Relax, there’s plenty of oil and gas

South Africans might be wondering if their energy security is under threat. Does Sasol need another oil-from-coal plant so desperately as to merit funding from the public purse? Is the company under threat from serious disruptions to the supply of imported crude? Read on ...

Sasol, the private-sector company that has been involved in a string of cartel scandals in South Africa and abroad, has the begging bowl out to government for help in funding another oil-from-coal plant.

Why? Does the country need one, particularly if it is as polluting as Sasol's coal-fed Secunda plant?

Sasol failed to respond to questions about the cost or timing of the proposed 80000 barrels a day (bpd) Mafutha project - and to questions about the anti-competitive fines. But in his presentation of Sasol's half-year results, CEO Pat Davies left the veiled threat that should the state fail to help fund Mafutha, the project would not go ahead.

We have not heard anything similar about Sasol's proposal to build an 80-90000 bpd oil-from-coal plant in China. If the company cannot afford to go it alone on Mafutha, how can it afford to be involved in a Chinese venture? Rather than turn to the state, Sasol might be better advised to seek private-sector partners to weigh up the economics.

Sasol has been suffering from the retreat (and partial recovery) of crude prices from 2008 price peaks - and suffering and contesting fines for being anti-competitive.

This past half-year's revenues fell to R58.1-billion from the record R83.1-billion in the six months to end-December 2008 and the interim operating profit more than halved to R10.5-billion from R21.5-billion. Part of this was due to the rand's strength and part due to lower average oil prices. But oil prices have been improving and are stabilising around the $80-a-barrel level according to experts at this past week's CERA-Week energy conference in Texas. Furthermore, Sasol has so little debt on its balance sheet that it could easily gear up to fund Mafutha.

Peak oil or peak demand? What is the outlook for oil?

A few years ago fears of the world running out of oil were in vogue. Well, the world's oil industry is approaching a major tipping point, or so it emerged at CERAWeek.

We are not staring soaring oil prices in the face. After crossing the then-record $120/bbl mark in May 2008, oil moved on to just shy of $150. By end 2008 the pricking of the financial bubble saw the price fall to $30/bbl and it has taken months to creep back to $80 or so. But, one argument goes, the millions of new cars expected on Chinese and Indian roads over the next decades will mean soaring demand and prices for oil. Perhaps.

Daniel Yergin, founder of CERA (Cambridge Energy Research Associates), is not convinced. Demand in rich countries fell in 2008 as oil prices soared and affected economic activity. In the US, daily oil consumption fell by two million barrels last year, though motoring only accounted for 15% of the fall and slower economic activity and flying for the rest. Meanwhile, the world looks increasingly awash with crude.

The US is now coping with a surfeit of natural gas, with reserves in shales across the Midwest alone reckoned to be sufficient to fuel the nation for a century or more. The upshot is significantly less concern over US energy security than has been the case as imports from neighbouring Mexico have faltered.

Mexico nationalised its oil industry in 1938. Privatising it or even allowing foreigners in would be political suicide for any Mexican government. So production is in steady decline despite massive offshore reserves.

State-owned Petroleos Mexicanos has neither the domestic skills and capital to explore and exploit them nor the ability to recruit external partners. Much the same goes for Venezuela and Iran, though not for intensely nationalistic Brazil whose state-controlled Petrobras recruits foreign skills and capital to explore and share vast offshore reserves.

Saudi Arabia is lifting production, partly to deliver more crude to India; reports say Russia's output overtook the Saudis' last year and the massive oil and gas reserves of a gradually stabilising Iraq are slowly starting to be exploited.

While the outlook for oil is far from worrying, the world can also turn to huge resources of "clean" natural gas for power generation, heating and eventual large-scale conversion into transport fuels.

Back in SA, state-owned Petrosa has stirred up the private oil sector with plans to build a 400000 bpd refinery at Coega. If "Project Mthombo" goes ahead its cost will soar way over budget and it will be run less than competently. Energy expert Philip Lloyd recently set out a strong logistical and marketing case for why Mthombo is unnecessary. The financial case seems equally persuasive.

CERAWeek speakers said refining margins are close to zero and there is a vast surplus of refined product available from new Asian and mid-East refineries.

This has persuaded Shell and Total to sell or close refineries. In SA Transnet is building a pipeline to carry petrol and diesel from a Durban refinery to Gauteng, fuels that could as easily be imported already refined.

South Africans should not heed self-serving scaremongering on energy security - there is enough oil and gas to fuel growing emerging and mature economies for decades.