CEF Group, Dr Poolo Keynote Address at Africa Oil Week, Tuesday, 4th Oct '22

South Africa Day at the Africa Oil Week

Tuesday, 4 October 2022

Keynote Address, Dr Ishmael Poolo, CEF Group CEO

Thank you, Programme Director, for your kind introductions.

Good morning honourable ministers, distinguished guests and colleagues and a special warm welcome to those who come from other countries. I hope you are enjoying our great hospitality.  

1.     Our world has changed

Philosophers tell us that the only constant in life is change. But you will agree with me that recently the pace of change itself has changed – it is now un-precedent faster – and thanks to the social media, the path for change advocacy is now unpredictable.

One of the themes that run through our constitution is the requirement for public consultation when government develops its policies and regulations.

South Africa’s energy planning processes consider basket of energy sources that can be used in the country to:

·            Ensure energy security, by that I mean, Accessibility to critical infrastructure, Availability and Affordability; as a means to grow the economy and improve the standards of living of our people.

·            Ensure the energy systems adequacy.

·            Ensure that the country meets its climate change commitments.

·            Reduce water use; and

·            Support local economic development and curb unemployment.

2.     South Africa’s Energy Status

Since 2005, South Africa has been in a persistent cycle of energy uncertainty originating from a deficit in baseload and aggregate generation capacity. The result of the uncertainty has been intermittent controlled power outages for more than a decade, placing significant strain on economic growth.

South Africa’s current nominal production capacity is estimated at 46 466 MW, but this is limited by technical failure that erodes about 12 000 MW intermittently, as indicated in the Power Utility’s base unavailability plan. It is important to note that the baseload capacity of approx. 38 773 MW is consistently deteriorating given the nature and age of the current generation plants still utilised by the utility. Considering the utility’s base unavailability assumption, baseload is currently operating at no more than 26 000MW. If demand at curtailed consumption is estimated at about 36,000 MW, then I do not need to explain South Africa’s dire state, which you would have experienced by now even over a short stay.

The introduction of renewable independent power producers has over time sought to supplement the existing capacity. The National Energy Regulator of South Africa (NERSA) states that the increased development and integration of Renewable Independent Power Producers (REIPP) into the distribution system is growing, with 86 commercial REIPPs providing 5 946 MW of installed capacity into the grid by December 2021. The figure is expected to continue to grow over time to about 8 629 MW by 2023. This places South Africa’s renewable energy proportion of available capacity at about 30%, which is comparable to the developed world’s energy source component.

As the International Energy Agency says in its Africa Energy Outlook, 2022 report, “oil and gas present an opportunity for the African continent to catch up with economic development which will result in the continent’s Green House Gas emissions increasing from the current 3% to a mere 3.5% of global emissions.” The upside to the continued use of oil and gas by Africa by far outweighs the risk to climate change.

Instead of South Africa being rewarded for deploying 30% renewables as a percentage of its generating capacity, the country is still chastised for its use of its natural endowment of natural resources.

Geopolitics continue to heavily influence governments’ energy policies. Noticeably, the European Union is now intertwining their trade policy with climate policy with an aim of using their strong trading position to influence / force African countries to accelerate their decarbonization.

It is unfortunate that the current EU cross-border carbon tax talks do not seem to differentiate between countries’ historic cumulative Green House Gas (“GHG”) emissions as well as heavy polluters with those countries that are undeveloped and have historically contributed less to Green House Gas emissions to date.

The intertwining of trade policy with climate policy has the risk of treating countries equally yet the current and historic share of GHG emission contributions is very different.

The wielding of trading power to force less developed countries to accelerate their decarbonization, to prematurely abandon the use of natural resources like oil and gas is tantamount to forcing countries like South Africa to a de-industrialization path. In the current situation of high unemployment this is not desirable for our country.

What we have noticed is that draconian Carbon Tax regimes are to be imposed as synonyms with decarbonization policy. In other words it is wrong to impose both decarbonization and trade policy (read, de-industrialization of Africa) as one.

3.     IRP revision and Gas Master Plan development

The process of developing the country’s gas master plan is now well underway and on 16 September 2022 the Director General of DMRE, Mr. Jacob Mbele, committed that the Department will finalise the Gas Master Plan by March 2023. This policy development will clearly outline how we intend to grow our domestic gas market and importantly how we will develop our indigenous gas resources which have been discovered onshore and offshore South Africa.

