Karoo Shale Gas Economics: Q & A with Saliem Fakir, Part I

Saliem Fakir of WWF-South Africa recent authored a detailed study on shale gas economics in South Africa. It found that the financial side of fracking looks rather discouraging.

Julienne du Toit interviewed Fakir on the background to the study.

Pictures by Chris Marais

JdT: What prompted this study?

SALIEM FAKIR: Largely, curiosity because we knew that many people talking about shale-gas didn’t have a clue how the economics works.

We wanted to take a very scientific and balanced approach to the issue.

We wanted the study to be completely dispassionate. We walked an interesting walk and talk.

It took us seven months to complete the work. I personally presented our early findings, as a set of slides, to a variety of people from government, academics, people in the industry and the investment world.

An audience of close to two hundred people had a preview of the study before it was written up.

We received a lot of useful comments. This improved the rigour of the analysis.

Then I wrote the paper up. It was reviewed by a variety of people. I even went to the extent of having it reviewed by industry experts.

That is why I am confident we have done a robust piece and of course we may not get everything right in the first round but I believe it will take the shale-gas debate to another level. It will open up the economics discussion and make the economics more transparent.

We felt such information will not come from the industry. They would have natural inclination to keep the asymmetry as they have an inherent interest to lobby for subsidies, tax rebates and lax environmental rules.

In the US unfortunately, competition between different states to drive investment in shale-plays meant that environmental issues were pushed to the margins.

There is no Federal law at the moment that sets minimum standards. Attempts at creating a federal legal framework for fracking is being resisted heavily by the oil and gas industry.

The US legislative system at the federal level is also complicated by how Congress works and which party dominates the House and Senate.

When you start getting into the complexity of fracking you begin to get a better sense of how tight the economics is because the economics relies on many things coming together.

Dealing with environmental costs would have added to the drilling cost burden.

So, in a way by having lax environmental rules or the fact there is not sufficient enforcement capability, means that the oil and gas industry can shift this burden onto society.

Inadvertently, we hand them over a subsidy in which they promise to pay us back.

But this rarely happens. We need to avoid this problem here because of the nature of the Karoo environment. And, if they agreed to high standards we must hold them to it.

JdT: Why is a ‘conservation organisation’ like WWF-SA writing about economics?

SALIEM FAKIR: WWF South Africa is a sorely misunderstood organisation. Most think we only care about pandas and wildlife. That is a side we do and we will continue to do.

I think we are responsible for not communicating enough about what our organisation does so as to change the caricatured view of WWF.

Most people do not know that WWF-SA has a specialised unit – a sort of internal think-tank – that is now geared to do a lot more economic, finance and other type of analytical work. There are different ways to defend or ensure environmental interests are attended too.

You can take the human rights approach and so go for litigation and street activism, you can play a defensive game by lobbying for more areas to be protected from development, you can take a compliance approach by setting proper environmental standards and rules for mining or other types of economic activity.

Or you can take the long-term view that the environment is part of the economy in three ways:

• It is a resource used by society for economic activity so we have to use it wisely;
• Certain economic activities are damaging to the environment and people and so we need laws and rules that ensure this damage does not cause irreparable harm;
• And then finally dealing with the problems of the environment itself generates investment and economic activity.

In any case, our new unit called the Policy and Futures Unit, which I also head up, is concerned with how we can build more positive economies in which environmental values are not on the margins of economic policy but central to the policy debates.

For this we have to engage in new models and ways of thinking. There is a lot of new work in the world going on in building an alternative economic system.

We decided we need to work on a similar challenge for the South African context.

A lot of this goes under the banner of ‘transition economies’. It can be vague and blue sky stuff. So, you have to work on real economies and real cases.

So, our economic work is both detailed and granular analysis like we did for the shale-gas study but also big picture stuff.

It will take us a while to build this capability but we will get there and we hope it will strengthen the environment movement and also economic analysis will enrich the debate in South Africa.

A great deal of our work is thinking hard about the future.

I have to admit we want this to be based on a high level of realism and that is why our analytics has to be good. We want to move away from making statements that cannot be defended.

This does not only do damage to our organization but also damage to the environmental cause.

JdT: Why did you feel this issue of shale gas economics need to be examined?

SALIEM FAKIR: Frankly, it is because we saw how the economics has been misunderstood or simply abused to give a false impression of the reality of the economics of shale-gas.

There have been loose comments made by industry people, academics and some journalists that the gas will be cheap and it will lead to economic development.

Comments like it will be a ‘game-changer’, ‘gas will be cheap’, or allowing shale-gas exploitation will lead to jobs and poverty reduction.

This is weapon of rhetoric used against environmentalists or even people who want to use the resource but with proper governance. You have to take the time and investigate these claims.

We decided to go deep to then be able to see what this means in terms of the big picture.

We are saying that because the economics for shale-gas extraction is often difficult and tight in countries where it has not been done before we need to understand what we are getting ourselves into.

This is why we tried to look at a base economic model approach. This what the government should have done in the first place.

We wanted to understand the drilling side. Once you get a picture of that you can see where gas prices are likely to go.

