A country, energy market and regulatory overview of Botswana, one of Africa’s most stable countries

Country Overview

The Republic of Botswana is a landlocked country located in Southern Africa. Formerly a British protectorate, it achieved independence in September 1966 and since then has maintained a strong tradition of stable representative democracy, with a consistent record of uninterrupted democratic elections.

Today Botswana has a population of just over two million people, making it one of the most sparsely populated nations in the world, and therefore ideal for natural resource exploitation. Its capital and largest city, Gaborone, which is located in the south-east of the country, is home to approximately 10% of the population.

Around the time of independence, Botswana was formerly one of the poorest countries globally, however it has since transformed itself into one of the fastest-growing economies in the world. Its GDP per capita, on a purchasing power basis, now stands at approximately US$17,000 (2014), which is one of the highest in Africa, having grown 4.8 per cent, 9.3 per cent. and 4.4 per cent. in 2012, 2013 and 2014, respectively.

S&P recently reaffirmed their A-/Stable credit rating for Botswana thereby allowing the country to retain its position as having the highest sovereign credit rating in Africa, being the only country with an “A” rating. Moody’s rate the country as A2/Stable. Diamond mining has fueled much of the economic expansion and currently accounts for more than one-third of GDP, between 70-80% of export earnings and about one-third of government revenues.

Tourism, financial services, subsistence farming, and cattle raising are other key sectors. Fortunately, this economic expansion has not lead to rampant corruption with Transparency International rating Botswana as having one of the lowest corruption indexes in the world, 31st out of 175 countries, in 2014. Unemployment is estimated to be in the region of approximately 20 per cent. with inflation currently low (in September 2015, it was estimated to be 2.9%).

The fiscal regime in Botswana compares favourably with many leading economies worldwide. Corporation tax rates range from 15% for resident companies to 22% for non-resident companies, whilst VAT is levied at 12% and dividends are subject to a 15% tax rate. A range of fiscal reliefs are available to certain types of investor, for example, in the manufacturing sector.

Botswana also has double taxation treaties in place with a number of countries, including the UK. In principle, all of these factors represent positive indicators for investment in the development and commercialisation of gas resources such as shale gas and CBM in Botswana.

Francis Town Botswana

Energy Market Overview

Whilst Botswana has significant indigenous coal reserves (estimated by RPS to be in excess of 200 billion tonnes), it currently has no proven reserves of conventional oil or gas and is therefore dependent, at this current time, on significant energy imports – primarily electricity, gasoline, fuel oil and LPG from South Africa, other neighbouring countries and the Middle East via Mozambique.

There are two main power generation facilities in Botswana, which are both supplied by coal from the nearby Morupule mine in the south east of the country. Morupule A has a nameplate capacity of 132 MW and has been in operation for almost 30 years. It was shut down for refurbishment in 2012 but this has not yet been completed and there is some uncertainty if and when it will be back in service. Morupule B has a nameplate capacity of 600 MW and the first unit was brought onstream in 2013. However, there have been several technical problems and plant outages, which have reduced deliverability from the plant.

These power outages persist and it is not known when and if they can be resolved. In addition, there are two gas/diesel power generating units in the country – one at the Orapa mine with a nameplate capacity of 90MW and the other near Francistown with a nameplate capacity of 25MW. They were intended to run as peak power units but are currently running full time, at a much higher cost than the Morupule plant. Most of the remaining indigenous power supply – particularly in the more remote rural areas is provided by small, local diesel generators.

A combination therefore of generally growing electricity demand (growth averaged 3.2 per cent. per year between 2009 and 2013), unavailable capacity (from Morupule) and high-cost backup generation as the main domestic generation alternative (from Orapa) has led to domestic electricity demand significantly outstripping domestic supply and requires the country to import significant amounts of electricity from neighboring countries.

In 2013, it was estimated by the Government-owned utility, Botswana Power Corporation (BPC), that imports from neighboring countries in Southern Africa accounted for 82% of Botswana’s total electricity supply. The growing power shortages across Southern Africa, particularly in South Africa, however, mean that none of these import supplies are under firm contracts and frequent supply interruptions are therefore commonplace. In 2013, for example, Eskom, the largest supplier of electricity in the region, suspended all exports to Botswana. This suspension remains in force today.

Whilst attempts are being made to rectify the problems at Morupule B and thereby increase domestic supply, there is considered to be a major opportunity, and need, for the development of domestic shale gas and CBM resources to satisfy both Botswana’s current and future electricity demand, which is forecast by the BPC to grow by 3-5 per cent. per year over the next decade. Please see Figure 2 below for a graphical illustration of this forecast supply and demand.

In addition, due to the significant unsatisfied demand for electricity across the wider Southern Africa region, the regional market could provide a highly attractive export opportunity for domestic gas developments in Botswana.

It should be noted though that to fully exploit both the domestic and wider regional opportunity, significant investment in the transportation and services infrastructure within Botswana will need to occur simultaneously with the development of the resource base.

Wireframe gas pump