustainable GDP is unlikely to exceed 2.5% per annum and has

recently dropped to 2.0%.

This will have a detrimental impact on the country’s goods-producing industries, particularly mining, mining

beneficiation, manufacturing, agriculture and its agro-processing sectors. By 2030, this could result in a GDP of

between R1.0 trillion and R1.4 trillion less than what should be achieved, whilst employment levels could be

approximately 5.0 million lower than the levels actually possible.

South Africa’s economic growth rate is stuck in the low region of emerging countries’ economic growth range at

approximately 2.5% per annum whereas other countries classified as emerging economies have economic growth

rates exceeding 4.5%. Many of the current policies affect labour, namely BEE, affirmative action and minimum wage

rates drive labour-saving investments. Driving a more green economy artificially through a carbon tax and other

disincentives for business forces higher prices into the system. They will not create a more labour-intensive

economy. In fact, they will do exactly the opposite. They discourage South Africa as a business destination and will

reduce investment growth, not only in major developments, but also in smaller more labour-intensive businesses.



Many countries are not endowed with the natural energy and other resources that South Africa has in abundance.

Clearly, something is radically wrong with the country’s political, social and economic policies and its energy and

electricity generation policies.

If introduced, carbon tax could contribute to the country’s weak economic performance. More particularly, it would

make South Africa’s important goods-producing sector less competitive. This would cause further structural

problems for the current account of the balance of payment, which already has a substantial deficit.

Over 70% of South Africa’s exports come from the goods-producing sectors. South Africa is a well-traded economy

with a high import and export component. Exports in the long run pay for the high import demand in a sustainable

manner.

The planned major move towards more expensive nuclear and particularly renewables will be just as damaging to the

economy.

Superficially, it would appear one should be gratified to see the World Economic Forum's 2015 Global

Competitiveness Index (GCI) which compares 140 countries, lifting South Africa's ranking in the Index quite sharply to

49th from 56 last year but it fell 11 places the previous year. However, the number of countries compared has been

reduced from 144 to 140. There was also some improvements in the ranking of the macroeconomic

environment, from 89th to 85th

Significantly, and more important, all factors affecting real goods producing ability have remained poor or have

deteriorated. This does not bode well for attracting and increasing investments in the critical mining, manufacturing

and agro-producing industries. There was deterioration in the ranking of infrastructure, from 60th to 68th.

Specifically, the country's ranking in terms of quality of electricity supply fell steeply, from 99th last year, to

116th this year.

The South African economy has been bottom in terms of cooperation in labour-employment relations for a number

of years. Although the ranking improved from 144th to 140th, this was entirely because the sample of countries

analysed was reduced from 144 to 140.

There was also deterioration in ranking in respect of the effects of taxation on incentives to work, which had been

one of the positive elements of the labour market environment. The ranking in this regard deteriorated from 15th to

30th. What is also very disturbing was the sharp deterioration in the rankings of the country's capacity to retain

talent and to attract talent, from 50th to 61st and from 39th to 46th respectively.

The economic realities of developing economies such as South Africa are that, for the foreseeable future, these

economies require security of supply of electricity at the most cost-effective possible prices in order to develop their

energy-intensive goods-producing industries and raise their economic growth rates in a sustainable way and thereby

their standards of living in a modern competitive global economy.

Producing electricity at the lowest, efficient, cost-effective price with security of supply is the single biggest

employment-generating decision policy-makers can make.



South Africa’s primary objectives

Econometrix believes that the country should give priority to its three primary economic, political and social objectives,

namely the need to:

reduce unemployment

reduce poverty

reduce inequality

South Africa needs to focus on its key objectives and develop a realistic electricity generation energy mix in order to

achieve these policies even if this means giving other objectives a far lower priority until these key primary objectives

have been achieved.

The policy that is best able to achieve these objectives is to maximise the economic growth rate of the country bearing in

mind the huge richness of resources and the limited access to capital. The GDP growth and employment figures show

that a strategy focusing on growth in mining, manufacturing, and agro-processing will employ considerably more people

than a strategy that continues with current trends fostering unsustainable services sector growth.

Higher economic growth rates lead to higher employment levels and thus to improved standards of living. If supported by

sensible social and economic policy this is the best way to fight poverty, inequality and achieve transformation. Higher

economic growth allows higher tax levels to support social grants, improve education, better medical care and many

other factors associated with a better standard of living.

In order to achieve higher economic growth rates, an essential element any industrialising society is higher growth in

energy and in particular in electricity. Not only this, but in a still industrialising economy, this is base load electricity,

which must be defined as having two elements: security of supply at the lowest achievable price.

In summary: South Africa requires base load electricity growth, offering security of supply at the lowest possible price.

Further aspects that are important to note:

Electricity is a necessary, but not a sufficient condition for economic growth.

Supporting economic, social and political policies must be in place for higher growth to be actually achieved.

However, higher sustainable growth cannot be achieved without higher electricity growth. This report focuses on the

electricity needs of the economy and it is now possible to start defining the correct electricity generation energy sources

that will allow this to occur. It is necessary first to consider the electricity-generating policies of other high growth

emerging or developing countries and importantly the policies they are planning to use going forward.



Future electricity generating capacity

Energy and electricity-generating capacity has to be increased - matters of the highest priority are:

Firstly, to restore the target reserve capacity, which in this document is set at 15%.

Secondly, to increase capacity to cater for future growth.

Econometrix believes that:

The IRP documents, which were released, based on recent forecasts, show that there will be insufficient electricity

generating capacity from 2020 onwards.

Because renewables only provide power approximately 30% of the time due to their variability and unpredictability,

they will require additional back-up power of approximately a further 18,000MW.

The price of electricity will increase by a minimum of 20% in real terms because of the major move towards more

expensive nuclear power and renewables, which will slow down economic growth. This excludes the effect of

carbon tax should that be introduced as well.

The increase in the real price of electricity required will result in a decline in the economic growth rate of the country

to well below its potential of 4.1% and higher targets of 5.5%.



Electricity generation mix

The map below gives an indication of the position of power stations in South Africa and of the transmission lines.

