South Africa: What Do You Expect To Achieve, Part 1 ( Nov 2006 )
Release Date: 2006-11-16 00:00:00Since South Africa’s leap into democracy in 1994, the country has entered the age of globalization and the local players were suddenly exposed to the challenges and opportunities that the oil and gas industry is facing worldwide. Stanley Subramoney, PricewaterhouseCoopers’ African Energy leader states that “since 1994, South Africa has become a well sought after destination for all types of foreign direct investment, and oil and gas is no exception.”
South Africa: What Do You Expect To Achieve
Land of opportunity
The event of hosting the 18th World Petroleum Congress in Johannesburg - the first time that the WPC’s leading congress took place on the African continent - has put Africa and South Africa’s oil and gas potential on centre stage. During the opening ceremony, Phumzile Mlambo-Ngcuka, South Africa’s deputy president and former minister of minerals and energy underlined that South Africa was hosting the congress on behalf of Africa as a whole. “I think it was mostly a highlight for Africa, as it recognized the increasing importance of Africa’s exploration and production potential to the international players in the industry,” stated Ayanda Mjekula, chairman of South Africa’s Central Energy fund, which is the government body controlling PetroSA, Petroleum Agency SA, iGas, Oil Pollution Control SA and the country’s Strategic Fuel Fund. The World Petroleum Congress strengthened the ties between PetroSA and the continent’s dominant National Oil Companies and co-host sponsors NOC, NNPC, Sonangol, and Sonatrach.
Sipho Mkhize, President and CEO of PetroSA, emphasized that the World Petroleum Congress served as a unique networking platform for the African National Oil Companies when he stated that “their participation as co-host sponsor emphasised the need for us in Africa to work together, share the resources and equally contribute to the development of Africa.”
The shift away from the traditional suppliers in the Middle East into the oil producing countries in Africa presents massive opportunities for the oil and gas industry across the entire African continent. Taking a historical perspective, Subramoney noted that traditionally large overseas companies sourced Africa’s resources and gave very little in return to grow the local economies. “Putting it bluntly, they plundered the resources of the African continent,” he noted before concluding that, “One of the tragedies of the African continent was that we exported wealth and imported poverty.”
Nowadays he sees a new model emerging, a model that is based on smart partnerships; it is about joint ventures, about public-private partnerships and about empowering local companies. Using the vast capital and technology resources of the multinationals in partnership with local companies will be of lasting benefit to local economies. The new model is targeting local economic growth, poverty alleviation and sustainable local skills.
Fostering these mutually beneficial, strategic partnerships amongst the continent’s national oil companies, as well as a range of up-and-coming African E and P companies and the international majors, independents and juniors is a critical step in the development of the sector across the continent. “This business is about capital, intellectual property and access to markets, so the go-it-alone scenario for national companies or international majors will probably not be the only solution going forward,” stated Subramoney.
In addition to being the consulting firm’s African Energy Leader, Stanley Subramoney is also the deputy CEO of PwC South Africa, the largest financial advisory services firm in South Africa. Servicing the oil and gas market across the continent, PwC has a footprint in 31 countries and employs approximately 7,500 people. “This enables us to service our national, multinational and trans-national clients in Africa through a seamless product offering which then enables us to provide our clients with a unique one-stop-service,” explained Subramoney.
The renewed interest in the African oil and gas industry forces the international frontrunners entering the African continent to adapt their business models to suit local dynamics. However, Stanley Subramoney underlined that “the rate of return that investors will achieve in Africa is higher than elsewhere across the globe. Markets are virtually untapped and Africa is open for business.” He recognizes that there are many challenges around corporate governance and political instability, but in his view, the economic returns far outweigh the political risk.
He takes particular pride in PwC’s role as a provider of thought leadership material on specific issues and challenges in the industry, which he claimed “assists CEOs in shaping their vision when they are preparing their strategic plans.” This directly responds to one of the main challenges of doing business in Africa - the lack of credible, current information.
In recent years, sound corporate governance has become a buzzword in the consulting and auditing environment. Subramoney jumped on the opportunity to emphasize that the PwC brand stands for integrity, honesty, professionalism and above all, good corporate practices. “Regardless of where in the world we operate, including Africa, we are guided by a strict code of conduct underpinned by global standards on independence and risk management, and we will not hesitate to resign from any assignment if it does not comply with our firm’s standards,” he said.
A firm’s reputation is largely based on the reputation of its clients, and PwC prides itself on the fact that the firm works with all of the majors and most of the national oil companies across the African continent, which makes for an enviable client base.
PwC is quite bullish and Stanley Subramoney stated the firm’s aim to double its revenue across Africa by 2010. As part of an Africa-wide strategic plan, PwC places particular emphasis on continuing growth in Angola, Nigeria and the Gulf of Guinea; a clear indication of the firm’s focus on countries where the oil and gas industry plays a dominant role in the national economy. “PwC will continue to be the leader in the oil and gas industry because of our strong African footprint,” he stated.
The next frontier in exploration and production
While South Africa is the continent’s largest energy consumer, the country has not been able to significantly beef up its energy mix with domestically produced oil and gas. Between 1977 and 1996, state-owned Soekor was the only entity that carried out exploration activities, and could not explore all areas effectively. In addition to democracy, the 1994 elections brought stability which paved the way for the return of investment, making it the turning point for both the economy and exploration activity. That same year, Soekor relinquished its onshore and offshore rights, except for blocks nine and 11a, and opened the acreage up for international competition. Soekor would never see international E and P companies operating on its home turf. In 1996, the company was separated into a licensing authority, which later became Petroleum Agency SA, and a commercial entity, which combined Soekor and Mossgas to become PetroSA.
