Fuel-from-coal deal snake oil?

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OVER the weekend, in the Eastern Highland city of Mutare, at the Sakubva rally, President Emmerson Mnangagwa read the roll call of promised investments, clocking a mouth-watering US$15 billion.

Brett Chulu

His indirect crow is that within a space of six moons of seizing the mantle from Robert Mugabe, he has mobilised investments the size of Zimbabwe’s current Gross Domestic Product.

Within the US$15 billion assortment of investment promises, the US$5,2 billion fuel-from-coal deal deserves singular scrutiny.

The coal-to-liquid plant, according to the lead partner Nkosikhona Holdings of South Africa will be located at Lisungu in Hwange; it represents the single largest investment in post-independence Zimbabwe and in Matabeleland.

The mad electoral season is upon us.

Politicians are known to up their snake oil salesmanship in pursuit of votes.

Today a snake oil salesman is a metaphor for peddling too-good-to-be-believed promises.

Between 1849 and 1882 Chinese workers provided cheap labour for the construction of the Transcontinental Railway.

They brought a balm made from the skin of Chinese water snakes famed for soothing the aching joints of Chinese railway labourers after a day’s hard toil.

The news of the unbelievable Chinese salve reached seedy American opportunists who decided to make a me-too ointment purportedly from rattlesnakes.

The most famous of the American ilk of rattlesnake oil peddlers is Clark Stanley who made the snake oil famous following his exploits of slicing open a live snake at a World Expo in Chicago in 1893.

Metaphorically, the coal-to-liquid deal could turn out to be either the genuine Chinese water snake oil or Clark Stanley’s sleazy concoction.

Fuel exporter

When the president boldly claims that in the next five years Zimbabwe will become a fuel exporter, it calls for organised scepticism, a cardinal principle of science — this is no rabid cynicism based on emotion.

Every day Zimbabwe consumes five million litres of fuel, 32 500 barrels, if you prefer the oil industry’s jargon.

Mnangagwa says the Lisungu plant (presumably) will squeeze out daily eight million litres or 50 000 barrels of fuel from the black rock.

It is from this that the excess of three million litres or 17 500 barrels of export fuel will come.

What a remarkable turnaround that would be; from fuel importer to fuel exporter.

The legend of the granny from Chivi who boiled stones and made a sumptuous pottage will have been turned from folklore into engineering reality.

Let me hasten to say that this is not the Rotina-scripted diesel from rock saga incarnate.

In 1925, two chemists from landlocked Germany, Franz Fischer and Hans Tropsch at the Kaiser-Wilhelm Institute of Kohlenforschung, developed the coal liquefaction and gas-to-liquid processes to isolate the various petroleum components from coal.

It is now famously known as the Fischer-Tropsch process.

Hitler leveraged on this German-birthed technology to order large-scale production of fuel from the Ruhr coal to fuel his impressive war machinery.

On August 23, 1955, 10 years after Hitler was vanquished, our neighbour South Africa became the first country in the world to use the Fischer-Tropsch process to commercially produce fuel from coal.

To date, South Africa state oil enterprise Sasol has produced 240 billion litres or 1,5 billion barrels of fuel at its Secunda plant.

Between sunrises, the Secunda plant produces 24 million litres or 150 000 barrels of fuel from coal.

We can infer that Zimbabwe’s Lisungu coal-to-liquid plant is envisaged to produce a third of South Africa’s daily coal-to-liquid output.

The economic dividend from the egg-is-not-yet-hatched US$5,2 billion Lisungu coal-to-liquid venture, if it materialises, will redefine the contours of our economy.

At this rate of production, Zimbabwe will save US$1,06 billion on fuel imports and generate US$637 million in fuel exports.

Oil exports will easily become our third largest export after minerals and tobacco.

At the envisaged rate of 50 000 barrels per day, the Lisungu plant will need a daily input of 95 000 tonnes of coal.

The sheer scale of this venture should be viewed in relation to Hwange Colliery.

According to the coal production statistics given by Finance minister Patrick Chinamasa in his 2018 National Budget, Hwange Colliery Company is producing 10 714 tonnes of coal a day.

Hwange’s current coal production rate is 8,9 times smaller than the required rate of daily coal output to meet Mnangagwa’s 50 000 barrels of fuel from coal a day target.

Massive investment in coal mining is needed as a prerequisite to the successful coal-to-liquid production.

