Issue 145 - 5 September 2008

Tullow mulls alternative ways to bring Namibia’s Kudu field to development

After trying for years to get a deal together for a regional gas-to-power project, Tullow Oil is now considering alternative markets for gas that might be produced from Namibia’s offshore Kudu field. But power generation remains the absolute priority for NamPower, as the Namibian utility evolves its strategy to cope with the southern African electricity supply crisis, writes Thalia Griffiths.

Namibia, South Africa and potentially other southern African electricity markets have long been seen as the eventual offtaker of gas reserves identified off the Namibian coast – and the SADC region’s power supply crisis has shown just how acute their need for more generation feedstock has become. But structuring a deal to bring this gas to market remains elusive, and upstream partner Tullow Oil has said it is now considering alternatives for commercialising the gas from Namibia’s Kudu field, after years of so far fruitless negotiations on the commercial aspects of the planned Kudu regional gas-to-power project.

The issue is highly sensitive for national utility NamPower, which is determined to see Kudu’s gas harnessed to meet Namibia’s power needs, but is equally disappointed that no deal has been reached so far.

“Following delays in concluding commercial arrangements on a major gas to power development for the Kudu gas field, alternative options are also being considered,” Tullow said in its H1 08 results statement. “One such option involves the possibility of developing the field as a marine compressed natural gas (CNG) project to supply gas into the regional industrial and transport markets as a replacement for diesel, HFO (heavy fuel oil) and LPG (liquefied petroleum gas). Further studies will be undertaken to assess the commercial attractiveness of such a project in the context of forecast regional energy demand and current technology.”

The extent of Kudu’s reserves is one issue to be resolved. Exploration drilling last year with the Kudu-8 well failed to find the additional gas Tullow had hoped for from the Kudu East reservoir. Tullow has ruled out a liquefied natural gas project, but believes CNG could have potential, for local power generation and export to southern African markets. The developers had originally planned to pipe Kudu’s gas to an 800MW gas-fired power station near the border town of Oranjemund to supply both Namibia and South Africa.

The issue is highly sensitive in Namibia, where the government has made it clear that gas-to-power – rather than CNG – is a priority. Even the government’s policy on independent power projects is deemed too sensitive to be discussed publicly, which analysts said could reflect a degree of tension and uncertainty over the future direction of Namibia’s energy supply structure.

NamPower’s Kudu project manager Margaret van der Merwe told the Africa Energy Forum in Nice in July that problems included the project’s dependency on a bulk offtaker, currency issues, the fact that the Kudu project appeared more expensive than other options, notably because of the rising cost of steel, and Eskom’s limited appetite for risk. Costly currency hedging is needed when project costs are in dollars but tariffs are in Namibian dollars and rand. Commenting on Tullow, she said: “There is a little bit of commercial tension with the developers.”

Meanwhile, as the Kudu negotiations have dragged on, the regional supply/demand balance has changed. Power demand growth in Namibia and the wider region is much higher than expected, not least because of the upturn in Namibia’s uranium mining industry. Alternative bulk offtakers such as big mining companies may now be willing to accept dollar-based prices to secure supply. “We had to ask: is Eskom still the most bankable offtaker in the region?” van der Merwe said, speaking in Cape Town in May. “Namibia is growing and Kudu may work better with more aggressive bulk users.”

Rival power plans

Some industry sources have speculated that Eskom could be dragging its feet on power purchase agreements for Kudu and other regional projects such as Botswana’s Mmamabula because South Africa prefers to pursue large-scale nuclear power (AE 143/5). If the regional project fails to get off the ground, NamPower is pursuing a local generation option, where the gas would be piped to shore at Uubvley for a plant to produce 675MW for Namibia, with the possibility of extra capacity if there was interest from other bulk offtakers in the region.

If Tullow’s CNG option goes ahead, some of the gas would be shipped ashore to Namibia for a smaller power plant than the planned 800MW regional one, with the rest shipped to other markets. This would offer less value-added for Namibia, but would reduce Kudu’s dependency on other bulk offtakers.

Efforts to find more gas have so far proved unsuccessful, though a number of companies are exploring onshore and offshore Namibia. Drilling of the Kunene gas prospect on the Sintezneftegaz-operated Block 1711 off Namibia’s northern coast found significant hydrocarbon shows, but joint venture partner EnerGulf Resources has said the well is non-commercial. The Russian operator is going on to test for gas in one zone, but EnerGulf has elected not to participate.

Namibia is looking to a range of power sources to meet its energy needs. A coal-fired power station planned for Walvis Bay is at the environmental impact assessment stage (AE 131/7). NamPower said in January that four companies had approached it to express interest in developing the project and named them as Sterford (UK), Beijing Vibroflotation (China), Atlantic (Hong Kong) and Namcoal (Germany). NamPower said the companies had approached it for negotiations on a power purchase agreement and transmission connection agreement.

NamPower cut an innovative deal with Zimbabwe Electricity Supply Company last year to fund the badly-needed renovation of the Hwange power station in exchange for power supply starting at 40MW and rising to 150MW once the work is complete, for a minimum period of five years. Wind power options for Namibia’s exposed Atlantic coast are also under consideration.

But despite the problems reaching a deal with Eskom, energy-starved South Africa does not want to rule itself out of Kudu completely. Visiting Windhoek with President Thabo Mbeki on 5 August, Trade Minister Mandisi Mpahlwa said SA remained committed to jointly developing the Kudu field. “Our two government delegations discussed energy issues and what we are taking home today is to establish the exact position of Eskom. Our two governments agreed to work jointly to develop the Kudu gas field. There were particular problems Eskom had, but the commitment of the South African government remains,” Mpahlwa told reporters.