“I think that there has been gross underinvestment in exploration activity in South Africa itself,” remarked Ayanda Mjekula. “This is a situation that we hope to reverse through one of the companies under the CEF, the Petroleum Agency SA, which is responsible for exploration and regulation.” A licensing round for the whole offshore area was pitched too soon after the elections for investors to feel confident about political stability and so there were no takers. Nevertheless, in 1997 Phillips Petroleum broke the ice by signing a sublease for blocks 17 and 18 off the east coast and this inspired other companies with confidence to come to South Africa.
Over the years that followed, South Africa welcomed companies such as Forest Exploration International, Anschutz, Pioneer Natural Resources, BHP Billiton Petroleum, Sasol Petroleum International and Canadian Natural Resources. Reflecting on the days when the international E and P companies were making their first steps in South Africa, Mthozami Xiphu, chief executive officer of Petroleum Agency SA, stated, “I think that international companies saw South Africa as international green field; an opportunity to come in and apply their international expertise.”
Rising oil prices and technological advances are allowing crude oil to be recovered in ultra-deep waters, which has turned exploration and production in South Africa into an interesting opportunity for the risk-takers in the industry. “We are a prospective country, the promise is valiant and the bubble of optimism is un-punctured, but at the end of the day, wells will have to be drilled to prove South Africa’s potential,” emphasised Xiphu.
The E and P in South Africa tend to be dominated by juniors rather than majors. Pioneer Natural Resources was one of the first juniors to recognize South Africa’s potential. General Manager Marek Ranoszek confirmed that: “South Africa is still pretty much a market for niche players that can take a 20 million barrel field and develop it in a profitable way.”
In 1998, Pioneer was looking for expansion opportunities outside of mainland USA and its eye fell on Africa, where it decided to enter South Africa in order to start its African operation on a manageable scale. Over the years, Pioneer moved away from operating its own acreage and focused its attention on Block nine, which holds the Sable (11,000 bbl/day) and Oribi/Oryx (3,500 bbl/day) fields and accounts for South Africa’s complete oil production, and where it has a joint venture with PetroSA, the operator.
The Petroleum Oil and Gas Company of South Africa, trading as PetroSA, own, operate and manage the South African Government’s commercial assets in the petroleum industry. In addition to the two floating oil production facilities on the Sable and Oribi/Oryx fields, PetroSA operates the F-A platform. Standing in 105 meter water depth, this gas and condensate production platform provides the essential feedstock for PetroSA’s gas-to-liquids (GTL) plant – the world’s largest commercial GTL plant – located 80 kilometers north in Mossel Bay. Extending their successful cooperation in the future, PetroSA and Pioneer are currently investing US$480 million in the South Coast Gas Development, which will link up a series of gas-condensate discoveries and feed the gas and condensate to PetroSA’s GTL plant via the F-A platform. PetroSA’s General Manager E and P, Dan Marokane, confirmed that “the South Coast Gas Development will guarantee feedstock for the GTL plant until 2013 and future developments linking into the F-A platform can extend its lifespan until 2020”. Simultaneously, PetroSA is rapidly increasing its footprint across Africa with a view to replacing current production and also growing and diversifying the reserve base. In line with the company’s aggressive E and P strategy to enable a target production rate of 65,000 bbl/day by the end of 2010, PetroSA has acquired interests in Gabon, Equatorial Guinea, Sudan, Nigeria, Namibia, Mozambique, Angola and Algeria.
New entrants: South African juniors
The African continent has nine percent of the world's oil and gas reserves and both geopolitical developments and rising oil prices have made investing in Africa’s oil business increasingly attractive. Billions of dollars will be invested in Africa's oil and gas industry in the next few years, and PetroSA is not the only South African E and P company that is ready to rise to the challenge of entering the African E and P arena. Two new South African juniors, Ophir and Energetic Petroleum, are rapidly establishing their positions in the industry. Ophir is building its portfolio based on the strong African network and financial base of Mvelaphanda Holdings and the experienced management that previously was the driving force behind Fusion Oil, while Energetic Petroleum was established by accident.
A few years ago, Mazwi Yako, a skilled negotiator who studied International Relations in Moscow, joined a friend in Chad where they successfully negotiated an oil block on his behalf. Yako recalled: “Later on, my friend told me that he had the intention of selling this oil block for US$ 70 to 80 million. Then I said to myself, here is an opportunity.”
Yako joined forces with Bruce Buthelezi and Malibongwe ‘Reeboh Mandela and since July 2004 he has been the executive chairman, and one of Africa’s youngest juniors, of Energetic Petroleum. “Through building a diversified portfolio of exploration, appraisal and production assets in Africa, our ambition is building an African oil company which will ensure that the major profits from oil remain in Africa,” Yako explained. The first country Energetic Petroleum entered with that philosophy in mind was the Ivory Coast, where they signed agreements on blocks CI-12 and CI-104 towards the end of 2005. Also, in Mauritania, Energetic has obtained two blocks, the offshore block 21 and the onshore block TA-3 in the Taoudeni basin. While in the northeast of Mali, the company has been awarded block 14, which is situated in the Tamesna Basin. General Manager Bruce Buthelezi is particularly excited about the latest block that Energetic has received in Kenya. “This block is very interesting because it’s only drilled well encountered oil and gas shows, and it is just below the border of the prolific area of South Sudan,” he boasted.
