South Africa Oil and Gas Report Q1 2013

BMI View: Rumours abound that the traditional refinery operators in South Africa could abandon the countryin the face of huge investment in capacity to meet higher fuel specifications. Plans by the country to build alarge new refinery are also causing concern, so the outlook for the downstream segment is uncertain. The statelooks likely to allow drilling for shale gas to proceed, unlocking considerable upstream potential - althoughlocal resistance is set to continue.

The main trends and developments in South Africa's oil & gas sector are:

South Africa's Cabinet has announced the end of a temporary ban on fraccing, which has been inplace since April 2011. Royal Dutch Shell, Bundu Oil & Gas, South Africa's Sasol, and USindependent Chesapeake Energy are among the players actively pursuing the development ofshale gas in South Africa. The government's decision will move the process forward, with publicconsultations the next step in an ongoing process to develop the country's unconventional gasreserves. Environmental groups have responded to the government's decision by confirming theywill file a lawsuit to prevent any actual production of shale gas, but Shell has said that followingthe government's latest decision first gas from shale would be possible by 2015.

South Africa has limited oil reserves, which stand at about 15mn barrels (bbl), according to 2011estimates from the Energy Information Administration (EIA). We expect this to decline over ourforecast period, with just 13.5mn bbl expected in 2021. However, BMI expects liquidsproduction to increase from an estimated 183,000 barrels per day (b/d) in 2012 to 290,000 in2021

Consumption of crude is forecasted to rise steadily over our 10-year forecast period, broadly inline with GDP growth. We anticipate that domestic demand will rise from an estimated610,000b/d in 2011, to hit 792,000b/d in 2021.

A significant share of this consumption will be met with synthetic fuels (synfuels) derived fromcoal-to-liquid (CTL) and gas-to-liquid (GTL) processes. Local company Sasol owns the160,000b/d CTL Secunda plant and state-backed PetroSA operates the 45,000b/d Mossgas GTLfacility, which combined add nearly 205,000b/d to domestic liquids production. Sasol has plansto expand Secunda by another 30,000b/d and has proposed to build the 80,000b/d Mafutha plant.As a result, we expect synfuels production to grow from an estimated 160,000b/d in 2011 to258,000b/d in 2021.

Although there is the potential to source gas from the Orange basin and the onshore shaleformations in the Karoo basins, we believe it is too early to adopt an overtly optimistic stance.As regards the Orange basin, we believe that the development of gas production could growmuch faster and we expect South Africa to produce 3.5bn cubic metres (bcm) of gas in 2012. Weforecast that this will increase significantly over our forecast period, reaching 6.8bcm by 2021.

Bolstered by strong macroeconomic growth, infrastructure projects and GTL, domestic gasconsumption is set to increase substantially, from an estimated 5.7bcm in 2012 to 9.7bcm by2020/21.

In terms of infrastructure, many ambitious projects have been proposed, particularly in thedownstream sector. The 400,000b/d Mthombo refining complex in Coega epitomises thecountry's willingness to remain a leader in the sector. South Africa is also hoping to increase itssynthetic oil output through Sasol's proposed expansion of the Secunda CTL facility, whichwould add another 30,000b/d, and the construction of the proposed 80,000b/d Mafutha CTL.

South Africa's dependence on oil prices leads to high volatility in the country's import bill. Ourassumptions of tight supply due to booming demand in emerging markets is clearly a risk for the country.

As a result, we forecast OPEC basket oil prices to remain elevated and average US$107.05 per barrel(bbl) in 2012, a figure similar to the 2011 average of US$107.52/bbl.