The story of the first South Africa tells of the wonders of its modern economy. It tells of the country’s marvelous opportunities in the energy sector and how the economy is growing at six percent per annum. It tells of the opportunities available to foreign investors eager to tap the country’s unexplored offshore acreage. And of course, it’s the story of Sasol Ltd., one of South Africa’s biggest companies, the one that is exporting its improved Fischer-Tropsch (F-T) technology to countries with loads of stranded natural gas. This South Africa has abundant cheap electricity, a surging thirst for natural gas, and a desire to leave the Third World and join the First World.

The second South Africa is still firmly stuck in the Third World, and by all appearances, that’s where the bulk of the country will stay. It is a country that is being devastated by HIV and AIDS, with some 20 percent of all its adults infected with the deadly virus. It’s a country that, for all its mineral wealth cannot provide electricity to about one-third of its people. This South Africa, desperately impoverished and desperately undereducated, is now trying to catch up with the other South Africa. And to that end, it is forcing the other, more prosperous South Africa to relinquish a share of its business – and gaining a stake in the energy sector is a key element in that strategy.

The stark differences between these two separate and unequal South Africas were made clear during my visit to Johannesburg for last fall’s 18th World Petroleum Congress. The conference was held at the Sandton Conference Center, a beautiful complex 15 minutes north of downtown Johannesburg. The complex contains expensive hotels, nice restaurants, and some of the most lavish boutiques on earth, such as Gucci and Polo. By any measure, the conference was a success. Thousands of energy industry personnel from all over the world came to Johannesburg for the event, which went off without a hitch. But a bit of exploring around Johannesburg in the days following revealed squalid squatter camps just 20 minutes from Sandton. There was no electricity in the camps, nor was there any sign of propane or butane tanks. Instead, the residents get their primary fuel from the firewood stacked just outside the doors of their ramshackle homes.

Another – very visible – facet of South Africa’s slow progress is in the skies over Johannesburg and the surrounding region. On most days, a faint brown cloud can be seen on the horizon in nearly every direction – a result of the country’s heavy reliance on coal. Nearly three-quarters of all energy consumption in South Africa comes from coal. Another factor that reflects the country’s developing economy: the country’s gasoline stations still sell leaded motor fuel. Outlawed three decades ago in the U.S., South Africa finally ended the use of leaded fuel in January. It will also require refiners to keep the sulfur content of their motor fuels below 500 parts per million.

But Gumede expects progress to be slow, particularly when it comes to having black-owned companies in the E&P sector. “There’s enough capacity to create small oil and gas companies,” he said. “But there is a lack of capital.” And therein lie two of the key challenges for the country’s energy industry: finding enough capital to allow black businesspeople to enter the business, and, just as important, finding enough black entrepreneurs with the requisite skills for success in the energy industry. Gumede says that last issue is perhaps the most problematic: roughly one-quarter of all working-age South Africans are unemployed. “We have a skills misalignment,” says Gumede. “We have a lot of skilled college graduates but we also have a lot of unfilled jobs.”

Gumede makes it clear that the South African government won’t allow any companies – American or otherwise – to ignore the mandates of the BEE and the charter for transformation. He explained that South Africa has a new licensing regime coming into place for large companies in all sectors. And if those companies are not complying with the BEE, “they won’t get a license to trade.”

For large companies operating in South Africa, it’s all about “transformation,” the term being used to describe the broad-based effort to include more blacks in the country’s ownership and management structure. And the energy sector is the focus of some of these highest-profile efforts. Just a few months ago, Sasol appointed Nolitha Fakude to its board of directors – the first black as well as the first woman. For decades, Sasol’s board has been all white, and all male. The appointment of Fakude – who had been a leading critic of Sasol – comes at the same time that Sasol is trying to win government approval for its merger with another South African company, Engen. If that deal is approved, Sasol will become South Africa’s biggest motor fuel supplier, with some 220,000 barrels per day of capacity. Further, if the deal is approved, Sasol’s new fuels subsidiary, to be called Uhambo, will have 25 percent black ownership.

The push for black ownership is occurring in all segments of the energy sector. But much of the country’s energy business is owned by the state. For instance, Eskom, the state-owned electric utility, provides some 95 percent of the country’s electricity. And while there are discussions about privatizing some of Eskom’s business, that process will take years. Furthermore, South Africa’s state-owned companies are not operated in the same way as private companies. A quick glance at PetroSA’s annual report offers proof of that, with sections of it reading more like that of a social services agency than an energy company. There are long sections on black empowerment, HIV/AIDS prevention, skills development programs, employment equity, gender-based hiring, and corporate citizenship.