The process of revising the IRP has also started in earnest. This involves developing a base case for projected energy demand and solving for the least cost supply option that optimize, addressing the country’s electricity crisis, ensuring security of supply for economic growth, addressing unemployment and using a just transition approach to addressing climate change; which are imperatives according to our priority ranking. The base case will then be published by the Department for public comments. I predict that this process will bring to the fore the issue of energy sovereignty i.e., the right of a government to determine its energy mix.

4.     Coordinated Refined Fuel Importation

It is very telling that today, South Africa is facing the fuel of crisis of 2005, another incident of market failure, and it comes largely because state intervention has not been forceful enough as it needs to be to address energy security.

The fuel crisis of 2005 and that of today demonstrate the short comings of an uncoordinated fuel industry which threatens security of supply through interruptions in fuel supplies including shortage of jet fuel. It was reported in the Moerane Fuel Investigation that such interruptions severely impacted essential sectors of the economy resulting in loss of revenue and reputational damage. Some of the interruptions included disruptions to the supply chain systems and flights had to be cancelled or postponed then and as we have seen in this week.

It is well document and known that the fuel supply crisis was triggered by operational problems at a number of refineries in the country and low stock levels by oil companies. Some of the reasons highlighted include

a)   Poor coordination in the implementation of the January 2006 fuel specifications.

b)   Uncoordinated scheduling of refinery shutdowns, which disregarded security of supply.

c)    Low than demand levels of refined product stocks.

d)   Inadequate logistical infrastructure.

e)   Poor communication amongst key stakeholders.

f)     A shortage in inland/coastal supply dynamics, which culminated into a poorly managed supply and demand situation.

These crises also highlight uncertainty in the direction that South Africa should take with regard to local production of refined product. There would have been an expectation in 2005 that local refiners should invest necessary capital to expand capacity in the country’s aging refineries. 

The industry was also plagued with the shortage of skills in both engineering and technical services, which contributed to the lack of investment problem.

What we put forward in support of the Moerane report are the following recommendations:

a)   It is international best practice for government to hold strategic oil product stocks to protect the country against possible disruptions in global petroleum products supply. At the time of the fuel shortage, it was found that the country did not hold strategic refined product inventories. This was left to oil companies to hold commercial quantities of refined product inventories for their own customer needs. When the crisis hit, it proved that whatever stocks that were held by private companies were not sufficient for the country’s needs. Thus government agencies, namely the Strategic Fuel Fund, have to play an active role in finished product imports to ensure adequate response to a supply crisis, like the one we face today, yet again.

b)   It would follow then that there is a need for a centrally managed monitoring role which would cover storage capacity, industry and commercial stock levels, production levels and overall refined products requirements for the country.

c)    As the Central Energy Fund, in carrying out of energy security function, we should play an increasingly significant role in managing future supply demand projections in order to better coordinate requirements for additional refinery investments.

d)   Another key limiting factor is delivering supplies inland, which points to the pipeline capacity constraints. When inland refineries lost production, it became impossible to adequately supplement inland fuel supplies from the coast. Thus highlighting the need for expanded pipeline capacity inland on an urgent basis.

e)   There needs to be coordinated measures to encourage investment in fuels related infrastructure. State owned enterprises (SOEs) can play a leading role in these developments. Some options which may be considered are:

a.    The role state-owned entities like the Strategic Fuel Fund can play in expanding storage capacity.

b.    The consolidation of the petroleum logistic assets of Transnet in one unit within Transnet to enable benefits of scale and the holistic management thereof, for the benefit of South Africa as a whole; and

c.    A review of the policy, economics, commercial arrangements and efficiency of Transnet Pipelines to ensure security of supply from the coast into the inland market.

5.      Summarize and conclude

Any energy security solution for Africa should address four imperatives:

1.    A just transition from no energy; to energy security.

2.    Security of supply; that seeks to balance the utilization of natural resources endowment, the cost of generating power and urgency to address climate change. (And let it be noted that the acceleration of renewables from developed countries is informed by security of Supply)

3.    Energy security must address the debilitating high employment levels in our continent, which is a social unrest ticking time bomb by any standards.

4.    Climate change and its impact on society remains a priority for African States; addressing this challenge does require innovative thinking that does stifle progress.