SOUTH AFRICA: UPDATE ON PBMR

C O N F I D E N T I A L SECTION 01 OF 03 PRETORIA 000762

SIPDIS

DEPT FOR NP/NE, ABURKART/AKRASS

E.O. 12958: DECL: 02/17/2015
TAGS: ENRG KNNP TRGY CH FR SF
SUBJECT: SOUTH AFRICA: UPDATE ON PBMR

REF: A. 04 PRETORIA 2956

B. 04 PRETORIA 1124

Classified By: ECON M/C J. Jeff Hartley, Reason: E.O. 12958 1.4 (b) and
(d)


1. (C) Summary. PBMR, Ltd. executives told Econoff that their
project would not be sidelined by a recent court decision
requiring the Department of Environment and Tourism to enter
into another round of stakeholder consultations on an
environmental impact assessment concerning their pebble bed
modular nuclear reactor project. With the financial and
political support of the government and a new leadership team
in place, PBMR was plowing ahead with the design and
engineering phase. All thirteen design and engineering
contracts had been signed and now there was a renewed effort
to attract more investors. The lead in government would be
transferred to Public Enterprises Minister Alec Erwin, who
had publicly stated recently that South Africa intended to
generate 4000-5000 MW of electric power from pebble bed
reactors. The executives were anxious to engage U.S.
national energy laboratories on research and development
programs, and the U.S. National Nuclear Regulator on
licensing issues. They also discounted recent press reports
that the Chinese pebble bed project was ahead of theirs. End
Summary.

Not Sidelined By Court Decision
--------------


2. (C) PBMR, Ltd. executives met with Econoff via telephone
conference to discuss progress on the pebble bed modular
reactor after a Western Cape court ordered the Department of
Environment and Tourism (DEAT) to reopen its environmental
impact assessment (EIA) regarding the Koeberg site. The
executives included Westinghouse Senior Vice President and
Chief Technology Officer Regis Matzie, Westinghouse Nuclear
Plant Projects Manager Edward Schmiech, PBMR Power Plant
Delivery Director Dieter Matzner, and PBMR Manager for
Modular Dynamics Willem Kriel. The executives told Econoff
that they did not see how the reopening of the EIA would
delay PBMR efforts at this point, since the project was still
in the design, testing, and engineering phase. Construction
would not begin before 2007 on a demonstration reactor to
come on-line in 2010. PBMR anticipated commercial sales to
begin in 2013. In fact, they were pleased that DEAT had
decided not to appeal the court's decision, opting instead to
simply include another round of stakeholder consultations as
the court had ordered. This worked in PBMR's favor, as it
provided resolution to the court challenge and allowed DEAT
to get on with modifying its EIA procedures and completing
the EIA for PBMR by the end of the year. PBMR had requested
two separate legal advisories before sitting down with DEAT
and Eskom to decide on a final EIA approach before end of
March.

South African Government Lends Full Support
--------------


3. (C) Since April 2004 when the South African Government
declared PBMR a national strategic project, PBMR has been
undergoing a number of significant changes. In August 2004,
Jaco Kriek, Vice President for Mega Projects at the
Industrial Development Corporation (IDC),was seconded to
PBMR to become its new CEO, replacing Nic Terblanche who
assisted with the transition as Chief Operating Officer
before retiring. Kriek brings a strong project financing
background and obvious connections to the IDC and the
Department of Trade and Industry (DTI),to which the IDC
reports. PBMR executives told Econoff that the IDC would
soon assume lead investor status from Eskom Enterprises.
Also in August, DTI Director General Alistair Ruiters was
appointed Chairman of PBMR's Board, giving the company direct
access to the upper reaches of South African Government.


4. (C) In October 2004, the government put its money where
its mouth was when it allocated R500 million to sustain PMBR
through March 2005. PBMR executives have been told that this
level of financial support would be extended over the next
2-3 years when Finance Minister Trevor Manuel delivered this
year's budget to Parliament on February 23. While the plan
was for the South African Government to maintain at least a
51% shareholding in PBMR, IDC's shareholding would increase
as Eskom Enterprises decreased to about 5%. Room would also
be made for a 10% Black Economic Empowerment investor.
British Nuclear Fuels' (BNFL),the company to which
Westinghouse belongs, would retain a 25% interest, but
shareholdings for all could vary as new investors are brought
in.


5. (C) Governmental oversight of PBMR would be transferred
from the Department of Minerals and Energy to the Department
of Public Enterprises (vice the Department of Trade and
Industry, as earlier believed). Minister of Public
Enterprises Alec Erwin, formerly Minister of Trade and
Industry and well known as one of President Mbeki's most
effective cabinet members, would take the point position.
Recently, Erwin publicly assured PBMR that the government
planned to generate 4000-5000 MW of electric power from
pebble bed reactors. This equated to 13-17 300 MW reactors,
a crucial first market and enough to bring PBMR substantially
down its learning and cost curves as it embarked on
commercial production.