Exhibit 1: Eskom Power Stations

Source: Eskom

Planned generation mix by 2030

This chart (slightly outdated) gives an indication of the current plans regarding Eskom electricity generation in 2030.

Chart 1: SA Electricity capacity in 2030 (MW)



Source: Eskom

The generating capacity totals 89,532MW and there are other later changes in the estimates of the current electricity

generating capacity and mix set out below.

Table 1: Current and planned generating capacity to 2030

Current and planned electricity generating capacity to 2030

MW Current Planned 2030

Coal 37,,780 15,850 42,728

Decommissioning 0 -10,902

Coal (Municipal) 1,080 -1,080 0

Nuclear 1,940 9,600 11,540

CCGT gas 18 2,370 2,388

Wind 824 7,618 8,442

SolarCSP 100 1,000 1,100

Solar PV 927 7,475 8,402

Hydro 600 0 600

Imported (Mozambique) 1,500 2,609 4,109

OCGT 2,426 3,910 6,336

Other 70 300 370

Total 47,265 38,750 86,015

Pump Storage 1,400 1,332 2,732

Total Capacity 48,665 40,082 88,747

Source: Econometrix

According to these figures:

Base load power, defined as coal and nuclear, is due to decrease from 86% of capacity (excluding imported,

hydroelectricity and storage), to 63% of capacity

The primary increase has come from renewables, defined as wind and solar which have increased from 1,851 MW or

4% of capacity to 17,944MW or 21% of capacity

This leaves the country with a major problem. As has been analysed elsewhere, wind and solar:

are unreliable, intermittent and unpredictable; they basically only deliver power 30% of the time

their true costs or dispatchable power costs are substantially more expensive than coal; wind is 43% more expensive

than coal, PVsolar is 57% more expensive and CSPSolar is 112% more expensive or more than twice the price of coal

nuclear is 26% and CCGT’s approximately 43% more expensive than coal

Despite the substantial increase in more expensive nuclear power, additional generating capacity will need to be added in

order to overcome the fact that wind and solar need 100% back-up power for each MW of nominal capacity that they are

rated for. The main electricity generating power technology will be inadequate to service demand in a reliable manner in

a still industrialising country. In addition, there will be significantly higher electricity costs.

The chart below gives an indication of the likely profile that could result from the planned electricity generation mix.



Chart 2: Estimated profile of planned mix

Source: Econometrix

As illustrated above

It can be anticipated that this mix will generate insufficient electricity, particularly at peak periods. This could

cause disruptions to industry and loadshedding with all the negative investment and employment consequences

previously discussed and currently being experienced.

Peak demand is estimated at 78,000MW should economic growth record approximately 4.1% per annum with

electricity growth set at 3.2% per annum.

The GDP growth target laid out in the National Development Plan (NDP) is 5.5%, but given the country’s human and

natural resources, the potential should be approximately 6%. Current growth is stuttering along at about 2%.

The country is in a relatively poor economic position. This is only partially because of global economic conditions. Major

factors are poor economic policies not supporting business and economic growth and also inadequate electricity capacity

and supply. The latter shortfall, as set out in the above chart, is set to continue. The growth potential of the country

should be close to that of China or at least at the level of 5.5% as indicated in the NDP. This growth target is not possible

without higher electricity capacity growth. India’s economic growth target is a minimum of 6% per annum. Their planned

electricity growth to reach this target is 6.1 % per annum.

Low growth supported by such low electricity growth targets in South Africa will indeed become self-fulfilling

prophesies. The adage that “electricity is a necessary but not a sufficient condition for economic growth” will yet

come back to haunt its citizens and the government.

The country needs to be optimistic about its abilities and at least give itself a chance to achieve the potential pot of

gold.



Recommended generation mix by 2030

It is strongly believed that South Africa should not move rapidly and unequivocally towards expensive and effectively

variable and unpredictable technologies such as renewables. Nor should it seek to move towards excessive increases of

nuclear technology. Whilst they each have an important role to play, in the case of renewables, the planned expansion is

excessive and will in the long-run cost South Africa and its citizens dearly. Renewables have proved to be extremely

expensive for industrialised and industrialising economies over long periods of time. In the case of nuclear, the difficulties

of expanding the use of this proven and reliable technology on this scale are being underestimated and its capital cost,

however financed, is not affordable on such a scale. It has proved to be a more expensive technology than coal with

lengthy build programmes. There will be costly consequences.

There should be a national plan to increase the use of gas substantially. Gas is more expensive at present, but it is an

essential to develop this technology and South Africa must have gas as it offers considerable benefits.

In order to reduce the costs of generating electricity, Econometrix believes the recommended generating capacity mix

should approach what is set out below.

Table 2: Recommended generating capacity to 2030

Recommended electricity generating capacity to 2030

MW Current Recommended 2030

Coal 37,780 30,102 56,980

Decommissioning 0 -10,902

Coal (Municipal) 1,080 -1,080 0

Nuclear 1,940 5,820 7,760

CCGT gas 18 10,982 11,000

Wind 824 2,376 3,200

SolarCSP 100 2,300 2,400

SolarPV 927 2,273 3,200

Hydro 600 0 600

Imported (Mozambique) 1,500 2,609 4,109

OCGT 2,426 0 2,426

Other 70 300 370

Total 47,265 44,780 92,045

Pump Storage 1,400 1,332 2,732

Total Capacity 48,665 46,112 94,777

Source: Econometrix

Fossil fuels in the form of gas and coal have proved to be extremely efficient technologies for generating energy, and in

particular generating electricity economically and reliably.

The chart below gives an indication of the likely profile that could result from this planned electricity generation mix.



Chart 3: Estimated Profile of recommended generating mix

Source: Econometrix

It should be noted that:

Few shortages of electricity are anticipated.

The recommended electricity generating mix set out above will have electricity prices that are approximately 15% to

20% less than the currently planned mix.

The capital cost is considerably less than that of the planned electricity mix because of the lower usage of nuclear.

The greater use of CCGT using imported or locally produced gas will allow shorter investment periods to production.

This should alleviate current problems and the long lead times associated with nuclear technology.

There has been an increase in MW capacity of 6,030MW from the planned capacity total mix 88,747MW to

94,777MW in the recommended mix capacity total.

