SOUTH AFRICA IS HYDROCARBON POOR, BUT HAS BIG PLANS FOR

UNCLAS SECTION 01 OF 05 CAPE TOWN 000056

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SUBJECT: SOUTH AFRICA IS HYDROCARBON POOR, BUT HAS BIG PLANS FOR

REFINERIES AND PIPELINES

REF: A) Pretoria 393
B) 08 Pretoria 386
C) 08 Pretoria 351



1. (SBU) This cable is not for Internet distribution. This cable is
a collaboration between Embassy Pretoria and Consulate General Cape
Town. Summary. South Africa has limited reserves of crude oil and
natural gas and imports 70 percent of its requirements, which are
for the most part refined locally. The remaining 30 percent of its
liquid fuel comes from the conversion of coal and gas and the
potential for coal bed methane is now gaining interest. Demand for
liquid fuels has exceeded refinery capacity and ever larger
quantities of refined fuels are being imported. Pipeline and bulk
rail transportation infrastructure has also reached capacity and
product is increasingly being moved inland by road, raising costs
and causing deterioration and overcrowding of the road system. The
SAG is promoting construction of new pipelines and an ambitious
400,000 barrels per day refinery at Coega in the Eastern Cape
Province. Prospects for discoveries of oil and gas on- and
off-shore are not favored by geology, but remain to be tested using
state-of-the-art exploration techniques. Deep water structures
offer some potential, but exploration investment has been hampered
by a complex fiscal and regulatory regime, which has not been
perceived as welcoming by the international industry. End Summary.


2. (SBU) This cable was composed using information gleaned from
meetings with the following contacts, mostly on the margins of the
Mining Indaba in Cape Town February 9-12 (Ref A):

-- Jack Holliday, CE, Lengau Resources - Coalbed Methane;
-- Prof Philip Lloyd, Energy Research Centre, University of Cape
Town;
-- John Langhus, Director, Forest Oil - Ibhubesi Gas Project;
-- Marek Ranoszek, GM, Pioneer Resources - Oil and Gas fields;
-- Avhapfani (Fani) Tshifularo, CE, SAPIA (Petroleum Industry
Association);
-- Dr. Faizel Mulla, Corporate Strategy Manager, PetroSA - Oil, Gas,
and Synfuels;
-- Mthozami Xiphu, CEO, Petroleum Agency of South Africa (PASA);
-- Charl Moller, CE, Transnet Pipelines (from an earlier meeting in
Durban).

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South Africa's Growing Demand for Fuel
--------------



3. (SBU) South Africa faces growing demand for liquid fuels,
particularly taxing its capacity to provision inland demand. A
total of 27.5 billion liters (173 million barrels) of liquid fuels
were consumed in South Africa during the economically good times of
fiscal year September 2007 - August 2008. This represented an
increase of some 31 percent since 2003 and exceeded the actual
capacity of domestic refineries -- 26.0 billion liters (164 million
barrels) in 2006 by 6 percent. No new refinery capacity has been
added during recent years and some has been lost due to upgradings,
accidents, and maintenance requirements. Industry has resorted to
depleting stocks and to importing refined product to sustain retail
Qdepleting stocks and to importing refined product to sustain retail
supply. Demand grew steadily -- but unevenly -- during the six-year
period from 2003, but declined by some eight percent during the
second half of 2008. During the six-year period to September 2008,
gasoline consumption increased by 18 percent, diesel by 62 percent,
and jet fuel by 25 percent, according to Department of Minerals and
Energy (DME) liquid fuels Officer Hein Baak.

