Let’s drill the South African Reservoirs

It’s no secret that the oil and gas industry is not an easy one to navigate as it is surrounded by multiple concepts and standards of measurement.


It’s no secret that the oil and gas industry is not an easy one to navigate as it is surrounded by multiple concepts and standards of measurement. However, energy is a wagon that is hitched to multiple industries. Reflecting on South Africa’s position within the Global Oil and Gas Industry is imperative in understanding how it can further assist in boosting the country’s economic development.

The oil industry is characterised by the following global processes: Exploration, Extraction, Refining, Transporting and Marketing of Petroleum products. Petroleum plays a significant role in boosting economic growth. What makes it so valuable? Oil and gas together make petroleum. They are a mixture of hundreds of different hydrocarbons molecules which migrate through porous sedimentary rocks towards the earth’s surface, from there they represent our sources for crude oil and gas.

The oil industry is divided into three main components: Upstream, Midstream and Downstream. In the South African context, we will only be looking at the relevant components which are Upstream and Downstream. Upstream oil and gas activity is when companies that specialise in exploration and production find hydrocarbon reservoirs, drill oil and gas wells, successfully extracting these two raw materials for the sole purpose of selling them to companies that specialise in refining oil into products such as gasoline. Downstream oil and gas activity refers to the refining, transportation and marketing of end-user products.

The value of oil is measured using the number of oil barrels produced and natural gas is measured using cubic feet.

Previously South Africa’s domestic energy demands have been met by relying heavily on the use of coal. The Department of Energy released preliminary information at the Gas Options Conference in 2016. Where the government discussed the various policies it initiated to increase the penetration of gas in South Africa’s energy economy, to increase dependants on other sources of energy other than coal in meeting domestic demands.

The Integrated Energy Plan came up with a Gas Utilisation Master Plan for South Africa (GUMP). Gump is a roadmap that will be used to facilitate the development of the gas economy, by analysing existing potential and opportunities for development and how we can develop indigenous gas resources. The Integrated Resource Plan (IRP) also sets out the electricity supply and demand balance requirements (including the technologies) from 2020 to 2050.

These plans will encourage the use of other resources, such as oil and gas in meeting consumer demands. The South African Petroleum Industry Association (SAPIA) mentioned that South Africa did not have its own independent crude oil reserves, and about 60% of its crude oil requirements come from the Middle East and Africa. Research conducted by Lexology corroborates this by noting that South African oil and gas production is relatively insignificant because in 2016 South Africa’s proven oil reserves amounted to about 15 million barrels.

The only company that has been specialising in upstream oil and gas activity on a commercial level in South Africa has been the Petroleum Oil and Gas Corporation of South Africa, PetroSA. Which operates in a block located basin in Bredasdorp. As it stands, PetroSA has produced more than 45million barrels of crude oil from our Oribi and Oryx oilfields that are located in block 9 off South Africa’s Southern Coast. Interestingly Oribi and Oryx produce on average, approximately 1,800 barrels of crude daily. PetroSA is also producing a small amount of natural gas offshore.

Most companies in the oil and energy sector in the country specialise in downstream activity but South African Petroleum Refinery (SAPREF) is the largest crude oil refinery in southern Africa with 35% of South Africa’s refining capacity. In 2018 researchers found that South Africa currently sources 5% of its fuel needs from gas 35% from coal, and 50% from crude oil refineries, the most recent statistics show that 80% of the country’s crude oil is imported through the Single Buoy Mooring system (SBM) off the coast of Durban.

The following companies own the SBM and are managed and operated by the SAPREF: Engen (26%) Shell (26%) BP (25%) Sasol Oil (16) and Total (6%). It should be noted that SAPREF processes 24 000 tons crude oil per day and they make 10 main products in 46 grades, they produce 2.7 billion litres of petrol per year. This is enough fuel to take 800 000 cars around the world.

The main source of South Africa’s natural gas is met by importation, which is done via a transmission pipeline that conveys gas from Sasol’s Pande and Temane gas fields in Mozambique. This pipeline is a joint venture between the South African Gas Development Company (SASOL) and Companhia Mocambica de Gasoduto SARL.