It should be noted that in comparison to the increase recommended above, even if there were to be an increase of

15,000MW of renewables, of 5,000MW to wind, and 5,000MW to SolarCSP and 5,000MW to solar PV - i.e. a total of

15,000MW – it would not alleviate the many shortages in supply. This is due to the unpredictability and variability of

sunshine and wind and the technologies associated with energy derived from these sources.

Reliability has increased and price reductions totalling approximately 15% to 20% have resulted from the increased use of

fossil fuels in terms of coal and gas for CCGT. The combination of these two elements has increased security of supply

and significantly reduced prices. This aligns the energy objectives of the country with economic, social and political

objectives. It is also in line with the currently planned energy policies of India, Bangladesh, Indonesia and China as set out

elsewhere in this report. In terms of electricity generation, the mix will involve the changes from the planned mix of



technologies, namely a major reduction in wind and solar and a major increase in power stations utilising coal and gas

fired CCGT technology.

The recommended electricity mix above is in line with the views long-held by Econometrix of the benefits and significant

value added by increased investment in natural gas, as submitted to the Davis Carbon Tax Committee and the

Parliamentary Appropriations Committee on Eskom funding. A recent report by McKinsey (South Africa’s Big Five Bold

Priorities) released in September also highlighted the benefit to the economy of natural gas production.

By 2030, the increase would involve:

Coal fired power stations generating approximately 9,000 MW, utilising clean coal technology (four or more

smaller such power stations).

An increased use of imported or domestic natural gas. The natural gas could be used to power CCGT units with a

capacity of approximately 11,000MW.

It is proposed allocating greater energy generation to gas in the short to medium term to deal with increased generating

capacity caused by growing demand and capacity loss due to the decommission of ageing plants between 2020 and 2030.

These recommendations will be instrumental in assisting the country to achieve its economic, political and social

objectives of reducing poverty and unemployment by increasing the rate of potential growth through lower electricity

price growth.

The recommended technology mix will reduce electricity prices by between 15% and 20% from the anticipated price

increases caused by the planned electricity mix. The difference may not sound substantial, but the cost to the country

through slower economic growth and reduced investment, particularly in its goods producing industries, would be

significant.

It is estimated that the planned electricity generation mix could cost the country between R150 billion and R250 billion in

slower growth by 2030 compared to the recommended electricity generation mix. The reduced growth in employment

could total a reduction in jobs being created of 2,000,000. The recommended mix could benefit economic growth to this

extent.

2 Overview of natural gas in SA


CHAPTER 2

OVERVIEW OF NATURAL GAS IN SOUTH AFRICA

Introduction

South Africa has considerable natural gas resources, however, unconventional gases such as shale gas, deep biogenic gas

(DBG) and coal bed methane (CBM) comprise the largest percentage. The use of hydraulic fracturing, or fracking, to

exploit some of these resources is a contentious matter and has therefore made limited progress.

Fracking is the drilling into shale rock formations that have low permeability and therefore limited gas flow and injecting

water mixed with chemical additives and sand in order to change the pressure and allow the gas to escape.

Chart 4: Unconventional gas

South Africa may potentially have one of the world’s largest shale gas reserves that could be as large as approximately

390 TCF (trillion cubic feet) situated in the Karoo Basin. Approximately 10% represent extractable reserves. It also has

approximately 20-30 TCF of coal bed methane.

South Africa’s potential natural gas demand outstrips domestic production, with the balance being imported. The big gap

allows room for the country’s production capacity to increase.



Chart 5: SA Gas Production vs Total Supply

Most of the country’s oil is imported from the Middle East, Nigeria and Angola. Increased domestic production would not

only decrease reliance on these countries, but would also improve the country’s trade balance and reduce the impact of

international oil price fluctuations on domestic fuel prices. However, it should be noted that while there is obvious scope

for improved local production to meet demand, significant investment in infrastructure would be required, as well as

amendments to legislation in the case of fracking.

Potential gas developments

South Africa’s natural gas reserves

The country’s conventional gas reserves are sited largely offshore. Block 9 off the South Coast is one of the most active

through the F-A and E-M fields and, to a lesser extent, other fields.

Exhibit 2: Significant Gas Prospects in Southern Africa – Petroleum exploration and production activities in South Africa



South Africa has several production and exploration projects underway as government seeks to exploit natural gas

reserves. While shale gas and coal bed methane represent the largest proportion of reserves, the process to begin

exploiting them will require coordinated efforts between government, the private sector and environmental groups,

which, for the time being, will limit activity to exploration. However, conventional gas production offers a buffer and time

to develop a regulatory and environmental preservation and protection framework.

The Orange Basin is the country's largest offshore area for natural gas and is largely underexplored. It represents

significant gas reserve potential.

The Ibhubesi Project, which is expected to supply Eskom from 2018 and the Namibian Kudu gas field (through imports) on

the West Coast, significantly increase the reserves potential.

The Namibian-owned Kudu gas field located in the same region, also has significant reserves. Namibia plans to

produce gas for an 800MW electricity plant and export potential exists for the surplus once production commences.

However, development has been delayed for several years and, at least in the near term, does not offer import

prospects.

At this stage, a proven field exists at the proposed Ibhubesi gas field development located in the Orange River Basin

off the West Coast of the Northern Cape, approximately 60km offshore. The Ibhubesi Project is exploring future

production capabilities and represents the most significant conventional offshore gas field. According to production-

right holder, Sunbird Energy, the Ibhubesi gas field could yield gas ranging from 4.5 to 13.3 TCF, although a moderate

approximate 7.8 TCF is forecast. The field significantly increases the country’s gas reserves. Sunbird and Eskom

signed a deal, whereby Sunbird would supply 30 BCF (billion cubic feet) of gas per year to the Ankerlig power plant for

up to 15 years.

The company expects to start supplying Ankerlig as early as 2018. The Ankerlig plant currently operates on diesel,

however, it is also able to use gas. Eskom spends billions per year on diesel purchases and the agreement has cost

reduction potential and reduced CO2 emission benefits. The commitment by an anchor buyer to the Ibhubesi project

ensures viability of production and could lead to further supply agreements from smaller buyers.