Being highly successful in obtaining exploration licenses, Energetic Petroleum’s main challenge is securing the financing. The company is currently in talks with private equity houses in London concerning future financing and in order to increase investors’ appetites, Energetic strives to add one or two oil blocks that are near production or in production to its portfolio of pure exploration blocks to balance its portfolio and reduce Energetic’s risk profile. The projected addition of South African assets to the portfolio provides finance houses with more comfort for their initial investment in South Africa’s.
Underlining that Energetic Petroleum is an African upstream company on the fast track, Yako explained: “our target is to float the company on the AIM by end March, early April 2007 and we are well on course to achieving this objective.” Energetic Petroleum’s management predicts that the IPO will not raise more than US$50 million since it does not want to dilute its shareholding by more than 30 per cent from day one. Nevertheless, the listing will boost the company’s international profile, paving the road for international independents and juniors to enter into strategic arrangements that will provide Energetic Petroleum with access to technical experience and expertise, while Energetic Petroleum’s partners will be benefit from a relationship with a 100 per cent company when moving into other areas of Africa. “It would be a win-win relationship,” concluded Mazwi Yako.
Having been an anti-apartheid activist, Tokyo Sexwale was sent to Robben Island as a political prisoner in 1977. After spending thirteen years in South Africa’s maximum-security prison alongside figures such as Nelson Mandela he was released in 1990. Following South Africa’s first democratic elections in 1994, Tokyo Sexwale was named Premier of Gauteng Province, South Africa’s economic powerhouse. While being a highly successful politician, Tokyo Sexwale decided to leave the political scene in 1998 and founded Mvelaphanda Holdings, which is now one of South Africa’s leading Black Economic Empowerment (BEE) groups. Realizing that empowerment is just a temporary legislative framework that is there to rectify the past, Tokyo Sexwale stated from the outset: “I’m building a non-racial company that includes white, blacks and Indians and reflects the country; I am not building a black company.”
In 1998, while he was actually considering emigrating from South Africa to the Far East, Mark Willcox met with Tokyo Sexwale and took an instant liking to him. Looking back at their first meeting the current CEO of Mvelaphanda Holdings reflected, “I was lucky enough that he offered me to join him as a partner.” Over the past eight years Mvelaphanda has grown to become South Africa’s largest black-owned diversified group, and through its investments the company is the world’s biggest producer of gold, the second largest diamond miner and the fourth biggest platinum producer. In the process, Mark Willcox emerged as one of the few white South Africans who have built their success on the BEE framework. At present, the group has interests across a diverse range of sectors including banking and financial services, healthcare, tourism and property, security, facilities management and industrial services. However, Mark Willcox is quick to point out that Mvelaphanda didn’t stumble into its businesses. “As soon as we established Mvelaphanda we went into platinum, since Tokyo said that platinum was going to be a long term market opportunity.” Similarly he said: “the Gulf of Guinea is going to be strategic, particularly with respect to instability in the Middle East, and the growth of China and India; let’s focus and acquire some assets in that area.” To turn this vision into reality Ophir was created, a privately owned oil and gas company with Mvelaphanda as its largest shareholder.
The development of Ophir is in the hands of Alan Stein and his management team which previously established and then sold Fusion Oil, an Australian-based African oil explorer. “All we are doing now is giving them much bigger marbles to play with; we now have big world-class blocks and are primarily involved in deepwater concessions,” explained Mark Willcox.
Since its inception in February 2004, Ophir has developed an extensive exploration portfolio covering projects in Equatorial Guinea, Gabon, Congo Brazzaville, the Nigeria-Săo Tomé/Principe Joint Development Zone, South Africa, Tanzania, Somaliland and Saharawi Arab Democratic Republic. Ophir’s net exploration acreage has expanded at a breakneck pace and today only Royal Dutch Shell, Sonatrach, Exxon Mobil and BHP Billiton supersede Ophir in terms of net deepwater acreage. However, Alan Stein is quick to point out that while this sends a message of what has been achieved it is not a real measure of the value of the business. Nevertheless, Ophir’s rapid growth is remarkable when taking into account that the oil and gas industry has woken up and realized that Africa is a good place to do business and in recent years competition for the continent’s resources has rapidly intensified.
“We move quickly and aggressively and the African governments, who are eager to develop their resource potential, are very interested in that” said Alan Stein, explaining one of the critical success factors for his company’s development. In order to grow a balanced portfolio of exploration and production projects, Ophir has expanded its focus beyond the African continent and is pursuing opportunities in Kazakhstan. Moving outside of Africa could have been an issue for an African oil company, but from day one Ophir has been pursuing the ambition of building a leading independent global African energy company. Ultimately, Ophir aims to be competing with the mid-sized US independents. “Ophir is a company that was born in Africa but aspires to be a global business,” said Alan Stein, before concluding that, “Fusion was kindergarten, Ophir is Cambridge”.
“The most exciting thing about Ophir,” Mark Willcox said, “Is that we are breaking out of the label of a Black Economic Empowerment company, which is what Tokyo has always wanted. He has always found BEE a shackle and has always said that he just wants to be known as a successful South African industrialist and philanthropist who happens to be black, not a Black Economic Empowerment player.”
The century of Africa
“Opportunities are everywhere and you have to dream in order to succeed, but remember to develop a sound strategy to make your dreams come true,” began Desnos T. Yed. Being a citizen of the Ivory Coast, but operating from a South African base, his dream is creating the leading African investment consulting firm. As Chairman and CEO of Yedcor International he realizes that, “in South Africa you can wake up in the morning with a brilliant idea, but when you check the yellow pages you see that there are two thousand people doing the same thing. However, when you open your eyes to the rest of Africa you will find only one person or nobody who is pursuing the same idea, so you have the freedom to implement whatever you dream about.”
