Ten years on, shale gas is slated as a commercial failure in the US, says Ray Hartley
Accounting tricks are used to make the case for abundant and cheap shale gas, but these are not grounded in fundamentals
From page 2 TWO weeks before he died in March, the economist Tony Twine made public the results of his research into “economic considerations surrounding potential shale gas resources in the southern Karoo of South Africa”. His heavyweight report lent an air of legitimacy to the claim that “fracking” would change the game for South Africa by solving its energy problems.
Picture: RUVAN BOSHOFFPIPE DREAM: Government’s plans to explore for natural gas deposits in the Karoo might not translate to jobs for locals
Until then, the idea that gas — and the Karoo is thought to have the world’s fifth-largest reserve at 500 trillion cubic feet — could be liberated from shale deep below the grazing sheep through “hydraulic fracturing” had been a debate between farmers and conservationists wanting to preserve the land, and energy companies wanting to exploit it.
Twine developed three scenarios predicated on all, half or none of the gas being exported. Even if all the gas were to be exported, the model predicted as many as 161 943 jobs would be created.
But the statistic that hit the sweet spot was the prediction that as many as 854 757 jobs would be created if the gas was used to provide cheap electricity and power to industry and homes in South Africa.
The fact that this was the most optimistic scenario of six presented; that it would come about only if economic growth hit levels not seen in democratic South Africa; and that the research making this projection was commissioned by Shell was soon lost. Contrarian commentators, government officials and energy bulls quickly turned Twine’s most improbable outlying scenario into the mainstream consensus.
From then on, the discussion about shale gas extraction would begin with phrases such as “We’re talking about 800 000 jobs here”, or “Look at what shale has done for the US, which is no longer dependent on foreign oil”.
By the time the Treasure Karoo Action Group published a systematic critique of Twine’s paper in August, the horse had bolted. The organisation, representing those opposed to shale gas extraction, commissioned a response to Twine’s paper by De Wit Sustainable Options. It showed that the Econometrix report had been very careful to explain how uncertain its conclusions were.
Econometrix had said “. . . estimates for gross fixed capital formation relating to the project and downstream activities generated or induced by the project must be viewed as extremely tenuous”.
De Wit concluded: “The model is not designed for and cannot give answers on key uncertainties ... and the financial costs of possible future environmental liabilities to the state.”
But by then the horse was in full gallop.
It is not difficult to see how fracking attained this “magic bullet” status with the government and business. The two decades since the fall of apartheid have been characterised by “jobless growth”. More people have been employed, but not enough to absorb new entrants to the labour market. Politicians are increasingly wary of the growing pool of disillusioned youths who are a recruiting ground for populist politicians such as Julius Malema and his Economic Freedom Front.
The rapid expansion of social grants, now distributed to some 15.5 million people, has kept this rebellion in check. But this sort of spending cannot be expanded forever — especially if the economy continues to stagger forward at a growth rate of only 2%.
The government has decided that it is going to bet on shale gas and is preparing exploration to confirm the extent of deposits in the Karoo.
It is a solution that chimes nicely with its statist vision of heavy industry working closely with the state to create “decent jobs” as the answer to unemployment.
But is fracking the magic bullet it has been made out to be? Even as South Africa becomes bullish about shale extraction, there is growing criticism of its commercial viability in the US.
At the annual meeting of the Geological Society of America — a 125-year-old organisation with a credible record — in Denver, Colorado, this week, the validity of claims about shale gas were questioned.
Among the presenters was Arthur Berman of Labyrinth Consulting Services, who said in his abstract: “After 10 years of production, shale gas in the United States is a commercial failure. This is because decline rates are high, per-well reserves are lower than expected and costs are higher.”
The financial results of leading US shale gas company Chesapeake Energy Corporation “calls the shale gas business model into serious question”, said Berman.
Instead of drilling holes, capping them and sitting back while the gas flowed well into the future, shale extraction had morphed into a “just-in-time phenomenon, meaning that the drilling can never stop or production will plummet”.
Berman’s abstract concluded: “When viewed objectively, it is impossible to deny that shale gas has been a commercial failure in the US. Accounting tricks and unrealistic modelling assumptions are commonly used to make the case for abundant and cheap shale gas for decades, but these are not grounded in fundamentals.”
Accounting tricks? Unrealistic modelling assumptions? That would never happen in South Africa, would it?
The real profits from fracking in the US appear to be coming from releasing “tight oil”, not the dry gas that is believed to lie in the Karoo shale.
Of course, if the price of shale gas rises rapidly, US production will cease to be a “commercial failure”— but then shale gas would not be the cheap energy source it has been touted as.
Shell itself has had to write down $2.2-billion (about R20-billion) because of the poor performance of its shale operations in the US.
According to Reuters, CEO Peter Voser said on the sidelines of the World Energy Congress in August: “We didn’t get the results which we were expecting to get in the shorter term and we will therefore have to develop this a little bit more before we can take benefits from it.” He added: “It was clearly not as successful as thought.”
There are clear signals that shale gas exploitation in South Africa might also not be “as successful as thought”. Sasol has been quoted as saying that the cost of drilling a well in South Africa may be six times as much as that of drilling one in North America.
Add to this the likelihood that the state will insist on local partnerships — quite probably with wellconnected consortiums of local businessmen — and the costs go up. Then there is the likelihood that gas prices will be state-regulated. The minister of mineral and energy affairs has already said coal prices need to be state-controlled.
And, although such drilling operations might create local jobs, it is likely that many of the top-level jobs will be imported from countries where there is experience with drilling, such as the US and Canada.
Among the arguments for shale drilling is that gas could replace coal as a cleaner source of energy for electrical power generation. But such arguments seldom discuss the impact that this would have on the local coal-mining industry, where tens of thousands of miners and others indirectly benefiting from the industry could find themselves out of work. Stated crudely, the Karoo might be flooded with hi-tech foreign workers as South Africa loses local jobs in Mpumalanga.
Decisions around fracking will set in motion months — possibly years — of conflict between the government, energy companies and those who own the land on which the reserves are located.
Draft regulations for exploration have been issued and the public has until November 14 to respond. After that, the minister will have to decide whether to accept or ignore the large volume of arguments against fracking that are likely to be aired. Parliament will have to discuss them and, if the processes are completed, energy companies will be issued with licences to explore probably only some time next year.
Then begins a new and complicated process as they identify the farms on which they would like to explore and inform the farmers in writing.
Activists such as the Treasure Karoo Action Group’s Jonathan Deal are preparing to fight exploration all the way. “There’s going to be a large volume of public comments. It’s not going to be a short or simple exercise.”
Energy companies are likely to find themselves stonewalled by Karoo farmers. “The farmers have been advised not to negotiate, but to hand it to the lawyers,” said Deal.
By the time the magic bullet is fired, it may be with a whimper, rather than a bang.
- 3 Nov 2013
- Sunday Times
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