The Orange Basin is underexplored and could yield further gas and oil reserves. This situation is also true of other areas in

South Africa. Should further discoveries similar to the Ibhubesi and Kudu fields be found, it would positively affect gas

and oil production for the region.

Currently South Africa imports most of its oil, with Sasol’s coal-to-liquid and Mossel Bay's gas-to-liquid making up most of

the balance.



Table 3: Current production and exploration sites

Offshore Shale Gas Coal Bed Methane Deep Biogenic Gas

F-A and E-M Fields* Karoo Basin Waterberg Witwatersrand Basin

E-CE Field* Springbok Flats

South Coast Gas* Highveld and Ermelo

Ibhubesi Gas Project Soutpansberg

F-O Field

Source: Petroleum Agency SA

* Production

While South Africa's offshore fields such as Ibhubesi show promise, shale gas still represents the largest gas potential.

While the economic benefits of fracking are apparent, public resistance has slowed down activity. Cabinet lifted the

moratorium on fracking in the Karoo while limiting activity. Should the government pursue shale gas production, it will

require coordinated effort between government and interested stakeholders to ensure safe and viable extraction. The

regulatory and environmental challenges would also have to be dealt with.

South Africa’s natural gas reserves are at different life cycle stages and thus offer varying benefits, risks and opportunities

for the economy. Globally, countries like the US, which have exploited their shale gas reserves, have experienced

significant increases in production and greater reliance on domestic production as opposed to imports.

A gas project at Saldanha could initially import natural gas and later convert to utilising gas from this field and later from

Karoo shale gas if the latter is proven technically and environmentally feasible. The same comment could be made for the

suggested Coega development. At a later stage should the Karoo gas deposit prove viable, a gas fired power station near

Sishen would be a further development, making gas a major component of South Africa’s energy mix. Initially, imported

gas could be used to convert Eskom’s Ankerlig power station and possibly Mossel Bay from diesel to gas before utilising

local gas from the Ibhubesi field and later Karoo shale gas. Advanced plans for the Department of Energy undertaking for

2,600MW gas fired IPP’s by 2025 and further plans could be developed using the Karoo shale gas.

A further four TCF reserves could possibly be exploited off the East coast in the Durban and Zululand Basins.



Potential locations for gas-fired power stations and gas-related suppliers

There are at least four potential locations for gas-fired power stations and development of upstream and downstream gas

related suppliers and industry users.

Exhibit 3: South African Power Network (grid map)

Source Eskom

The possible locations are:

Western Cape in the Saldanha Bay/Cape Town areas

Eastern Cape in the Port Elizabeth/Coega economic zone

KwaZulu Natal near Durban/Richards Bay

Mpumalanga near Nelspruit

The first three locations are more ideally sited for imported or local offshore sources of gas and the latter for imported

gas by pipeline from Mozambique. Saldanha Bay offers the advantage of possibly moving fairly quickly from imported gas

to gas from the offshore Ibhubesi field. Longer term, both Saldanha and Coega could utilise shale gas once the shale gas

deposits are proven economic and technically viable. Other nodes for longer-term gas development include Mossel Bay

and Sishen. The former to replace diesel utilised in an OCGT generator located there, the latter to supply the mining

industry in the Sishen and Kimberly areas. The suggested locations are close to larger populations and industrial centres

servicing domestic and industrial demand for energy electricity but also, importantly, offering the elements of a skills base



and basic support infrastructure necessary as a power station location and for the development of upstream suppliers

and potential downstream users of gas.

The local economies have large young populations and access to basic services including energy, water, refuse removal,

telephone services and sanitation. They offer better-than-average health, education, income and infrastructure and offer

better supporting infrastructure including transport and communication whilst the ports offer harbour and railway nodes.

At the same time each location and its surrounding area has relatively high unemployment levels in excess of 25% and

growing populations.

In order to maximise the full potential of gas development, potential investment in the economic and physical

infrastructure in the selected regions would be required. Although the current economic infrastructure in each area is

highly diversified and includes roads, railways and in three cases, the necessary deep-water harbours, full development

would possibly need larger road networks running through the municipal areas and additional or expanded rail linkages.

These could be required, particularly as expanded facilities for agro-processing and, in the case of Coega and Saldanha

Bay, minerals beneficiation would almost certainly become part of the potential industry development mix.

There are deep-sea harbours available to expand and cater for export-orientated industries at Saldanha Bay, Coega and

Richards Bay (or an envisaged expansion of Durban harbour into the surrounding old airport area), as well as possible

space to handle imported liquid natural gas until local sources are developed.

Benefits of development of gas industry in identified locations

Utilisation of imported gas should help development of neighbouring countries to the North of South Africa, primarily

Mozambique, Namibia and Angola whilst Nelspruit would also support local development and Mozambique’s

development. Both are important strategic and economic allies of South Africa. All three ports are suitable for

developing increased mineral and commodity exports in unbeneficiated and beneficiated forms.

The major development of gas industries in each of these areas could make a major contribution to both regional and

national growth.

Both Cape Town/Saldanha Bay and Richards Bay could be developed as major regional gas and energy hubs offering

technological expertise, support, repairs and maintenance and infrastructure development and support for the gas

industry on the West and East coast of Africa.

All areas have been identified by the respective provincial governments as growth nodes as they are strategically

positioned, through their transport corridors, for increasing fixed investment in the provinces. The key challenge is to

establish resilient local economies, through economic diversification. The transport infrastructure, other economic

infrastructure, and the availability of sufficient land for future expansion and land-use densification, are regarded as

catalysts for growth. In the case of the three ports, the harbours create the opportunity to strengthen and diversify

these regional export hubs. This also in fact applies to Nelspruit as it lies in the transport corridor to Mozambique.

There is a potential for further investment opportunities especially in the downstream metal manufacturing sectors

and the oil and gas industry and agriculture initiatives.



Other key economic driving forces include potential public-works programmes, business-support programmes and

skills-development programmes with specific focus on the harbour economies, specific manufacturing industries and

the service sectors.

The fishing industry is an industry which could be developed at Saldanha Bay, Coega and Richards Bay.

Tourism could also be targeted as a potential growth industry in all four regions identified.