However there has been a shift in the industry that could be a huge game-changer for South Africa. In February 2019 the French Petroleum giant, Total publicly announced that it had discovered a large gas condensate and secured the rights to commence exploration of the Brulpadda block which covers 175 kilometers off the coast of South Africa. The prospects lie in the Outeniqua Basin, which is about 275 kilometers south of Mossel Bay.

The company says the area may contain between 500 million to over a billion barrels of oil barrels equivalent. The well extends to more than 3.5 kilometers in-depth, a research expert suggested that this gas can be used as petrol or converted into electricity.

Now that we understand the current state of South Africa’s oil and gas industry, we need to unearth some of the main challenges that have put us in the position we are in today. There are multiple key constraints hindering commercial production of fossil fuels, the main one being stringent environmental regulations, these laws exist because energy production, processing and conversion and transportation consume a lot of water. The oil and gas industry is under constant scrutiny and is being encouraged to move towards cleaner fuels.

Another major problem is the extremely high input costs especially considering the low oil price. The major petroleum products that are sold in South Africa are Petrol, Diesel, jet fuel, illuminating Paraffin, fuel oil, liquid gas and Bitumen. Petrol and Diesel are the main liquid fuels used in the country; the government regulates wholesale margins and controls the retail price of petrol. These petroleum prices are regulated based on import parity price formulas.

This means that domestic prices are influenced by supply and demand for petroleum products in International Markets together with the rand/dollar exchange rate. Loosely translated this proves that the downstream activity we specialise in costs us more as we don’t have total control on pricing.

Improve performance in order to help oil companies valorize their assets, using technology will help them increase the life of mature sites, while at the same time allowing them to seek new oil and gas sources. Since extraction, transportation and refining are evidently much more costly. Reducing the cost of extraction will allow companies to optimise production systems and environment utilities on currently operating sites.

Another challenge South Africa faces is the long-running debate over laws that apply to mine exploration. Following Total’s announcement about finding the first significant Deepwater Oil find Mineral Resources and Energy Minister, Minster Gwede Mantashe expressed in a speech in June 2019, addressing media he noted: “We need to speedily work to entrench regulatory and policy certainty. The department has begun the process of developing a Petroleum Resources Development Bill.”

This comes after President Cyril Ramaphosa announced that he seeks to lure $100billion of investors by 2023 to revive a struggling economy.

Oil companies also face a key challenge when it comes to recruiting and training next to the generation as specialised experience in the sector lies within the older age groups.

Health and Safety is also another major concern, however, it has significantly improved due to advancement in technology as intelligent health equipment (AI driven), has made provision for systematic techniques to identify and utilise automated diagnostics reducing human intervention.

Industry 4.0 has had a major impact on the industry as 4D seismic technology has enabled classic reservoir monitoring and is now used to maximise return on investment, enabling deeper exploration. As specialised technology has successfully intercepted where human labour and less advanced equipment were previously unable to drill. Smart oil field technologies and management of real-time data surveillance improve product lifespan as they capture real-time data which helps identify and analyse challenges the field equipment may be confronted with. Challenges such as strong currents that previously made it difficult to drill further. Development of Subsea oilfields has also reduced infrastructure and production costs.

Deeper exploration provides greater profits; advances in oil recovery technology make provision for enormous efficiency improvements. To date, only one-third of oil is recovered in the drilling processes.

Future trends in the oil and gas industry are dependant on companies formulating future proof strategies unique to their individual capabilities. At the same time, these strategies should enable them to sustain their businesses despite short term volatility. According to Oil and Gas Trends 2018/19 research conducted by Strategy& Part of the PWC network, companies can achieve this by implementing the following principals in their strategies: Managing the overall portfolio with a much lower break-even price, whatever actual oil prices are, this can be done by companies weeding out assets that don’t comply. Next is holding onto a mantra of capital discipline because capital will only flow in companies that deliver positive returns in any type of commodity price environment.

Refocusing investment and effort on asset maintenance, oil and gas companies need to ensure adequate funds are available to keep supply infrastructure in good repair. In addition, replacing the (owner-operator model) with an (owner-only approach) where returns are the priority. Companies urgently need to double down on digitization, as leveraging advanced technology will drive efficiencies and open up new opportunities.

Companies also need to develop talent for a new era of technology as the industry’s talent profile is drastically changing, they basically need to up-skill young talent. Lastly, they need to consider how the whole business should evolve long term especially considering the major trends that are shaping the sector. 

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