Do We Still Need Diesel?

Last week between the 5th and 7th  of June, The Ministry of Energy held a conference called Oil and Gas Week. The Government through the Ministry of Energy was seeking to raise awareness of current issues in the industry and also to highlight areas in which they are seeking foreign investment. The Conference was supported by several local financial institutions.

According to reports in the Government's possession, consumption of petroleum products will exceed 4 million m3 per year by 2030. At present, the Government-owned Refinery (INDENI) is in need of investment to firstly increase its throughput capacity and also to be able to meet cleaner fuels requirements for diesel (at present the sulphur content for diesel produced by INDENI Refinery is 5000 ppm against an African Refiners Association (AFRA) agreed target of 50 ppm). To support this increase there will also be a need to increase the throughput of the TAZAMA pipeline. This will involve the construction of additional tanks in Kigamboni and the replacement of the 934 km of 8" line with 12" line. What struck me about these presentations is that we have been planning these expansions for the last ten years but nothing has physically happened. Instead, the cost of completing these projects has steadily risen in the face of our inaction. The market share for Refinery products has fallen to around 40% of the national requirement while the remaining 60% is imported as finished products. TAZAMA is proposing a new products pipeline be built alongside the existing one as well as the construction of storage tanks for petroleum products in Dar-es-Salaam at a cost of $1.5 billion. In all, the expected investment in petroleum infrastructure will exceed 2.3 billion dollars. When we couple these investments with the fact that they will have to be financed through debt, the cost to the consumer will be very high and any investor will be expecting a return on their investment.  

It was interesting to note that one of the banks made a presentation. They were categorical in stating their view that profitable refineries must have a throughput of at least 200,000 barrels per day (around 10 million tonnes per annum). They were however very keen to support storage tanks and pipelines. We have been fighting to save the Refinery for at least the last 15 years but it should be noted that we have failed to lock down a strategic partner after all this time. Due to the large investment expected, the Refinery would have to be supported for at least 20 years which takes us to 2040. Is it reasonable to expect that the world will continue to use fossil fuels for all the period?  

Perhaps the time has come for a bold decision taking us in a new direction. By this I mean, it may be better to direct our resources into projects that can receive support in our current environment. Transport can be fueled by the following options:

1. Liquefied Petroleum Gas or Natural gas   
2. Biofuels 
3. Electricity

To successfully roll out the use of any of the above will require the development of new infrastructure. 

LPG or LNG

In our national context, either one of these fuels will only be viable if we identify our own local source or undertake to construct a pipeline from Mozambique. Capacity will need to be developed to pipe the gas all over the country or to establish satellite operations that can support the consumption of gas in their vicinity. Those countries that have adopted this technology have catalysed consumption by converting buses used in cities to run on gas. It will require a full commitment from the Government to implement and may be too challenging for us in terms of the human and the financial resources required to achieve it. 

Biofuels 

Discussions around biofuels have continued but there have been lukewarm efforts to really make sure it is a significant part of our national fuel mix. Blending of up to 10% of either biodiesel or ethanol into existing cars can be implemented immediately. We still have not developed sufficient capacity in biofuel production to meet national demand. It will also require the establishment of blending facilities around the country. The existing petroleum infrastructure can be leveraged to assist in this endeavour. There is a chicken and egg scenario here and we may need to make interventions to ensure clear progress is made. a good start would be the advertisement of a contract to supply biofuels to the national market over a two year period. The contractor would have an obligation to ensure that there is local production and also to ensure standards are maintained. The Biofuels Association presented a paper and they have been saying the same thing for over 10 years. Isn't there a way to move things forward?    

Electricity

The electric car is fast approaching a tipping point. They can no longer be ignored. We also must take on board the sentiments of vehicle manufacturers. Volvo has already announced that they will stop making diesel vehicles from this year. Other manufacturers have started announcing similar plans. These means that the assumptions outlined above regarding the future consumption of fuels may need to be revised simply because the diesel engine is on borrowed time. The greatest challenge for this technology is the availability of a network of charging stations to recharge batteries. In Europe, governments have actively built charging stations or given incentives to suppliers to make them available. On average, an electric car will be able to drive around 400 km (Lusaka - Ndola) on a single charge. I would envisage that in Zambia to start out with, the first adopters would need to have a charging station at home. The government could accelerate adoption by putting in place charging stations at Government buildings for Government vehicles. It would also mean that we have to address our load management issues as soon as possible. Charging stations for home use would cost around USD1,000. Commercial fast charging equipment would, however, cost much more than this.

