UNCLAS SECTION 01 OF 06 JOHANNESBURG 000337

SIPDIS

SIPDIS

STATE PLEASE PASS USAID, USGS
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
DOE FOR THOMAS SPERL

E.O. 12958: N/A
TAGS: EMIN ENRG ECON SF
SUBJECT: THE SOUTH AFRICAN COAL INDUSTRY: PART II -- COAL IN SOUTH
AFRICA

REF: JOHANNESBURG 335

JOHANNESBU 00000337 001.2 OF 006



1. (U) Introduction: This is the second of a four-part cable
dealing with coal and the important role coal plays in the South
African economy. Part 2 provides an in-depth look at the South
African coal industry, from coalfields to production, uses and
exports. It also looks at the infrastructure available and the
legislation governing the industry, including the requirements
of black economic empowerment legislation. Reftel contains a
summary for all four parts. End Introduction.

The South Africa Energy Scene
--------------

2. (U) South Africa's primary energy mix is 68% coal, 18% oil,
9% biomass, 3% gas, 1% hydro and 1% nuclear. The 18% oil
component includes 4% synfuels derived from coal conversion and
is made up of 65% imported crude and 35% locally produced oil.
South Africa's daily oil production is about 35,000 barrels of
crude from three small off-shore oil fields; 155,000 barrels of
crude equivalent from Sasol's two coal-to-liquid (CTL) plants;
and 45,000 barrels of crude equivalent from State-owned
PetroSA's gas-to-liquid (GTL) plant. South Africa imports some
430,000 barrels per day crude at an annual cost of about $10
billion. In 2005, domestic oil production saved the country
nearly $4.7 billion in foreign exchange.


3. (U) Sasol's CTL process consumes about 43 million tons of
coal per year, produced mainly from its own four mines, plus
purchases from other collieries as required. PetroSA derives
natural gas for its GTL plant from small gasfields off the south
Cape coast. These are expected to reach end of life by about

2012. A major search is underway to replace this supply either
by discovering more gas, importing liquid natural gas (LNG), or
relocating the plant to the west coast where two offshore gas
fields may be producing by 2012. The Sasol and PetroSA coal and
gas conversion plants are the largest of their kind in the
world.


4. (U) Eskom generates 95% of South Africa's electricity and the

remaining 5% is generated by municipalities. During 2005, 92%
of Eskom's output of 273,000 GWh was from 10 coal-fired plants
with a net maximum capacity of 32,680 MW.
(Note: A MW equals 1 million watts of electricity and a GW
equals 1 billion watts. Gigawatt-hours (GWh) are obtained by
multiplying the generating capacity (MW) by the operating hours.
For example, if the average capacity of a generating plant is
10 MW and it operates continuously for a year or 8760 hours, it
will deliver a total of 87,600 MWh or 87.6 GWh. End Note.)


5. (U) Three others coal-fired plants with a total capacity of
3,540 MW will be returned to production by 2008. Apart from
these base-load stations Eskom also operates a 1,800 MW
pressurized water reactor (PWR) nuclear station at Koeberg in
the Western Cape. Peaking and emergency supply is provided by
two pump-storage stations totaling 1,400 MW and located in the
Western Cape and KwaZulu/Natal, two gas turbine stations
totaling 342 MW are in the Western and Eastern Cape provinces,
and six small hydroelectric stations totaling 660 MW are located
in various parts of the country.


6. (U) Over the past decade, mainly due to the SAG's now defunct
energy privatization program, there has been an under-investment
in new generation and transmission capacity. This became
painfully apparent early in 2006 when an accident to Koeberg's
Unit 1 generator caused the nuclear station to go off-line. The
Western Cape suffered months of unplanned and (later) scheduled
power outages due to a combination of insufficient generation
and transmission capacity in and from Mpumalanga power plants.
The SAG has allocated some $15 billion to be spent over the next
five years to boost the whole electricity system. This includes
expanding generation capacity by some 8,000 MW - 6,000 MW from
refurbished and new coal-fired plants and 2,000 MW from
gas/diesel-fired open cycle turbine plants. Nevertheless,
reserve generating capacity is likely to remain below 10% of
usable capacity for the foreseeable future, less than the
industry-recommended reserve of 15%.

South African Coal Industry
--------------

7. (U) Coal was first mined in the early 1890's to provide
domestic and industrial heat and steam (and later electricity)
to power the country's expanding diamond and gold mines. By
2005, domestic coal sales amounted to 175 million tons of which
112 million tons were supplied to Eskom for generating
electricity, 43 million tons to Sasol for conversion to liquid
fuels and chemical products, and 20 million tons for local use
in the chemical, cement, metallurgical and steel industries and

JOHANNESBU 00000337 002.2 OF 006


for domestic heating and cooking. An additional 71 million tons
were exported, of which 77% went to Europe. Eskom's coal-fired
plants generated 92% of the country's electricity. This
represented 66% of the continent's total electricity supply and
six to seven times Nigeria's total output with a population
three times that of South Africa. Sasol Synfuels produced about
25% of the country's total fuel needs.