As part of that social service aspect, PetroSA is looking at ways to provide adequate fuel to rural residents. Many currently rely on kerosene. PetroSA would like to replace the kerosene with LPG, but the country has little infrastructure to support LPG consumption.

Eskom and PetroSA are attempting to deal with black empowerment issues while also trying to accommodate South Africa’s explosive growth. For instance, demand for diesel fuel surged by 7.5 percent in the first half of 2005 when compared with the year-earlier figure. LPG use increased by nearly 10 percent over that period. Booming electricity demand is forcing Eskom to expand its generation capacity. Eskom, which is among the lowest-cost producers of electricity on earth, is now planning to add about 1,000 megawatts of new capacity every year for the foreseeable future. (The company is also discussing a massive dam on the Congo River, in the Democratic Republic of Congo. If approved, the project would cost $50 billion and generate about 40,000 MW of electricity.)

The Opportunities

While there is a myriad of challenges in South Africa, there is also a spate of opportunities for businessmen eager to take some risks. The country has enormous quantities of natural resources, it continues to be the world’s largest gold producer, coal is abundant, and the region is relatively unexplored when it comes to oil and gas. But more exploration is underway, particularly offshore. One of the papers presented during the WPC estimated that areas off of South Africa’s southern coast may contain up to six billion barrels of oil.

One of the first foreign companies to enter the market was Dallas-based Pioneer Natural Resources, which jumped into South Africa in 1998. Now involved in several offshore energy projects off the Cape of Good Hope, Pioneer was initially lured to South Africa by the potential returns on investment, CEO Scott Sheffield told me. “It was the terms,” said Sheffield. “They were very accommodating. They wanted to find foreign investors.” Pioneer’s total investment in South Africa is now nearing $500 million and in late September, the company signed a memorandum of understanding with PetroSA, its partner in the offshore Sable field, to bring ashore the gas produced at Sable. The two companies were re-injecting the associated gas from Sable. Through a sub-sea tie-back, the two companies will produce about 100 million cubic feet of gas per day from Sable and that gas will be sent to PetroSA’s gas-to-liquids plant at Mossel Bay.

Pioneer is one of several companies exploring offshore South Africa. According to PetroSA, BHP, Anschutz Corporation, Forest Exploration, Sasol, and Pioneer are all in various stages of evaluating prospects off of South Africa’s southern coast. Pioneer says it has identified deposits containing up to 500 Bcf in an area known as Block 9.

While these offshore deposits may help South Africa meet its energy needs, it is clear that the country as a whole will continue to grapple with the realities of the post-apartheid era. Tens of billions of dollars in new investment will be needed to bring the country’s energy sector – and the rest of its economy – into the twenty-first century.

“The industry has to put its money where its mouth is,” says Colin McClelland, head of the South Africa Petroleum Industries Association. A self-described “old white man,” McClelland lived through the apartheid era. He recalls that during that period, electricity was unavailable in predominantly black cities like Soweto, even as recently as 1988.

Now, nearly 16 years after former Soweto resident Nelson Mandela was released from the prison on Robben Island, McClelland believes that energy lies near the heart of South Africa’s future. And it is imperative that the energy industry play at major role in the country’s transformation. “If we don’t do it,” McClelland said, “there isn’t going to be a South Africa, or an economy here. The tremendous gap between the rich and the poor in South Africa is unsustainable.”

Population: 42.7 million
Percent living below the poverty line: 50
Percent unemployed: 26.2
Percent of adults infected with AIDS/HIV: 21.5

GDP: $196.5 billion

Oil reserves: 15.7 million barrels
Production: 40,000 bbls/day
Consumption: 470,000 bbls/day
Imports: 270,000 bbls/day

Installed electricity capacity: 40,000 MW (about 35,000 MW of this capacity comes from coal-fired plants)

National oil company: PetroSA, formed 2002

Natural gas reserves: 387 Bcf
Production, 2003: 88 Bcf

Coal reserves: 54.6 billion short tons (approximately 5% of the world total)
Production: 245.3 million short tons (2002)

Synthetic fuel production capacity: 205,000 bbls/day
Crude oil refining capacity: 519,0000 bbls/day

Major energy companies:
Sasol Ltd., 2005 revenues: $10.6 billion*
PetroSA (state owned oil company), 2005 revenues: $936 million*
Eskom (state owned electricity company), 2005 revenues: $6.9 billion*

Other notes: South Africa is the world’s largest producer of platinum, gold, and chromium. It is the sixth-largest coal producer.

* These are full-year revenue figures. Each of these companies uses a 12-month reporting cycle that ends on June 30.

Sources: WPC-News, Sunday Times, CIA World Factbook, Energy Information Administration.