Geopolitics of the energy transition: Part 2

Small but well-funded and vociferous groups of environmental activists and lawyers are blocking exploration for gas both offshore and onshore. They are also now objecting to the construction of gas-fired power stations and facilities to import gas. In neighbouring Mozambique, internal discontent is being exploited by external forces, delaying production at what has been described as a global game-changer for world gas markets.

One of my current areas of work is the energy transition in South Africa. In 2022 I co-authored two important pieces on this in the online publication New Frame. Unfortunately, New Frame has since shut down and those articles no longer appear in internet searches so I am republishing them here.

Note that the geopolitics of energy, and gas in particular, changed dramatically in some parts of the world after the Russian invasion of Ukraine, with knock-on effects for the issues described below. We may incorporate those considerations into writing elsewhere.

Gas is a game-changer and the players are plotting

By: Mike Muller

By: Seán Mfundza Muller

Illustrator: Anastasya Eliseeva

22 Apr 2022

In the second of two articles on the energy transition, the battle for gas exploration in South Africa is explored – and why the production delays in Mozambique suit some interests.

Yet at last year’s COP26 climate change conference in Scotland, the global consensus was that gas will be a vital transitional fuel. And rich countries, along with their businesses, continue to implement projects that will use gas on their terms and for their profit.

Mozambique’s gas fields, offshore of Cabo Delgado province in the north, are among the most valuable in the region. Over a decade ago, it became apparent that the development of those deposits could transform Mozambique into a major global liquefied natural gas (LNG) exporter. Properly managed, gas development could help transform Mozambique into a middle-income country. But it has also put it on the front line of global energy geopolitics. And this is reflected in the current insurgency and destabilisation in Cabo Delgado.

In January, a consortium led by Italian energy company Eni took delivery of Africa’s first floating gas plant, built in South Korea. Anchored off the coast of Cabo Delgado, it is due to start production later this year. However, the large onshore developments that would increase production eightfold are on hold owing to security concerns.

The consortium led by French company Total, which had already begun to build its production facilities, has declared force majeure and halted work. The United States’ Exxon has delayed its “final investment decision” from 2021 to 2023. Further economic casualties of the conflict include gas-based opportunities for electricity generation and industrial development, including fertiliser production that could have supplied the whole Southern African Development Community (SADC) region.

The security challenges that would be created by Mozambique’s gas reserves were already being discussed in 2010. Not long afterwards, the World Bank warned that the prospect of huge gas revenues might destabilise the whole region, a prediction that has come to pass in dramatic fashion. Corruption at the highest levels of Mozambique’s government left the country effectively insolvent, with former minister of finance Manuel Chang in a South African jail awaiting extradition to the US. The insurgency in Cabo Delgado has required security forces from SADC and beyond to stabilise.

Many roleplayers, many interests

Much attention has, correctly, focused on the domestic drivers of the conflict: inequality, a lack of opportunity and rampant and well-publicised gross corruption by the Mozambican elite. But external forces have also played a critical role. Blackwater, a notorious US security contractor, was seen as a leading contender for contracts to provide security in Cabo Delgado.

Eni is working with China and South Korea’s oil companies, Portugal’s Galp Energia and Mozambique’s national hydrocarbon company ENH, which is a part of all the consortiums. But the full potential of their development will only be achieved when Exxon builds its onshore liquefaction facilities. Total’s consortium includes Asian gas users (Japan, India and Thailand) and is working with Exxon, which has proposed cooperation to reduce production costs for both consortia.

However, Exxon – and the US – have obvious conflicts of interest. Mozambique’s gas development could weaken the dominant position of the LNG market leaders Australia, Qatar and, increasingly, the US itself. Exxon has admitted that the Rovuma Basin discoveries in northern Mozambique and southern Tanzania “will be a game-changer for the world’s energy markets”.

The importance of Mozambique to US energy policy is illustrated by American involvement being led personally by Rex Tillerson, in two separate roles: first as chief executive of Exxon Mobil and then as Donald Trump’s secretary of state. The efforts by Erik Prince, the founder of Blackwater, to gain control of the maritime security opportunities are suggestive. So too is the fact that Mozambique’s loan scandal was driven, in large measure, by attempts to raise money to fund local companies to provide these services.

