IHS World Markets Energy Perspective | |
Significance | Shell is nearing the completion of the application process for shale gas exploration rights in South Africa, while concerns over how shale operations may affect the environment and the nation's bid to construct an important astronomic telescope abound. |
Implications | Concerns remain that shale gas exploration could harm the environment and put scarce water resources in jeopardy. There are also fears that it could also negatively interfere with the government's plans to become a leading scientific and astronomic destination. |
Outlook | Due to South Africa's own search for additional gas reserves, the government could decide to lift the ban placed on new applications for shale gas but given the current opposition to shale, it is likely that future operations could be disrupted by protest action, denting company reputations. |
Yesterday (14 April), Shell made public its Environmental Management Plan (EMP) for its proposed Karoo shale gas project in South Africa. The Petroleum Agency of South Africa (PASA) will evaluate the 4,000-page document as part of Shell's licence application process, with an outcome expected in August. In contrast, PASA has also accepted a 104-page objection from the "Treasure the Karoo Action Group" against Shell's proposed use of hydraulic fracturing in its search for shale gas in South Africa. The juxtaposed documents presented to the regulator of the South African upstream industry illustrate the rising tensions between local communities, politicians, and energy companies ahead of the next potential shale gale. It has long been known that there are shale gas reserves in South Africa's Karoo region, an arid area spanning the Northern, Western and Eastern Cape provinces that is home to sheep farms and unique fauna and flora. Soekor, the former regime's NOC, first identified the region's shale potential in the 1980s after failed attempts to drill for shale oil. The exploration efforts were, however, abandoned and it was not until the shale gas "revolution" hit North America that interest in the Karoo picked up.
Shell is by no means the only company that will engage in shale gas exploration, however, but has perhaps been singled out by its international prominence. Falcon Oil and Gas was an early entrant, obtaining a technical co-operation permit (TCP) covering 30,000 sq. km on the southern edge of the Karoo Basin. Sunset Energy holds a TCP for 4,600 sq. km to the west of Falcon's area, while a Sasol/Chesapeake/Statoil joint venture holds a TCP area of 88,000 sq. km. Anglo American has applied for a TCP for an application area of 50,000 sq. km. Shell, on the other hand, obtained a TCP covering the biggest area of all, namely 185,000 sq. km. A TCP is a permit that allows the holder to conduct a desktop study and acquire seismic data on the acreage, but does not include any prospecting and exploration activities. It is valid for one year only, after which the holder has exclusive rights to apply for an exploration licence for that area. Shell has already done so, in fact submitting the EMP is a key part of its exploration application and it is highly probable that the other companies holding TCPs will follow suit. The government is also planning to hold four licensing rounds before the end of 2012 which will pertain to onshore oil and gas exploration, and is highly likely to include licences for shale gas (see South Africa: 9 March 2011: South Africa to Hold Up to Four Onshore Licensing Rounds Before End of 2012).
The Environment and Shale Gas
Shale gas exploration requires a procedure called hydraulic fracturing (commonly referred to as "fracking"). The process involves pumping millions of litres of water mixed with a cocktail of chemicals into wells under high pressure. This causes the rocks to break apart, thereby releasing the trapped gas to the surface. This procedure often has to be repeated more than once. According to its application, Shell's proposed exploration will apparently entail drilling 8 boreholes in each precinct (24 in total) up to a depth of 5 km, over a three-year period, which could be extended to nine years. It appears that each well will need between 0.3 million and 6 million litres of water, which implies that Shell's exploration programme alone would require between 7.2 million and 144 million litres of water. The crux of the widespread opposition to shale gas exploration arises from the fact that the Karoo is a semi-desert area, and not only are natural water sources scarce, but the region is also prone to drought. Thus far, none of the companies have managed to come forward with a viable solution of acquiring sufficient water and how it will be transported to the exploration sites. The second issue is that the chemicals used, which could include known carcinogens, may filter through to the groundwater and underground reservoirs, contaminating a valuable resource for the region's many cattle farms. Although Shell has indicated that it will not be using harmful chemicals and that it would take precautions to prevent water contamination, recent events relating to coalbed methane extraction illustrate how chemical contamination can never be entirely prevented. For instance, Ophir Energy had to halt operations in the Surat Basin in Queensland, Australia after traces of benzene, toluene, ethylbenzene, and xylenes were found in water samples. It was later discovered to have come from the gasoline used during the extraction process (see Australia: 20 October 2010: Origin Energy Halts Fracking Operations in Australia After Discovering BTEX Chemical Traces). These environmental concerns have become widespread, not only from local communities but also from the political opposition. Consequently, the government placed a ban on all new applications for exploration rights for shale gas (see South Africa: 11 February 2011: Government Places Ban on Awarding New Exploration Rights for South African Shale Gas).
The Telescope and Shale Gas
In addition to environmental matters there is another concern, which although not often publicly discussed, is one that will provide a regulatory and legislative challenge to the South African government. South Africa has long been competing with Australia to win the bid to construct the world's most powerful astronomic radio telescope. The telescope, the Square Kilometre Array (SKA) needs to be located in a very remote area where there is little radio frequency interference, and the Karoo is one of the most suitable areas in the world due to its remoteness, low pollution levels, and clear skies. In order to ensure the current competitive advantage that the country holds over Australia, the South African government has declared 12.5 million hectares in the region as an astronomy advantage area by enacting the Astronomy Geographic Advantage Act (2007). This means that, at least theoretically, shale gas exploration in the Karoo could be illegal if it can be proven that exploration will in any way damage the area's astronomic advantage. The licence for the SKA is due to be awarded in 2012, and if shale gas exploration goes ahead it will significantly dent the country's bid, which, if awarded, could put South Africa on the scientific and astronomic world map. This is perhaps another rationale behind the government's moratorium on new shale gas exploration applications.
Outlook and Implications
Data from the International Energy Agency (IEA) indicate estimates that South Africa may have shale gas reserves of 485 tcf—the highest in Africa and the sixth highest in the world after China, the United States, Mexico and Argentina. These are merely the technically recoverable resources, however, and the exact extent of reserves has never been ascertained. It is widely claimed that the reason that Soekor abandoned its search for shale oil and gas in the Karoo was because of the limited amounts of gas discovered. This may indicate that the search for shale in South Africa may not be as successful as in the United States and elsewhere. South African only produced about 115 bcf of natural gas in 2008 and it currently a net importer of gas. The country's own indigenous gas reserves are nearing depletion and the government is therefore keen to obtain another source of gas. For this reason, the government is likely to push shale gas exploration forward. The chief executive of PASA, Mthozami Xiphu is reported to have indicated that the moratorium is only an "administrative matter", which will enable PASA to process current applications. Hence, it is very likely that the moratorium will be lifted despite strong opposition and the possible impediments to the SKA telescope bid. Nevertheless, Shell's presence in the Karoo will attract the interest of other international companies, eager to be swept along with the global shale gale. With strong opposition in place before exploration commences, companies such as Shell may find their operations in the Karoo disrupted by possible protest action and their international reputations negatively affected as a long-term consequence.