With an estimated 3.5% of global coal reserves, South Africa has traditionally benefitted from an ample supply of cheap fuel. It has the fifth most energy-intensive economy in the world, accounting for 30% of total power consumption in Africa. South Africa generates 94% of its electricity from coal. BP estimates that its coal reserves will last for at least another century at current production levels, but underinvestment in the backbone of the national grid has resulted in difficulties coping with increased electricity demand since 2008, and has caused the country to become the world’s 14th-largest emitter of carbon dioxide. Parastatal power firm Eskom is building the country’s first new coal-fired power plants in nearly 20 years, Medupi and Kusile, although there have been several delays.


To reduce dependence on coal and improve energy security, the government pledged to increase exploration to find domestic gas feedstock in the National Development Plan (NDP), and promulgated a 20-year Integrated Resource Plan (IRP) in 2010 to diversify the energy mix by increasing nuclear, natural gas and renewable power generation capacities. The government also unveiled the Renewable Independent Power Producer Procurement Programme in 2011.

South Africa’s proven oil reserves are modest, at 15m barrels in January 2011, according to the Oil & Gas


South Africa has the continent’s most developed energy sector in terms of capacity and load management, but if it is to stoke headline growth, major investment will be needed throughout the value chain, as will improved cost-recovery tariffs and clear regulatory goals. As Eskom is state-owned, it reports directly to the Department of Public Enterprises, which acts as a representative shareholder. The electricity tariffs Eskom charges are regulated by the National Energy Regulator of South Africa (NERSA), which was established in 2005 to license and oversee the country’s piped gas and petroleum industries, which had previously not been subject to direct federal authority.

The Department of Energy (DoE) is responsible for formulating and implementing policies to ensure that the nation’s mineral wealth is efficiently exploited in a manner that is environmentally friendly, and provides all citizens with reliable, affordable energy. Oil and gas exploration and production is regulated by the independent Petroleum Agency South Africa (PASA), which is also the custodian of the national petroleum database. However, the agency may be disbanded if the proposed amendments to the Mineral and Petroleum Resources Development Act (MPRDA) passed by parliament in late 2013 are signed into law.

Revised IRP

In response to a round of load-shedding in 2008, when demand outstripped supply, the government promulgated an IRP in 2010 that aimed to reduce South Africa’s dependence on coal-fired electricity to 15% by 2030 and raise renewables’ share in the national energy mix to 42%. The IRP aimed to meet the projected increased electricity demand by building 9600 MW of additional nuclear base load capacity; generating 3900 MW, equivalent to 9% of total estimated consumption, through open-cycle gas turbines during peak demand periods; and importing 2600 MW (6%) of hydroelectric power and 2400 MW of natural gas (6%).

Though the 2010 IRP remains legally in place, in March 2014 the government released an updated 20-year plan for public comment that is in the process of being finalised, and is scheduled to replace its predecessor by 2015. The most notable distinction between the proposed revision and the 2010 IRP is the reduction in projected energy demand in 2030 from 454 terawatt hours (TWh) to 345-416 TWh, meaning some of the build programme targets outlined in the first IRP to boost capacity are likely to be delayed or scrapped.

Wind’s share in the future generation mix has shrunk substantially in the updated version, from 9200 MW in 2010 to 4360 MW in the base scenario. Gas is more prominent in the new IRP, which aims to pursue both regional and domestic imported gas options and step up exploration for potential shale gas reserves. The plan also calls for boosting the generation capacities of both open- and closed-cycle gas turbines and urges lawmakers to fast-track the decision-making required to support natural gas-fired power by 2019. The plan also makes reference to several new regional potential power sources, including hydropower imports from Mozambique, Zambia and Lesotho, and imported gas from Namibia and Mozambique.


