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South Africa inches towards shale exploration in the Karoo basin

Large reserves in the Karoo basin are bringing upstream interest, but many barriers stand in the way of production

The South African government expects to issue exploration permits for shale-gas reserves in the first quarter of 2014 once regulations on exploration and hydraulic fracturing are approved.

The government has been enthusiastic about the prospects of shale gas despite the obstacles to exploring and exploiting the remote and environmentally sensitive Karoo Basin.

In October 2013, Susan Shabangu, the minister for mineral resources, signalled South Africa’s determination to pursue exploration of its unconventional resource. “Not only does the potential of shale-gas exploration and exploitation provide an opportunity for us to begin production of our own fuel, but it also marks the beginning of the re-industrialisation of the South African economy,” she said in a statement.

“By embarking on this process presented by hydraulic fracturing for the production of shale gas, we bring the country a step closer to the achievement of our objectives.”

According to the US’ Energy Information Administration, South Africa has 485 trillion cubic feet (cf) of technically recoverable shale-gas resources, mostly in the Karoo basin, the fifth largest resource so far identified.

Making assumptions

The semi-arid Karoo basin is a wilderness with a wide range of rare and endangered animals including the mountain zebra and the riverine rabbit. The Karoo has few roads, pipelines and services and covers a vast area far from towns and supply chains. Exploitation of South African shale will require both ingenuity and massive investment in infrastructure.

But the rewards could be considerable. A 2012 study commissioned by Shell estimated that the development of 10% of the estimated shale resources could boost the economy by 200bn rand ($19.5bn) per year and create 700,000 jobs.

South Africa is the most developed economy in Africa but suffers unemployment of around 25%. With the legacy of Apartheid to deal with, the government has also tried to ensure that 25% of the energy sector is in the hands of black-owned businesses.

The South African economy relies heavily on coal, which accounts for about two-thirds of energy supply. South Africa has the 25th largest economy in the world but it is the 12th worst emitter of CO2.

Greater use of gas could help address environmental concerns. In 2011, South Africa consumed 162bn cubic feet (cf) of natural gas, but produced just 45bn cf, with the remainder piped in from Mozambique.

According to Wood Mackenzie, an energy consultancy, the challenges facing developers are water, the untouched environment, the absence of infrastructure and massive distances to supply chain and existing infrastructure.

South Africa has average rainfall of 50 milimetres per year. Very little of this falls in the Karoo, which means “thirsty land” in the local language Khoisan.

Drillers could use saline wells near the shale formations, but doing so would increase the wear and tear on equipment. If water could be collected, the heat of the Karoo could help the treatment of any liquid produced from fracking. Other advantages include the shallow depth of the Karoo shale at around 8,000 ft, similar to the US Barnett Shale.

However much of the analysis of the potential of the Karoo has been desk-based, relying on untested assumptions – the only research the government has so far permitted. Wood MacKenzie analyst Lynva Forrest estimated a break-even price of $10 per million cf if many of the obstacles can be overcome. “There is a massive need of infrastructure. The volcanics are a big unknown and this could make it difficult to map the shale and work out where the sweet spot is. All these things make the play very challenging and will drive up costs,” she said.

Shell has applied for an exploration licence covering more than 95,000 square kilometres of the Karoo basin. Other applicants include Falcon Gas and Oil, Chevron and Bundu Gas and Oil. Shell in South Africa has been at pains to say it will practise “responsible hydraulic fracturing (fracking)” and will not compete for water with the people of the arid Karoo.

It has promised to conduct specialist studies, water tests and seismic testing and does not expect to see exploitation for nine years.

Forrest said that she did not expect to see any production for at least ten years, which would allow for further development of waterless fracking technology. This could could reduce some domestic opposition to fracking.

Fracking using propane gel is being carried out in North America and could prove an alternative to water in the future.

Possibly the biggest factor hindering exploitation of the Karoo is the opportunities provided by deep-water offshore exploration off the coast of South Africa.

Total, Sasol, ExxonMobil, BHP Billiton, Cairn India, Silverwave, PetroSA, Andarko and Shell have all been granted exploration licences. For investors, offshore discoveries could prove to be more attractive than disturbing the Karoo basin for a few years at least. 

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