The Future of Shale Gas in South Africa

A fracking pad at night. Picture by Jonathan Deal.

A fracking pad at night. Picture by Jonathan Deal.

By Saliem Fakir

The local hype over shale-gas continues as the ANC’s National Executive Committee recently announced that shale-gas is a “game-changer” and must be exploited for the benefit of the country.

How much gas there truly is below the Karoo’s surface is anybody’s guess. The original U.S. estimate of the South African resource was put at 480 trillion cubic feet (TCF). Separate resource estimates by the Petroleum Agency of South Africa and the Council for Geosciences put estimates much lower at anywhere between 40-72 TCF – and this is only for the resource.

We don’t know enough to have a view on the final economic reserve. Water could be a pivotal factor in Karoo shale-gas extraction, possibly throwing the economics out.

Water could be a pivotal factor in Karoo shalw gas extraction.

Water could be a pivotal factor in Karoo shalw gas extraction.

Fracking Science and Economics

This has not tamed the propaganda from both sides. Nevertheless, it is science and hard-nosed economics that will ultimately determine what is viable.

Shale-gas is not just a mineral product; it is also a good that will come up against the tension of whether it is best privatised or its rewards socialised as much as possible. The real economic viability and benefit of the resource will rest on settling this tension.

Unfortunately, as current debates in the mining sector go, the economics of shale-gas will undoubtedly fall prey to the same resource nationalism dynamics as other natural resources, i.e., pursuing fracking simply because it is assumed that there is a compelling story for the future, beyond the current hopeless narrative soiling the promise of our mining sector, that persuades us that private benefit is always the same as public benefit.

Shale Gas Export?

Two immediate issues highlight a serious concern about the real motives driving shale gas exploration in South Africa. Firstly, there is the absence of a proper gas infrastructure network in South Africa. Secondly, and related to the first problem, gas is not used pervasively in the country.

This situation is likely to become an incentive for exporting gas out of the country. Shell is already gearing itself for this eventuality, as it is developing new technology, such as a mobile liquefaction plant, that can be placed directly at shale-gas boreholes.

Once the gas is extracted and liquefied, it will be quickly transported out of the Karoo and shipped out of the country.

This scenario is the least beneficial for South Africa.

So where do we turn to learn more about the benefits of shale-gas exploration for South Africa? The U.S. is the leading example, but is it replicable and is their model appropriate for South Africa?

A small frack pad in America. Picture courtesy Jonathan Deal.

A small frack pad in America. Picture courtesy Jonathan Deal.

The Invention of Horizontal Fracking

The late George Mitchell, one of the early pioneers of hydraulic fracking, succeeded in productively extracting gas from impermeable shale-rock in the nick of time, as his company, Mitchell Energy, desperately needed new sources of gas and oil to keep going in the 1990s.

Gas and oil is stored in difficult to reach ‘source’ rock that has to be fractured artificially to get gas and oil to gush to the surface. After many years of trial and error, Mitchell, a Greek immigrant, got the right technology mix – combined horizontal and vertical drilling with a mixture of chemicals and water – to remove high rates of gas from deep within the earth’s bosom.

Mitchell’s desperation was a powerful force for innovation. Today, the U.S. has moved from producing 11% of gas from shale in 2008 to more than 20% in 2010 and if current assumptions still hold, may approach 50% by 2035.

It was this technological revolution in the oil and gas industry combined with unique above ground U.S. characteristics that produced the current boom from unconventional sources since hydraulic fracking was first commercialised in 2004.

Since then, thousands upon thousands of fracking wells have been drilled across close to 48 shale gas and oil fields.

Fracking Crash?

Ironically, these new technological innovations will facilitate the expansion of conventional sources of oil and gas from existing wells that have been economically unrecoverable, keeping the fossil fuel economy going for a few more decades.

America’s drilling pace is driven primarily by firms started by maverick, never-say-die entrepreneurs, eager to risk all in the new ‘gold rush’. Many of these companies, like Chesapeake, are willing to bet everything on the continuous flow of gas and oil.

They use their friends on Wall Street to borrow to the hilt and come up with financialised products like volumetric production payments (VPPs) or forward contracts to advance payments for the promise that they can deliver the hydrocarbon product at some future date.

But some analysts are sceptical that this gold rush will last without a major crash and restructuring of the U.S. industry. In some cases the rate of capital and operational expenditure far exceeds the amount of revenue generated.

Wastewater pond, frack pad, US

Where will all the toxic wastewater go?

Replicating America’s Shale Boom

There are a few reasons why the U.S. experience is unlikely to be repeated in other parts of the world, including here in South Africa.

One of the key reasons the American model won’t work here is the lack of an economic framework to support shale-gas exploration.

