NJ Ayuk, Executive Chairman, African Energy Chamber
It is no exaggeration to say that South Africa’s offshore gas discoveries represent a potential economic transformation for the country, comparable to Guyana’s oil boom or Suriname’s emerging energy sector.
The Luiperud Bururupada Gas-Condensate Project in Block 11B/12B off South Africa’s southern coast is estimated to have reserves of 3.4 trillion cubic feet (tcf) of gas and 192 million barrels of gas-condensate. Production at the facility would represent thousands of jobs and a revitalization of areas like Mossel Bay, where South Africa’s gas-to-liquids refinery once fueled local jobs and industry until it was forced to cut back on production.
Unfortunately, this could all just be wishful thinking, as TotalEnergies’ withdrawal from the project in 2024 revealed significant hurdles.
South Africa’s gas potential is currently locked up. This is partly due to a legal challenge by environmentalist groups that halted the $1.6 billion project, but also because all parties involved have not reached an agreement on the price to buy the gas.
GTL solution
A gas-to-liquids (GTL) strategy, one that ties prices to liquefied natural gas (LNG) spot markets and incorporates meaningful community engagement, will help deliver sustainable growth to other parts of the country while balancing the needs of upstream investors, downstream users, and coastal communities.
The petrol price dilemma is the main stumbling block.
Upstream companies like TotalEnergies require dollar-based contracts to reduce currency risk and secure returns on large exploration investments. The South African government is understandably wary of dollar-based arrangements and would prefer rand-based prices to protect local consumers and maintain affordability. The impasse that TotalEnergies has encountered on this issue is one of the factors behind its withdrawal from Block 11B/12B, despite promising and hard-won discoveries on the ground.
The domestic market further complicates the situation.
Power producers require low gas prices because they operate on small margins when carbon costs are taken into account. Upstream operators, on the other hand, need to charge higher prices to justify the development of capital-intensive deepwater projects. On the other hand, the global LNG market is expected to remain saturated for the next three to five years, making exporting gas in the form of LNG a less competitive option at present. Without compromise on pricing, South Africa’s gas will remain untapped and all the benefits and opportunities it brings will be left behind.
However, the GTL strategy offers a multifaceted solution. By revitalizing the PetroSA GTL facility in Mossel Bay and converting natural gas into high-value liquid fuels such as diesel and kerosene on site, South Africa could reduce its dependence on fuel imports, strengthen energy security and expand employment opportunities for thousands of workers.
The precedent is clear. In Suriname, TotalEnergies’ GranMorgu deepwater project is expected to create 6,000 local jobs and inject at least US$1 billion into the economy. A similar initiative at the dormant Mossel Bay facility could transform South Africa’s southern coast and bring new revenue and broader economic stability to the government.
This is more than just optimism. This strategy will be a practical means of leveraging existing infrastructure to drive regional development. But again, the economic viability of the GTL strategy as a solution for South Africa’s gas production depends on securing gas price agreements that meet the needs of both producers and consumers.
To resolve this pricing impasse, South Africa should adopt a formula that links the gas purchase price to the global LNG spot price minus a percentage to reflect the absence of liquefaction and transport costs. This approach allows upstream companies to receive dollar-based payments, allowing them to meet their financial requirements while aligning with the unique changes in global markets. Downstream power producers and GTL operators enjoy discounted and affordable prices, making projects economically viable at both ends of the supply chain.
Furthermore, because governments may encourage GTL development through tax breaks, infrastructure subsidies, and public-private partnerships, the economic benefits of these projects are likely to exceed their initial costs. This pricing model avoids the pitfalls of land-based contracts and is a fair compromise that meets the needs of all stakeholders.
additional obstacles
Overcoming environmental opposition is another important step towards progress in gas development, and ignoring community engagement in this regard only empowers non-governmental organizations (NGOs) to challenge projects in court. Petroleum Agency SA’s community awareness campaign to educate local residents about the benefits and risks of gas development provides a model for improvement in this sector. Expanding such efforts to include early and transparent involvement in the environmental impact assessment (EIA) process will help build trust and reduce grounds for litigation.
Town hall meetings and accessible EIA summaries could be a means to highlight the economic benefits of a GTL strategy. By engaging communities as stakeholders, government and industry can work together to demonstrate that gas development can create shared prosperity.
The introduction of a GTL strategy is itself another way to address the legal resistance posed to exploration projects in South Africa. Domestically produced liquid fuels reduce emissions by avoiding long-distance transportation. This means that your GTL strategy is already aligned with your environmental goals from the beginning. While emphasizing the carbon footprint reduction of GTL projects will go a long way in gaining public approval for projects, the government needs to work to expedite the permitting process by establishing time-bound and clear guidelines for EIA and consultation. They also need to put in place mechanisms to limit repeated legal challenges after approval and allow projects to move forward without endless litigation.
The establishment of a dedicated task force comprising industry, government and local representatives would strengthen South Africa’s bargaining power and hold projects accountable to environmental and social standards.
A collaborative path forward
Extracting and monetizing the gas resources held in Blocks 11B/12B and elsewhere could be a course correction for South Africa, but doing so for maximum benefit will require bold and collaborative action. For South Africa to truly benefit from its gas resources, President Cyril Ramaphosa’s government needs to move beyond its traditional focus on coal and mining to prioritize gas development and embrace the potential of a GTL strategy.
By reviving the decommissioned Mossel Bay GTL facility and introducing a pricing model linked to the LNG spot price, the government can meet the needs of both upstream and downstream stakeholders, while creating jobs for South Africans and reducing import dependence. By simplifying the permitting process and increasing community involvement, we can address environmental concerns and move projects forward without unnecessary delays or litigation.
With decisive leadership and a commitment to balance, South Africa can transform its gas potential into a catalyst for sustainable growth, securing a prosperous future not just for the industry but for the country as a whole.