You can build some sense, through modelling work, as what this means in terms of GDP, labour growth, investment flow, taxes, and how much of the cash-flow (or proceeds) from the sale of gas can be used to cover short-term and long-term environmental issues that need to be mitigated.

One of the things we are interested in is a financial model for the provisions that need to be set aside for reclamation of shale-gas sites if the government goes ahead with fracking.

This has been one of the biggest problems in the US with abandoned wells.

In the report we discuss this a bit but it needs more work.

Either there are not sufficient funds in the trust or escrow accounts and then the state or federal government has to step in to top-up or put out funds to repair damaged wells or failing wells.

By then the industry does not want to take responsibility for this.

You would want to push for full provisions within the first three years of the shale-gas well’s life.

And, if you see the type of analysis we did you begin to see that you do not want to leave this for after three years or five years.

My view is that we really need to make sure that the best standards and technologies are used to deal with the fracking water and the design of the reclamation funds and how this is financed as to be core part of the operational cost of the industry.

In turn these reclamation costs will become a source of jobs and economic activity. So, the government must not shoot itself in the foot by giving the industry too much leeway in this.

In any case, this is all well and good. We simply do not know if fracking will be commercially viable in South Africa.

We are sceptical. We think water costs alone will add to the cost burden.

You can only lower that cost burden with high gas prices. We think it will throw the economics out.

The geology could also play a role. We are doing a separate study on water.

I think this will be a pioneering piece of work once we have done it. This work and the current study will be reference pieces and will be even used by the industry.

Even though the industry may not want to admit they are using an environmental organisation’s work.

JdT: If you had to distil down the five most important points of your study, what would they be?

SALIEM FAKIR: There are several things.

• It will take a long time before we see fracking happening in South Africa. It could well happen faster in off-shore conventional wells than on-shore. One has to look at this more closely as more and more fracking licenses in the US are being given to off-shore drilling;

• I think the geology of South Africa needs to be understood better for there be a chance that the economics will work;

• Shale-gas requires an almost seamless interaction between the application of the technology, knowledge of the geology, ability to have secured large tracts of land that allow for unhindered drilling at pace, the right gas price and being able to frack without compromising the environment and the quality of life of people;

• Our sense is that shale-gas may take-off if there are some significant new technological breakthroughs that allow gas recovery rates to increase substantively as they are much lower than gas recovery rates for conventional wells. If, you can crack that then a marginal economics can be turned on its head;

• There is no direct correlation between a vast resource and economic development, especially more jobs and alleviation of poverty. It all depends on your political-economy, governance system and the type of arrangement one makes with oil and gas companies. If, these are weak then economic dividend for the broader populace will also be compromised.

JdT: What were the most useful references for your study?

SALIEM FAKIR: I read hundreds of documents and talked to many people. I was very privileged to have conversations with people who gave of their knowledge freely.

The thing with shale-gas economics is that you really have to grapple with where the technology is, understand the core characteristics of the geology before you can draw this understanding into the well-head economics which we are making an attempt to construct.

For me it was like solving a puzzle or breaking a code.

There is a lot of fresh academic work going on as the commercial growth of shale-gas is still young.

It’s only a decade or so old. I read many student thesis and academic papers. I attended a lot of workshops/conferences both in academia and the industry.

You have to have some understanding of the oil and gas industry. I am still learning but I feel a lot more knowledgeable now than I was going back three years ago when I started dealing with fracking.

To be brutally honest fracking is not our core work although it may seem like it.

In a way it has allowed us also not to be materially invested in the issue. We could stand at a bit of distance and study it in more detail.

Cleaner energy sources, like renewables, is part of our core work. The food, water, and energy nexus work remains part of our core work.

I had to deal with fracking in my spare time. We do not raise any special funds to undertake work in this area. In fact you can say it’s a non-funded mandate.

But I see a bigger picture. It has enabled us to understand the broader economic work we need to do.

And, because that work involves the mining or resources sector getting into the fracking debate is giving us some grounding in thinking through a vision from resource dependence and intensity to a different type of economic model or system.

A lot of people just think that digging holes is the end. This is not very good long-term thinking and planning. You have ask what happens when all the gold, platinum or shale-gas is gone.

The problem of abundance is that it leaves these questions for too late.

People simply do not spend time thinking of the future when there is abundance. In economic literature it’s called ‘tunnelling’.

In many ways it’s a dereliction of governance responsibility.

Governance is not just about accountability but taking proper responsibility for the future when you have been given such power by your voters.

We need to build or think about an economy as if no minerals wealth existed. This opens one’s mind to other possibilities. It takes you out of tunnel vision.

It is important to do proper research. You should take the time. And, where there is no evidence for certain claims do not insert insinuation or false evidence this can be damaging.

We should rather admit we do not know. We must ask for such evidence to be gathered or researched to ensure informed decisions.

• This is the first of a two-part interview. The second part of the interview with Saliem Fakir can be found here.
• Fakir’s full report, called Framework to Assess the Economic Reality of Shale Gas in South Africa, can be found here.
• Saliem Fakir is head of WWF-SA’s Living Planet Unit. He is also a regular contributor to the South African Civil Society Information Service. Saliem Fakir’s profile and other contributions to SACSIS can be found here.