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Renergen prepares for South Africa’s first-ever LNG auction

By David Whitehouse
Posted on Friday, 24 July 2020 17:43

An asteroid bombardment two billion years ago set off a chain reaction leading to very pure helium deposits in South Africa. Don Davis/Southwest Research Institute via REUTERS

Renergen CEO Stefano Marani is “encouraged” by the early levels of interest in South Africa’s first ever liquefied natural gas (LNG) auction, he tells The Africa Report.

The LNG being sold will be produced from the company’s Virginia Gas project in Free State. Prospective bidders must register their interest by 27 August. Those accepted will then be given the date of the auction. Bidders will have to sign a confidentiality agreement under which all details will be kept secret.

Renergen, shares in which trade on the South African and Australian markets, is an emerging producer of LNG and helium. The company’s gas is biogenic rather than thermogenic, and is generated by microbes underground. This means long-life wells producing carbon-negative gas, which “is a massive environmental benefit,” says Marani.

READ MORE South Africa VS Coronavirus: Insurers face crisis of confidence

The company plans to start LNG production around the third quarter of 2021 and will distribute LNG at filling stations in partnership with Total. The target customer base will be logistics companies relying on trucks.

Helium

Renergen’s project also has one of the world’s richest sources of helium, estimated by the MST Access research firm in Australia at 344b cubic feet. That’s close to half the total reserves of the US, the world’s largest helium supplier.

  • The company’s helium has average concentration of around 3%, compared with average concentrations of 0.04% in Qatar, 0.06% in Russia and 0.35% in the US.
  • The deposits are a result of a meteor strike which occurred around 2 billion years ago.
  • This is known as the “Vredefort impact” and created the world’s largest known crater in South Africa.
  • Helium is a by-product of the decay of the huge uranium deposits which resulted from the “bombardment”.

Helium is used in medical scanners, for deep-sea diving and as a lifting gas.  MST Access cautions that the major risk to helium demand is recycling, reuse and refining of its use by customers. Still, these risks mainly concern gaseous rather than liquid helium, MST Access says, and Renergen will supply purely liquid helium.

Competition and Dilution

Despite COVID-19, Renergen shares in South Africa are now higher than at the start of 2020.

Still, the existence of a unique natural resource does not necessarily make the stock a good investment.

  • According to the company’s 2019 Australian IPO prospectus, the company’s ability to grow partly depends on its ability to source sufficient capital.
  • The company may need further funding if construction or operating costs are higher than expected, or to build any additional plants.
  • That means shareholders run the risk of dilution in future.
  • The company has a $40-million borrowing facility with the US International Development Finance Corporation, and the first repayment date for the portion drawn down is August 2022.
  • Phase two of production, which will see helium take a greater share of revenue than LNG, is scheduled for 2023. More equity and/or debt financing will be needed for phase two.

Although the company has the only onshore petroleum production in South Africa right now, this is likely to change as more production rights are granted, so increasing LNG supply competition and affecting profit margins, the prospectus notes.

Marani welcomes the prospect of more competition. “If there were more legislative clarity, investors would be flocking in,” to South Africa. More competition, he says, means more customers for everyone due to the greater prevalence of the fuel. “Bring the other gas producers in. It’s good for the country. There’s more than enough of an opportunity for everyone.”

Neither does the prospect of large-scale LNG development in Mozambique worry him.

  • There’s no way that a pipeline can be built from Mozambique to South Africa, says Marani.
  • And South Africa does not have a port ready to accept LNG. “That’s the missing piece that people can’t seem to appreciate.”
  • Enabling ports to receive LNG might require legislative changes and environmental assessments, which he sees as a mid-term prospect.

READ MORE Mozambique’s Islamic insurgency poses risks to Total’s LNG project

So given such a natural resource, why does South Africa need to mine coal? “It’s a question I ask myself every day,” he says.

Bottom Line

Renergen has the natural resources to help redefine South Africa’s energy mix – but shareholders should expect a rocky ride on the way.

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