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Limited Fuel Supplies - but Domestic Potential Exists
-------------- --------------


4. (SBU) South Africa produces limited amounts of crude oil and
natural gas from a number of small offshore deposits along the

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southern coast of the Western Cape Province (Ref B). Reserves are
modest and will be depleted by about 2011-2012, pending further
discoveries (there were estimated reserves of 318 billion cubic feet
of natural gas at the end of January 2008). Natural gas produced is
used to supply state oil company PetroSA's Mossel Bay gas-to-liquids
(GTL) plant, which produces liquid fuels and chemicals. In
particular, PetroSA produces a zero-sulfur diesel that is exported
or sold to local markets for blending with higher sulfur diesels,
according to PetroSA Manager Faizel Mulla. PetroSA is looking to
secure other gas supplies, including imports of LNG, to maintain
production at its GTL plant. In addition, some 4.25 billion cubic
feet of natural gas per year is imported from Mozambique by South
Africa's synthetic gas-to-liquids producer Sasol, which plans to
increase this amount by 20 percent by the end of 2009.


5. (SBU) U.S. firm Forest Oil is developing the Ibhubesi gas field,
which lies some 70-80 kilometers off the Western Cape coast, 300
kilometers north of Cape Town. The field is estimated to contain
reserves of about one trillion cubic feet of gas, based on an
initial four-exploration-well-drilling program. Five additional
wells were subsequently drilled, partially funded by partner
PetroSA, but these yielded disappointing results, which did not add
to the reserve base. The field is not yet in production and
majority shareholder and operator Forest Oil has been waiting for a
production license and finalization of the fiscal and regulatory
regime from the Petroleum Agency of SA (PASA) for a number of years.
Forest has recently posted Director John Langhus to Cape Town to
procure the final license, market and distribute the gas onshore,
and generate a return on the $100 million total investment in the
project ($57 million by Forest). Prime candidates to take Ibhubesi
gas are state power utility Eskom and west coast industrial
companies at Saldanha Bay. (Note. It was hoped that Ibhubesi might
have sufficient gas to feed PetroSA's GTL plant, but it appears that
the reserve is too small to justify the costs of a 400-600 kilometer
pipeline to the plant at Mossel Bay. End Comment.)


6. (SBU) South Africa possesses ample reserves of coal (and
uranium). The country produces only 4-5,000 barrels of crude oil
per day from two nearly depleted fields and relies on imports for 70
percent of its crude oil supply, mainly from the Middle-East,
supplemented by domestic coal-and gas-to-liquids capacity. The
imported crude is refined in four internationally-owned refineries
with a total capacity of 513,000 barrels per day:

-- Sapref in Durban has a capacity of 180,000 barrels per day and is
jointly owned by oil companies Royal Dutch Shell of Holland and BP
of the UK;
-- Enref in Durban has a capacity of 125,000 barrels per day and is
owned by Malaysian oil company Petronas;
-- Chevref in Cape Town has a capacity of 100,000 barrels per day
Q-- Chevref in Cape Town has a capacity of 100,000 barrels per day
and is owned by U.S. oil company Chevron;
-- Natref in Sasolburg has a capacity of 108,000 barrels per day and
is jointly owned by South Africa's Sasol (64 percent) and French
company Total (36 percent).


7. (SBU) Recent economic growth has rendered the country's fuel
capacity insufficient to meet the needs of the economy and some 6-8
percent of refined products are being imported, although this
percentage is now declining with the weakening economy. Fuel supply
is supplemented by synthetic fuels from the conversion of natural
gas (PetroSA) and coal (Sasol),accounting for nearly 30 percent of
South Africa's refined fuel output. PetroSA's GTL plant at Mossel
Bay has a rated refined capacity of 45,000 barrels per day and Sasol
produces some 160,000 barrels per day of refined fuels at its
coal-to-liquids (CTL) plant at Secunda, located 100 kilometers
south-east of Johannesburg. Both plants are the biggest commercial
ventures of their kind in the world and both produce zero-sulfur and
high quality diesels and kerosenes, the latter having proved of
sufficient quality for jet engines. (Note. Sasol/Chevron, Shell,
Marathon, ExxonMobil, and ConocoPhillips have plans for GTL plants
ranging from 80-140,000 barrels per day to be built in Qatar, but
these will only reach production during the next decade. To date,

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only Sasol's 34,000 barrels per day Oryx GTL plant is producing.
End Note.)

