‘Mostly rand-denominated’ Ibhubesi-to-Ankerlig gas deal expected to be sealed in 2015

19th March 2015

By: Terence Creamer

Creamer Media Editor

  

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State-owned electricity utility Eskom has confirmed that it will enter into commercial negotiations with Sunbird Energy and PetroSA for the supply of indigenous natural gas from the Ibhubesi field, off South Africa’s west coast, to the diesel-sapping Ankerlig power station, 400 km to the south in Atlantis, Western Cape.

ASX-listed Sunbird owns 76% of the Ibhubesi Gas Project (IGP) joint venture (JV), while PetroSA, South Africa’s State-owned national oil company, holds the 24% balance.

The utility confirmed with Engineering News Online that it has concluded a gas supply agreement (GSA) term sheet with the IGP JV, while Sunbird has communicated with shareholders that it is aiming to conclude a 15-year commercial supply agreement before the end of 2015.

A binding GSA, should it be concluded, would create the platform for the IGP JV, together with funding and infrastructure partners, to finance what could be a R10-billion to R20-billion project, comprising production wells, an offshore gas platform, a 400 km pipeline and an onshore gas processing facility. Eskom itself has no intention of investing in the project.

Various environmental and regulatory approvals are being pursued in parallel to the negotiations on the GSA, which, if concluded before the end of the year, should enable the project to reach financial close in either late 2015 or 2016. The project would be funded through a combination of equity and debt, but the ratios have not yet been decided.

Eskom says first gas is expected to flow during 2018, by which time the utility will have converted the Ankerlig open cycle gas turbine (OCGT) plant to a dual-fuel operation, enabling it to employ both diesel and gas as feedstock.

“Conversion to dual-fuel capability is planned for implementation during the major plant outages scheduled for between 2016 and 2018,” Eskom tells Engineering News Online, adding that the conversion will not deliver any additional capacity benefits above the plant’s current 1 300 MW nameplate.

Sunbird Energy executive chairperson Kerwin Rana says the initial aim is to supply six of Ankerlig’s nine turbines with 30-billion cubic feet (Bcf) of gas yearly for a period of 15 years.

He stresses, though, that the initial GSA is premised on only the 210 Bcf of reserves already proved through exploration and appraisal campaigns that have involved an investment of around R1.2-billion since 2000. These campaigns have focused on only 5% of the 5 000 km2 Ibhubesi production licence area, where proven and probable reserves are currently estimated to be 540 Bcf, making it South Africa’s largest proven gas field.

Sunbird, which acquired the project from Forest Oil in 2014, believes there to be material exploration upside, with its current “best estimate prospective resource” published as 7.8 Tcf. However, various other energy groups have contiguous exploration rights, which could increase the West Coast resource base further; potentially making the IGP a “catalyst” for a larger indigenous offshore gas industry as envisaged by the ocean-economy component of government’s Operation Phakisa.

Rana even goes so far as to draw comparisons between the West Coast and Western Australia’s North West Shelf fields, which, since their discovery, have stimulated billions of dollars of investment in gas production, transportation and in liquefied natural gas (LNG) export capacity.

The other potential tailwind includes the mandate to Eskom from the Cabinet and the War Room to convert its expensive diesel-fuelled OCGT operations at Ankerlig and Gourikwa to gas, with Eskom having controversially spent over R10-billion in 2013/14 on diesel – an expenditure figure that is expected to be repeated during the 2014/15 financial year.

PRICE IN FOCUS

The immediate focus, though, is the bedding down of a GSA, which will determine the price of the gas, the volumes and the delivery schedule.

Both Sunbird and Eskom have confirmed that the cost of the gas feedstock will be lower than that of diesel. But Eskom adds that, the extent of the savings, and the resulting cost of electricity from the plant, will be subject to the outcome of the negotiation process.

A key value proposition is the potential for the gas tariff to be largely rand-denominated, although Sunbird stresses that the level of rand-denominated project debt will determine the extent to which it will be based on the domestic currency. In addition, there are portions of the project itself,  such as the production platform, where the costs are likely to be dollar denominated.

Eskom says the details of the currency denomination will be finalised during GSA negotiations. “No price has been agreed to yet. Price per gigajoule will be negotiated during GSA negotiations.”

Rana believes the price will be competitive with LNG imports, which are also being considered for the West Coast to potentially supply Ankerlig, as well as  those independent power producers (IPPs) that bid as part of an upcoming procurement programme to be run by government’s IPP Office.

The cost of gas could also fall materially during any subsequent supply phases, as by then the pipeline’s costs should have been ammortised. However, this would depend principally on whether additional gas reserves could be proven.

The GSA will also need to secure internal Eskom governance and external shareholder and regulatory approvals, including from the National Energy Regulator of South Africa, which could influence timing.

But the project is unlikely to be affected by the current uncertainties surrounding the regulatory regime for oil and gas in South Africa, as the Petroleum Agency South Africa had already granted a 25-year production right over the property in 2009 and had recently extended its gas market development period to 2017.

“With a binding gas sale agreement, that we hope will follow in the coming months, this becomes an incredibly bankable project – there is proven gas, an engineering concept that works to deliver that gas and a committed market for that gas. Those ingredients would make the project infinitely fundable,” Rana argues, noting, too, that the production right was also “clear and stable”.

Edited by Creamer Media Reporter

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