The discovery of shale formations believed to contain natural gas in the Karoo Basin was hailed as a "game changer for our economy” by President Zuma in his State of the Nation address earlier this year.[i] Environmental groups and concerned citizens, however, remain sceptical of the impact that fracking will have on the fragile Karoo ecosystem and water supply.

Since the discovery of natural gas in the Karoo Basin, the South African Government has implemented a number of moratoria on hydraulic fracturing (commonly known as "fracking”) to allow further study of its possible environmental impacts. Fracking is a process whereby a cocktail of sand, chemicals and water is pumped into porous rock (typically shale rock formations) at high pressure to create fractures that stimulate the flow of natural gas and oil.[ii] In 2013 the Department of Mineral Resources published draft regulations to cover the exploration and exploitation of shale gas resources. The regulations required the disclosure of chemicals used in the fracking process to meet the standards set by the self-regulating American Petroleum Institute.

During October 2014 the Petroleum Agency of South Africa (PASA) (the oil and gas exploration regulator) resumed processing applications received before the initial moratorium in 2011. PASA, however, emphasised that the current moratorium on new applications remained in place and no exploration fracking would be allowed before the regulations were published (currently expected at the end of January 2015). Given the lead times between receiving the rights to proceed with exploration activities and the activities actually starting, fracking is thus not expected to start before the middle of 2016. [iii] [iv]

The current discourse surrounding the possible exploitation of shale gas from the Karoo Basin has been particularly partisan, with stakeholders either emphasising its likely benefits (government and energy sector insiders) or costs (environmental groups and concerned citizens). While there have been attempts to quantify the benefits - see for instance the 2012 Shell-funded report by Econometrix – a rigorous, independent report, that adequately considers the relative size of both the costs and benefits of fracking in the Karoo Basin, is lacking.[v]

In fact, as this article aims to show, there is uncertainty surrounding the pure economic benefits that fracking the Karoo may bring. Two factors in particular do not seem to have received sufficient attention, namely the size of the shale gas resource and the impact of the expected greater integration of the South African market for natural gas with international and regional markets.

The first key factor is the true size of gas reserves in the Karoo. While government has been grappling with shale gas policy and regulations, questions have been raised regarding the size of this resource. In a 2011 report titled World Shale Gas Resources, the US Energy Information Administration (EIA) estimated the technically recoverable gas resources at 485 trillion cubic feet (Tcf). A ‘technically recoverable resource’ is one that producers can theoretically extract using current technology, without consideration of the cost of production. A ‘proven resource’, however, is a resource where there is a high degree of certainty that the resource can be recovered using current technologies AND under current political and economic (demand, supply and pricing) conditions. Resources typically only become proven after a number of exploration wells have been drilled to validate assumptions about the geology and size of the resource, something which has not yet happened in the Karoo.

In June 2013 the EIA revised their estimate of the technically recoverable resource down to 390 Tcf citing "geological intrusions that make seismic imaging challenging.”[vi] Recently, PASA indicated that the technically recoverable gas volume is likely to be around 40 Tcf, while the Department of Mineral Resources mentioned that conservative estimate of the size of the resource is between 18 Tcf and 70 Tcf. [vii][viii]

The second key factor is the evolution of regional and global gas markets. The global natural gas market is expected to expand significantly in the medium to long term. The 2014 International Energy Agency (IEA) Medium- Term Gas Market Report estimates that global gas production will increase by 23% over the medium term.[ix] The United States (US), which in 2012 had proven natural gas[x] reserves of roughly 300 Tcf[xi], has been the shale gas success story of the last decade. US shale gas production increased eight fold from a 2007 base of 1,293 billion cubic feet (Bcf) to 10,371 Bcf in 2012.

Historically, natural gas markets are regional due to the use of pipeline infrastructure as a form of transportation. The intercontinental export of natural gas, however, can be feasible if it is shipped as liquefied natural gas (LNG). The oversupply of natural gas in the US has resulted in cheaper regional gas prices, making LNG exports from the US increasingly attractive. Regional gas markets may thus be less isolated in future.

According to IEA estimates[xii] an LNG export pipeline project approved by the US Department of Energy is expected to enable US exports to effectively double the size of the global LNG market to 3,885 Bcf. EY points out that natural gas liquefaction capacity more than doubled between 2000 and 2012, and is expected to double again by 2025 (to 650 million (metric) tonnes per year).[xiii] This will undoubtedly exert downward pressure on natural gas prices. It is therefore not beyond comprehension that larger than anticipated increases in supply (possibly linked to further refinements in fracking technologies) could lead to structural shifts in the dynamics of global gas markets. It is also entirely plausible that this could lead to much larger reductions in prices than are currently expected.

