The demand for gas in South Africa

Kinetiko Energy Limited (ASX:KKO) CEO Nick de Blocq discusses the South African energy market and the role of gas in the clean energy transition.

Tim McGowen: We’re talking today with Kinetiko Energy (ASX:KKO), which is an Australian gas explorer focused on advanced shallow conventional gas and coalbed methane opportunities in the rapidly developing markets in South Africa. It has an ASX code of “KKO”, market cap around $42 million. We have with us Nick de Blocq, who is the company’s CEO. Nick, thanks for your time. Welcome to Australia.

Nick de Blocq: Well, thanks very much, Tim. I’m delighted to be here in fact, to share the story of what we’re doing in South Africa with our Australian friends. It’s a wonderful, wonderful opportunity.

Tim McGowen: And, Nick, there’s been a lot of press lately on the energy crisis in Europe in particular, but we don’t hear any context in that regard from South Africa. You’re a South African-based business. Can you talk to us about what’s going on in the power markets in South Africa?

Nick de Blocq: Yeah, we look at what’s going on in Europe with big wide eyes, I must admit. We’ve got a kind of a mirror going on in South Africa. What’s going on there, it’s pretty much a broken mirror. Our crisis in South Africa is born from a failing infrastructure, aging coal-fired plants. Most of our power, 80-plus per cent comes from coal, and the infrastructure, the grid, the power stations, are all in desperate need of upgrading and moving on. We’ve got a nameplate capacity of about 48,000 megawatts coming out of Eskom. We can’t really deliver more than 30, 32 at a time at the top end. And there’s a huge gap to be filled. Naturally, Europe is looking very much towards renewables as a solution. Having said that, they’ve all been forced to return, as you’ll know, back to coal and oil as an energy source with the reduction in Russian input. We don’t suffer from that same scenario, and we like to think that we are going to be part of the solution going forward.

Tim McGowen: And so we’re talking gas and we’re talking gas in South Africa. Why gas in South Africa?

Nick de Blocq: It is the cleaner solution, A. Gas in South Africa represents the only substantial difference, if you like, to replace the heavy dependence on coal, on heavy fuel oils, on burning diesel for peak power, for example. Gas also gives you the options beyond electricity. LNG in support of thermal industry, for example, liquid fuels from gas, chemical derivatives, these things are all important to the industry, directly to pipelines to feed thermal industries. These are all options available to us in different pillars of our production plan.

Tim McGowen: And Kinetiko Energy, what have you been busy working on more recently, and what’s the plan for the next couple of months moving forward?

Nick de Blocq: Yeah, we’re going to be expanding our exploration effort. We have seven more core holes planned for the rest of this year. We need to do some work up in our blocks ER272, which is in the north, 270 in the south. But the first one that we’re going to do, probably as early as next week we’ll be spudding a core hole very close to Majuba, right in Majuba Power Station, right in the middle of 271. Gas to power represents our initial approach into production. We remain in essence an exploration company, but the evolution to production has to take place. We’re going to do this with a very small-scale gas to power proof of concept, developing into something more relating to a business as we get more gas online to the same plant. And the other thing is, of course, the merger, we’ve got to complete the merger with our partners, Badimo, which is the co-owner of Afro Energy, which is the rights holder in South Africa. Everything’s been done. We have approval from the departments. We have approval from the Reserve Bank and the Revenue Services in South Africa. The only remaining formality is shareholders’ approval, which is going put us through the finish line on that regard.

Tim McGowen: And you’ve got a successful joint venture with the Industrial Corporation of South Africa. Is there any plans to do any more joint ventures to help subsidise exploration?

Nick de Blocq: Yeah, that’s exciting, isn’t it? IDC has come on board as a partner in a special purpose vehicle with a ring fence scope for production over a certain amount of time, a certain amount of wells. It’s reasonably generic. But we’ve had very, very loud knocks on the door from other parties, indeed very keen to form joint ventures with us. People desperate for the gas, for LNG purposes, for chemical derivatives, urea, ammonia. These are all part of the big plan going forward. It’s going to take literally hundreds of wells, even into thousands of wells, to support the needs that these offtakers have. All of them are keen to form joint ventures with us, so whether the SPV with IDC forms a joint venture with one of them as well, whether Kinetiko directly forms a JV with them, these are all options available to us, and it’s very exciting actually. Our nice problem to have is choosing where to start.

Tim McGowen: And, Nick, from managing environmental kind of obligations, I suppose, what effect can Kinetiko have in its natural environment?

Nick de Blocq: That’s a very good question indeed. I’m an environmentalist at heart. One of the hats I wear, apart from being a gasman, is an environmentalist hat. We have a wonderful advisor in the form of SLR, who keeps us honest, who reports very honestly to the regulatory in South Africa on our behalf. Our relationship with them is excellent because I believe thoroughly in what they’re doing. Our contracts are agreements with the landowners, for access for example. What we do are packed with environmental obligations to look after their farmyards that we work within. We like to avoid things like wetlands, for example, and work well away from those. Given our geology, unique geology of compartmentalised, shallow, gassy sandstones, there’s absolutely no fracking in our plan at all. There’s no need for it. We are not dealing with deep shales like they are in the Karoo. The effect of moving from dirtier more particulate pollutives like coal, like diesel, like heavy fuel oils in various forms of the industry to gas represents a substantial decarbonisation effect. For that, we are very proud and we’d like to be out there on a green ticket.

Tim McGowen: And just finally, where does gas sit in the energy transition, if you like, from coal and oil? Does gas sit somewhere in the middle before we move to a kind of cleaner aspect of power?

Nick de Blocq: You can look at it as at least as a transition fuel. In terms of substance, there’s absolutely nothing to match gas today. Renewables are great, but there is a challenge in terms of the output. At very best, our installed capacity in South Africa has only been able to produce about 20 per cent of what it’s built to do at its best. So, that remains a challenge. In terms of substance, moving away from coal, coal to liquids for example, gas is the only replacement for that. Gas to power, obviously there is such a need for power. The latest IPP document out for comment at the moment, driven by the government to procure from private independent power producers, has 3000 megawatts of gas contained within it. It’s not hard to imagine how important and how substantive gas can be in the mix going forward. It can indeed evolve into perhaps better technologies, more clean technologies at the end of the day, but even things like hydrogen, we still need gas to produce. So, it has a role to play. And, again, not only in terms of electricity. Electricity only comprises about 25 per cent of global energy consumption. So, we’ve got to look beyond that. We’ve got to look at fuels. We’ve got to look at thermal industries, steel works, etc, etc, pulp mills. These are all potential beneficiaries of gas.

Tim McGowen: Nick, nice to have you back in the country. Thanks for your time.

Nick de Blocq: Thank you, Tim, indeed. Been a pleasure.