Kinetiko is taking the fast train to South African gas production

Kinetiko setting the stage for gas production
Key deal with IDC to co-fund an initial 20 wells
Large acreage has plenty of potential

South African-focused gas play Kinetiko Energy (ASX:KKO) has been on a tear in recent months with exploration drilling progress, acquiring Afro Energy, and reaching a key joint development agreement with the Industrial Development Corporation of South Africa (IDC).

Speaking to Stockhead, executive chairman Adam Sierakowski said the company has been putting a lot of things in place to achieve its goal of becoming a gas producer by accelerating its exploration initiatives.

It has also been aided by the removal of former South African president Jacob Zuma from power and the appointment of Cyril Ramaphosa to replace him.

“There was probably until that point a lot of investors who felt that South Africa had a great deal of sovereign risk,” Sierakowski noted.

“They probably added that while we had a huge resource, there were too many question marks around how long it would take South Africa with all of its corruption and political inefficiencies to actually bring in gas as a strong interim substitute for the very aggressive decline of their carbon-based economy.”

Adding interest, South Africans have also embraced the shift away from big coal-fired power stations and carbon based economy to renewable energy while accepting that there has to be a viable, reliable and economic energy source like gas to fill the gap during the transition.

This is best reflected by Energy Minister Gwede Mantashe saying that he is “enthused” by the prospect of domestic gas discoveries as they would attract foreign investment.

Further impetus for the need to secure local gas reserves and production comes from the expectation that gas sourced from Mozambique – its largest source of the fossil fuel – will be very much in decline from 2024 with little capacity for replacement.

“That is why we are keen to show investors that we can start small-scale production and modularise into larger-scale production,” Sierakowski added.

South African gas production is a goal that is well within reach

So just how does Kinetiko intend to fulfil its ambition of becoming a major gas supplier to South Africa?

For starters, the company has a massive footprint covering 7,000sqkm that hosts many potential gassy zones with certified 2C category resources totalling 4.9 trillion cubic feet of gas and ready access to adjacent existing infrastructure.

The ministerial approval for its acquisition of Afro Energy also takes Kinetiko’s ownership of the acreage up from 49% to 100%. That makes the company more attractive to investors who had been previously put off by its minority interest, though Sierakowski noted the company is keen to maintain a healthy Black Economic Empowerment percentage.

kinetiko energy south africa natural gas — Kinetiko’s land holding in South Africa. Pic: Supplied

Exploring and developing such a large area will require additional investment, which is neatly covered – at least initially – by the company’s deal with IDC.

Under this agreement, IDC will contribute 70 million rand ($6.3m) to drill about 20 wells to earn a 45% interest in the area covered by the joint development agreement.

It will also have the right of first refusal to participate in up to 45% of the next 80 wells developed by the company.

Sierakowski said this first phase is engineered to produce gas quickly and efficiently given that the company already has regulatory approval for the first 10 wells in place.

“We can be a gas producer – albeit starting from a small-scale – very quickly, but this can expand quickly with the IDC agreeing to develop up to 100 wells with us,” he noted.

“I think we can do this quickly, and a year from now, we will talk about other IDC-style investments and with further capital coming into our company, drilling more than 50 wells over the next 12 months is a legitimate ambition. We can grow exponentially from there.”

This will also enable the company to start building and certifying a strong gas reserve with Sierakowski noting that converting even half of the resources into reserves will give Kinetiko a tier one project on a global scale.

Returns are also likely to be attractive with an assumed gas price of $11 per gigajoule for its offtake agreement with electricity producer Vutomi Energy providing a clear benchmark.

Shallow wells a big plus

The shallow depths of the prospective gas zones are another tick in the company’s pursuit of gas production.

As highlighted by the Korhaan wells – the first that Kinetiko is drilled in seven years or so, the company only has to drill them to a depth of about 500m.

Combine that with very accessible flat land around Amersfoot and excellent landowner relations, and it is clear why the company believes that the turnaround time for drilling wells will be quick.

And if that was enough, previous wells drilled by the company have demonstrated high flow rates that indicate excellent permeability, which means that the company does not have to resort to expensive (and environmentally suspect) fracture stimulation to achieve commercial success.

“Our ESG advantages are very high. Being able to carry out our work with a very light touch to the environment and the community is really important to us,” Sierakowski noted.

He added that the company was keen to scale up and develop newsflow on a raft of exploration activities and continuing production initiatives.

“There’s so much geology, the most prospective and high quality targets we haven’t even touched yet,” he explained.