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Fuel Transport a Bottleneck to Supply
--------------



8. (SBU) South Africa may not be able to supply its inland fuel
needs by the third quarter of 2009 unless something drastic is done,
according to DME Deputy Director-General of Hydrocarbons and Energy
Planning Nhlanhla Gumede in June 2008. State-owned Transnet's
former CEO Maria Ramos acknowledged that mitigation strategies need
to be implemented before that time with respect to provisioning
greater Johannesburg. Transnet Pipeline CEO Charl Moller told
Energy Officer the company has implemented interim remedies to
augment Durban-Johannesburg pipeline capacity such as the
introduction of drag-reducing agents to reduce pipeline friction.
This step has increased annual throughput by as much as 30 percent
(from 3.2 to 4.2 billion liters or 20 to 26 million barrels).
Transnet Freight Rail has also purchased specialized bulk wagons to
move fuel inland. Despite these efforts, the pipeline is operating
at full capacity and more than two-billion liters (12.6 million
barrels) of fuel per year are being transported by road or rail per
year (Moller quoted 800 million liters or 5 million barrels by rail
and 1.6 billion liters or 10.1 million barrels by road).

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From Strategic Stock to Market Trading
--------------


9. (SBU) South Africa has long held strategic petroleum stocks as
part of maintaining energy security and self-sufficiency. Saldanha
Bay on the west coast hosts a fuel tank farm consisting of six
concrete containers, which hold 7.5 million barrels of oil each (Ref
C). This strategic stock facility has a total capacity of 45
million barrels of oil, making it the biggest installation of its
kind in Africa. It was constructed as a clandestine installation
for strategic oil storage under the apartheid government, but now
international oil traders have contracted to use the site to store
their oil supplies. Overseas contractors use about 35 million
barrels of storage capacity, while the remaining 10 million is used
by South Africa for trade and as a strategic oil stock. The tank
farm is managed by the state-owned Central Energy Fund.

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Need for State-of-the-Art Exploration
--------------


10. (SBU) Limited hydrocarbon exploration has been carried out in
South Africa to date for a variety of reasons. Onshore exploration
by state-owned PetroSA (formerly Soekor) in the 1970's was
unsuccessful, but did produce some positive hydrocarbon indicators,
which PetroSA is planning to re-investigate. Offshore drilling in
shallow waters has had limited success, but remote sensing surveys
in northern sectors of the west coast towards Namibia -- at water
depths of more than 2,000 meters -- have indicated potentially
Qdepths of more than 2,000 meters -- have indicated potentially
favorable oil and gas traps. Plans by BHP-Billiton (with U.S.
company Occidental, which subsequently withdrew from the venture) to
drill a deep exploration well in the area at a cost of $50-70
million have been delayed while fiscal and regulatory certainty was
negotiated. BHP and the South African government are progressing in
their discussions on the fiscal framework under which drilling could
proceed, according to new BHP Southern Africa Chairperson Xolani
Mkhwanazi. With the exception of portions of the southern Cape
shallow continental shelf, the remaining shelf and its deeper
confines around the South African coastline have not been explored
using state-of-the-art exploration technologies and methods.
Onshore and inland exploration also has not been done using the
newest technologies.

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Impediments to Investment in Exploration
--------------


11. (SBU) The potential for hydrocarbons in South Africa needs to be
tested using modern technology, but requires licensing, fiscal, and
regulatory certainty to attract exploration investment. Not a
single lease area was taken up by exploration companies during
PASA's 2008 international promotional road-show because of this
uncertainty, according to PASA CEO Mthozami Xiphu. However, he said
impediments relating to the outstanding Royalty Bill (postponed for
implementation in mid-2010 instead of 2009),as well as fiscal and
legal requirements have been sorted out to the extent that Forest
and BHP projects could go ahead as early as the end of this year.