Conclusion

There is a demand for energy for transport and this demand is growing. Of the three above, I would recommend that we adopt a combination of biofuels and electricity as the way forward. The government should undertake a study to establish some baseline data. It is my hope that when the Oil and Gas Week is held next year, there will be policy guidance available regarding the inclusion of electricity into the national fuel mix.        

The Dilemma of an Energy Crisis

Introduction

From the middle of 2015, the hours of load shedding that Zambians are being subjected to has been steadily rising. There is little to be gained from finding people to blame for our current situation and frankly there is more than enough blame to go around. The unfortunate result of the blame game will however be to distract our attention and full faculties to implementing a lasting solution to our current woes. On one side of the triangle we have the Zambian people, on the other sides we have the Patriotic Front Government and lastly we have the energy cluster (comprising Energy Regulation Board and Zesco).

The Zambian People

The year 2016 is an election year in which the Zambian people will file their report on the performance of the Government. To date, the people have been told that the current electricity deficit is beyond human control and was pretty much inevitable due to the fact that God has not blessed us with enough rain for two consecutive rain seasons. Not much has however been said about the change in the consumption pattern of water for hydro-electric power generation. The running of an additional 360 MW of hydroelectric power generation capacity at Kariba North Bank Extension has not been widely discussed. Zambians have seen the hours of load shedding carried out by the national vertically integrated Government owned utility Zesco increase from 2 hours daily to 10 hours in the last 12 months. In addition, the people were asked to pay an increased amount of money to the utility through a tariff increase that was implemented on 1^st December 2015. The people were told that the tariff increase was unavoidable and needed to be done to make tariffs cost reflective. The load shedding continued despite the tariff increment and the tariff adjustment has been subsequently reversed on the instructions of the President in the face of a public outcry. In the face of this about turn, the question arises: what next? Everybody considers themselves an expert on electricity because it only needs you to flip a switch for you to know whether it is there or not. If it is not, then someone is not doing their job.  Regardless of the complexity of the industry required to deliver power, the urge is to blame someone for this failure.  

The Patriotic Front Government   

Over the years, it will have been noted that the Patriotic Front Government has had an uneasy relationship with the energy sector. Amongst one of the first actions of the Government on taking office was to launch a probe in to the operation of the Energy Regulation Board (the national body responsible for the regulation of the energy sector in Zambia). To date the recommendations and findings of this Commission of Inquiry have not been made public however the top leadership of the institution at both Board and managerial level were replaced. A similar change was effected at the national utility Zesco with both the Board and Management undergoing a change. At present, while the Chief Executive of the company has been appointed, there is still no supervisory Board in place for the utility.

The post of Minster of Energy and Water Development was combined with that Mines as one of the first changes made by the PF government. President Lungu has since separated the Ministries again. In terms of government energy policy, the PF manifesto of 2011 acknowledges the failures of the MMD to invest in energy infrastructure. The following are the measures outlined to address this situation in the electricity sub-sector:

·         Accelerate and scale up public private partnership investment in hydro power generation to raise the installed capacity in order to meet national demand and surplus for export

·         Promote investment in alternative energy sources such as thermo electricity generation form coal and nuclear reactors

·         Promote investment in the development of renewable energy sources such as solar, bio-fuels and wind

·         Accelerate the provision of electricity to rural and peri-urban households at subsidized rates

·         Promote the development and use of other alternative fuels in households such as liquefied petroleum gas and ethanol gel fuel so as to reduce dependency on wood fuel

·         Unbundle the public power utility Zesco into (i) generation (ii) Transmission, Distribution and Customer Service to improve its efficiency

·         Promote private sector involvement in generation, particularly using renewable energy such as biofuel or small scale hydro