The additional flow of rates and other taxes can be utilised to help many of the above developments.

The objectives of Operation Phakisa would be realised to a significant extent.

Challenges in developing gas industry in identified locations

The local economies, as with the overall economy, have been experiencing a low rate of capital expenditure and

insufficient maintenance of assets, which have to be addressed. This places a burden on economic activities and the

environment, especially through inadequacy of sewerage treatment capacity.

Household incomes in the poorer sections of the communities are generally low, but particularly alarming is that

many have no income and unemployment is the major problem.

Generally, the regions suffer skills shortages and Further Education and Training (FET) colleges would need to be built

to support growing industrial development.

Each area has socio-economic needs regarding education, health, crime and housing backlogs.

4 Impact of natural gas in SA


CHAPTER 3

IMPACT OF NATURAL GAS DEVELOPMENT IN SOUTH AFRICA

Introduction

The conclusion in Chapter 1 is that South Africa should not base its economic future at this stage on excessive use of

renewables or nuclear energy. In addition, it is believed that the planned growth in electricity generation capacity was

insufficient to meet future economic growth targets.

The recommendation is that major increases in capacity should come from gas, in addition to coal. The latter would be

used to generate electricity from CCGT’s but just as important, such a development could give rise to a new industry base

for the country.

This section will explore the economic benefits that could arise from using gas and making the country a major user and

potentially producer of natural gas.

Benefits of developing a natural gas project in South Africa

Economic impact

Increased extraction of natural gas would stimulate productive activity and contribute positively to GDP.

South Africa’s economic growth is forecast at 2.0% and 2.1% for 2015 and 2016 respectively by the IMF. With China’s

growth slowing and commodity prices expected to remain subdued going forward, greater onus to lift growth and

create employment will have to come from within the economy.

Exploiting the country’s gas reserves, such as shale gas in the Karoo, gas from Ibhubesi, and the coal bed methane

reserves would result in significant job opportunities and contribute billions of Rands to the GDP per year.

Subsequently, significant employment opportunities would be created. The economy has failed to meet the number

of jobs targeted by the NDP and creating opportunities in the industry would bring the economy closer to meeting its

target.

The value chain would benefit from increased production. While midstream industries that refine natural gas account

for the majority of the work, upstream and downstream industries would also benefit.

The versatility allows for multiple applications, which would encourage further industries.

Improved trade balance due to decreased oil imports.

Support the mineral beneficiation policies of the country.

Export potential of gas will stimulate economic growth.

Megaprojects, such as the national gas project, meet many of the economic development policy needs of South Africa

and Southern Africa. Based on the economic arguments and facts contained in the report, a national gas project will

make a substantial positive economic and socio-economic impact with particular regard to the development needs of

South Africa in each of the designated areas. Whilst a national gas project and the associated power station conversion



and potential build programme are themselves capital intensive, with a high capital cost per job created, such projects

offer South Africa considerable benefits.

Fundamentally, capital-intensive megaprojects such as a national gas project will not in themselves solve Southern

Africa’s under-employment problem. An important part of the solution lies in the fact that upstream and downstream

development promotes labour-intensive manufactured supply and exports. Capital-intensive projects help in supporting

the infrastructure required for the development of such labour intensive projects. Ultimately, South Africa’s economic

agricultural and industrial growth in particular would increase with a resulting positive impact on standards of living and

long-term employment growth. Megaprojects such as a national gas project offer significant advantages to regional

development as they enhance infrastructure and increase electricity supply for the region and the country. Economic

development of the region and the country is enhanced by the increase in electricity supply and various associated socio-

economic programmes.

A national gas project offers South Africa significant economic benefits :

The average annual contribution to the GDP from the capital expenditure (capex) and operational expenditure (opex)

from the gas projects being developed in all four areas would increase regionally and nationally

The savings from diesel imports would add an additional annual R2.0 billion to the GDP each year

Annual government tax revenue would increase

The trade account would improve

Direct and indirect employment opportunities would be created regionally and nationally

An indigenous skills base would be developed

Impact on electricity supply

Increased supply security

Less reliance on diesel exports which affect Eskom’s cash flow

Supporting the power supplied by the variable and unpredictable renewables

Help stabilise the grid and offer base load power

Reduce future electricity price increases

Infrastructure

Construction of power plants for instance would be faster in comparison to coal or nuclear

Infrastructure that would be needed for other coal-based energy production, such as storage facilities, would be

eliminated

The development of a South African local industry to support the infrastructure would be established



Environmental impact1

As countries commit to greater CO2 reduction, incorporating more natural gas as compared to coal and oil would help

South Africa to reduce its own CO2 emissions

Gas will greatly assist South Africa to compensate for the variability and unreliability of renewables and act as a back-

up for installed renewable capacity. Natural gas, with reduced CO2 emissions, offers an alternative to other carbon

fuel sources

More efficient fuel source as compared to other carbon fuels and considerable lower energy waste

Eskom would reduce its carbon footprint

Reduce South Africa’s Greenhouse Gas Emissions (GHG) emissions

Reduce pollution

Natural gas compared to other carbon fuel sources such as coal and oil contributes considerably less CO2 emissions

globally and also per single unit of output which makes it a better alternative. It will help the country reduce its

emissions and is a relatively clean source of energy

Chart 6: CO2 Emission 2012

Source: IEA

Technology and skills transfer

South Africa currently does not have the technology to exploit unconventional gas resources such as fracking. It

would have to be imported. However, as the industry develops, design and manufacturing capabilities could be

developed. A prerequisite to import agreements could be skills transfer.

Development of technological patents.

Development of technical and maintenance services.

As other African countries develop their own gas resources, South Africa could become a regional leader in the field

as expertise and experience and grows. Cape Town/Saldanha and Richards Bay could become regional gas and

1 The Obama administration announced the ambitious and, in some quarters contested Clean Power Plan, which commits the US

to a 32% CO2 emission reduction from 2005 levels by 2030. The plan would greatly reduce the emissions of one of the world’s

biggest CO2 producers and leads the way for other countries to reduce their emissions. COP 21, which will be held from 30

November to 11 December 2015. It is highly likely that a new administration after elections in eighteen months will overturn or

reduce the plans that Obama has in mind although it can be seen as a political move prior to the conference.



energy hubs.