Regionally, East and Southern Africa are expected to become important natural gas exporters. Since 2010, there have been significant natural gas discoveries in Mozambique and Tanzania. The Oil and Gas Journal estimates Mozambique’s proven reserves (both offshore and onshore) to be four and a half Tcf, with its technically recoverable resource estimated at 35- 63 Tcf in 2013[xiv]. This is enough to support LNG projects and the country is expected to start exporting within the next five to ten years. Given an estimated technically recoverable resource of 45 Tcf in 2013, Tanzania also has the potential for LNG exports. The Kudu offshore field in Namibia has one point three Tcf of proven natural gas reserves and an estimated productive life of 22 years.

The economic value of the Karoo Basin shale gas resources is therefore likely to be significantly affected by closer integration of South Africa into regional gas markets and developments in the global supply of natural gas. In addition to South Africa’s potential to tap into regional gas resources, the possibility of increasingly accessing international markets also exists. The Western Cape Department for Economic Development and Tourism, for example, is currently assessing the feasibility of developing an LNG import terminal and related infrastructure to serve the Saldahna Bay-Cape Town Corridor. If the project goes ahead, it will compete directly with shale gas from the Karoo.

A cost-benefit analysis is only as good as the assumptions that underlie it. If a rigorous cost-benefit analysis of exploiting the Karoo Basin shale gas reserves is to be undertaken, it is important that these supply and pricing factors are considered in detail. Such an analysis would, of course, also include a range of other factors that influence key assumptions as well as a serious assessment of the likely environmental and other costs that fracking may entail.

Written by Brent Cloete and Nolwazi Sokhulu, DNA Economics

Notes:

[i] State of the Nation Address by His Excellency Jacob G Zuma, President of the Republic of South Africa on the occasion of the Joint Sitting of Parliament, Cape Town. Available [online]: http://www.thepresidency.gov.za/pebble.asp?relid=17570

[ii] United States Environmental Protection Agency (EPA) (undated) The Process of Hydraulic Fracturing. EPA website. Available [online]: http://www2.epa.gov/hydraulicfracturing/process-hydraulic-fracturing

[iii] Creamer, T. (2014) Petroleum agency moves to process pending shale-gas applications. Engineering News Online. 27 October 2014. Available [online]: https://www.engineeringnews.co.za/article/petroleum-agency-moves-to-process-pending-shale-gas-applications-2014-10-27

[iv] SAPA (2014) Karoo fracking could start by mid-2016. Engineering News Online, 28 October 2014. Available [online]: https://www.engineeringnews.co.za/article/karoo-fracking-could-start-by-mid-2016-2014-10-28

[v] Econometrix (2012). Karoo Shale Gas Report: Special Report on Economic Considerations Surrounding Potential Shale Gas Resources in the Southern Karoo of South Africa. Report prepared by Econometrix on behalf of Shell. Available [online]: http://www.shell.com/zaf/aboutshell/shell-businesses/e-and-p/econometrix-report.html

[vi] US EIA (2011). World Shale Gas Resources; an Initial Assessment of 14 Regions outside the United States.

[vii] Vecchiatto, P. (2014) SA petroleum agency’s Karoo shale-gas estimate ‘far lower’. Business Day, 21 February 2014. Available [online]: http://www.bdlive.co.za/business/energy/2014/02/21/sa-petroleum-agencys-karoo-shale-gas-estimate-far-lower

[viii] SAPA (2014)

[ix] IEA (2014). Medium-Term Gas Market Report, Executive Summary. Available [online]: http://www.iea.org/Textbase/npsum/MTOMR2014sum.pdf

[x] Wet natural gas contains a proportion of natural gas liquids that are heavier than methane e.g. propane and butane.

[xi] US EIA (2012). Annual Energy Review: Total Energy. Available[online]: http://www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb0401

[xii] IEA (2014)

[xiii] EY (2013) Global LNG Report – Will New Demand and New Supply Mean New Pricing. Available [online]: http://www.ey.com/Publication/vwLUAssets/Global_LNG_New_pricing_ahead/$FILE/Global_LNG_New_pricing_ahead_DW0240.pdf

[xiv] KPMG (2014). Oil and Gas in Africa: Reserves, Potential and Prospects of Africa. Available [online]: https://www.kpmg.com/Africa/en/IssuesAndInsights/Articles-Publications/General-Industries-Publications/Documents/Oil%20and%20Gas%20in%20Africa%202014.pdf. Data converted using http://www.convertunits.com