No time to waste in South Africa’s shale-gas exploration

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The US Energy Information Administration says South Africa has the eighth-largest technically recoverable shale-gas resources in the world.

It estimates these resources, located in the Karoo, to be 11-trillion cubic metres. This is huge. Mossgas was developed on the basis of only about 200-billion cubic metres.

The agency estimates that the US has technically recoverable shale-gas resources of 19-trillion cubic metres (number four in the world).

The US is by far the world leader in extracting gas and oil from shale. According to the body, this has "revolutionised US oil and natural gas production". Last year, shale provided 29% of US crude-oil production and 40% of its natural gas production.

Further development of shale-gas and oil production could help the US meet all of its energy requirements by 2030 — an astonishing turnaround for a country that was for decades the world’s largest oil importer.

Last week, the UK announced important tax concessions to encourage production of its shale-gas and oil resources, which are about one-third of the size of South Africa’s. In return, energy companies will be required to spend £100,000 for every well drilled on benefits in surrounding communities.

The Energy Information Administration warns that turning technically recoverable resources into commercially viable production depends on variations in their geological structure. Economic recoverability also depends upon the costs of extraction and the price received for natural gas.

The body warns that small local variations can make gas extraction uneconomic. It calculates that a shale-gas well costing twice as much to develop and producing only half what a typical well in the US does is unlikely to be economically viable at current prices.

So it is impossible to predict the potential value of developing South Africa’s resources until we are more certain how much can actually be extracted economically. But it requires only a relatively small proportion to be economically extractable for the effect to be very significant indeed.

The economic consultancy Econometrix estimates if just 5% (570-billion cubic metres) of South Africa’s resources are economically recoverable, this will add more than R80bn, or 3.3% a year, to gross domestic product for 25 years. This, Econometrix notes, is nearly double the total current contribution of coal mining to the economy.

Government tax revenue would increase by R35bn a year and the number of permanent jobs created could be about 300,000. If 10% or 20% of the reserves can be turned to account, the long-term economic benefits for South Africa would be enormous.

If paying reserves are big enough, South Africa could turn the gas into oil, as we do at Mossgas or Sasol. Or we could use more modest amounts of localised gas to meet South Africa’s growing electricity needs for many decades. This is important, because the huge coal-powered plants being built, Medupi and Kusile, will provide only a short breathing space. Much more new generating capacity is required to accommodate future economic growth as well as to replace old power stations whose coal reserves will soon be exhausted.

Meeting electricity needs through shale gas could have huge benefits. Natural gas has much lower levels of carbon dioxide omissions than coal. Gas could also be a very much cheaper way to meet our future electricity needs than the nuclear option, which South Africa is looking at as the alternative to coal.

Debate about the development of our shale-gas reserves and future electricity supplies is taking place in an emotional but largely uninformed fashion. We need more facts about what we could do with the gas under the Karoo before we can have a meaningful exchange about all its potential costs and benefits.

We will not know how much gas can be extracted, at what cost and how best it can be used until exploratory wells have been drilled and geologists have examined the extracted data.

Even if permission to drill exploratory wells is granted now, it will take several years to develop this data, as environmental impact assessments will be required before any exploration begins.

Permission to drill will have to be obtained from private landowners, even though the mineral rights are owned by the state. Actual production, if positive results are obtained, is thus many years away.

The longer we delay finding out the true value of the shale-gas reserves, the more likely it will be that we make uninformed and possibly very costly decisions about South Africa’s future energy needs. This will result in unnecessarily expensive electricity, as well as the inappropriate expenditure of scarce capital.

The media has focused on the fears about fracking. There may be legitimate environmental concerns about gas extraction in the Karoo and these must be addressed before production is permitted. But the environmental risks associated with preliminary exploration are relatively minor and can easily be managed by existing regulation.

Let us at least reach a point where we know what it is we are debating. The sooner the geologists get drilling, the better.


Keeton is with the economics department at Rhodes University.

Source: Business Day