To put it directly: has the insurgency provided Exxon with a useful excuse to delay the big onshore development that would dramatically expand Mozambique’s production, thereby conveniently protecting Exxon’s other production centres? Even if the Mozambican projects resume, full planned production will have been delayed by some years, keeping world market prices higher to the benefit of existing producers like Exxon. Meanwhile, Reuters reports that the US will be the largest LNG exporter this year.

This perspective on Mozambique and the wider world of global hydrocarbons is relevant to South Africa, and the focus on gas is important.

Skewing the frame

Much of the climate and energy strategies – and legal fees – of South Africa’s non-governmental organisations and civil coalitions appear to be focused on opposing gas-related developments. Their simplistic and populist narrative frames the issues as a choice between apparently cheap and easy renewables or hydrocarbons.

This superficially attractive approach ignores both the costs of replacing the national energy infrastructure and the limits of intermittent sources like wind and solar. And it assumes, without evidence, that a transition from coal-fired power to clean energy can be achieved without using gas.

Drawing on global consensus, the government’s 2019 integrated resource plan (IRP) considered some of the objections that had been formally submitted. It noted that “gas is considered a transition fuel globally and it provides the flexibility necessary to run a system like we have in a cost effective manner. It is cleaner than other fossil fuels. The extent of the gas contained in the draft IRP is within the imposed emissions reduction trajectory.”

Perhaps the problem is that, in energy planning terms, the IRP only provides a short-term perspective, until 2030, that does not reveal the challenge of managing a system with a large proportion of intermittent renewables like wind and solar.

The IRP 2030 scenario projections show that while 33% of the grid’s nameplate generating capacity – the maximum rated output – would come from wind and solar and 43% from coal, those renewables would only produce 24% of the system’s energy compared with coal’s 59%. Nuclear and hydropower would represent just 8.2% of generating capacity, but they produce almost 13% of the system’s energy because they offer consistent and predictable supply at high load factors.

The real challenge will be faced after 2030. As the proportion of intermittent renewables continues to grow, complementary sources of generation or storage must also be increased to compensate for periods in which solar and wind is not available. Complementary infrastructure will likely be more costly and take longer than the rollout of renewables, so delaying it will simply stall the transition.

A place for gas

Faced with this challenge, countries like Germany and Britain, leading advocates for zero carbon strategies, have committed to using gas for another two to three decades as a core element of their energy transition. This is despite their access to complementary sources of power, through Europe’s continent-wide grid to Norwegian hydropower, French nuclear and Danish wind, which will help them manage the intermittency of local wind and solar generation.

South Africa does not have such complementary sources. Critics’ comments recorded in the IRP show little evidence that they had any technically feasible alternatives, let alone suggestions on how to fund them. Proposals were limited to vague “flexible renewable generation” or “energy storage technologies” without suggesting what they would be or how they could be afforded.

One representative from the Council for Scientific and Industrial Research admitted in a radio interview that its proposals simply assumed that storage costs would come down enough over the next decade to make higher shares of renewable energy feasible. Even this is based on the assumption that storage is only needed for a few hours of generation and ignores the risk of the longer-term supply reductions already experienced in Europe and the US. At best, the suggested “all renewable” investment route would put South Africa’s energy security at risk in a way that no other sizeable country is doing.

There is presently no proposed solution that can reliably and affordably provide South Africa’s energy requirements purely from intermittent renewables. While storage technologies are progressing, the cost of long-term (multi-day) storage remains prohibitive. South Africa’s pumped storage schemes are currently among the cheapest technologies for large-scale energy storage, but an installation like Ingula, which can only store enough to generate 1 300MW for less than a day, cost R36 billion.

Costly delays

Important local work on energy storage and the production of “green hydrogen” from renewable energy could be supported since it may offer global opportunities for South African mining and manufacturing. But it will take many years to be brought to scale and deploy, not least because of the massive investment needed in dedicated wind and solar power and Sasol-size production plants.

