US embassy cable - 05PRETORIA762

C O N F I D E N T I A L SECTION 01 OF 03 PRETORIA 000762 
 
SIPDIS 
 
DEPT FOR NP/NE, ABURKART/AKRASS 
 
E.O. 12958: DECL: 02/17/2015 
TAGS: ENRG, KNNP, TRGY, CH, FR, SF 
SUBJECT: SOUTH AFRICA: UPDATE ON PBMR 
 
REF: A. 04 PRETORIA 2956 
     B. 04 PRETORIA 1124 
 
Classified By: ECON M/C J. Jeff Hartley, Reason: E.O. 12958 1.4 (b) and 
 (d) 
 
1. (C) Summary. PBMR, Ltd. executives told Econoff that their 
project would not be sidelined by a recent court decision 
requiring the Department of Environment and Tourism to enter 
into another round of stakeholder consultations on an 
environmental impact assessment concerning their pebble bed 
modular nuclear reactor project.  With the financial and 
political support of the government and a new leadership team 
in place, PBMR was plowing ahead with the design and 
engineering phase.  All thirteen design and engineering 
contracts had been signed and now there was a renewed effort 
to attract more investors.  The lead in government would be 
transferred to Public Enterprises Minister Alec Erwin, who 
had publicly stated recently that South Africa intended to 
generate 4000-5000 MW of electric power from pebble bed 
reactors.  The executives were anxious to engage U.S. 
national energy laboratories on research and development 
programs, and the U.S. National Nuclear Regulator on 
licensing issues.  They also discounted recent press reports 
that the Chinese pebble bed project was ahead of theirs.  End 
Summary. 
 
Not Sidelined By Court Decision 
------------------------------- 
 
2. (C) PBMR, Ltd. executives met with Econoff via telephone 
conference to discuss progress on the pebble bed modular 
reactor after a Western Cape court ordered the Department of 
Environment and Tourism (DEAT) to reopen its environmental 
impact assessment (EIA) regarding the Koeberg site.  The 
executives included Westinghouse Senior Vice President and 
Chief Technology Officer Regis Matzie, Westinghouse Nuclear 
Plant Projects Manager Edward Schmiech, PBMR Power Plant 
Delivery Director Dieter Matzner, and PBMR Manager for 
Modular Dynamics Willem Kriel.  The executives told Econoff 
that they did not see how the reopening of the EIA would 
delay PBMR efforts at this point, since the project was still 
in the design, testing, and engineering phase.  Construction 
would not begin before 2007 on a demonstration reactor to 
come on-line in 2010.  PBMR anticipated commercial sales to 
begin in 2013.  In fact, they were pleased that DEAT had 
decided not to appeal the court's decision, opting instead to 
simply include another round of stakeholder consultations as 
the court had ordered.  This worked in PBMR's favor, as it 
provided resolution to the court challenge and allowed DEAT 
to get on with modifying its EIA procedures and completing 
the EIA for PBMR by the end of the year.  PBMR had requested 
two separate legal advisories before sitting down with DEAT 
and Eskom to decide on a final EIA approach before end of 
March. 
 
South African Government Lends Full Support 
------------------------------------------- 
 
3. (C) Since April 2004 when the South African Government 
declared PBMR a national strategic project, PBMR has been 
undergoing a number of significant changes.  In August 2004, 
Jaco Kriek, Vice President for Mega Projects at the 
Industrial Development Corporation (IDC), was seconded to 
PBMR to become its new CEO, replacing Nic Terblanche who 
assisted with the transition as Chief Operating Officer 
before retiring.  Kriek brings a strong project financing 
background and obvious connections to the IDC and the 
Department of Trade and Industry (DTI), to which the IDC 
reports.  PBMR executives told Econoff that the IDC would 
soon assume lead investor status from Eskom Enterprises. 
Also in August, DTI Director General Alistair Ruiters was 
appointed Chairman of PBMR's Board, giving the company direct 
access to the upper reaches of South African Government. 
 
4. (C) In October 2004, the government put its money where 
its mouth was when it allocated R500 million to sustain PMBR 
through March 2005.  PBMR executives have been told that this 
level of financial support would be extended over the next 
2-3 years when Finance Minister Trevor Manuel delivered this 
year's budget to Parliament on February 23.  While the plan 
was for the South African Government to maintain at least a 
51% shareholding in PBMR, IDC's shareholding would increase 
as Eskom Enterprises decreased to about 5%.  Room would also 
be made for a 10% Black Economic Empowerment investor. 
British Nuclear Fuels' (BNFL), the company to which 
Westinghouse belongs, would retain a 25% interest, but 
shareholdings for all could vary as new investors are brought 
in. 
 
5. (C) Governmental oversight of PBMR would be transferred 
from the Department of Minerals and Energy to the Department 
of Public Enterprises (vice the Department of Trade and 
Industry, as earlier believed).  Minister of Public 
Enterprises Alec Erwin, formerly Minister of Trade and 
Industry and well known as one of President Mbeki's most 
effective cabinet members, would take the point position. 
Recently, Erwin publicly assured PBMR that the government 
planned to generate 4000-5000 MW of electric power from 
pebble bed reactors.  This equated to 13-17 300 MW reactors, 
a crucial first market and enough to bring PBMR substantially 
down its learning and cost curves as it embarked on 
commercial production. 
 