Financing capacity

The deal signed as a Memorandum of Understanding by Mnangagwa last week was reported to be between Nkosikhona Holdings of South Africa and Verify Engineering Private Limited.

Verify Engineering Private Limited is said to an agent of the of Higher Education ministry.

The Amos Murwira-led ministry is the one that interested Nkosikhona Holdings.

Jaco Immink, chief executive of Nkosikhona Holdings, revealed that Canadian-based Magcor Consortioum, whose sub-Saharan office is in Lusaka will be a key partner.

This disclosure unlocks the mystery of the financial capacity of the parties to the deal.

The Alberta-based Magcor focusses on five areas: road infrastructure, mining, energy, housing and agriculture.

It is its mining and energy divisions that are relevant to the Lisungu coal-to-liquid project, whose ground breaking is set for June 1, with work slated to commence in September.

In the mining area, Magcor specialises in pre-feasibility studies and sourcing of finance for turnkey mining projects.

Magcor describes its financing model as private equity financing, what it calls “Pool of Funds”.

Its model of business is Private-Public Partnerships (PPPs).

We expect the Lisungu mining venture to be a turnkey project.

Turnkey is a project that is constructed, completed and sold to a buyer.

In essence, this implies that Magcor will have to find interested investors to off-take the necessary Lisungu mining venture that will feed coal to the coal-to-liquid plant.

This implies a complex shareholding structure that will eventually see the yet-to-be-named equity investors owning a stake in the Zimbabwean joint venture Vectol Zimbabwe Limited.

In the energy division, Magcor provides engineering, procurement and construction contracting.

This means Magcor has the capacity to mobilise financial and human resources from project-conception to completion.

Magcor’s financing model is very attractive; it offers 100% finance with a maximum interest of 2% per annum, with a five-year no-payment grace period. If this financing model were to materialise, interest payment would be about US$104 million per year.

The three million litres surplus fuel from the Lisungu plant should generate six times cover for the interest.

There is a hurdle, a big one. Michael J. Glynn, the president of Magcor is on record as saying Magcor, needs the backing of legislation that underwrites a sovereign guaranteed backed loan.

That is the catch.

Zimbabwe is not credit-rated by the trio of Fitch, Moody’s and Standard & Poor’s.

It will take extraordinary negotiation abilities by Magcor to convince its financing partners to extend financing to the PPP venture where the public partner has no investment grade credit rating.

Secondly, Magcor requires legislation that outlines how PPPs work in Zimbabwe.

We do not have clear PPP legislation in the mould Magcor requires. This is another snag.

The weight of evidence points to a 50-50 chance of the project succeeding.

Depending on how the post-election government lines its political and economic policy ducks in a row, the Lisungu project could become either the Chinese snake oil or the cowboy Clark Stanley’s infamous pretentious rattlesnake oil.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer reviewed international journal. — brettchuluconsultant@gmail.com

4 thoughts on “Fuel-from-coal deal snake oil?”

  1. Martz says:

    True this CTL or CTC is a true project that is going to be a game changer. Watch this space for a USD25 Billion is coming on this project to be partners to the existing investors already.

  2. chiremba wematombo says:

    Zviroto zviroto, what is required before Zimbabwe can again underwrite loans of this magnitude with sovereign guarantees is to deal with our sovereign debt!!! For ZANU that will not be in less than 20 years , while with MDC it will be in less than three years as they will be extended debt forgiveness and can afford to undertake austerity measures and can deal with corruption as they are relatively clean!!! Our only salvation will be a completely brand new government in Zimbabwe!!!

  3. Mack daddy says:

    Okay now, I had just replied to the article on the missing $15 billion diamond scandal, were they needed Mugabe to help in their so called investigation and find it bizarre that the Munangagwa using the same figure in his pitch about investments in energy and such. Is this the buzz figure for them to keep our hopes up that there is something big in the works for the people who have nothing, to hear such grand figures been thrown around. Have heard this all before, remember why they call this guy crocodile, it is his nature and in the end as a croc does so does he. $15 billion is nothing but talking points to make us thing that they are working hard as herald showed with grand kids visiting the Munangagwa in office, whatever you just needed to resign and let free fair elections take place, you sound just like Mugabe, oh wait a minute you are cut from the same tree.

  4. Nintalan says:

    Production of 8m litres per day would more than double (117%) the nations demand for electricity. How do they plan to acquire the additional 9.6m Mw p/a?

    Also the process would need nearly 38,000 MT of coal per day. How do they propose to achieve that?

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