However, South Africa has today become the entry to the rest of Africa. For South Africans, operating in Africa is just a continuity of their business, while for Europeans or Americans this means breaking the barrier between the Western and African business culture. “By showing investors the way of doing business in Africa we allow people to operate successfully on our continent,” noted Yed. “Going to Africa is not like going to Canada, where you arrive at the airport, put your suitcase down, register your company and start to compete in the local market.”
Africa’s reserves of natural resources are vast and even after the colonisation of Africa, which was aimed at exploiting Africa’s resources, Africa still holds the largest resources worldwide in many raw materials. “When you know and respect the business culture of the African continent you can still be rich in Africa overnight,” said Desnos Yed, “Africa has a lot of potential, and this century is the century of Africa.”
World leadership in gas-to-liquids and coal-to-liquids technology
In 1927 the South African government already realized that the country did not have significant crude oil reserves and that it was imperative to protect the country's balance of payments against increasing crude oil imports. That year South Africa’s parliament adopted the White Paper to investigate the establishment of a South African oil-from-coal industry which marked the start of Sasol’s history. Nevertheless, it would take many years of research and international negotiations before Sasol was formed in 1950 to commercially develop the unique Fischer-Tröpsch technology for the conversion of both low grade coal and natural gas into value-added synthetic fuels and chemicals. At present, Sasol operates the only coal based synthetic fuels facility in the world, producing liquefied petroleum gas from low grade coal, and is a global leader in the commercialisation of gas-to-liquids technology. Today, Sasol’s operational footprint extends to more than 20 countries and the company has grown to become one of the top five publicly listed companies in South Africa and maintains listings on both the JSE and the NYSE.
The South African government’s visionary decision to explore the potential of synthetic fuels continues to provide significant return on tax payers’ money invested in the company during the first three decades before privatization. Today, Sasol provides direct and indirect employment for approximately 170,000 people, which represents two per cent of South Africa’s formal employment sector, and the company contributes to over US$7 billion, or four per cent, of South Africa’s GDP. In addition, Sasol provides the country with over US$5 billion in foreign exchange savings and contributes around US$1 billion to the South African government in taxes and levies, making the company the major private contributor to the South African economy. Pat Davies, who was appointed to the board in 1997 and became Sasol’s Chief Executive on July 1 2005, confirmed: “we are very proud of being South African and are committed to our country. Over the coming years about 63 to 65 per cent of our capital spent is going to be in this country.” Although Sasol remains a proudly South African company it has become a player of global significance in the industry.
Commercialising its world-class technology has been the main building block of Sasol's success, and the conversion of both coal and gas to liquid fuels is based on two steps: synthesis gas production and the Fischer-Tröpsch process. The syngas production process uses steam and oxygen at high temperatures to gassify coal and reform natural gas to produce synthesis gas, a mixture of carbon monoxide and hydrogen. The heart of GTL and CTL technology is Fischer-Tröpsch synthesis, the conversion of synthesis gas into a range of hydrocarbons using a catalyst. This process creates synthetic fuel components that are converted into a range of liquid fuels, such as dieses, naphtha, kerosene and liquefied petroleum gas, as well as chemical intermediates that are subsequently converted into polymers, olefins and surfactants, waxes and other products. Technology development is critical for Sasol’s future. “Clearly we believe that we are the world leaders at the moment, but will we stay ahead? Yes, I believe we will, although I cannot guarantee that we will. The only way you stay ahead of this game is by continuously improving your technology,” realized Pat Davies.
Sasol has developed two new-generation Fischer-Tröpsch technologies which are utilising two sources of gas: the high-temperature Sasol Advanced Synthol (SAS) process and the low-temperature Slurry Phase Distillate (SPD) process. In Sasol’s SAS reactors, synthesis gas from coal is converted to yield gasoline and light olefins. In the SPD process, natural gas is reformed into synthesis gas and then converted to high-quality diesel. Pioneering these new generation technologies on a global scale currently is a key priority for Sasol.
The increasing global discoveries of natural gas reserves particularly create a positive environment for the widespread application of the Slurry Phase Distillate process on the global stage. The commercialization of the unique gas-to-liquids technology plays a key role in Sasol’s development. “The first plant is being started up in Qatar at the moment, which is a significant step forward, and a second plant in Nigeria is under construction,” stated Pat Davies. The Oryx project in Qatar marks the first time that Sasol’s GTL technology is applied on a large scale outside of South Africa. “It is a very important project for us, said Pat Davies, “we have done coal-to-gas and gas-to-liquids in this country for the last fifty years and we have produced over 1.5 billion barrels of oil from coal, but it has all been in South Africa.”
The Oryx GTL plant will be the Middle East’s first commercial gas-to-liquids plant. Sasol produces 160,000 bbl/day of oil equivalent in South Africa and the Oryx project will contribute 34,000 bbl/day. “This is a fairly small percentage increase of our total existing volume base, but its significant potential lies in the future that it holds”, emphasises Davies. “It is like a shop window to showcase our technology and expertise, and we believe that the anticipated success of this project will generate a lot more interest in gas to liquids.”
However, Sasol is betting on two horses as the company is also taking its coal-to-liquids (CTL) technology to the international stage. CTL has attracted China’s interest, and in June 2006 Sasol signed a landmark coal-to-liquids agreement with the Chinese government regarding the construction of two 80,000 bbl/day CTL facilities. “We think that coal-to-liquids in China is a great opportunity because we will just be replicating what we did in this country,” noted Pat Davies, “however, the potential of CTL lies not only in China of course, but also in countries such as India and the United States.”
