South Africa pledges more support to foreign energy firms after TotalEnergies quits gas project

South Africa has indicated it may increase support for foreign energy companies after French major TotalEnergies decided to abandon its plans to develop the country’s largest offshore gas discovery in the Outeniqua Basin.

According to South Africa’s Electricity and Energy Minister, Kgosientsho Ramokgopa, the government needs to collaborate more effectively with the industry to fully utilise the country’s hydrocarbon reserves.

Natural gas, which many view as a cleaner fuel, has become a key element in South Africa’s shift away from coal and oil to renewable energy sources. However, the country's ability to access gas resources is limited by several challenges, including delays in developing domestic discoveries and insufficient gas infrastructure.

TotalEnergies announced its decision to withdraw from the Brulpadda and Luiperd prospects (Block 11B/12B) in late July, saying that it was “too challenging to economically develop and monetise these gas discoveries for the South African market.”

The discovery of an estimated 1bn barrels equivalent of light liquid hydrocarbons at the Brulpadda field in 2019 was followed by success at the Luiperd well in 2020. The company reportedly spent at least $400mn, using advanced engineering solutions to drill in one of the fastest ocean currents in the world, however, neither prospect progressed to development.

The minister acknowledged that Pretoria could have done more to make the offshore discovery commercially viable, the Financial Times (FT) reported on September 3.

TotalEnergies’ withdrawal was “extremely disappointing,” Ramokgopa said in an interview. “Could we have done better to ensure this resource could be exploited in a more commercially attractive sense? Yes,” he was quoted by the FT as saying

“Domestic gas is far cheaper than imported gas, so we need to do more to work with players who can help us exploit these reserves,” the minister added.

Reasons behind the decision

TotalEnergies’ original development plan was to transport gas from Block 11B/12B to the Mossel Bay gas-to-liquids (GTL) plant, operated by the state-owned oil company PetroSA.

According to industry investors, PetroSA’s reluctance to strike a deal to buy gas from the project was partly to blame for TotalEnergies’ decision to exit the development. Last year, PetroSA’s acting CEO Sandisiwe Ncemane mentioned that the two parties could not agree on the price of gas.

Jan Martinek, one of the private investors in the project told the FT that South Africa needed the energy after years of blackouts. “But for no good reason, PetroSA simply refused to sign a deal to buy this gas,” he added. PetroSA declined to comment, said the media outlet.

South Africa is just beginning to recover from over a decade of severe power outages implemented by the state-owned power utility Eskom. However, Africa’s most advanced economy is now expected to encounter significant gas shortages.

This looming shortfall follows an announcement from Sasol, the company that supplies natural gas to the country from Mozambique, that it plans to stop deliveries to industrial customers by 2027 as the gas fields are nearing depletion.

Busi Mavuso, CEO of Business Leadership South Africa (BLSA), suggested that the government’s repeated “dramatic flip-flops” in regulating the gas sector, including a draft law that would grant the state a 20% stake in new exploration projects, may have influenced the French company’s decision.

Canada-listed Africa Energy Corporation (AEC), TotalEnergies’ former partner in the Brulpadda and Luiperd projects, will now take full ownership of the block and look for technical partners to help develop the prospects. However, the company acknowledged that these projects would be more challenging to pursue without the involvement of the French group.

Meanwhile, insiders at TotalEnergies informed the FT that the decision to withdraw was driven by the technical challenges of developing the discovery at depths ranging from 200 to 1,800 metres, as well as uncertainties around how to commercialise the project, rather than political factors.

AEC CEO Rob Nicolella said that a “combination of economic factors and the business environment” was the likely reason behind the company’s withdrawal.

“Total has retained its interest in other South Africa oil projects so . . . this is not a rejection of the country,” he told the FT. “But had there been greater support from the government, Eskom and PetroSA, it would undoubtedly have made the economics more beneficial”.

According to Nicolella, it made no sense for South Africa to ignore a major gas discovery, even if it would have been difficult to develop. “This project could provide up to 4,000 jobs and 4 gigawatts of power, and the government ignores this,” he added.

Although analysts believe that this forecast may be overly optimistic, the project would have still made a substantial contribution to South Africa’s stressed electricity grid. The Petroleum Agency SA, which oversees oil and gas exploration, estimated that the project could generate $450mn in annual revenue for the government.

James Mackay, CEO of South Africa’s Energy Council, a private organisation representing the country’s energy companies, stated that attributing TotalEnergies’ withdrawal to government failure or an intent to avoid risky countries would be inaccurate.

“Total is continuing with its projects in far more volatile areas of Mozambique, so they don’t shy away from politics or risk,” Mackay said. “Rather, it is the economics of the project that doesn’t stack up.”

However, many industry players, like Johnny Copelyn, CEO of Hosken Consolidated Investments, which has a stake in AEC, say that while South Africa has viable gas reserves, their development depends on whether the government has the political will to support the industry, the FT writes.