Recent remarks in Parliament suggest that the state is being lined up as a major player.
Is the state gearing up to go fracking? Following statements last week by Minister of Energy Dipuo Peters broadly supporting shale gas development, the state may well be planning to carve out a role for itself as a leader in the industry.
The potential of shale gas and other more conventional sources of gas to provide a local source for electricity and liquid fuel has drawn the government’s interest. The comments by Peters last week suggest the state is preparing to ensure that national energy firm PetroSA becomes a key instrument in the development of a shale gas industry.
She said before her budget speech that President Jacob Zuma and Deputy President Kgalema Motlanthe had been party to discussions on PetroSA’s systems and operations and presentations would be made to Cabinet.
Peters could not give full details on the meeting, but said a strong national oil company would be necessary to develop the shale gas industry.
The United States, although not without its own opponents to fracking, is an industry leader. Fracking there has led to a dramatic fall in natural gas prices and an energy boom. According to the US Energy Information Administration, shale gas comprised 23% of the country’s total natural gas supply in 2010, but it was forecast to rise to 49% by 2035.
Exploiting shale gas
According to the administration’s 2012 Annual Energy Outlook, natural gas prices will remain below $5 per 1 000 cubic feet until 2023, thanks to the success in exploiting shale gas. This is well below prices forecast for crude oil.
PetroSA, in a presentation to Parliament earlier this month, said shale gas could play a key role in the long-term sustainability of the company after 2020. According to minutes from the parliamentary monitoring group during discussions with the portfolio committee on energy, PetroSA chief financial officer Nkosemntu Nika expressed the company’s “desire to bring liquefied natural gas into the industry” and “future plans to invest in shale gas”.
But PetroSA spokesperson Thabo Mabaso said the company had not made any comments on the subject or taken a position on fracking.
Fracking, or hydraulic fracturing, is the injection of a mixture of chemicals and water into deep shale rock formations to extract gas trapped there. It is highly controversial, given the impact it is believed to have on water resources and the environment. There appear to be vast shale gas reserves in the Karoo, although they still need to be verified.
In February last year, the department of mineral resources placed a moratorium on all applications relating to fracking in the region. A task team was set up to investigate the feasibility of shale gas and its final report is due to be tabled in the Cabinet in July.
Development of shale gas
Although the full environmental impact of fracking is not properly understood, the prospect of producing electricity from gas is gaining support among government officials, particularly because South Africa’s electricity supply remains under severe strain.
Potentially, gas-powered electricity could provide South Africa with cheaper baseload and mid-merit power. Gas-driven power stations are cheaper to build and become operational faster than nuclear and coal plants. Gas is also deemed to be less carbon-intensive than coal.
The ANC’s draft policy discussion document on state involvement in the minerals sector advocated a more active role for state-owned companies in the development of shale gas. It noted that the reserves had to be confirmed, but early indications showed “enough gas to replace the bulk of our coal-fired plants with gas with much lower carbon emissions”.
It also stated that the minister had to reserve prospective shale gas areas for exploration and evaluation by the state.
Shell has applied for exploration rights for 90000km2 in the Karoo. Other companies with applications pending include Bundu Gas and Oil and Falcon Gas and Oil. Anglo American holds a technical co-operation licence, but Sasol relinquished its application for an exploration right in September last year.
Integrated resource plan
Jonathan Deal, national co-ordinator of Treasure the Karoo Action Group, said the utterances of the government about shale gas were “far too premature” without a thorough cost-benefit analysis being completed.
Experts have also warned that the government’s integrated resource plan, IRP2010, does not make sufficient allocations to electricity generated from gas, which will deter investment in this kind of infrastructure.
The plan allocates 711MW from gas between 2019 and 2022, with a further 1659MW set to come on line only between 2028 and 2030.
Deal also said the state had not made it clear that shale gas could take between 10 to 12 years to bear fruit. This contradicted the notion that it would provide a more affordable and cheaper stop-gap measure to meet South Africa’s power needs.
Renewable energy could be brought on line far quicker and the cost of a wide range of renewable technology was coming down, he said. “The technology is modular and can be deployed for light industrial and domestic use.”
Plummeting
Deal said the ANC stood to gain from the development of a shale gas industry. A report in the Sunday Times stated that the Batho Batho Trust, founded by ANC veterans, held a 51% share in Thebe Investments, Shell’s empowerment partner in South Africa. Thebe was reported to have a 25% stake in Shell SA Refining and a 28% stake in Shell SA Marketing.
He also questioned the financial sustainability of a shale gas industry. The rapid fall in shale gas prices in the US had resulted in revenues of energy companies plummeting.
Although PetroSA would not be drawn on fracking, Mabaso said it wanted to diversify its gas supplies to ensure the sustainability of its gas-to-liquids plant in Mossel Bay. He said PetroSA and Eskom, the owners of the Gourikwa open-cycle gas turbine power plant in Mossel Bay, were exploring the possibility of importing liquefied natural gas.
Gourikwa is one of Eskom’s two peaking power plants that are used when the electricity grid is experiencing peak demand. Both run on diesel but were built to be converted to run on gas.
“In view of other future gas supply options, liquefied natural gas is seen as a bridging solution to sustain and develop the gas infrastructure in Mossel Bay,” Mabaso said.
Gas hub
“A world-class gas hub could be created that is flexible enough to integrate imported liquefied natural gas with indigenous offshore and onshore gas. The concept is also open for regional solutions through supply from Mozambique or Angola.”
But the financial viability of this kind of infrastructure development is critical. A gas hub could be feasible by establishing anchor gas markets with other state-owned entities.
To develop a gas hub, a “fit for purpose” liquefied natural gas import facility would be required as a mid-term solution to unlock the potential of the gas market in the Southern Cape corridor, Mabaso said.
“The aggregation of anchor gas markets linked to state-owned corporations’ assets or investments will create economies of scale, de-risk the investment and therefore enable the development of the gas infrastructure in a cost-effective manner.”
This could also ultimately benefit private sector gas users, he said.
A feasibility study of the liquefied natural gas project was complete, he said, and basic engineering studies on the technical issues and to determine a rough investment cost were under way.