Around 86% of South African households are electrified, according to the DoE, and over the last five years nearly 1m new homes have been connected to the national grid. Through the new household electrification strategy, the DoE expects to reach the NDP target of universal electricity access by 2025, five years ahead of schedule. Eskom generates 95% of South Africa’s electricity, largely through its coal-fired power plants, which consume more than half of the country’s coal production. The rest is supplied by independent power producers (IPPs). South Africa’s total nameplate installed electrical capacity is 45,700 MW, although its net maximum capacity is thought to be as low as 35,650 MW. Between 1994 and 2008, South Africa’s GDP grew by 70% and around 4m new households were connected to the national grid. Though electricity consumption rose dramatically during this period – particularly by the commercial and industrial sectors, which consume 60% of power supply – South Africa’s generation capacity increased by only 14% and its reserve margins shrunk to a low of 5% in 2008, compared to an average international rate of 10-20%.


Energy consumption rose by 2.6% from 2011 to 2012 to 123.8m tonnes, 72% of which was produced with coal, which is the main feedstock for Eskom’s power plants. Notwithstanding the government’s efforts to diversify its fuel supply, coal remains South Africa’s most significant resource. The country is estimated to have 15bn-55bn tonnes of economically recoverable coal reserves, much of which is located close to the surface, making it easier to mine, but is also notable for its low-quality, high-sulphur content. The “BP Statistical Energy Review 2013” estimated that South Africa had 30.2bn tonnes of recoverable coal reserves and produced 146.6m tonnes in 2012, up from 141.8m tonnes in 2011. World Coal Association figures are even higher. It estimates that production reached 259m tonnes in 2012, 74m tonnes of which was exported, making South Africa the world’s sixth-largest coal producer and seventh-largest coal exporter.

According to the EIA, around 25% of the coal produced in South Africa is exported – India, China and to a lesser extent Europe are the largest markets – through Richards Bay Coal Terminal (RBCT) on the eastern coast. When it was built in 1976 with a nameplate capacity of 12m tonnes, RBCT was the world’s largest coal export terminal. Its nameplate capacity has since been upgraded to 91m tonnes and it remains one of the largest coal export facilities in the world, though it has never operated at full capacity, according to the EIA. Shipment volumes through RBCT peaked at almost 78m tonnes in 2012, and fell to just over 70m tonnes in 2013.

Most coal production takes place in the Witbank, Highveld and Ermelo fields in the Central Basin near the eastern border with Swaziland, but these reserves are expected to be exhausted over the next decade, according to a 2011 study by Stanford University. Recently exploration activity has picked up at inland coal fields in Limpopo Province and around Waterburg that are also believed to contain significant reserves, though their commercial viability depends on overcoming water, transportation and infrastructure constraints. Water scarcity is becoming an issue, but in March 2014 the governments of South Africa and Lesotho launched Phase 2 of the Lesotho Highlands Water Project, which includes a system to augment delivery to South Africa.

Oil & Gas

Oil is the second-largest contributor to the energy mix, accounting for 22% of consumption (26.9m tonnes) in 2012, according to BP. Domestic sourcing offers limited scope in filling demand, with imports largely sourced from OPEC countries. South Africa had proven reserves of 15m barrels at the end of 2013, according to the Oil and Gas Journal, clustered offshore in the southern Bredasdorp Basin and at another site near the maritime boundary with Namibia, where possible offshore hydrocarbon resources were reported.

There is currently unprecedented interest in oil and gas exploration off South Africa’s coast, with heavyweights such as Shell, Anadarko, ExxonMobil and Total all involved. Several seismic surveys of the seabed have been conducted in recent years. “South Africa has never been in this position before,” said PASA’s resource evaluation manager, David van der Spuy. “If encouraged by the surveys, the companies could sink test wells.”

South Africa consumed an estimated 166bn cu feet (bcf) of natural gas in 2012, amounting to 2.5% of total energy use, according to BP. Around 39 bcf of this was produced by PetroSA, which operates all domestic productive petroleum assets, including its only known offshore natural gas reserves in the F-A and South Coast Complex fields, according to the EIA. The remainder was imported by pipeline from Mozambique.