And, if “green hydrogen” eventually becomes commercially viable, it would best be used to generate electricity in the kinds of natural gas-fired generators that are now being blocked. In this respect, renewable power activism is leading South Africa off course right at the start of the transition marathon.

The latest example is the legal action opposing the construction of gas-fired power stations at Richards Bay and Durban that are to be fuelled by imported gas. But one reason for these developments is that gas exploration onshore and offshore has been repeatedly delayed.

It is the failure to develop local gas resources that has allowed the much-criticised Karpowership “emergency” generation proposal to succeed. The ship will burn gas and it requires no local production or importation infrastructure, offering minimal local development benefits.

South Africans need to stop their dangerously narrow focus on one particular element, or definition, of the energy transition and think much more carefully about how to achieve a genuinely just and viable transition.

The question also has to be asked: who benefits from the current rush to privatised forms of renewable energy, especially since it does not take seriously the interests either of workers and the impoverished in general or economic viability and national sovereignty?

Seán Muller does not receive any funding, or have any other conflicts of interest, related to the subject of this article.

Mike Muller’s pension is invested in, among others, renewable and conventional energy and construction companies.

First published by New Frame.

Geopolitics of the energy transition: Part 1

At present, groups with strong vested interests are encouraging South Africa to make a fast and radical transition without explaining how the costs incurred in doing so will be paid and by whom. Worse, they want the country to do this in a way that would reduce the income it could earn to fund the transition.

Who gets the ‘dirty’ profits while going for ‘clean’?

By: Mike Muller
By: Seán Mfundza Muller

21 Apr 2022

Analysis

In the first of two articles on the energy transition that must happen across the world, it’s clear that coal will be around for years to come. Less clear is who will benefit from it.

Current proposals for an energy transition in South Africa are wholly inadequate. The energy transition is a marathon that will be run for at least three decades and it needs a well-considered strategy to complete successfully.

Countries that try to sprint from the start are likely to fall by the wayside. Yet the popular narrative promoted in South Africa doesn’t move beyond the cheap populism that simply asserts that Eskom and fossil fuel-based energy production are evils that need to be got rid of at the greatest possible speed.

The world must undoubtedly transition to a new energy system, but it will be a hugely complex and costly project. To make a successful transition, each country – and community – will have to address its specific challenges.

For a country as unequal as South Africa, a primary concern will be to ensure a genuinely “just transition”. It should not impose unreasonable burdens on ordinary South Africans, particularly workers and the impoverished, through retrenchments, extra taxes, unreasonable energy price hikes or reduced public services. The transition strategy must consider the implications for public finances, therefore, and it must also consider the implications for national sovereignty and stability.

The current model for transition to green energy is through rapid privatisation. It amounts to a form of self-imposed structural adjustment that threatens to repeat the economic policy mistakes of the 1990s. These collapsed the manufacturing sector of the economy and closed many paths to a more inclusive and prosperous society.

Weaker and more dependent

Meanwhile, the wildly overhyped promised external support for a just transition in South Africa is limited. Close inspection of the “green financing” deal for the country, announced with much fanfare at the COP26 climate change conference held in Scotland in November last year, reveals unfavourable terms and little real financial support.

Populist campaigns that push for the swiftest possible transition to privatised forms of green energy production are likely to contribute to turning an already difficult transition into a brutal one. Instead of ensuring that South Africa can design, fuel and fund its transition primarily from domestic resources, it will become even more dependent on energy imports and conditional external funding.

This will reduce its ability to negotiate trade and finance deals, including for renewable energy investments, further undermining its economic sovereignty. It will weaken public finances and reduce the resources needed to address poverty and inequality in a sustainable way. And history shows that weakened sovereignty on these fronts can weaken political sovereignty as well.

While many domestic commentators like to frame South Africa as some kind of energy pariah, this does not hold up against a global perspective. Globally, South Africa is being outplayed by more powerful nations who seek to maximise their returns from their hydrocarbon resources while they still can.

Take Australia. Back in 1981, its national intelligence agency, the Office of National Assessments, warned then-prime minister Malcolm Fraser that by the middle of the 21st century, CO₂ emissions would cause climatic change that “would require major economic and social adjustments”.

