Apocalypse for Zim's Energy Sector

Source: Financial Gazette (Harare)

Date: 6 October, 2005

Author: Nelson Banya

At a time when most regional countries are moving into high gear and securing their power requirements ahead of the 2007 regional deficit, two firms which carry Zimbabwe's hopes of energy self-sufficiency- ZESA Holdings and Hwange Colliery Company Limited - are still groping in the dark.

It is increasingly apparent that Hwange's ambitious $2 trillion recapitalisation exercise will not materialise, just as much as it is increasingly obvious that ZESA's two power stations at Hwange and Kariba South will not secure the much-needed foreign capital injection in time to avert disaster in less than two years' time. The two projects are currently valued at US$900 million and due for completion by March 2009.

Zimbabwe's energy crisis, dramatised by acute fuel shortages since the turn of the century and debilitating power cuts, has compounded problems for the ailing economy, which has shrunk by as much as 30 percent since 2000. The impending power deficit will render the region's major power exporters - South Africa, the Democratic Republic of the Congo and Mozambique, on which Zimbabwe has frequently counted on to provide up to 35 percent of her power requirements - unable to export.

This spells doom for the stricken Zimbabwean economy and signals coming out of the corridors of power do not show any understanding of the urgency of the situation that confronts the country. Zimbabwean government officials have not gone beyond showing token awareness of the problems at the odd energy or power conference they address.

Meanwhile, officials at both Hwange and ZESA are, with good reason, getting frantic as the 2007 approaches.

ZESA executive chairman Sidney Gata is on record saying the state-owned power utility requires no less than a US$2 billion investment to avert disaster, come 2007. This is no mean feat for a country that is faced with a litany of critical imports - medicines, fuel and food top the bill. The kind of foreign currency investment required to boost the capacity of ZESA's two power stations requires foreign investment, which has been elusive over the past few years and for very obvious reasons too.

Even the much vaunted Chinese investors, who have shown an unsettling lack of commitment to investing in plant and equipment in the country, have given out mixed signals in terms of their commitment to the power projects, despite numerous memoranda of understanding.

Hwange, on the other hand, could see its blockbuster rights offer failing to fly as key shareholders do not see value in committing more funds to a venture whose viability has been impaired by a price monitoring regime imposed by none other than the biggest shareholder in Hwange itself - the government.

However, management, in a draft letter Hwange shareholders are yet to see due to the delay and possible abortion of the recapitalisation project, stresses the critical importance of injecting fresh capital into the venture.

"Hwange Colliery's strategic position within the coal mining industry in Zimbabwe is however under threat as a result of its undercapitalised mining operations. The trading environment in Zimbabwe continues to present challenges to Hwange Colliery. The company is currently operating against a background of obsolete plant and equipment, which poses additional costs arising from downtime; a challenging working capital position and a foreign currency denominated debt, which has imposed a potentially huge exchange risk burden onto the company's balance sheet.

"These internal factors have combined to result in declining tonnage of raw coal mined, itself resulting in significant loss of revenue. Coupled with this, the company's products continue to be sold under a price-monitoring framework, the result of which is that any price increases by Hwange Colliery require the prior written approval of the relevant government ministry," Hwange directors state in a circular intended for shareholders.

In advancing their argument for a rights issue of the magnitude they proposed, the directors warned that "a retention of the status quo would mean that the foreign currency-denominated debt in Hwange Colliery's balance sheet would continue to present challenges in servicing the same on the back of the huge exchange risk imposed on the company."

The directors, who would have wanted to float the additional 703 million shares, all things being equal, next Monday, also considered both local and offshore loans as an alternative funding option, but discounted the idea as they did a proposal to sell off the company to a third party.

The company's US$10 million debt was to be serviced by $260 billion raised through the rights issue, going by the $26 000:US$ exchange rate currently obtaining at the central bank's managed foreign currency auctions, but analysts have warned that the company was chasing a moving target as the rate is now being adjusted in tandem with inflation, which came in at 265.1 percent in August and was expected to breach the 300 percent mark in September.

While Hwange is grappling with enhancing its capacity to extract its considerable coal resources, hopes of capitalising on the vast reserves of coalbed methane gas have waned.

A Harare-based energy expert this week said Zimbabwe had lost its "world class coalbed methane expertise to Botswana and Zambia as a result of being ignored and rebuffed locally."

"The colliery will have to change its approach if it is to climb out of the morass. It is surrounded by billions of clean burning, high energy cubic metres of methane gas worth approximately US$3 billion a square mile and rising," the expert, who requested anonymity for professional reasons, said.

It is a full decade since Zimbabwe's untapped methane reserves generated excitement, even at international energy symposia, but precious little has been realised.

World-class methane experts from Amoco, South Africa's Sasol and Conoco visited Zimbabwe at the time, with one John Oehler of the Texas-based Continental Oil Company declaring that Zimbabwe had the best coal-bed methane on the continent.

Hwange's is reputed to have clean burning energy gas with enough reserves to feed the power station for a century.

In comparison, Zimbabwe's southern neighbour, South Africa, has transformed what was first known as the South African Coal, Oil and Gas Corporation and later the South African Synthetic Oil Limited (Sasol) into a fully fledged, highly profitable industrial force through foresight and the requisite investment. According to Paul Hollaway, Zimbabwe's coal reserves in the Sengwa field have just the right quantities for Sasol's gasification process.

While Zimbabwe can only envy its southern neighbour's well diversified energy sources, South African power utility Eskom commissioned a study into ways of preparing for the power deficit.

Ezekiel Madzikanda, a Zimba-bwean electrical engineer who is working on an Eskom-commissioned research into ways of managing power consumption, says the power industry in Zimbabwe has to wake up from its slumber and devise ways of ensuring the sustainable use of electricity.

"The South African government, through the Department of Energy, has tasked Eskom to look at ways of reducing power consumption and also ways of increasing power production.

"They are currently working on several options but two are more feasible at this moment. The first is demand side management. Demand side management is, in layman's terms, reducing power consumption. The other option they are looking at is that of re-mothballing of "mothballed" power stations. In simple terms, there are power stations that had been put off production sometime back and are now being refurbished and put back into production. All these efforts are being done to reduce the impact of running out of power come 2007," Madzikanda said.