Interest in the country’s offshore blocks has increased in recent years, following a spate of successful finds in Mozambique and Tanzania. At least 14 energy firms have offshore exploration rights to 16 different blocks in the Orange Basin, including PetroSA, Shell and BHP Billiton, but exploration is in the early phases and far from being commercially viable, according to a 2012 report by South African consultancy Econometrix. Nearly 60 firms also have onshore exploration rights in the country, although none have yet begun production.


In October 2013 Eskom said that it would start work on a major underground coal gasification (UCG) plant at its Majuba power station as soon as environmental approval was received. Regulations governing prospecting and mining for UCG in South Africa were included in the MPRDA Amendment Bill, increasing the likelihood that the clean coal technology will be introduced to the national energy mix. UCG enables coal to be gasified within a seam, converting it to synthetic gas and enabling access to previously unmineable seams.


In 2013 the EIA revised its estimate of South Africa’s technically recoverable shale gas reserves from 485trn cu feet (tcf) to 390 tcf. PASA puts them at 49 tcf. Determining the commercial viability of exploiting unconventional resources is key to expanding gas production and meeting objectives outlined in the IRP.

In 2009 and 2010 PASA awarded technical cooperation permits (TCPs) to four international energy corporations to conduct geological surveys of potential shale reserves in different areas of the Karoo Basin, giving them the exclusive right to apply for a future exploration licence for each block. Royal Dutch Shell has applied to convert its TCP for a 90,000-sq-km block of the Karoo into an exploration licence, submitted an environmental management plan and is awaiting PASA’s approval. Falcon Oil and Gas was the first firm to be awarded a TCP for a 30,000-sq-km block in 2009, and has submitted an exploration licence application in partnership with Chevron. A joint venture between Statoil, Sasol and Chesapeake Energy was awarded a TCP to evaluate an 88,000-sq-km block but was then relinquished. Anglo American applied for a TCP for 50, 000-sq-km of the Karoo, but the government then imposed a 19-month moratorium on fracking to conduct an environmental impact assessment.

The prospect of unconventional production has prompted opposition, with concerns related to the impact of fracking on the Karoo’s ecosystems, although Shell stated that fracking would only take place in 1% of the 80,000-sq-km basin, and bring much-needed job opportunities and development. In September 2012 the fracking moratorium was lifted, but exploration licences will not be issued until the regulations governing petroleum exploration and production released for public comment in October 2013 are promulgated. In October 2014 PASA confirmed that it would proceed with the processing of pending shale gas applications received prior to February 1, 2011.

In October 2014 Thibedi Ramontja, the director-general at the Department of Mineral Resources, said that after consultations with communities, the department would focus on re-processing applications to explore for shale gas. “Our intention is that by July-August 2015 we will be issuing exploration licences, beyond which the shale gas exploration shall duly commence.”


Expanding capacity is crucial for Eskom to continue to meet demand and ensure sufficient power to help South Africa meet headline growth targets. Increased demand and reduced margins led to a spate of load-shedding in 2008, resulting in an estimated $5bn of economic losses, according to NERSA. The issue was raised again in 2014, and in June Eskom declared its fourth emergency of the year. “The power system is currently severely constrained, meaning that any extra load or faults in the system are likely to result in load-shedding,” it warned. The utility resorted to rotational load-shedding for the first time since 2008 in March 2014, doing so again in November after a coal silo collapse damaged its Majuba power station.

“Eskom’s generation fleet has not been producing the power needed to meet rising demand. Coupled with the fact that new power plants coming on-line have been delayed, this has limited capacity, which reached its limit in the March 2014 load shedding,” the former acting CEO of Eskom, Collin Matjila, told OBG.