·         Review the regulation  of the energy sector

The implementation of the above measures may have fallen short due to the fact that the methodology of funding the measures outlined above is not clear. All the investment measures can only be attractive if investors are clear that they can recover their costs from the market and also make a profit through an independently regulated tariff. Clearly also in the period, some work could have commenced to review the structure of the public power utility. The re-structuring of such a large parastatal with such a large impact of the economy would require a level of buy-in from the public and also from politicians who may not share the political ideology of the government. It would also require the assembly of a team of talented men and women with a mandate to change the energy sector over a period of at least 10 years without being subjected to the shackles of political capture. Whilst it is clear that some of the measures have been implemented, the absence of an electricity market means that we will not be able to record substantial growth or investment in the absence of private sector investment and transparent regulation. In the words of Oliver Wendell Holmes Sr.

“To reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor.”

The Energy Cluster    

At present, it is not clear where the industry (Zesco and ERB) will find itself in the ten years. In the past ten years, the top leadership of both the Energy Regulation Board and Zesco has not been stable.  Whilst the Energy Regulation Act makes provision for the appointment of appropriate professionals to the Board such as engineers, economists, lawyers and accountants, the Board members have been drawn from other backgrounds. These have included District Commissioners, traditional leaders and religious leaders. Zesco Limited has also under gone a lot of changes at Chief Executive level. In the past ten years, the company has had four different Managing Directors. In at least three of the replacements of Managing Directors, a purge of top management has also taken place. For a company of the size of Zesco, it is clear that this loss of management human resource would affect overall performance however these skills will still available to the private sector in a restructured energy market.  

The Blueprint

There is need to increase availability of electricity to households from a national penetration rate of 19% and also to deal with the expected increases in domestic consumption to be expected as the burgeoning middle class invests in appliances such as fridges and air conditioners. Whilst investment may be made in generation, we may find ourselves struggling to deliver the power to household customers due to underinvestment in the distribution of power. For real progress to be recorded in this area, the institutional framework of both the above institutions must be enhanced. An example is that one term of an Energy Regulation Board member has been limited to three years. A Board member also is limited to two terms. This means their skills are only available in this role for six years. In other jurisdictions where significant reforms have taken place, most regulator terms are now at around five years. This allows for a planning horizon of at least ten years. The Energy Regulation Board and the Ministry need to implement a ten year plan and identify the correct people to carry this plan forward. This plan should involve some of the following issues:

1.      Attracting at least $4 billion of private sector investment into the sector (significant attention must be paid to political risk)

2.      Completion and implementation of an Electricity Master Plan (this should be a document produced by the Ministry of Energy)

3.      Immediate eradication of load shedding

4.      Metering of all customers

5.      New connections (doubling penetration in the next ten years)

6.      Restructuring of Zesco

7.      New generation capacity (doubled in the next ten years)

8.      Cost reflectivity of tariffs to be married with costs of new connections and new generation and ensuring we never undergo load shedding again

9.      Immediate implementation of energy efficiency and demand side management programmes that have significant commercial impact

10. Guidelines for the management of shared water resources so that it is more transparent to the public

Solar energy has been targeted as an area in which large expansions can be made in generation capacity. Under the current structure, however, the cost of underwriting the implementation of such technologies will fall on the Government. In a restructured market where distribution of power has attracted private sector investment, this charge on the Treasury would be avoided. This injection of private capital would also serve to reinvigorate investment into the generation sector. Our continued insistence that power is “cheap” has led us into this cul-de-sac. Cheap power is a fallacy and the time to realise that we have to pay for power has now come. Fundamentally unless we all accept a change must happen and now, load shedding will continue as the politicians will be wary to implement the immediate reforms required to change the status quo.    

As an immediate measure, a target must be set to end load shedding in the next two months. The cost of unserved demand in the market will continue to devastate the economy. It should also be noted that while the public embark on a spree of buying and installing inverters, the battery charging load will adversely affect the grid. Whilst there appears to resistance to increasing the use of diesel power for large scale electricity generation (greater than 50 MW), in the face of the needs of the Zambian people, there is a compelling case for such sources of power to be in the market for a long time into the future. The flexibility such solutions can provide cannot be ignored. These include quick start up and shut down and also the capability to open a market for renewable energy sources by combining the diesel used in such generators with biofuels. We also have large hydroelectric power generation sites that have been identified but we are still struggling to attract investment into these sites.  