Renewed Campaign for Investors 
------------------------------ 
 
6. (C) PBMR executives said that the South African 
Govenment's political, financial, and market support made it 
much easier for them to approach potential investors.  PBMR 
sought two to four serious investors to take up to 40% of the 
company.  In preparation, it had contracted HSBC and Rand 
Merchant Bank to produce an investor information memorandum 
and prospectus to potential investors.  Matzie said that a 
consortium of local banks had already shown interest.  In 
addition, investing suppliers/vendors would be given the 
right to match competing bids on PBMR contracts.  Finally, 
the South African Government had added PMBR to its offset 
program, thus encouraging defense contractors and Eskom 
suppliers (such as GE, Westinghouse, Mitsubishi Heavy 
Industries, and GEC Alstrom) to seriously consider PBMR as a 
way to satisfy offsets generated by large contracts with the 
South African Government.  Matzie said that the potential 
offset investment pool totaled some R20 billion (or $3 
billion).  (Note: Matzie added that, at this point, it seemed 
clear that the hard bargaining AREVA (France) would not 
invest in PBMR.) 
 
All Supplier Contracts Signed 
----------------------------- 
 
7. (C) PBMR executives told Econoff that PMBR had already 
signed all thirteen major supplier contracts for detailed 
design and engineering work.  This included a recently signed 
contract with Mitsubishi Heavy Industries for the basic 
design and research and development of the helium driven 
turbo generator system and the core barrel assembly, as well 
as a R260 million contract with IST Nuclear for the detailed 
design of three key systems: fuel handling and storage, 
reactivity control and shutdown system, and gas systems.  In 
addition, the Nuclear Energy Corporation of South Africa 
(NECSA) started construction of a helium test facility at 
Pelindaba in December 2004, with a completion date of April 
2006.  The executives said that the University of the 
Northwest (formerly Potchefstroom University) should have its 
heat transfer test facility operating by then.  To accomodate 
the ramp up in design and engineering, PBMR planned to move 
to a new building on Route 21 near the international airport 
that would accommodate a staff of 700. 
 
PBMR Wants to Use U.S. R&D Agreements 
------------------------------------- 
 
8. (C) Since the project was moving into a testing phase, 
PBMR executives wanted to take advantage of U.S.-South 
African R&D agreements on nuclear energy and nuclear 
materials safeguards technology as soon as they were signed. 
PBMR executives thought that such agreements would facilitate 
testing and research at Idaho National Laboratory in Idaho 
Falls and Oak Ridge National Laboratory in Tennessee.  PBMR 
told Econoff that they would press the South African 
government to move forward on these agreements.  In fact, 
Matzie called back later to tell Econoff that CEO Jaco Kriek 
had agreed to ask Public Enterprises Minister Alec Erwin on 
February 21 to take it up with Minerals and Energy Minister 
Phumzile Mlambo-Ngcuka as soon as possible. 
 
Construction License 
-------------------- 
 
9. (C) The authority to grant the construction license to 
PBMR rested with the South African National Nuclear Regulator 
(NNR).  While NNR was not required by law to conduct public 
consultations, it wanted to incorporate some level of public 
participation into the process.  PBMR planned to press NNR to 
start the process soon, but knew that it would have to wait 
for a new NNR CEO to be installed.  Former CEO Luisa Zondo 
departed at the end of 2004 and her successor would soon be 
announced.  PBMR executives told Econoff that the chosen 
person, to be installed on April 1, was "knowledgeable and 
supportive" of PBMR. 
 
U.S. Licensing Effort 
--------------------- 
 
10. (C) In November 2004, PMBR convened the first meeting of 
its U.S. business advisory group, comprising seven top 
electric utilities accounting for over 50% of the nuclear 
power capacity in the U.S.  The group agreed to meet every 
six months.  Senate Energy Committee staffer Peter Lyons was 
also to have been a member of this group, but he pulled out 
after he was named to become a Nuclear Regulatory 
Commissioner. 
 
11. (C) Also in November 2004, PBMR executives delivered a 
two-hour presentation to members of the Nuclear Regulatory 
Commission (NRC) in an effort to initiate a "pre-application 
review" during 2005.  The NRC told PBMR that it faced a 
number of U.S., Canadian, and French company applications 
over the next 12-18 months, which would stretch NRC resources 
on major planning and policy issues.  PBMR executives 
believed that a higher political profile for PBMR would make 
the NRC more responsive to its needs. 
 
The Chinese Connection 
---------------------- 
 
12. (C) PMBR executives bristled at local newspaper reports 
that the Chinese pebble bed project had overtaken that of 
South Africa.  They had visited China in September, talked 
monthly with scientists at Tsinghua University, and were very 
familiar with the Chinese effort.  They felt that without a 
design on the table, the Chinese 5-year timetable was 
unrealistic.  Nonetheless, there was room for cooperation 
between the two, and they had extended two Memorandums of 
Understanding to the Chinese for cooperation on technical 
development. 
FRAZER