A white paper in 1998 warned that South Africa would face a power crisis by 2007 if something was not done to boost electricity supply, although it was only in 2005 that Eskom was able to access capital to spend on a new build programme, which aims to add 17.1 GW of generating capacity by 2018/19. The key to this expansion is the construction of two new coalfired power plants, Medupi and Kusile, with nominal capacities of 4764 MW and 4800 MW, respectively, and the Ingula hydroelectric plant, which would generate 1322 MW during peak demand periods.

Between 2005 and April 2013, Eskom delivered 6017 MW of additional generation capacity; expanded its transmission lines by 4686 km and its transmission substation capacity by 23,775 mega volt amperes; and funded capital upgrades worth $5.7bn, according to Eskom’s 2012/13 annual report. In 2013 Eskom added 261 MW of capacity to the grid with 200 MW from Komati Power Station, 31 MW from Camden Power Station and 30 MW from Koeberg Nuclear Plant.

Nuclear power accounts for 2.5% of energy consumption, and is generated at the country’s only nuclear plant, Koeberg Power Station, which is owned and operated by Eskom and regulated by the national Nuclear Energy Regulator. “The development of nuclear energy will help South Africa meet its emission reductions targets as it is a source of clean energy and baseload capacity,” the CEO of the South African Nuclear Energy Corporation, Phumzile Tshelane, told OBG.

The three pillars of Eskom’s planned build programme have been affected by project delivery issues. At the end of the first quarter of 2013, Kusile was only 22% complete “due to uncertainty about funding” and Ingula was 68% complete “mainly reflecting geological challenges”, Eskom’s report said. Originally scheduled to deliver electricity by 2011, Medupi is also behind schedule, which Eskom attributes to “labour unrest leading to site closure, contractor performance regarding welding and postwelding, and treatment and delivery of the control and instrumentation system”.

Load Management

Due to unfavourable economic conditions that resulted in peak electricity demand falling by 2% between 2011 and 2012 to 35,525 MW, and by deferring maintenance, Eskom was able to avoid further power cuts until 2013, but at a high cost.

The company is increasingly relying on open-cycle gas turbines to generate electricity, which costs $0.24 per KWh, compared to $0.06 for coal-generated electricity, Shaun Nel, the director of the Energy Intensive Users Group (EIUG), told OBG. In February 2014 Eskom’s CEO said that over-expenditure, due to an excessive reliance on open-cycle gas turbines, amounted to R2bn ($189m) in the first half of the 2014 financial year.

By deferring maintenance on its power stations, nearly two-thirds of which are beyond the mid-point of their projected lifespans, the unplanned capability loss factor increased from 7.97% to 12.12% in 2013, more than double the 6% target. The total maintenance backlog was 30 in April 2013, more than half of which were ad hoc repair outages. “Despite the dip in demand and sales, these peak demand values are uncomfortably close to Eskom’s nominal generating capacity. This will continue to be the case until Medupi power station starts delivering first power to the grid at the end of 2013,” the Eskom report warns.

Increased Tariffs

In February 2013 NERSA, which must balance Eskom’s need for capital against the impact of price hikes on cost-sensitive consumers in both the household and industrial segments, granted the company an 8% electricity price hike for standard customer tariffs, half of the 16% tariff increase it had requested. Eskom claimed that this would result in a revenue shortfall of $21bn up to 2018.

“Our medium- to long-term financial challenges are significant,” according to Eskom’s annual report said. “We enjoy strong support from the shareholder in the form of a government guarantee, which has allowed us to continue sourcing funding for the current build programme. The downgrading of our outlook, however, combined with the allowed level of tariffs over the next five years, may affect both the availability and cost of funding for future expansion.”

However, in October 2014 NERSA announced that it had approved an average tariff increase of 12.69%, which it said would only be implemented in the 2015/16 financial year. In addition, the finance minister, Nhlanhla Nene, announced in his medium-term budget speech in October 2014 that the government is to inject R20bn ($1.9bn) into Eskom. The government is keen that the provider bridge its funding gap without raising its rates too high, due to the implications for key sectors.

