Issue 119 • 27 July 2007

Delays on shape and details of Kudu GTP jangle nerves in Namibia

The upstream group led by Tullow Oil has started the latest phase of appraisal drilling, but delays in putting together this complex GTP project are again putting the Kudu scheme’s viability into question.

Delays over gas pricing and other details essential to trigger the Kudu gas-to-power scheme, now expected by the project’s developers to supply Namibia and South Africa with electricity from combined cycle power plants to be built in both countries, are making some project sources uneasy.

This is despite reports of further progress in the upstream, where Tullow Oil chief executive Aidan Heavy recently listed offshore Namibia alongside his company’s current hotspots, Ghana and Uganda, as holding the potential to deliver “a substantial step change in our business”.

All sides remain committed to a GTP scheme, although analysts suggest that other alternatives – including liquefaction if reserves are sufficient, or piping all the gas to South Africa – might yet come into the mix if Kudu’s gas reserves are finally to be exploited.

Namibia Power Corporation (NamPower)’s Kudu project leader Margaret van der Merwe sees a possible final investment decision in 2008 – itself representing further slippage in the project timetable – with construction of the complex scheme within three years. “We have to get in by 2011, when [South African utility] Eskom’s new projects start coming in,” she told the late-June Africa Energy Forum.

The upstream developer group led by Ireland’s Tullow is drilling the Kudu-8 well as part of a two-well appraisal programme in the east of Production Licence 001. The well aims to establish commercially productive flow rates from the extensive Kudu East reservoir, where previous operator Energy Africa had some success in Kudu-5, drilled in 1998 (AE 111/3).

General manager exploration Angus McCoss told a conference call on Tullow’s 11 July operational update that the well should reach total depth by mid-August.

Tullow is taking a relaxed attitude, saying that talks on a power purchase agreement with NamPower and Eskom are continuing. “The ongoing drilling in Kudu could have a material impact on the outcome,” chief financial officer Tom Hickey said in the mid-July conference call.

According to Tullow, the parties are discussing combining the previously planned GTP project – which NamPower had structured around piping gas to land and building a generation plant in Namibia, for power to feed into the regional grid – with a pipeline to SA to allow direct gas export.

Van der Merwe said the most likely outcome now was for Kudu gas to supply a 800MW CCGT unit in Namibia, helping to assure national supply, and for gas to be piped 690km to South Africa, for conversion by Eskom at the planned Atlantis CCGT plant, at Ankerlig, Western Cape.

Farm-in questions

Drilling has started despite the Ministry of Mines and Energy still not formally approving Itochu Corporation’s farm-in the Tullow-led group. But on a more positive note, 10% partner state National Petroleum Corporation of Namibia (Namcor) has decided not to exercise its pre-emption right

Pending government approval, Itochu will take a 20% interest Production Licence 001, paying 40% of the cost of two appraisal wells. The Japanese firm is also committed to making “further financial payments depending on the ultimate volume of reserves developed and will provide Tullow with beneficial development financing for the project,” the Irish company said after agreeing the farm-in in April.

Pricing conundrum

Negotiations over the 22-year power contract remain stuck over questions of gas supply pricing, which would feed into the tariffs NamPower and Eskom pay for their electricity, and wider strategy. Indeed, the GTP scheme’s final shape has still to be decided.

Speaking at AEF, organised by EnergyNet, this year in Hamburg, Van der Merwe commented that the pricing question was eating into the project timetable, losing it comparative advantage as other regional projects – many of them coal-fired – gather momentum. The Kudu-fired power plant, she said in a spirited defence of the project, would have “to sell into a market that has cheap coal”.

The delays mean “leverage to negotiate favourable terms with Eskom is reduced as Eskom commits to alternatives”, such as the huge new coal-fired schemes in Botswana and SA, and gas-fired and hydropower options being provided by Mozambique (AE 118/1 & 4).

However, “to all intents and purposes no further progress can be made without resolution of price levels for gas supply and power offtake, and allocation of forex risk.”

To “unlock Kudu’s value”, the project sponsors are looking at a mid-merit or peaking plant to supply South Africa. The project’s original structure, as a baseload plant to supply SA, “wasn’t working”, and now it was envisaged Kudu gas could produce electricity that would be sold to Eskom in smaller blocks but at more lucrative peak times.
Selling peak power to Eskom will help to make the project bankable. Also to be resolved is how much NamPower pays Tullow’s group for the gas it consumes. The price so far has seemed too high for Windhoek’s budget.

As Van der Merwe replied to a question on project economics, from a government perspective, “it’s easier to get a lot of tax revenues from export, rather than trying to develop GTP.”