LPG/CNG vehicles

South Africa has been using liquefied petroleum gas (LPG) in vehicles for decades. However, use is still limited. Several

reasons have limited growth, chief among them, the risk of an explosion during a collision due to pressurised fuel tanks,

the limited number of service stations and subsequently limited range. Cost and economic benefits and opportunities of

using LPG and CNG (compressed natural gas) are:

Innovative technology to eliminate or reduce the risk of an explosion of the fuel tank during collisions

Service stations to meet growing demand, especially for short, inner city travel

Auto manufacturers such as Iveco and Volvo introducing their LPG/CNG ranges which would prove attractive to

logistics companies operating in urban areas in close proximity to service stations and consumers looking to reduce

petrol costs

LPG/CNG conversion services and establishment of the industry

Other benefits

Transmission losses will be considerably reduced and the cost of delivering power to each region will be significantly

reduced. For example, in the case of the Western Cape, Koeberg provides about 60% of the Western Cape’s electricity.

The shortfall needs to come from power stations in the rest of the country, (with an average loss of 13% on the

transmission lines) or from the open-cycle gas turbine (OCGT) at Ankerlig.

Impact on upstream and downstream industries

The development of a natural gas industry in South has the potential to support a wide range of business segments in

South Africa, both upstream and downstream, along with adjacent industries.

South Africa has a high value domestic energy market currently dominated by base load coal (80 %) with limited diesel

peaking. Any offshore gas development is likely to comprise onshore and offshore components and would consist of

three phases of development activities: construction, operation and decommissioning. Much of this would run

concurrently given the phased nature of any planned development. The drilling of new wells and the construction and

installation of new infrastructure would occur continually throughout the lifecycle of any project. The decommissioning

of the sub-sea infrastructure and production platforms would take place as relevant reservoirs are depleted.

Operational activities would involve production and processing. Gas can be used as an energy supply in a number of

ways. These include electricity production (for example combined cycle gas turbine power plant), as distributed gas, as an

alternate fuel supply to industry, or as a direct energy supply (for example as an alternate to burning coal to heat smelters

or boilers) and the development of supply to the automotive industry. Condensate also has a market and can be utilised

as a fuel source in certain industries, thus providing an additional commercial product.

A high-level overview of the potential impacts of the proposed major gas project development plans would need to show

the impact of the capital expenditure over construction and operational phases. The economic impacts include their

effects on gross domestic product (GDP), tax impacts, employment impacts and impact on imports and exports.



Downstream impact

A number of downstream savings and activities can be supported by affordable natural gas. Although these downstream

savings and activities are not all quantifiable, future individual studies would attempt to highlight some of these benefits.

The numerous potential downstream impacts given the availability of affordable natural gas (whether this is imported or

from offshore or onshore wells) can include:

Primary energy for electricity generation.

Building new Combined Cycle Gas Turbine (CCGT) electricity generating facilities in the designated operational areas

that operate on gas i.e. Saldanha, Port Elizabeth, Richards Bay and Nelspruit.

Supporting and supplying the energy needs in terms of gas and electricity to the local economies.

Replacing the current diesel consumption of any Open-Cycle Gas Turbine (OCGT) facility such as Ankerlig and Mossel

Bay in the Cape with gas, thus reducing imports and hence assisting in reducing the trade deficit.

Development of gas as an automotive fuel either directly or indirectly by generating electricity for battery-driven

vehicles or gas-to-wheel-driven vehicles.

Feedstock for GTL conversion displacing crude oil.

Energy feedstock for fertilizer production.

Energy resources for transport equipment, displacing crude oil generated liquid fuels.

Industrial heating fuel, displacing crude oil generated liquid fuels.

Creation of various petro-chemical feedstock, displacing crude oil generated liquid fuels.

Decreasing the electricity losses on the transmission lines to Durban, Port Elizabeth and particularly the Western Cape

by providing more local generating capacity.

Providing additional income to the government and state-owned enterprises.

Offering greater security of supply.

Reducing the CO2 and GHG emissions impact.

On the import side, many of these downstream applications will require technology imports of their own. Fresh

investment opportunities are bound to arise from medium to large-scale commercially viable levels of natural gas

production, attracting foreign direct investment into such downstream opportunities.

Gas for OCGT

There are five gas turbine facilities in South Africa including one at Ankerlig and another at Mossel Bay. The cost of

operating these OCGT plants was more than R3.6 billion per year in 2013 and this has risen with the current electricity

shortages. Ankerlig has a capacity of 1,338MW. These plants were originally designed to cope only with increased power

demand during peak periods but currently are run extensively.



If gas could be supplied at half the price, this can potentially produce a saving of R20 billion over an 18-year period or

over R2.5 billion per year for Eskom. Although it is known that expenditure is far higher than this at present it has

been assumed that in due course current shortages of electricity supply will be reduced and the expenditure will go

back to levels that are more normal.

If the OCGT operating cost can become competitive using other power sources, all these areas could become more

independent from the rest of the country and this is particularly true of the Western Cape’s electricity supply as it will

bring down excessive expenditure on diesel and will result in fewer losses on the transmission lines.

Shale gas

The potential exploitation of the 390 TCF shale gas resources in the Karoo and coal bed methane could result in

growth of supportive industries.

Waste management and transportation services.

Growth in surrounding communities such as housing, consumer goods and services to cater for growing numbers of

employees.

Downstream and upstream economic impact

A rough estimated forecast has been prepared to assess the upstream and downstream economic impact of developing a

natural gas industry in South Africa at a single location. This considers the implications of project development to exploit

the full value of the project and any associated gas field developed. Clearly, where any gas field is developed there would

be a start-up phase, an on-going exploration phase and finally a winding-down phase. However, because of the on-going

nature of gas exploration and development, these stages for individual wells may be occurring concurrently.

Based on an estimated gas turnover of R15 billion per annum, upstream and downstream turnover could total as

much as R50 billion per annum. Of this value of production, the total value added in the economy is estimated at R26

billion per annum.