According to Nel, the EIUG’s 41 members had seen their electricity costs increase by 280% since 2008. “If we don’t manage the capacity expansion programme and the costs associated with electricity generation, there will be a significant decline in industrial consumption,” he told OBG. “As industrial tariffs cross-subsidise commercial and residential electricity prices, the commercial impact on them is going to get worse.”

Regulatory Reform

The sector may be set for a shake-up if pending legislation is passed and implemented. The Independent System and Market Operator Bill approved by the National Assembly in 2012 would create a separate, state-owned entity under the DoE to procure electricity from a variety of power producers; ensure that Eskom was honouring the terms of its contracts with IPPs; and possibly take control of the utilities’ transmission assets. The bill has been stalled since mid-2013, reportedly due to opposition from the minister of public enterprises. In February 2014, former energy minister Ben Martins asked Parliament to fasttrack the legislation and, according to Business Day, told energy conference delegates Eskom could not be “ player, referee and linesman” of the electricity sector.

Upstream Reforms

Pending legislation may also have an impact on the sector. In March 2014 Parliament approved a controversial amendment to the 2004 MPRDA that promises to have wide-ranging implications for the development of the country’s potential shale gas reserves and its nascent upstream industry if the legislation is implemented. The bill entitles the state to a 20% free-carry interest in all new oil and gas discoveries, and allows it to increase its stake in all future petroleum drilling ventures by 80%, either at an “agreed upon price” or through a production-sharing deal. A previous version of the bill limited the government’s ownership of oil and gas resources to 50%.

“This will have a direct impact on the intensity of exploration as it makes investment returns uncertain,” Barnard told OBG. “It could put off exploration of new resources by foreign investors, which would mean South Africa would continue to be reliant on coal, imported energy and nuclear power.”

The amended MPRDA passed in 2013 would bring PASA under the management of the Department of Mineral Resources. This was widely criticised at hearings on the bill held by the Portfolio Committee on Mineral Resources in September 2013. “The disbandment of PASA will provide the tipping point for the industry,” Sean Lunn, director and country manager of Impact Oil and Gas, said in his testimony. “Oil and gas companies will simply shift their focus to other global opportunities that provide the desired level of certainty.”

In April 2014, US oil firm Anadarko announced that it was suspending expenditure on offshore exploration that it had been conducting with PetroSA on blocks 5, 6 and 7 in the Western Cape until the petroleum law and fiscal terms were clearer. In addition, the exploration manager of Shell’s international upstream business in sub-Saharan Africa, Menno de Ruig, told Reuters; “We are hopeful that the uncertainty around the petroleum bill in South Africa gets resolved in a workable manner so that we can move forward to the drilling phase.”


South Africa has one of the largest downstream sectors on the continent, though growth in demand has outstripped supply. A decade ago the country was a net exporter of petroleum products, but it currently imports around 5bn litres of fuel annually to meet its consumption needs, equivalent to 120,000 barrels per day (bpd), according to the executive director of the South African Petroleum Industry Association (SAPIA), Avhapfani Tshifularo. With demand for transportation fuels forecast to grow to more than 400,000 bpd by 2020 in South Africa, PetroSA estimates that if no new refinery investment is made, the country will have to import more than 200,000 bpd by the end of the decade.

In recognition of impending supply chain constraints, in 2012 the DoE began drafting a 20-year Liquid Fuel Roadmap to curb South Africa’s mounting dependence on imported fuel; ensure the future security of supply; bring standards in line with international norms; and provide a framework for investment in downstream infrastructure. The roadmap was due to be published by the end of the first quarter of 2014, but had yet to be released at time of press.