The success of the commercialization of the GTL and CTL technologies will be dependent on future oil prices. “Coal-to-liquids is more capital intensive, so if the oil price stays anywhere near the current level, or even drops down to around US$40/bbl, then I think that the potential for CTL is probably higher than the potential for GTL in the longer term. If oil prices drop down to below US$40/bbl then I think that we will see GTL being stronger,” he explained. “The future development is oil price scenario dependent, but I am optimistic that both are going to be really marvellous. The future looks very exciting, and Sasol in ten years time will easily have doubled or trebled its production capacity in GTL and CTL.”
Sasol has positioned itself as the global frontrunner in the commercialization of GTL technology, but this development does not worry Sipho Mkhize, CEO of PetroSA. “I think it creates an opportunity for both PetroSA and Sasol to move outside of South Africa. We are more than happy that GTL is now known globally,” he stated. South Africa’s national oil company has been operating the world’s largest GTL plant for twelve years, and Mkhize claimed: “we are the most experienced in gas-to-liquids in the world.”
PetroSA, formed in 2001 through the merger of the state’s exploration company Soekor and its GTL company Mossgas, has been operating below the radar while it was realigning the business. At the 2005 World Petroleum Congress in South Africa, a new PetroSA emerged. GTL commercialization, which has been an activity within PetroSA since 2001, has become one of the company’s strategic priorities. Conventional GTL technology, which PetroSA applies under license from Sasol to produce approximately 36,000 bbl/day at its Mossel Bay GTL facility, is based on High Temperature Fisher Tröpsch synthesis. This process takes place at over 900°C, but technological advances are opening up new opportunities.
PetroSA has teamed up with Statoil and Lurgi to develop a Low Temperature Fisher Tröpsch (LTFT) synthesis technology which requires a process temperature of 200-250°C. In 2005, the technology joint venture consisting of PetroSA, Statoil and Lurgi commissioned a 1000 bbl/day semi-commercial process demonstration LTFT plant, the only plant of its kind in the world. The joint venture partners will jointly own and commercialize the technology. The successful pioneering of the LTFT technology positions PetroSA as an African NOC with unique niche technology competency, a competitive edge that might prove too hard to match in future bidding rounds for GTL projects across Africa.
Currently, PetroSA is rivalling Sasol and Shell in the bidding round for the construction of a GTL plant in Algeria. Sipho Mkhize assumes that PetroSA derives a slight competitive advantage from being an African NOC, although he agrees but it looks like all parties stand an equal chance. “For PetroSA being successful in this bidding round is of great importance, since it would give us the opportunity to show that we are able to build GTL plants outside of South Africa.” He continued, “It would also underline that our technology is commercially available, and that national oil companies are able to work together and create value.” In addition, PetroSA has intensified its exploration activities in the region. Sipho Mkhize emphasized that, “any natural gas discovery of over three Tcf would be large enough to support a GTL plant, and in such a case PetroSA would consider building a gas-to-liquids plant, because it is our core technology and the centre of PetroSA’s operations. In the new blocks that we are exploring it looks likely that there will be gas reserves that could support such developments,” he concluded.
Walking the talk
“Dream no small dreams for they have no power to move the hearts of men,” as stated by Goethe, has been taken to heart by Anthony van der Merwe. As Chairman and President of Drako Oil & Energy, his ambition is to establish a new, technologically advanced, crude oil refinery in South Africa. Given the fact that he is only 39, and started Drako Oil & Energy four years ago, many of the established players in the industry thought that he was a front for an Arab country, or investors with too much money for their own good. Anthony van der Merwe chose to set up his operation in South Africa, a strategic location to cover the globe enabling Drako Oil to link into the European, Asian and US markets. “This is essential since we intend to compete with oil majors such as ExxonMobil,” said Anthony van der Merwe.
His business plan is based on mismatches in both the global and South African refining environments. Worldwide there are about 714 refineries left while the world accounted for 724 refineries in 1994-95, over the same period of time demand for refined product has grown by five per cent per year, so the whole globe is running out of refining capacity. The fact that Drako Oil & Energy’s refineries will be new is of strategic importance. “Nowadays, very expensive crude oils, or high API crude oils such as the Saudi light sweets, are being processed worldwide because all refineries strive to simplify their capital costs, and most global refineries were designed for this type of crude oil feedstock. These high API crudes will be depleted sooner than the heavier crudes,” explained Anthony van der Merwe. “Drako Oil’s current refinery project will apply unparalleled technology, and by processing heavier crudes is destined to achieve an internal rate of return of 20 per cent, which is about five per cent to 10 per cent higher than the current global standard. Given the fact that most crudes in and around the African continent are sour and heavier crudes, it is a pleasure to have those on our doorstep.”
According to Van der Merwe the South African refining environment is a total mess. A looming fuel crisis and fundamental risk of South Africa running out of fuel, coupled to the high economic growth rate and the fact that no new refineries were planned, created a window of opportunity for his ambition. Ayanda Mjekula, chairman of the CEF, agrees that refining capacity in South Africa may be sufficient today, but he can foresee that in the next couple of years the country will be running out of refining capacity. “Our situation is very precarious; if there is a hiccup in any one of our current refineries it always translates into downstream petroleum shortages. We have very little spare capacity, and that spare capacity will be exhausted within this year,” he stated.
“Although Sasol, Engen, Chevron, BP, Shell, and Total want to play it down, the South African refineries are in a shocking condition and barely EURO II compliant,” Van der Merwe claimed. “None of the South African refineries are world class refineries, and the newest refinery that we have is the Sasol facility which was built in 1973.” Anthony van der Merwe makes no effort to be a diplomat, and underlines that: “the South African refineries are blaming the recent fuel shortage on the upgrading from the old fuels to the new fuels, but the reality is that the refineries are obsolete and ancient, requiring replacement now.”