Average upstream and downstream potential employment created could peak at an estimated 70000, that level

being achieved during the mature phase of the project’s production life.

The potential economic impact of such a large gas resource find such as the Karoo shale gas supported by other local

finds is clearly very significant for the South Africa economy.

Even based primarily on using imported gas, the impact on South Africa and the four suggested regions is considerable.

The figure given above is for full development of one region utilising support from an offshore or onshore gas field. The

figures estimate the impact on the country as a whole and it is not possible at this stage to isolate the effect on a region

without further detailed analysis.

If all four regional projects are fully developed, the impact on the country is substantial and could approach a value

add of R100 billion and the creation of over 200,000 jobs.



A national gas project would help restore confidence in South Africa and could significantly enhance its geo-political

and economic standing as a hub for energy and resource development in Southern Africa.

The macroeconomic aggregates are only one aspect of the possible benefits to the economy. Less measureable

beneficial effects would include the impact that this might have on the growth in energy supply that South Africa

shares with other African nations.

Furthermore, general trade would be enhanced. It creates the possibilities of creating employment across the corporate

size spectrum, ranging from international energy companies to small and micro enterprises in South Africa, and the

spread of benefits, both in terms of upstream and downstream product availability, and the economic development of

areas of the country with few other growth prospects is significant. The local regions would actually be able to export

energy products in various forms to the rest of the country and create value-adding opportunities for exports to the rest

of the world as well.

Construction and operational phases

Normally the capital expenditure programmes tend to show that:

Given their high import dependency, there is a large outflow of the invested capital to purchase capital equipment.

However, these losses would be recovered during the operational phase of the project.

During the construction phase, construction and other business services are the two sectors that will be affected the

most. However, clearly there are impacts that run through the entire economy from ports, harbours and transport

through to clothing and numerous other products ranging from iron and steel to shoes and plastics.

As a result of the capital expenditure phase, highly skilled, skilled, and semi-skilled and unskilled employment would

show, not unexpectedly, that job opportunities would be created in construction, financial services, insurance and

pensions, real estate activities, health, education, hotels and catering, agriculture, food processing and other business

activities and services benefit.

During the operational phase, investment still totals a significant figure and has requirements across and affecting

many industries as set out above including construction, mining, general purpose machinery, electrical machinery,

other manufacturing, electricity, gas distribution, other transport equipment, other business activities and

transportation.

Operational activities affect the same sectors, primarily construction, retail and wholesale, financial services and other

business activities. The economic impact and employment are expected to mainly benefit the transport, electricity and

gas distribution, financial services, health services, education, insurance and agriculture industries but they are also

spread across numerous other sectors.



Challenges in developing a natural gas project in South Africa

Customer base

A sufficiently large customer base or anchor client is needed to justify infrastructure spend to pipe gas to a specific

location.

Infrastructure

The country lacks the infrastructure to expand production rapidly, and capacity would have to be built up.

Government is the biggest investor in energy generation and increased investment in gas production would require

diverting resources away from other projects or programmes. Constrained government budgets, and hence

spending, would limit infrastructure development. It is essential that Government must open the market to

Independent Power Producers (IPPs) to speed up the build programme, reduce financial pressures and secure the

importation of the necessary skills. In the long run, this will increase the potential sustainable economic growth of

the economy and speed up transformation.

Lack of large-scale construction experience

Unfortunately, the country has lost many of the skills associated with major power station build programmes. The

country has not had to build large-scale power generation facilities for many years until it embarked on the Medupi and

Kusile projects and major problems are evident as the projects are over budget and significantly delayed. Similarly, while

Koeberg power station has been operational for several decades, the country lacks experience in nuclear plant

construction. Similar challenges could delay the adoption of gas energy. Foreign skills hence foreign investment is

therefore essential to speed up this process and ensure their success. In the long term, this will build the local skills base

and ensure continued transformation.

Risk to Square Kilometre Array (from fracking)

The Square Kilometre Array (SKA) is a project to build the world's largest radio telescope in South Africa and to a lesser

extent in Australia and New Zealand. The South African part of SKA is located in the Northern Cape. The Northern Cape,

due to its clear skies and population density made the location ideal. Shale gas production could affect the SKA due to

seismic disturbances that would affect the functionality of the sensitive fibreglass dishes. The SKA is regulated under the

Astronomy Geographic Advantage Act of 2007 that limits disturbances to the project to as little as possible. A buffer zone

has been suggested to limit disturbance.

Dangers of fracking to the Karoo community

While the economic benefits of extracting unconventional gases are vast, fracking has been opposed due to the potential

adverse impact on water sources and the surrounding environment:

The contamination of water due to possible leakage of the chemicals used in the process or post-production due to

ageing infrastructure.

Damage to the surrounding ecosystem.



Induced seismic disturbance because of fracking process.

Water depletion due to the vast quantities of water required per well which would put additional strain on the

country’s water supply. South Africa is a water scarce county and dam levels have decreased due to drought. Dam

levels nationally declined to 73% as of August 2015 from 82% in the same period last year. The decline in the

Northern Cape was slightly higher as dams dropped to 84% from 98% over the same period. The use of waste and

seawater has been offered as possible alternatives to drinking quality water.

Reduced tourism activity due to 'unsightliness' of fracking.

While public resistance and environmental concerns over fracking cannot be dismissed, the potential value added

represents a much-needed lift to the economy and needs to be factored into government’s decision on how to exploit the

reserves.

Potential economic impact of increased electricity generation

It is vital that gas should become a major component of South Africa’s electricity generation mix, as an additional 8600

MW of electricity generation creates the potential to increase:

South Africa’s GDP by approximately R645 billion

employment by 1,720,000 jobs

the number of dependents positively impacted by 6,880,000

Much will depend on which of the major application routes for natural gas are followed. The selection of generating

electricity significantly enhances such a project’s economic contribution to the country. It implies a greater mix of

exportable commodities, exportable electricity and reductions of imported materials, beginning with natural gas and

going on to end user consumables.

The table below gives an indication of the potential impact of new electricity generation.