According to the South African Revenue Service, crude oil imports averaged 378,000 bpd in 2012. In 2013, South African oil consumption hit 616,000 bpd, nearly 70% of which was imported, largely from OPEC members and African nations. South African petroleum production reached 180,000 bpd in 2013, 90% of which was used for synthetic fuels. The remaining 10% was produced from crude oil and lease condensate derived from PetroSA’s maturing Oribi and Oryz fields and natural gas plant processing liquids.

According to the World Coal Association, 30% of the fuel consumed in South Africa is coal-based. Petrol comprises the biggest share of production (14bn litres), followed by diesel (9bn litres) and jet fuel (2bn litres), according to SAPIA. South Africa has six petroleum refineries with a total nameplate capacity of 708,000 bpd, though SAPIA estimates that they are operating at 70% of capacity and producing 500,000 bpd, well below the global refinery efficiency rate of 90%.

Synthetic fuels account for nearly 40% of consumption and are processed at two plants. Sasol owns and operates one of the world’s largest coal-to-liquid plants, Secunda, which has a total capacity of 160,000 bpd, and the company plans to raise this by 30,000 bpd. Secunda also processes natural gas imported from Mozambique through a pipeline that was built in 2004 in a joint venture between Sasol and the governments of Mozambique and South Africa. PetroSA owns and operates the Mossel Bay gas-to-liquids plant, which has the capacity to convert natural gas into 45,000 bpd of synthetic liquid fuels. Petrol accounts for more than half of Mossel Bay’s production, according to the EIA, and the remaining output includes kerosene, diesel, propane, liquid oxygen, nitrogen and other fuels.

South African’s remaining fuel demand is met by four conventional refineries that were all built between the 1950s and 1970s to process imported crude oil, and had a total combined capacity of 485,000 bpd as of January 2014, according to the Oil and Gas Journal. The Sapref refinery, jointly owned by Shell and BP, has a capacity of 169,000 bpd; followed by Engen Petroleum’s refinery, with a capacity of 118,000 bpd; Chevref, which is owned by Chevron’s local subsidiary Caltex Oil SA, and has a capacity of 110,000 bpd; and the Natref refinery, which is a joint venture between Sasol and Total and has a capacity of 88,000 bpd.


Petroleum prices are tightly controlled by the government, which SAPIA argues is a deterrent to third-party investment in the downstream segment. The Central Energy Fund sets the price of petroleum on a monthly basis using an import parity mechanism dating from 2003 that accounts for domestic shipping and storage costs, as well as international market prices. Pipeline transmission and storage costs are set by NERSA. Tshifularo told OBG in March 2014 that it would cost petroleum producers an estimated $4.5bn to make the upgrades necessary to comply with recently passed Euro V cleaner fuel standards and none of the refineries had begun the process yet, though the deadline is 2017. “Cost recovery is key to the oil companies decision of whether or not to invest in refinery upgrades,” he said. “The government has been receptive to cost recovery, but they haven’t specified the mechanism yet so I cannot see us meeting the deadline.”


Although upgrades and refurbishment of existing refineries could help address demand in the short to medium term, PetroSA signed a deal in March 2013 with China’s state-owned Sinopec to conduct an updated feasibility study for the new mega-refinery it wants to build in the Coega Industrial Development Zone. The proposed refinery, Project Mthombo, which would have an estimated output of 300,000 bpd and immediately be compliant with Euro V standards. With the shortfall in South Africa’s domestic petroleum supply projected to increase to 180,000 bpd in 2030, according to PetroSA, Mthombo would be able to meet a large proportion of future fuel demand.


Although it has one of the largest, most developed energy sectors on the continent, after three years of less-than-expected economic growth and tight capacity margins, South Africa is again reformulating its 20-year plan in a bid to address long-term energy security, equity of access to electricity and environmental sustainability. The government’s commitment to weaning the country off fossil fuels is evident in the updated IRP, but in order to stimulate the investment that is needed to expand capacity improving regulatory clarity will be crucial in the near to medium term.