A few pointers can be drawn from the recent comments and work of Leonard Maugeri who has written about the economic infrastructure of the American oil and gas industry. Maugeri is a proponent of the oil and gas industry and a familiar global expert.

Firstly, the U.S. economy was built on oil and gas. Think of Rockefeller and you slowly begin to see the relevance of railroads, pipelines and the first T-model automobile that Ford built going back more than a hundred years. All of these were supported by the discovery of rich oil fields in the U.S.

As a result, today’s frackers had something to build on, including industry knowledge, technology, vast amounts of drilling logs, a financial sector that understands the business and a dense network of oil and gas pipelines that supply energy to major centres within America, mainly in the North East and South.

The already-paid costs of old investments – soft and hard – allowed a rapid revival of their oil and gas sector. This ‘plug-and-play’ characteristic has been the most important factor in America’s ability to scale gas and oil production from unconventional sources.

Shale gas concessions in the Karoo Basin.

Shale gas concessions in the Karoo Basin.

Shale Gas Economics, South Africa

South Africa does not have this advantage and this does influence the economics of shale gas exploration, for a start.

The key to the success of U.S. shale gas drilling is that the pace of drilling is done rapidly with quick turn-around periods. We are talking days as opposed to months.

There is a good reason for this. If gas prices are low, overall production rates can only be kept at high levels if companies drill as many wells as they can.

Shale-gas wells on an individual basis have high decline rates – as much as 80% or more within the first two years. Companies find themselves on a rapid death treadmill if they are just drilling for gas.

With low gas prices as well as high capital expenditure and debt, companies can do nothing but drill as much as they can, creating paradoxical overproduction with gas prices too low compared to production costs.

In the end, the U.S. model may not be appropriate for South Africa. Even their cheap gas scenario, largely due to the nature of their gas market, is unlikely to last in forthcoming decades as cheap gas is already inhibiting further exploration and development of dry gas fields.

The Karoo, with deep shale, faulting and dolerite sills and dykes, is not geographically hospitable to fracking.

The Karoo, riddled with dolerite sills and dykes, deep shale and minimal water, is not geographically hospitable to fracking.

Complex Karoo Geology

Geography and depth also matter. The most productive U.S. wells are at depths that are easy to drill and in hospitable terrain. The deeper you have to dig and the rougher the terrain, like Chinese shale-gas, the costlier it is to extract the gas.

Geographic hospitality includes generous availability of water – something that our Karoo simply does not have in any form of economical abundance.

Poland’s recent foray into shale-gas also turned out to be a damp squib. Blame was put on their government for wanting too many royalties. But in truth, this was not the foremost reason fracking was abandoned.

The real reason behind the decision to withdraw is that Poland’s wells proved not to be as economical viable as originally anticipated.

The sheer weight of the economics – because it is going to be tough for South Africa – will merely force us to leave the gas in the ground, which would be preferable given the ecological sensitivity of the Karoo and the lack of any evident social benefits for South Africans other than lots of talk.

Alternatively, selfish interests could push us towards extraction through false promises and taxpayers might be persuaded to socialise the cost and privatise the benefits.

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4 Responses to The Future of Shale Gas in South Africa

  1. Taxpayer1301 June 21, 2014 at 2:34 am #

    This is a sound analysis with its emphasis on the ponzi-scheme or house-of-cards nature of the American approach to fracking. Fracking in America is not ecomonically viable or sustainable. It’s being propped up by Wall Street and gas-oil industry-bought politicians. What the article does not mention and what makes fracking worse is that like all industrialized mineral extraction, it is devestating to local infrastructure, environments, and residential property values. And, like all mineral extraction efforts, there is a “bust” after the extractors leave when the local enviornmental and economic devestation is left to the locals to clean up and/or live with. Last, the life cycle of methane extraction and buring is produces more heat-trapping, global warming green house gas (methane not carbon dioxide) than coal; so fracking’s impact on climate change is monstrous. Bottom line: leave the frack gas in the ground.

  2. Caroline Hurry June 26, 2014 at 8:01 am #

    Good article. The answer is simple: Leave our Karoo the frack alone! This site makes things more understandable http://www.dangersoffracking.com/

    • ron capes December 22, 2015 at 6:11 pm #

      The answer is simple, there will be no fracking in the Karoo or anywhere else in South Africa.It will be stopped, violently if necessary. To all oil companies:FRACK OFF! ! Take your financial boondoggle elsewhere.WE WILL NOT HAVE IT!

  3. Gavin December 19, 2014 at 1:37 pm #

    Until the drilling results are in from the exploration phase all this is mere speculation. It’s possible that the business case for extracting gas in the Karoo fails. What we need now is for exploration to be licensed so we know what is recoverable – if anything – and at what cost. It would be irresponsible to simply let a potential resource of this size lie underground without further investigation.

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