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Sasol shuns South Africa’s shales

Environmentalists hail decision as a victory

Sasol’s decision to abandon South Africa’s controversial shale-gas sector has been hailed by environmentalists as a victory. But the decision has as much to do with hard-headed economics as green issues.

The Johannesburg-based petrochemicals group said last week it withdraw from the sector, following the conclusion of a technical study and the expiry of a 12-month technical co-operation permit (TCP) on 17 November. Sasol chief financial officer Christine Ramon, said, however, that it would “continue to monitor the South African shale-gas landscape for new developments”.

The move was welcomed by pressure groups campaigning for a ban on extraction in the Karoo basin, a 90,000 square km area where most of the country’s shale-gas resources are located. Much of the Karoo is agricultural land or semi-arid wilderness, where limited water supplies could be threatened by hydraulic fracturing (fracking) – a big water consumer – and whose growing tourism industry could be stymied by the presence of drilling rigs, environmentalists contend.

“We welcome Sasol’s decision, particularly as the company appears to have taken time to listen to the people of the Karoo and acknowledge their concerns,” said Jonathan Deal, chairman of the Treasure Karoo Action Group. The group said it hoped to convince Shell and other firms that have applied for exploration rights to follow suit.

Exploration moratorium

The government has imposed a moratorium on further exploration in the Karoo – in place until at least the end of February 2012 – while it assesses the potential environmental damage from shale-gas development. Besides Sasol, Shell, Statoil, Chesapeake and others have carried out desktop studies of the Karoo’s shale-gas potential, but if they want to drill they must show they can do so without contaminating water supplies or depleting the water table. (The US Energy Information Administration estimate the country’s recoverable shale-gas resources at 485 trillion cubic feet.)

But Sasol’s decision may have more to do with its global corporate strategy and the economics of shale drilling than yielding to local protests, although, as a South African company, it is acutely aware of them.

“A couple of weeks ago, Sasol said that it would be six times more expensive to drill a shale well in the Karoo than it costs the company in Canada. The company only had a year to conduct its study and the TCP doesn't allow drilling. That means Sasol is very uncertain over its prospects in the Karoo and it would rather focus on international upstream operations. Its decision was based on pure economics,” says Marné Beukes, an Africa analyst at consultancy IHS Energy.

Ebbie Haan, managing director of Sasol Petroleum International, said in November that the cost of drilling a well in South Africa, which requires imported equipment, would be around $30 million, compared with some $5 million in the more mature North American market, where the company has interests. The likely need to import water from outside the drilling region for fracking would also add to costs, analysts note.

South Africa’s National Planning Commission (NPC) said recently that shale-gas development should be permitted if environmental-impact studies show it to be safe. But Sasol’s Haan claimed large-scale South African shale-gas projects would not be viable for another two decades. “Maybe in the future, when there is more certainty over the issues, the company will reconsider. It doesn't have to apply for an exploration permit straight away,” says IHS’s Beukes.

North American ambitions

In the meantime, Sasol’s North American ambitions are likely to remain a strong focus. It is participating in a 50:50 partnership with Talisman Energy in the development of the Farrell Creek and Cypress A shale-gas assets in British Columbia, Canada. But it also has big ambitions further downstream. The company says the rapid development of the shale-gas industry in North America, together with cheap gas have created opportunities for growth in the fuels and chemicals sectors.

This thinking has driven the company to direct more of its investment towards projects in the US and Canada. Sasol is working on plans to build an ethane cracker and derivatives complex at its Lake Charles facility in Louisiana, at a cost of up to $4.5 billion. A feasibility study is due for completion in late 2013.

The company is also investing in other African projects. In November, Sasol said it was creating a joint venture with Australia’s Origin Energy to explore for coal-bed methane (CBM) in Botswana, southern Africa. Under the deal, Sasol and Origin will jointly acquire three licences, covering an area of around 3,000 square km in central Botswana, from a local CBM operator. The deal is subject to approval from the Botswana government.

Sasol’s reluctance to pursue Karoo developments leaves the field open for others, notably Shell which said in September it was considering investing $200 million in Karoo exploration .

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