The primary concern for Australia was not climate change. It was rather the “potentially adverse implication … for the security of Australia’s export markets for coal”. The country’s response was simple and is now a matter of public record. It ramped up coal production to maximise its carbon income before the fateful day arrived. It also encouraged the exploitation of its offshore gas fields. So today Australia is not only the world’s largest coal exporter, but also the largest exporter of liquefied natural gas (LNG) – although in total gas exports (LNG and pipeline) it is only fifth in the world.

Making hay while sun still shines

Other rich countries are following similar strategies to Australia’s. Canada has a relatively low-carbon domestic electricity system, thanks to extensive hydropower and nuclear generating capacity. But despite local opposition, Canada continues to exploit its huge reserves of dramatically dirty “tar sands” despite the extreme environmental and social damage. The aim is to produce oil for export, maximising its hydrocarbon income while it still can.

Canada’s big neighbour, the United States, is even more aggressive. In the 1970s, the US produced much of its electricity from local coal. For transport fuels, however, it depended on oil imports from cheap but politically unstable, or destabilised, Middle East countries.

Like Canada, the US has huge, potentially valuable reserves of gas and oil in shale rocks that are difficult to tap. Fracking technologies, developed with support from the government, have solved the technical problems and transformed the country’s energy sector. Expanded gas supplies are replacing coal for electricity generation, enabling a significant reduction in CO₂ emissions. This has turned the US into a net exporter, with both the Trump and Biden administrations aggressively promoting LNG exports.

As energy prices fluctuate dramatically worldwide, providing transitional solutions – dirty old coal – remains a highly profitable business. AGL Energy, which is responsible for 8% of Australia’s CO₂ emissions, rejected a bid from US private equity company Brookfield saying it was well below fair value. AGL Energy intends to continue using coal until 2045, which will help it to build a renewables business.

In South Africa, the future value of a few decades of coal-fired business was demonstrated when Anglo American sold its local coal business to Thungela Resources, a black economic empowerment company, in June last year. Thungela’s share price has since gone up over 600%, with most of that rise happening even before the Ukraine crisis.

The importance of local mining production for public finances was demonstrated by the tax windfall from higher commodity prices that helped to relieve the post-Covid fiscal shock, just as it boosted public finances before the global financial crisis of 2007.

Worsening inequity

So whether one likes it or not, profits will continue to be made from fossil fuels during the energy transition. The question now is who will capture those profits and for whose benefit will they be used? A just transition would see the transitional profits go to the more impoverished countries that bear the heaviest burdens. That’s not currently happening and, if anything, the present trajectory suggests the inequity will worsen.

As Mia Mottley, prime minister of Barbados, put it earlier in March, developing countries need “a way to finance our route to net zero”. And if the wealthy nations that “caused the problems” would not provide funding, these countries would need to find other ways to generate revenue, such as exporting fossil fuels. “There has to be equity,” she told a Financial Times climate conference.

Historically, wealthy countries have been reluctant to really pay their share. In 2007, the then Ecuadorian president Rafael Correa proposed that wealthy countries pay Ecuador not to drill for oil in an Amazon rainforest reserve. In other words, he wanted them to compensate Ecuadoreans for the national revenue they would lose by keeping oil in the ground. Of the $3.6 billion proposed, only $13 million was forthcoming and the oil drilling in the Amazon went ahead.

The question that motivated Correa was simple: why should poor countries sacrifice much-needed revenues from exploiting natural resources when rich countries that can better afford this sacrifice are often not doing so? This same question can be applied in South Africa and beyond to other Southern African Development Community countries that have strong incentives to “monetise” their hydrocarbon reserves to help fund the building of their domestic power systems and economies.

The stated aim of virtually all campaigns in South Africa at present is to achieve a “just transition”. But analysis of South Africa’s options, supported by evidence from the rest of the world, suggests that their effect is more likely to impose an unnecessarily brutal transition on the majority of South Africans and a loss of energy and political sovereignty.

Séan Muller does not receive any funding, or have any other conflicts of interest, related to the subject of this article.

Mike Muller’s pension is invested in, among others, renewable and conventional energy and construction companies.

This article was first published by New Frame.