Renewed Campaign for Investors
--------------


6. (C) PBMR executives said that the South African
Govenment's political, financial, and market support made it
much easier for them to approach potential investors. PBMR
sought two to four serious investors to take up to 40% of the
company. In preparation, it had contracted HSBC and Rand
Merchant Bank to produce an investor information memorandum
and prospectus to potential investors. Matzie said that a
consortium of local banks had already shown interest. In
addition, investing suppliers/vendors would be given the
right to match competing bids on PBMR contracts. Finally,
the South African Government had added PMBR to its offset
program, thus encouraging defense contractors and Eskom
suppliers (such as GE, Westinghouse, Mitsubishi Heavy
Industries, and GEC Alstrom) to seriously consider PBMR as a
way to satisfy offsets generated by large contracts with the
South African Government. Matzie said that the potential
offset investment pool totaled some R20 billion (or $3
billion). (Note: Matzie added that, at this point, it seemed
clear that the hard bargaining AREVA (France) would not
invest in PBMR.)

All Supplier Contracts Signed
--------------


7. (C) PBMR executives told Econoff that PMBR had already
signed all thirteen major supplier contracts for detailed
design and engineering work. This included a recently signed
contract with Mitsubishi Heavy Industries for the basic
design and research and development of the helium driven
turbo generator system and the core barrel assembly, as well
as a R260 million contract with IST Nuclear for the detailed
design of three key systems: fuel handling and storage,
reactivity control and shutdown system, and gas systems. In
addition, the Nuclear Energy Corporation of South Africa
(NECSA) started construction of a helium test facility at
Pelindaba in December 2004, with a completion date of April

2006. The executives said that the University of the
Northwest (formerly Potchefstroom University) should have its
heat transfer test facility operating by then. To accomodate
the ramp up in design and engineering, PBMR planned to move
to a new building on Route 21 near the international airport
that would accommodate a staff of 700.

PBMR Wants to Use U.S. R&D Agreements
--------------


8. (C) Since the project was moving into a testing phase,
PBMR executives wanted to take advantage of U.S.-South
African R&D agreements on nuclear energy and nuclear
materials safeguards technology as soon as they were signed.
PBMR executives thought that such agreements would facilitate
testing and research at Idaho National Laboratory in Idaho
Falls and Oak Ridge National Laboratory in Tennessee. PBMR
told Econoff that they would press the South African
government to move forward on these agreements. In fact,
Matzie called back later to tell Econoff that CEO Jaco Kriek
had agreed to ask Public Enterprises Minister Alec Erwin on
February 21 to take it up with Minerals and Energy Minister
Phumzile Mlambo-Ngcuka as soon as possible.

Construction License
--------------


9. (C) The authority to grant the construction license to
PBMR rested with the South African National Nuclear Regulator
(NNR). While NNR was not required by law to conduct public
consultations, it wanted to incorporate some level of public
participation into the process. PBMR planned to press NNR to
start the process soon, but knew that it would have to wait
for a new NNR CEO to be installed. Former CEO Luisa Zondo
departed at the end of 2004 and her successor would soon be
announced. PBMR executives told Econoff that the chosen
person, to be installed on April 1, was "knowledgeable and
supportive" of PBMR.

U.S. Licensing Effort
--------------


10. (C) In November 2004, PMBR convened the first meeting of
its U.S. business advisory group, comprising seven top
electric utilities accounting for over 50% of the nuclear
power capacity in the U.S. The group agreed to meet every
six months. Senate Energy Committee staffer Peter Lyons was
also to have been a member of this group, but he pulled out
after he was named to become a Nuclear Regulatory
Commissioner.


11. (C) Also in November 2004, PBMR executives delivered a
two-hour presentation to members of the Nuclear Regulatory
Commission (NRC) in an effort to initiate a "pre-application
review" during 2005. The NRC told PBMR that it faced a
number of U.S., Canadian, and French company applications
over the next 12-18 months, which would stretch NRC resources
on major planning and policy issues. PBMR executives
believed that a higher political profile for PBMR would make
the NRC more responsive to its needs.

The Chinese Connection
--------------


12. (C) PMBR executives bristled at local newspaper reports
that the Chinese pebble bed project had overtaken that of
South Africa. They had visited China in September, talked
monthly with scientists at Tsinghua University, and were very
familiar with the Chinese effort. They felt that without a
design on the table, the Chinese 5-year timetable was
unrealistic. Nonetheless, there was room for cooperation
between the two, and they had extended two Memorandums of
Understanding to the Chinese for cooperation on technical
development.
FRAZER