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R 121233Z MAR 09
FM AMCONSUL CAPE TOWN
TO RUEHC/SECSTATE WASHDC 2999
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHINGTON DC
RUEADCR/DEPT LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 0120
RUEHBY/AMEMBASSY CANBERRA 0171
RUEHLO/AMEMBASSY LONDON 0191
RUEHMO/AMEMBASSY MOSCOW 0066
RUEHNE/AMEMBASSY NEW DELHI 0009
RUEHOT/AMEMBASSY OTTAWA 2490
RUEHFR/AMEMBASSY PARIS 0215
RUEHSG/AMEMBASSY SANTIAGO 0020
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 05 CAPE TOWN 000056 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, EEB/ESC AND CBA 
DOE FOR SPERL AND PERSON 
DOC FOR ITA/DIEMOND 
 
E.O.   12958: N/A 
TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB SF
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). 
 
-------------------------------------- 
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. 
 
--------------------------------------------- -------- 
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 
 
CAPE TOWN 00000056  002 OF 005 
 
 
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, 
 
CAPE TOWN 00000056  003 OF 005 
 
 
only Sasol's 34,000 barrels per day Oryx GTL plant is producing. 
End Note.) 
 
------------------------------------- 
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). 
 
-------------------------------------- 
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. 
 
------------------------------------- 
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. 
 
---------------------------------------- 
 
CAPE TOWN 00000056  004 OF 005 
 
 
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. 
 
CAPE TOWN 00000056  005 OF 005 
 
 
 
¶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