“Let’s look at South Africa as a whole,” he continued. “The Caltex (Chevron) refinery in Cape Town has an installed capacity of 105,000 bbl/day which is operating at 67 per cent. PetroSA’s refining capacity is 45,000 bbl/day but is operating at 69 per cent. Engen’s installed capacity is 124,000 bbl/day and operates at 68 per cent. Sapref, which is a joint venture between Shell and BP, has installed capacity to refine 180,000 bbl/day, but is probably operating at around 70 per cent. Sasol 1 is not running at peak performance either, while the other refinery is operating over its safe operating limit to counteract lack of production of the other South African refineries.” According to Van der Merwe’s calculations the combined South African environment is refining around 479,000 bbl/day, while Drako Oil’s planned 300,000 bbl/day refinery will produce 63 per cent of that total on its own.
Within the African continent everybody is forming a network in the context of NEPAD. That is why Drako Oil & Energy putting up a second refinery in Mozambique, which will be servicing Zambia, Malawi, Botswana, Zimbabwe and Mozambique itself as well as Madagascar and the surrounding islands in the Indian Ocean. “We will offset the remaining capacity to Asian and European markets,” stated Anthony van der Merwe, “and we are also looking at putting up a refinery in the USA, to supply North America, the Caribbean, as well as Central America, but this is still in the planning phase.” Ultimately, Drako Oil aims to be competing in the global markets, so South Africa is insignificant in its long-term strategy.
While the construction and planning phases for the initial South African refinery will take another four five years, Van der Merwe looked into the future when stating that, “there is no question that our refinery will be the most technologically advanced refinery ever built, and simply due to the fact that it will be the latest one built, thus it will employ the latest in global refinery design technology.”
In addition to the refinery, Drako Oil is looking at constructing a main strategic facility, probably 100 to 200 million barrels of crude, which will dwarf South Africa’s current Strategic Fuel Fund. “We will be using a different construction approach which we have been working on for a while, and one which we intend patenting worldwide,” stated can der Merwe.
Drako Oil’s ambition is to participate and compete throughout the global petroleum value chain, being exploration and production, refining, distribution, all the way down to retail. Van der Merwe recognized, “I want to cover and control all aspects from A to Z.” In addition, “through Drako Shipping Limited we will be building our own oil and gas tankers and we want to set up the shipbuilding yard in Saudi Arabia as a joint venture between Drako Oil and the Saudi Arabian government, which will be a US$20 billion project,” he boasted.
Drako Oil will be pursuing a listing in the USA and UK shortly. Additional project funding will come from the large international banks and companies Drako Oil will approach, which include BAE Systems, the Saudi oil company, Royal Bank of Scotland, Barclays UK, HSBC, Citigroup and ABN Ao.
“I have a lot of respect of Exxon and I am using them as an example,” stated Van der Merwe. His goal and ambition is to use the best and the biggest in the industry as a role model and exceed their performance. “Once we reach that point it will be our turn to bring the whole oil industry to a completely new level,” he concluded.
Gauteng: Africa’s financial services capital
Historically, Gauteng has been relying on mining as the backbone of the economy, and since the early days Province’s minerals wealth generated a lot of international interest. The importance of gold as one of the precious metals that were used to benchmark foreign exchange gave impetus to South Africa moving rapidly into the financial sector. This process has accelerated since 1994, and Cas Coovadia, Managing Director of the Banking Association, confirms that “post-democracy the government created a macroeconomic environment which positioned South Africa as an attractive financial services market and platform for the continent.” South Africa has a world class financial system, and Stanley Subramoney, deputy CEO of PricewaterhouseCoopers, emphasised that “strong capital markets are critical to the African Renaissance, and banking is an important element of a strong capital market.
Over the past, the financial services sector has become a leading sector in the South African economy, while Gauteng emerged as the financial services capital of Africa. Nowadays, more than 70 foreign banks have their head offices in Gauteng, and that amount is vastly exceeded by the number of South African banks, stockbrokers and insurance giants. The CEO of the Johannesburg Stock Exchange, Russell Loubser, has seen the direct impact of the overhaul of South Africa’s political landscape and macroeconomic fundamentals. “Many people have been stimulated to ‘buy South Africa’,” he stated.
It was no coincidence that the financial sector located in Gauteng, South Africa’s smallest province and economic powerhouse accounts for 33 per cent of the country’s GDP, while it also represents 11 per cent of the African continent’s GDP. Home of the Johannesburg Stock Exchange, Gauteng’s economy already offered critical mass for the development of a financial services centre, which was also stimulated by the proactive approach of the Gauteng government towards broadening its economic horizons.
“In Gauteng we looked at new pillars and our economy has become highly diversified with particular emphasis on financial markets and the high-end, secondary manufacturing sectors. In Gauteng we call them the smart industries,” stated Keith Khosa, CEO of the Gauteng Economic Development Agency (GEDA). At present, the financial sector contributes over 25 per cent of Gauteng’s gross geographic product, a percentage that is expected to continue its rise over the coming years. Gauteng offers the firsthand experience that firms locate around financial centres, positioning Gauteng is well ahead of the rest of the country in terms of investment potential.
