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How South Africa can benefit from Mozambique’s LNG

By David Whitehouse
Posted on Thursday, 16 May 2019 14:23

South Africa' mining industry is thirsty for cheaper power sources. REUTERS/Siphiwe Sibeko

Mozambique’s LNG reserves, highlighted this week by the government’s approval of ExxonMobil’s Rovuma project, represent a major opportunity for South Africa, Standard Bank oil and gas analyst Paul Eardley-Taylor argues in research this week.

Rovuma can deliver 15.2m tonnes of LNG per year and has the potential to help turn Mozambique into the fourth-largest LNG producer globally, according to Standard Bank.

The International Energy Agency predicts that gas will overtake coal in the global energy mix by 2030, with LNG playing a major role. Mozambique’s reserves imply capital expenditure of $128bn over the next decade, and South African companies are well-placed to win contracts, Eardley-Taylor says. Though South Africa is relatively poor in terms of gas, the country’s limited shipping distances from Mozambique will help favourable delivery prices, he argues.

Crucially, South Africa’s peak demand period in the winter falls at a different time to that in the northern hemisphere, meaning that South Africa is in an ideal position to make competitive LNG purchases and even take risks in the spot market, he argues, adding that South Africa’s government needs to be talking directly with Mozambique project operators. Standard Bank and its shareholder, the Industrial and Commercial Bank of China, are the largest lenders to Mozambique’s Coral floating LNG development.

Eskom’s woes

Costs at state energy utility Eskom are at the core of many of South Africa’s problems. Costs of dollar-priced diesel used by Eskom could be slashed if Mozambique’s LNG is used, according to Eardley-Taylor.

  • Spot LNG is currently around $32 barrel of oil equivalent (BOE), while contract LNG is around $37.
  • Diesel costs more than double, at $77-$80, Eardley-Taylor says.

Moody’s, the only ratings agency that continues to rate South Africa at investment grade, has said that Eskom is South Africa’s main source of contingent liability risk. Loss of that rating would have a catastrophic effect on the country’s investability. Eskom has set aside R50bn ($3.5bn) over the next five years just to keep its ageing electricity infrastructure running.

Eskom’s cost of debt service is mainly due to capital expenditure on coal-fired power stations at Medupi and Kusile, the Helen Suzman Foundation argued in a submission to the South African regulator in December 2018.

  • The company has effectively been trying to claw back cost overruns and delays through increased consumer tariffs, so damaging the economy, the foundation said.
  • Energy expert Ted Blom has said that the company is on the brink of collapse, with inflows from China that have been used to prop the company up having been cut off.

According to Indigo Ellis, Africa analyst at Verisk Maplecroft in London, the ANC’s election victory means that President Cyril Ramaphosa now has a mandate to begin necessary economic reorganisation, with Eskom at the top of the agenda.  South Africa’s dependence on the mining industry means that its energy needs are especially acute.

  • Ellis predicts that Eskom tariff hikes will make 75% of platinum-group operations marginal or loss-making by the end of 2021, jeopardising 67% of South Africa’s production.
  • More than 111,000 jobs will be at risk if nothing is done, she says.

Bottom line:

The political timing is right for South Africa to finally fix Eskom – and the resources to do so are on its doorstep.

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