The question then arises,”if we know what to do, why aren’t we doing it?” Therein lies our dilemma.  

The Future of the Zambian Petroleum Sector

In the next couple of weeks, we will be expecting to hear the findings of the Special Committee investigating the Energy Regulation Board. What has become clear, however, is that the petroleum sub-sector is not in a great state of health. Since the cancellation of the World Bank sponsored Petroleum Rehabilitation Project in 2001, there has been no sustainable institutional framework in place to manage the importation of petroleum products in the country. Both the Refinery and the Pipeline (both Government owned) are in need of re-capitalisation and expansion. Government also has fully taken on the responsibility for the importation of all petroleum.

Oil Pricing

A study of the international petroleum industry will indicate that it is becoming increasingly difficult to find petroleum. Deep water finds in Angola and in Brazil are pushing the envelope in terms of the technology that is now deployed to exploit these resources. The use of remote submersibles for the deployment of production infrastructure is an expensive undertaking. Consumption or demand has been suppressed by the continued poor performance of Western economies. It is clear that this will not continue and at some stage, most of the Western economies will recover. This will in turn increase demand and this will result in an upward pressure on the price of crude. In Zambia, we have no power over these pricing dynamics as we import all our petroleum requirements. It is therefore inevitable that at some time in the future there will be a price shock in the oil market and we need to prepare ourselves for this eventuality.

Supply of Petroleum

There are essentially two ways in which petroleum can be supplied to the country. Firstly we can supply ourselves. This means showing more seriousness in our search for a petroleum resource within Zambia’s borders. As I write this blog, the Geological Survey website which hosts all the information for interested applicants to apply for a block is not accessible. The Petroleum (Exploration and Production) Act Cap 440 of the Laws of Zambia was revised in 2010. Provision was made in the Act for the setting up of a National Oil Company. Progress has not been made in the setting up of this oil company nor have there been significant efforts to promote Zambian petroleum exploration opportunities. Our national oil company continues to be absent from important industry showcases such as the World Petroleum Congress and Africa Upstream. In the region Namibia, Tanzania, Mozambique and Uganda are registering significant investment in petroleum exploration and the same countries have all recently reported significant finds of oil and gas. All these countries have active and effective National Oil Companies.

The other method of supplying the nation’s needs remains that of importation. Continued Government involvement in the importation of crude needs to be better structured so as to ensure adequate levels of accountability and transparency exist in the process. The possibility of allowing the private sector to import feedstock should also be considered as a sustainable option. History has proved that the temptation for a government to politicise fuel pricing if it is involved in importation has been overwhelming. Attempting to subsidise energy consumption has proved to be extremely costly and has the potential to damage a national economy. Previous regimes have racked up large bills for petroleum over the years. The fact that the liquidator for Zambia National Oil Company is still active ten years after the company wound up should be an indication of the capability of settling bills. It is also clear that over the last two years the fuel price in Zambia has not been reflective of the price on the international market.

An innovative way to resolve this dilemma would be for the regulator to advertise a licence to supply petroleum feedstock. Companies like the refinery or TAZAMA or the private sector would have to compete so as to ensure the best deal is obtained for the Zambian people. The role of Government would be to facilitate a financial environment where instruments to hedge fuel prices can become available to large consumers.

The Single Buoy Mooring in Dar-es-Salaam

Logistics of Supply

The main route for the supply of petroleum products is through the TAZAMA Pipeline. Whether or not the Refinery continues to operate, the pipeline will remain and important tools for the delivery of fuel to the market. It is important to note that there is need to expand the capacity of the pipeline. Opportunities also exist to extend the pipeline to DRC and also to study the possibility of extending the pipeline southwards to Lusaka if it is being used in a finished products mode. The existence of a market in Lubumbashi would offer opportunities for raising finances for pipeline extensions. Thus far little progress has been made to open competing routes to the pipeline from the Western seaboard or from the South. As the economy expands, it will important to diversify the routes of supply to the country. This includes studying opportunities of supply from both Angola and Namibia. A study of all these options will go a long way towards reducing the cost of supply of petroleum products to Zambia and thus sustainably keeping the cost of petroleum products down.