Building on its success in attracting investment, GEDA is now striving to elevate the oil industry as a primary sector for investment and further development. “Oil is an essential element in managing our affairs as people, industries and countries,” Khoza acknowledged. In terms of communication and transportation infrastructure Gauteng is an area that can be compared to most developed cities in the world. “The provinces competitive edge,” said Keith Khoza, “lies in the presence of both the financial institutions and the key decision makers of the South African economy. Gauteng is serious about business.”
South Africa’s ‘Big Four’
Prior to democracy, South Africa’s banking sector was very concentrated, and was dominated by the country’s four main banks: First National Bank, Absa, Standard Bank and Nedbank. “The South African banking sector is very competitive and South African banks are hard-working, have good capital ratios, deliver exceptional returns and have always been technologically well advanced. It is a very efficient banking industry by global standards and South Africa’s banking regulation is very good and stringent,” stated Tom Boardman, chief executive of Nedbank. Post-democracy, the sector opened up substantially, particularly in the corporate, merchant, high-net worth banking environment, creating considerable competition through the entry of international banks. “By increasing competitiveness and bringing international best practice as well as innovation into the sector, the international banks have done the South African banking system a great deal of good,” reflected Cas Coovadia.
While many international banks set up branch offices, Barclays Bank bought a majority share in Absa, one of South Africa’s four big banks, in July 2005. The R33 billion (US$4.7 billion) acquisition, making it the largest foreign direct investment in South Africa, created the country’s only bank that can truly claim to bundle local perspective and global expertise. The philosophy driving the acquisition has been to combine the best of Barclays and the best of Absa to create the pre-eminent bank on the African continent.
Less than a year after the acquisition, a new investment bank was unveiled to the South African landscape. Representing a combination of the global expertise of Barclays Capital and the specialist local knowledge of Absa, Absa Capital was created to replace Absa Corporate and Merchant Bank. “Absa Capital is set to challenge the market and shake up investment banking in South Africa with fully local, fully global capabilities,” said John Vitalo who is heading up the new investment bank. “Through our affiliation with Barclays, Absa can now claim a dominant position in both the national and global markets,” he continued.
Inevitably, these changes impacted Absa’s positioning in the oil and gas industry. Bobby Jurd, Head of Resources for Absa Capital, has been with the bank for a long time and notes that “before Barclays came on the scene we were a formidable player in the resources sector.” The main changes that occurred when Barclays came on the scene relate to geography. From an oil and gas perspective Absa’s domain was more or less Southern Africa, including Angola and Sonangol as well as Mozambique and the Pande field. “With Barclays’ arrival on the scene we have been given the geographic responsibility for Africa in oil and gas,” stated Bobby Jurd. “That is the main change; we were very much Southern Africa bound, but Africa became our playground.”
Absa’s investment banking activities could have been continued under the Barclay’s Capital brand, but a clear choice was made to operate under the Absa Capital name. “The primary reason is one of size,” explained Bobby Jurd, “Barclays Capital has got a small oil and gas team that is involved in extremely big projects, while African projects tend to be smaller and thus tend to be below Barclays’ radar. In addition, ABSA Capital has the expertise required to operate successfully in Africa.”
ABSA Capital’s oil and gas unit operates in Africa and has full access to Barclays Capital, enabling the bank to provide global solutions to African clients. At the same time, Barclays Capital brings international expertise to the table and for the period April 2004-April 2006 was ranked in the top three worldwide as mandated arranger of oil and gas project finance loans. Strengthened by its affiliation with Barclays Capital, Absa Capital is well equipped to increase its penetration in the exploitation of Africa’s oil and gas resources. The investment bank derives a competitive edge from its access to the Absa/Barclays network in Africa in terms of ability to source and service projects across Africa. “When this network is combined with the expertise available in Johannesburg, where Absa Capital has a dedicated oil and gas team, and London, it puts Absa Capital in a unique position and gives us a definite advantage over our competitors,” put Bobby Jurd. “In oil and gas our reach in Africa is increasing on a monthly basis. Our footprint in Africa is formidable; we are well represented in fourteen countries in Africa and those countries are the resources rich countries. A well strategized plan is being executed to perfection at the moment, it is not idle talk, we want to be the best and we want to be the best as soon as possible,” he concluded.
While Absa joined forces with Barclays Bank and Standard Bank and First National Bank embarked on successful independent growth strategies, it seemed that Nedbank would be left behind. At the end of 2003, a big shake-up in Nedbank’s senior ranks brought Tom Boardman the position of chief executive, charged with the task to turn the bank around. During those days the bank was experiencing very bad publicity. “On the day Nedbank announced that I was the new chief executive the share price of fell five percent,” remembered Tom Boardman, “the second day I drove to work, the headline of every newspaper read ‘Nedbank share price falls on Boardman’s appointment’, so that was a nice way to start.” Two and a half years into the four-year turnaround plan, people can see that Nedbank is back on track and its chief executive is highly rated and respected by his people, clients, shareholders and even competitors for getting the vision right.
Part of getting the vision right was realizing that even if you are a big bank you cannot be everything to everybody. Therefore, in its corporate and investment banking business, Nedbank has chosen particular sectors in which it has attracted people who have sector-specific skills. “It would take many years to make our bankers experts in oil or synthetic fuels, while we can take experts in synthetic fuels or petroleum and teach them about the bank in six months to a year,” stated Brian Kennedy, the managing director of Nedbank Capital. Nedbank firmly believes in the strategy of recruiting experts from deep-level mining, gold mining, platinum mining, coal, synthetic fuels, petroleum and gas and turn them into bankers.
“There is a lot of activity in the oil and gas industry so over the next three to five years we expect to build reasonable income streams out of the industry from both risk-free and risk income. Our focus will be on the Southern African region, which is clearly in our comfort zone, but we will closely monitor opportunities on the West coast of Africa,” concluded Boardman.
