In its World Energy Outlook 2011, the International Energy Agency (IEA) stated that global proven conventional natural gas reserves are equivalent to more than 120 years of current global consumption. This estimation did not include the large potential reserves of unconventional gas such as shale gas, but unconventional gas could play a key role in boosting the prominence of gas in the global energy mix well into the future. Nowhere is this truer than in South Africa, where gas currently constitute a mere 3% of the national energy mix. Conventional gas reserves (proven and probable) in this African economic powerhouse were only 3.7 tcf at the end of 2011.

Gas in South Africa: Need it, don't have it.

A key energy policy objective of the South African government is to diversify its energy mix away from coal which constitutes 85% of the current mix. Gas will play a key role in the future South African economy, with demand coming from electricity generation and gas-to-liquids projects. However, obtaining a long-term and reliable gas supply is giving government officials a headache. Offshore gas reserves are dwindling, and the national oil company PetroSA lacks the financial backing to explore and produce potential deepwater conventional reserves. The lack of sufficient, economically viable conventional reserves is deterring private investors from giving the underdeveloped gas industry a much-needed capital injection, and serves to keep gas consumption artificially low.

The Karoo to the rescue?

The Karoo region is well-known in South Africa as the best place for star-gazing as it is so remote and sparsely populated (there are more sheep than people). It is arid and huge, measuring 400,000 square kilometers. However, the Karoo has begun to attract more than star-gazers and sheep-shearers, and exploration companies have been more recent visitors. Oil explorers found small gas deposits in the 1970s and the US-based Energy Information Agency (EIA) conducted a study in 2011 on world shale reserves and concluded that there could be as much as 1,834 tcf risked gas in place and 485 tcf recoverable reserves of shale gas in the Karoo Basin. Inevitably, commercially recoverable volumes would likely be a fraction of the technical recoverable volume. Nonetheless potential on this scale is significant relative to other potential shale gas bearing regions globally.

The true extent, and commercial viability, of shale reserves can only be proven through exploratory drilling. No recent drilling has occurred, with explorers unable to actually drill due to licensing requirements. The South African licensing regime for upstream exploration requires a technical cooperation permit (TCP) first that only allows for a desktop study. Then a reconnaissance permit is required that only allows surveying but no drilling. Shell, Statoil, Chesapeake, and Sasol were amongst the companies that held TCPs, which are valid for only one year.

As elsewhere in the world, shale gas exploration in the Karoo has been controversial. The process of exploring for shale gas often requires "fracking"- pumping millions of litres of water mixed with chemical and sand. Unconventional gas exploration evoked strong opposition in Australia due to concerns over the potential impact of fracking on aquifers, and it did not take long for rural communities and campaign groups in South Africa to follow suit. Protests abounded, and Shell unwittingly found itself the main bête noir, probably because it was the most visible with its global brand. The government responded with a moratorium that was in place for over a year until September 2012, delaying any planned exploration. Therefore, it will be some time before it can be established if an African shale gale is going to blow from the Karoo.

This map shows the Karoo Basin's size and remoteness from gas pipelines and GTL plants. Source: IHS EDIN.

Government and regulations.

Even if the Karoo has viable shale reserves and testing shows that well productivity is favourable, there are several challenges. First there is the expense of gas production in a remote area far removed from existing transport infrastructure. Sasol estimates that drilling a well in the Karoo would cost the company six times as much as it currently does at the firm's Canadian shale license. Shell stated that production is at least a decade away even if commercial reserves are found. Probably the biggest challenge is the regulatory environment: outdated, vague and unnecessarily bureaucratic. With an aim to reduce the bureaucratic delays, the Department of Energy in Pretoria is currently reviewing the 2001 Gas Act. The review is meant to address these concerns and prepare the regulatory framework to reflect the changes in the gas market, not only the possibility of shale gas but also the prospect of liquefied natural gas imports from Mozambique. While there are some positives, such as potentially making land access easier in the future by giving the government more power to expropriate land that is not easily accessible due to landowner objections, the proposals will only add more bureaucratic pressure on exploration companies. The government body that deals with license applications, the Petroleum Agency of South Africa, will be disbanded under current proposals, and its licensing functions awarded to the regional powers of the Department of Mineral Resources. The shale reserves spread across three provinces, and companies will have to submit license applications and post-drilling reports to three regional authorities. This will result in unnecessary duplication. The next South African shale gas blog post will look at the proposed amendments in more depth.

Posted 4 June 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.