Thirst for natural gas: South Africa weighs supply options to meet power sector needs

South Africa is currently navigating a pivotal moment in its long-term energy planning, necessitating a focused effort from both industry and government to secure energy stability while fostering economic growth. The recent establishment of a new ruling coalition following the May 2024 general elections has not altered the pressing priorities within the power sector, with several outstanding issues yet to be addressed.

Natural gas has emerged as a critical component in South Africa's transition from coal, a sentiment echoed by various stakeholders. However, the country's access to gas resources is hindered by multiple factors, including delays in capitalizing on domestic discoveries, inadequate gas infrastructure, and expiring long-term contracts for pipeline gas imports. The pace at which natural gas can be integrated into the energy market will largely depend on identifying the most cost-effective import solutions, as domestic supply is insufficient to meet the projected demand.

South Africa's planned capacity additions up to 2030 are primarily based on the country's Integrated Resource Plan, which emphasizes renewable energy sources.

In its long-term power outlook, S&P Global Commodity Insights seeks to align power demand with fuel supply alternatives outlined in the country's energy plans. Commodity Insights base case incorporates various assumptions regarding South Africa's historical performance, its commitment to clean energy targets, and the existing constraints within its infrastructure.

Currently, coal-fired power plants dominate South Africa's electricity generation, but the landscape is changing. The increasing difficulty in financing new coal assets, coupled with stringent carbon emission targets and evolving legislation, presents significant challenges. As a result, investment in new coal generation is expected to halt after the full commissioning of the Kusile and Medupi power stations. The future energy mix will likely see coal being supplanted by an increase in renewable and gas capacity additions.

Over the planning period, South Africa is projected to add more than 2 GW of renewable capacity annually. This growth will be supported by public procurement of renewable projects, embedded generation assets, corporate power purchase agreements, and Eskom's initiative to repurpose decommissioned coal sites for renewable energy production.

Access to the global LNG market, combined with potential domestic gas production, is anticipated to facilitate growth in gas capacity starting in 2029, according to Commodity Insights' base-case scenario. This growth will require a balanced mix of LNG imports and regional gas supplies. By 2050, gas generation is projected to constitute about a quarter of the energy mix.

South Africa's 2024 draft Gas Master Plan outlines various solutions for establishing a long-term gas energy infrastructure across the gas supply value chain. A central theme of the GMP emphasizes the necessity of integrated energy planning to create resilient gas infrastructure while considering demand uncertainties and potential transitions to cleaner fuels.

Despite South Africa's estimated total gas resources of approximately 52 Tcf, many projects remain economically unfeasible, and final investment decision timelines are uncertain due to the lack of processing and transportation infrastructure. The uncertainties in gas pricing further complicates project development, as multiple import options and tariffs based on distance would need to be factored into the overall cost structure.

Among the 15 discovered gas fields, only three projects are currently considered operational in the 2024 draft GMP. This conservative estimate suggests that FIDs for these projects could occur this year, but the typical timeline from FID to commissioning spans three to four years. Given the current challenges, including partner exits and insufficient infrastructure, these timelines appear overly optimistic.

Commodity Insights gas supply forecast incorporates current recoverable resources from both onshore and offshore projects. Recent developments, such as TotalEnergies walking away from its Block11b/12b project, indicate that the biggest contributing project to the South Africa gas supply may not commence until after 2035, as new partners will be needed for development.

Gas imports come to the rescue to fill a supply gap

From mid-2027 onward, a significant gas shortage is expected, driven by Sasol's announcement that it will cease gas supply to industrial users via the Rompco pipeline and the planned retirement of Eskom's coal fleet, which will elevate the demand for gas-to-power facilities. Both Commodity Insights' models and the GMP indicate a domestic gas supply shortage by 2050, albeit at different timelines.

As South Africa anticipates a growing reliance on LNG imports, projections indicate that by 2034, domestic gas supply will fall short of meeting gas-to-power demands. Based on the Commodity Insights demand forecast, By by 2050, up to 87% of gas supply could stem from LNG imports, posing risks related to currency fluctuations and volatile market prices. To mitigate these risks, long-term supply contracts and substantial investments in gas network infrastructure will be essential.

Strategic planning is critical to ensure sufficient time for developing and securing the necessary gas supply. The GMP also highlights the importance of regional collaboration to address energy supply and demand imbalances, suggesting that synergies in regional developments could yield significant cost benefits. For instance, oil and gas discoveries in Namibia present an opportunity due to their proximity to South Africa, although no immediate offtake solutions are currently in place.

South Africa must engage with regional governments to ensure long-term energy security while exploring alternatives to reduce dependence on imports. Continued exploration and investment in domestic gas resources, along with innovative energy solutions like regional integration, long-term energy storage, and green hydrogen, are vital for fostering a sustainable energy future.

Addressing strategic and policy challenges will be crucial for attracting foreign investment and advancing the development of upstream discoveries for domestic use. A collaborative approach focusing on regional energy balance is essential for securing a resilient and sustainable energy landscape in Southern Africa.