Exhibit 4: Economic impact of potential electricity generation

Electricity 4,000MW 8,600MW

GDP R300 bn 645 bn

Employment 800,000 1,720,000

Dependents 3,200,000 6,880,000

The figures above are a rough estimate of the potential beneficial economic impacts for approximately 4,000MW of new

electricity generated and the target of 8,600MW by the project.

The figures are rough estimates but give a reasonable idea of the tremendous potential impact that electricity generation

has on the economy of South Africa and its future growth.



It must be stressed that it is only a potential impact. “Electricity is a necessary condition for economic growth and

employment generation, it is not a sufficient condition”. The correct economic and political environment need to be in

place for this potential to be realised.

4 Conclusion


CHAPTER 4

CONCLUSION

This report has investigated South Africa’s electricity needs for the future with particular reference to its base load power

requirements. The analysis has taken into account the primary political, social and economic objectives of the country,

the cost of the various electricity generating technologies and the future economic requirements in order to meet primary

economic objectives. The analysis concludes that South Africa cannot economically afford to move rapidly and

extensively towards expensive, variable and unpredictable energy technologies such as renewables. In the case of nuclear

power, the economic and financial difficulties of increasing the use of this proven and reliable technology on a major scale

are being underestimated, as its capital cost, however financed, is not affordable. Moreover, it has proved to be a more

expensive technology than coal. Whilst they each have an important role to play, in the case of renewables, the planned

substantial expansion will, in the long run, have costly consequences for the country because of lower achievable future

economic growth rates.

The following conclusions can be drawn:

The government must minimise the damage to all goods-producing industries in the country, which include

agricultural, mining and manufacturing industries, and must ensure that there is an adequate future potential

electricity supply.

The positive economic impact of megaprojects, including the mining, mining beneficiation, oil, gas and energy

industries are substantial in terms of jobs created, taxes paid, foreign currency earned, community contributions

and purchases from local suppliers.

The proposed major gas development project will offer substantial benefits to the South African economy with

significant downstream and upstream development, and would increase the country’s GDP.

The upstream and downstream industry would provide employment for a substantial number of people in South

Africa and this income would provide a livelihood supporting many people including dependents.

The project would make a significant contribution to the proposed regional GDP of Mpumalanga, KwaZulu Natal,

the Eastern Cape and the Western Cape, particularly near Nelspruit, Richards Bay, Port Elizabeth and Saldanha

Bay area and to employment in these areas.

Combined with the import savings for downstream industry and the savings on imported diesel costs, the positive

impact on the balance of payments would be significant.

Gas must play an important role in the energy mix going forward if South Africa is to meet its economic, political and

social objectives of reducing poverty, reducing inequality and raising the standard of living of all its citizens. This applies

whether South Africa goes for a policy of high carbon-low cost-high growth technologies or for lower carbon-higher cost-

lower economic growth nuclear or renewable technologies. Gas offers considerable benefits. It is an essential technology

whichever technology or energy mix option South Africa chooses. South Africa needs to have a national gas plan to

increasingly use this energy source extensively for power generation and also to use in many other upstream and

downstream applications. The report makes firm recommendations regarding the future use and regional development

of imported and potential gas resources.

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structural and strategic issues that affect the growth and investment prospects of the

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The Team

ROBERT JEFFREY

Managing Director, Senior Economist and author of the report

Rob worked closely with Econometrix for many years, both as a client and in a

consulting capacity, and joined the team to head up a business unit in 2004. He

was appointed Managing Director in 2009. He consults, gives presentations and

lectures on current international and domestic economic developments and

growth strategies including advising on development strategies for multinational

corporations and banking institutions. He has been the author or co-author of

numerous reports and papers on matters related to important national industrial,

energy related and economic policy development.

Areas of specialisation include global and domestic economic trends and

strategies to foster economic growth, the development of a number of important

sectors of the economy including industry, mining, agriculture and electricity in

South Africa. An important focus has been the key global and domestic trends

affecting economic and industrial policy including globalisation, the implications

for pricing in South Africa and the importance of major industrial projects and small business development on economic

growth and employment. One of Rob’s major areas of expertise is the South African electricity and energy crisis.

Rob has wide skills and experience ranging from negotiations with domestic and international companies and public

authorities ranging from direct line responsibility for investment decisions involving mergers, acquisitions, capital projects,

company rationalisation and restructuring to the development and profitable growth of private and listed companies. Rob

is on the Executive Council of the Fossil Fuel Foundation and was Chairman of the Constructional Engineers Association

(CEA), the CEA representative on SEIFSA, an executive member of the Association of Steel Merchant Stockholders, as well

as being active on a number of other councils. For more than twenty years, he has been involved in consulting to a range

of government, corporate and private clients in investments, business and economic analysis, strategic planning and

organisation structuring.

He joined the Nedcor Group in 1969 as an investment analyst and was appointed Investment Manager of the merchant

bank after gaining experience in London. During this time, he completed his MBL, Cum Laude, at the University of South

Africa. In 1975, he moved into the construction industry as a Financial Director and became Managing Director of Dorbyl

Structural Engineering and a member of the Group Executive Committee. He later joined Murray and Roberts with

responsibility for a number of diverse industrial, electronics and engineering companies.

DR JOHANNES JORDAAN

Senior Economist and econometrician

Dr Johannes Jordaan is a highly experienced economist and

econometrician. He has worked closely as an associate of

Econometrix for a number of years with particular regard to

economic modelling, economic impact studies, project analysis

and economic forecasting. Johannes has 13 years’ experience

ranging over several aspects of economics, including lecturing,

socio-economic impact assessment studies, economic impact

modelling, cost escalation modelling, macroeconomic modelling,

policy analysis, economic forecasting and general economic

research.

Johannes holds a PhD in Economics at the University of Pretoria.

His doctoral thesis focused on foreign direct investment (FDI) and

neighbouring influences – utilising a panned data econometric

approach in the analysis. He also has a Bachelor’s degree in Town

and Regional Planning.

Johannes has written or co-authored various published and

unpublished research articles and has presented at various national and international economic and econometric

conferences. In addition, he was previously involved in lecturing economics and econometrics from first year to Masters

Level at the University of Pretoria and has supervised M.Com and MBA theses’ of numerous students.

future role of gas in - ee publishers...rates exceeding 4.5%. many of the current policies affect...

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