South Africa – The Rising Star of African Oil and Gas

When it comes to oil and gas, South Africa remains relatively unexplored, but this is all about to change, and fast. Recent discoveries and the potential of shale gas point to a flurry of drilling and exploration to come within the next five years, and several factors are driving its emergence as a hub for the wider region. Jacques Rautenbach, Petroplan’s new Regional Director for Sub-Saharan Africa, looks at the country’s bright future, and the unique challenges that face the industry in Africa’s richest economy.

A Brief Background

As in many other respects, South Africa has a curiously idiosyncratic history when it comes to its oil and gas industry. The apartheid era of international sanctions created a need for a certain level of self-sufficiency in energy supply. As a consequence, South Africa has a long history of drilling and exploration stretching back to 1965. Nonetheless, a lack of technical expertise limited exploration during this period to shallow-water drilling, the area in which the industry accumulated experience – yet much of South Africa and indeed the wider region’s future potential lies in deepwater sites.

A Bright Future

And it is a bright future indeed. South Africa is poised to be a hotbed of activity for the global oil and gas industry over the next five years. Vast tracts along the South and East Coasts and in the Orange River Basin – a vast and unexplored region adjacent to the Namibian border – have been licensed for exploration by major players including Petro SA, Forest Oil, Tullow Oil, and BHP Billiton.

It isn’t all about offshore either. The global shale gas revolution looks set to take South Africa along for the ride: the country is home to the 8th largest technically recoverable shale gas resources in the world. There are an estimated 485 trillion cubic feet waiting to be tapped in the country’s interior Karoo Basin, where Shell and Falcon Energy have recently acquired development rights. No wonder there is talk of South Africa becoming a net energy exporter in the future.

Nor is it just about upstream development. Cape Town is rapidly emerging as an industry hub for the wider Sub-Saharan region, with companies such as Chevron and Tullow opening regional headquarters in the city. Furthermore, Saldanha Bay – situated about an hour and a half’s drive up the coast from Cape Town – is being developed into one of the world’s few Oil and Gas Free Zones. These hubs provide a convenient central port for the maintenance of oil rigs and so forth along the global oil and gas supply chain; equipment moving in and out is cleared through customs and transactions are VAT-exempt, making them far more attractive for maintenance purposes than conventional ports.

Commercial factors firmly support this development. South Africa has long been renowned for its expertise and skills base in the area of oil and gas maintenance, being home to a plethora of companies specialising in activities such as engineering and fabrication. Saldanha also has a distinct geographical advantage in the changing global marketplace: many oil rigs are produced in Asia in places such as Singapore, before heading over to Latin America to explore and drill; Saldanha provides a convenient mid-point for this route, as opposed to alternatives such as Dubai or the UK. And needless to say Saldanha is well positioned to service future rigs taking advantage of Africa’s offshore reserves.

The case for the Saldanha Free Zone overlaps with the wider case for South Africa as a regional industry hub: good infrastructure, a first world business environment, English-speaking, the continent’s largest economy, world-class business schools, high standards of living, good regional transport links, a strong relationship with other emergent producing countries such as Mozambique … the list goes on. And the region will certainly need a hub in the years to come: Africa’s proven onshore oil reserves stand at around 124bn barrels, with another 100bn estimated offshore, while its proven reserves of natural gas amount to around 509 trillion cubic feet.

Challenges

Exciting times lie ahead for South Africa’s oil and gas industry, but the country is not without its challenges. The largest of these relates to a chronic skills shortage. It is well documented that the global oil and gas sector as a whole suffers from an acute shortage of staff at the mid-tier level – those with around 10 to 15 years of experience – largely thanks to the freeze on recruitment initiated during the oil glut of the 1980s. South Africa is no exception on this score, but it also faces an added shortage at the lower level due to a lack of specific oil and gas training programmes at University level, and years of neglect for trade skills in favour of more academic routes. While much of the shortage relates to high-end workers such as engineers and so forth, the shortage also extends to more mundane areas such as welders and pipe fitters.

South Africa also faces a number of additional challenges specific to its labour market. Its constitution affords unions a large amount of power, and relations between unions, employers, and government have a somewhat combatative history, with strikes a relatively regular occurrence. While the oil and gas industry does not currently have a specific union of its own, this is likely to change in the near future. In the meantime, the diversity of the oil and gas supply chain means that it can easily be disrupted by industrial action elsewhere.

The skills shortage is also exacerbated to an extent by the Black Empowerment Act, which places strict quotas on companies requiring them to hire from the domestic talent pool, specifically from groups considered to be disadvantaged along the lines of ethnicity or gender. This brings with it a whole host of processes that may be unfamiliar to non-South African businesses; even where the role is ultimately filled by, say, a Western ex-pat, businesses must ensure they have advertised locally, and must be able to demonstrate that no local candidates are available for the role in question. This is a particular difficulty for the South African oil and gas industry given that it is so reliant on ex-pats from Western nations such as the UK and USA – much of its future lies in deepwater drilling in conditions similar to offshore fields in the North Sea and Canada, and as such much of the technical skills and expertise has to be imported from these regions.

The solution to these challenges, as with elsewhere in the world, lies in a mixture of improved training and sideways recruitment from similar sectors. Fortunately, South Africa’s oil and gas industry is better positioned to travel these routes than many of its global counterparts. On the training front, the Government has acknowledged the skills shortage and is now working with industry in a concerted effort to rectify the situation. Students are being encouraged to develop trade skills, and the UK’s Robert Gordon University is in talks with counterparts in South Africa to develop an oil and gas programme in the country.

Industry is also embarking on significant training initiatives now that the South African Government has made it a tax-deductible expense, with major companies recruiting 100-200 graduates a year. Training can often be a tricky proposition for energy companies elsewhere in the world due to a reliance on contract-employment and the relative ease of finding new better paid positions (nobody wants to subsidise the training of a rival’s workforce). This is far less the case in South Africa, however, where high unemployment, a lack of a national health fund, and a culture of loyalty cause workers to place a relatively high value on job security and the additional benefits that come with permanent, salaried positions.

South Africa is also uniquely positioned to take advantage of sideways recruitment thanks to its established and prosperous mining sector, which has plenty of overlap with oil and gas in terms of roles (e.g., heavy equipment specialists, hydraulic specialists). This allows recruiters in the region to identify non-oil and gas candidates that can make the jump across to oil and gas with minimal training – for example, an intensive three-month programme will suffice as opposed to a two-year one. This pushes training costs down, and such workers also cost less to employ than equivalent staff hired from within the industry – two factors that go a long way to overcoming the sector’s traditional reluctance to recruit externally.

These solutions will take time to bear fruit, however, and much of the industry’s needs are far more immediate. In the meantime, oil and gas players looking to take advantage of South Africa’s renaissance will need to make heavy use of workforce specialists that can draw on a global network of contacts while similarly demonstrating a firm understanding of the country’s local culture, and the particularities of its labour market.