German banks roaming the African savanna
While Germany’s national football team kicked off for the first match in the FIFA World Cup 2006, Clive Kellow, Christian Nägele and Volker Stein were discussing Commerzbank’s opportunities and ambitions in the African oil and gas industry. Germany’s second largest bank is a strong player in the South African market and has maintained a presence in the country for nearly fifty years. Operating through a Representative Office until 1995, Commerzbank was the first foreign bank to obtain a branch license after the ANC had come into power. Clive Kellow, CEO of Commerzbank’s Johannesburg branch, explained that “since then Commerzbank has been concentrating on corporate banking and merchant banking with a strong focus on the top 100 South African companies, multinationals in South Africa, and financial institutions.”
By 2002, Commerzbank had become the biggest foreign bank in the country but as more and more banks entered the South Africa’s banking sector, obviously more and more liquidity came into the market and Commerbank experienced that the dynamics of supply and demand shrank its margins. Clive Kellow stated, “Commerzbank tried so safeguard its position as market leader, but the enormous influx of the other big banks has put an extreme amount of pressure on this market. This has emphasized our need to move towards a matrix driven business where we use sector specialists from overseas.” He believes that you have two choices in South Africa, either you buy a local bank or you use the strengths that you have overseas; something in the middle is not going to work, and Commerzbank has chosen to use the strength of its global offices in London and Frankfurt.
“These days Commerzbank is the best mid-cap bank in Europe and we are partly bringing that strategy down to South Africa,” stated Clive Kellow. He quickly notes that one has got to put that into perspective, because a mid-cap in South Africa and a mid-cap in Europe are slightly different. “One of our main competitive advantages is our ability to offer exactly the right products for the right development phase,” boasted Volker Stein, Commerzbank’s head of Structured Finance. This ability has been derived from Commerzbank’s experience of supporting the development of Central and Eastern Europe where the various markets are in different stages of development. Stein remarked, “of course we know that the situation here is different, but the point is that supporting emerging markets is nothing new for Commerzbank.”
Clive Kellow underlined that “the experience that Commerzbank gathered in Eastern Europe and Russia through dealing in economies with a very strong single government involvement, and structuring deals around that can be applied in many sub-Saharan African countries as well.” This experience, which some of the other foreign banks here cannot offer, forms the basis of Commerzbank’s niche market approach.
“In South Africa we want to specialize in structured finance, and we feel that we could present particular strengths in energy, transport and telecommunications. In our world energy covers power, oil and gas,” he added. Head of corporate banking at Commerzbank’s Johannesburg branch, Christian Nägele outlined that oil and gas has very much become and African issue, both in terms of resources as well as because of geo-politics, and that is why the big banks, both locally and globally, which have knowledge in these sectors are focussing on Africa at the moment.
Volker Stein, who is based in Frankfurt, emphasised that the natural resources situation in sub-Saharan Africa is becoming increasingly important for European decision makers as they are looking to develop new sources of supply for oil and gas. Ready to take advantage of the momentum in the industry, Clive Kellow is eager to note that Commerzbank’s matrix structure enables the bank to assess opportunities quicker and better than the other banks, and to use the opportunities. “Commerzbank is well positioned, and we are prepared to take on the challenges that are ahead of us,” Stein concluded.
Deutsche Bank generally is not a big lending bank like Citibank or Commerzbank, but is more a sales and trading bank. One leg of the business is corporate finance and transaction banking while the other leg of the business is global markets, which includes debt and equity with a focus on sales and trading. Deutsche Bank South Africa, which is one of the bigger international investment banks in the country, mirrors Deutsche Bank globally from an investment banking perspective. Murray Winckler, Deutsche’s CEO in South Africa, puts that “from an opportunity point of view we focus on structuring packages and distribute them to investors, which also is one of the differentiating factors that Deutsche Bank has from a global perspective.” Deutsche Bank has a strong commitment on the ground in South Africa and leverages the group’s global resources. “In the derivative space and the debt and equity markets we top the league tables with Goldman Sachs globally and we leverage this very strong offshore franchise in South Africa. Our domestic operation links very well with the offshore capabilities.”
Deutsche Bank tends to be on the forefront of any debt-raising in South Africa, but “the cross border transactions are the space where we really have a competitive advantage,” said Winckler. “In addition, we have been rated as the number one equity sales house in the last four years while in trading we have been consistently rated in the top three over the last five years.”
Deutsche Bank covers more than 10 per cent of trade in the equity market and part of its business would be with foreigners. “The last two years we have seen huge net buying into emerging markets, and we have obviously done a lot of that through our desks into South Africa,” noted Winckler. “Clearly Sasol is a favourite with international investors, about 35 per cent of Sasol is held by foreign investors, and we play an important role in marketing them internationally in Europe, the US and the East.”
Having established a strong position in the debt and equity businesses, Deutsche Bank clearly focuses on about twenty large companies in South Africa. “In the oil space Sasol is one of the companies we work close with,” noted Winkler, before explaining that “Deutsche Bank has just done a hedging of the oil price for Sasol, a zero cost collar with an upside of US$83 and a downside of US$62 for 30 per cent of their oil production.”
He continues, “The oil and gas industry is such a huge industry and there will always be a lot of opportunities out there.” Deutsche Bank aims to continually differentiate itself through its cross-boarder expertise, its ability to raise capital whether it is equity or debt, and its capabilities in foreign exchange and commodity hedging. “We have an array of products that we are able to offer to the major players and we are the number one equity house in South Africa, so I think we have a lot to offer the industry,”