8. (U) The future of South Africa's international coal trade
depends on a number of external factors including coal, oil and
gas prices; concerns about energy security; competition from
other energy sources and coal producers; and the ability to
radically reduce emissions and capture and permanently store CO2
gas at relatively low cost. South Africa is investigating a
number of options and alliances to develop and implement clean
coal technologies.


9. (U) In 2005, five major and some 40 small coal companies
produced 306 million tons of run-of-mine (ROM) coal from about
64 mines - 55% from underground operations. Over twenty of the
smaller coal companies were created under Black Economic
Empowerment (BEE) legislation and one is a black-owned and
operated mine. The 245 million tons of saleable coal produced
included 1-2 million tons of anthracite, coking and
metallurgical coals, the rest being steam coal. Output came
from Anglo Coal (23%), Ingwe (BHP-Billiton) (22%), Sasol (20%),
Eyesizwe/Kumba merger (18%), Xstrata (8%), and small and BEE
operators (9% total).

Coal Research
--------------

10. (U) For two to three decades prior to 2000,
industry-supported research on the fundamental properties of
coal was generally neglected. Given the size and importance of
the coal industry, government-supported and university research
facilities were and still are inadequate and few coal scientists
were or are being trained. Major users Sasol, Kumba and Eskom
funded research to improve quality and efficiency of usage while
competitive research on applications was carried out in-house or
in overseas laboratories by major producers Kumba, BHP-Billiton
and Anglo Coal.


11. (U) Over the past decade, growing global demand for steam
coal, coal's increasing importance to the South African economy,
and concerns about shrinking reserves of quality coal in
producing coal fields, galvanized the industry into establishing
the Coaltech Research program. The program formally commenced in
1999 as an initiative to develop technology and apply research
findings that would enable the South African coal industry to
remain competitive, sustainable and safe, well into the 21st
century. Coaltech was established as a joint venture and
equally funded agreement between Eskom, Anglo Coal, Ingwe Coal,
Kumba Resources, Xstrata Coal, Sasol Mining, Eyesizwe Coal,
Total Coal, the Chamber of Mines, and the CSIR (the
government-owned Council for Scientific and Industrial
Research). A conditional grant was also provided by the
Department of Science and Technology through the Enhanced
Technology Development Program.


12. (U) In terms of the agreement, the program is directed by
the Coaltech Management Team (CMT) composed of representatives
from the above companies. In addition the Universities of the
Pretoria and the Witwatersrand, the Department of Minerals and
Energy, and the National Union of Mineworkers are represented on
the CTM by invitation. Work done to date has extended the life
of the Highveld and Witbank coalfields by more than five years.
It has also resolved problems experienced with polluted water
and fine coal discards, amongst others.

South Africa's Coal Resources
--------------

13. (U) South Africa has 18 principal coalfields spread over an
area of some 700 km from north to south and 500 km from east to
west. The coals are generally high in ash and low in reactive
constituents and have a low sulfur level of (generally) less
than 1%. Nine coalfields host operating mines that produce
predominantly thermal coals. The remaining fields are deep, of
poor quality, may contain undesirable radioactive and trace
elements, and are unlikely to be developed in the near future.
However, some contain coking coals and Rio Tinto is currently
evaluating the Limpopo field in the north for this potential.
There is no commercial production of coal-bed methane (CBM) but
Sasol and Anglo American are investigating this potential.


14. (U) South Africa's estimated hard coal resource base exceeds
120 billion tons of which some 31 billion tons are considered to

JOHANNESBU 00000337 003.2 OF 006


be reserves. (Note: Reserves are that portion of a deposit or
resource base that are economically recoverable under present
economic and technical conditions. End Note.) The vast
majority of this is steam coal, the remainder being anthracite
and minor reserves of metallurgical and coking coal. In 2005,
South Africa ranked fifth in production, and sixth in total
reserves. However, because many countries do not comply with
the reserve estimation standards used in South Africa, Canada
and Australia, this ranking could change in the future.


15. (U) The Waterberg field in the north-west, hosts one
mega-mine that produces 17 million tons of coal annually, of
which 14.7 million tons feeds the giant, dry-cooled, Matimba
power plant (3,690 MW). Matimba is the largest dry-cool plant
in the world. Officially the Waterberg contains 10% of South
Africa's coal reserves but is estimated to host about 50% of the
total resource base. The field extends westwards into Botswana
where plans are being formulated to produce power for export to
South Africa. Coal reserves by field in billions of tons are:

Coalfield Reserves %Total

Highveld 9.8 32
Witbank 9.4 31
Ermelo 4.4 14
Waterberg 3.1 10
Vereeniging/Sasolburg 1.8 6
South Rand 0.7 2
Soutspansberg 0.3