--------------
Ambitious Projects
--------------


12. (SBU) New Pipelines: The increasing need for fuel in the
industrial heartland of the country requires an expansion of the
transportation infrastructure. Transnet Freight Rail service has
proved inadequate to the task, the pipelines from Durban have
reached capacity, and bulk road transport has had to fill the gap.
Government has allocated some $14 billion to upgrade and expand road
and rail capacity, but this has not yet been fully implemented. Two
fuel pipeline projects to alleviate the bottleneck are at different
stages of development. Transnet Pipelines CEO Moller said the
company has begun construction of a 540-kilometer, 24-inch,
three-pump-station, multi-product pipeline from Durban to
Johannesburg at a cost of $1.1-$1.2 billion, which should be
completed by third quarter 2012. Secondly, private company
Petroline has applied to build a 12-inch pipeline from Maputo in
Mozambique to Nelspruit in Mpumulanga Province at a cost of $500
million, to be completed in time for the 2010 World Soccer Cup
event. (Comment. It is unlikely that the pipeline will be
completed by the proposed completion dates as regulatory
requirements and licenses have still to be finalized. End
Comment.)


13. (SBU) Coal bed Methane: Other developments to facilitate fuel
supplies to South Africa's industrial heartland include the ongoing
evaluation by Anglo American and others of the coal bed methane
(CBM) potential of the Waterberg coalfields in north-eastern Limpopo
Province. No commercial production of CBM has taken place in South
Africa to date. (Comment: A number of international companies are
investigating the CBM potential of the Waterberg extension in
Botswana. End Comment). Sasol is evaluating the feasibility of a
new 80,000 barrel per day CTL plant in the Waterberg coal-bearing
region and also plans to increase its existing plant output by
30,000 barrels to 180-190,000 barrels per day over the next seven
years. Eskom is researching the viability of in-situ coal
gasification in Mpumulanga Province. The deposit in question has
proved un-mineable and if the tests prove positive, the process will
reduce environmental impact and emissions from coal and
Qreduce environmental impact and emissions from coal and
substantially increase the country's exploitable coal reserves.


14. (SBU) Refinery: South Africa's concern with security of future
fuel supply has prompted the development of both the large-capacity,
540-kilometer, multi-product pipeline from Durban and PetroSA's
proposed 400,000 barrel per day state-of-the-art refinery (known as
Mthombo) designed to process cheaper heavy crude oils of the type
produced in the Venezuela Orinoco oil field. (Comment. Heavy crude
oils also occur in Angola and Chad, but it is not clear whether any
of these would be made available to the proposed refinery. End
Comment.) The SAG has entered into some loose arrangements -- with
no tangible commitments on either side -- with Venezuela's
government on such cooperation. PetroSA's Faizel Mulla stated that
the proposed new refinery, together with the existing refineries,
would give South Africa the flexibility to import a variety of oils
from a number of sources. Excess refined product would be sold as
required.

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15. (SBU) PetroSA CEO Sipho Mkhize is reported as saying U.S.-based
engineering firm KBR was scheduled to complete the feasibility study
on the refinery in August and construction would start in 2010, with
first production expected in 2015. KBR was appointed as the
engineering contractor for the project in December 2008 and will be
responsible for the execution of the feasibility study, the
front-end engineering design, and project management of the project
through to the commissioning of the refinery. Mkhize also noted
that the project's estimated cost had been reduced to $9 billion
from the initial $11 billion, owing to fewer process units, lower
materials costs, and lower engineering construction costs.


16. (SBU) Comment. South Africa is frustrated that its neighbors
are blessed with hydrocarbons, but its own potential has never
materialized. On-shore exploration by the previous government drew
a blank and it developed CTL and GTL capacity to gain a measure of
self-sufficiency in the face of trade sanctions. It is not clear
that PetroSA will manage to build its ambitious refinery. It is
also not clear what will happen to existing refineries, which face
an estimated cost of $4 billion to upgrade to meet pending clean air
standards over the next five years. These refineries would also be
forced to compete with the greater economies of scale and more
efficient technology of the proposed state-owned PetroSA refinery.
If it became clear that the PetroSA refinery was going to be built,
this could undermine the justification for the upgrades for the
smaller refineries.
Mayberry