Gas changes the energy landscape
The potential of shale gas has crept back into the public awareness, along with associated fears, after Deputy President Kgalema Motlanthe told Parliament it could be a game-changer in meeting South Africa’s energy needs.
As oil reached highs of over $114 a barrel this week, driven by strife in Syria, and the rand sank to lows of over R10 to the dollar, Motlanthe’s comments seem timeous.
What the exploitation of shale gas in the Karoo basin could mean for South Africa remains to be seen but what is certain is that the tapping of unconventional gas sources is reshaping the global energy landscape, transforming the world’s second hungriest consumer of energy, the United States, into an energy exporter.
Arguably, this has helped to stabilise global energy prices, said Cornelis van der Waal, the business unit leader for energy and power Africa at the consultancy Frost & Sullivan.
At a recent growth, innovation and leadership conference held by the company, Van der Waal said that, although the stabilisation could also be attributed to a slowdown in global growth, it could also signal the decreasing power of the Organisation of Petrol Exporting Countries (Opec) with fewer wild fluctuations of global energy prices over the past three years.
The Stanlib economist Kevin Lings said it does appear that the dynamics of the global oil market are changing.
Shifting the balance of power
“The exploration and extraction of natural gas is slowly shifting the balance of power away from the Middle East,” he said.
This does not mean the oil price is no longer vulnerable — major supply disruptions are still a risk — but the “balance of forces” has led to a slightly more stable oil price, Lings said.
This shift is likely to continue as the US becomes more self-sufficient in energy production. The US will still rely heavily on energy imports from Canada, he said, but it is likely to become less reliant on oil from the Middle East.
“The state of global growth coupled with increased use of shale gas would perhaps argue for a lower oil price. However, some of the major oil producers are actively trying to keep the price relatively high in order to meet their internal fiscal requirements,” Lings said.
“Equally, a surge in the global oil price, or extreme volatility in the oil price, would actually hurt Opec as this would most likely lead to increased efforts to extract natural gas, and not just in the US, as well as the development of alternative energy sources, which appears to be gaining momentum globally.”
Although the controversy over shale gas and the technique used to access it — hydraulic fracturing, or fracking — cannot be ignored, the benefits for the US are beginning to emerge.
US energy sector is the fastest-growing
In a research note earlier this month, Lings said that, thanks to technological advancements in the extraction of natural gas and oil, the US energy sector has become one of the fastest-growing industries in the country.
According to the International Energy Agency (IEA), the US will become the world’s biggest oil producer by 2020, overtaking Saudi Arabia and Russia.
The renewed expansion of the energy sector “boosts the US economy both through the direct investment in the oil and gas sector as well as the indirect impact on other industries”.
The increased energy output should also boost the US trade balance, “as domestic energy production systematically replaces imported energy sources”, Lings said.
But overall employment in the oil and gas industry is relatively low as a proportion of total US employment — only 0.15% — and the oil and gas extraction sector represents only about 1% of US gross domestic product (GDP), he said.
Nevertheless, the extraction of the US’s newly accessible oil and gas reserves is going to require a huge investment in infrastructure, said Lings. He quoted a recent McKinsey study, which estimated that the US oil and gas industry needs to invest an estimated $1.4-trillion in infrastructure by 2020 — roughly $200-billion or 1.5% of GDP a year in energy-related infrastructure.
Potential competitiveness gains
But the potential competitiveness gains in energy-intensive industries, such as the chemicals and primary metals industries, are the most important impact of these developments, Lings said.
The increase in the supply of natural gas has seen gas prices fall by over 50% to below $4 a million BTUs since 2008, reducing end-user costs substantially.
“Because natural gas cannot be traded easily on the global market, there has emerged a substantial price differential between US gas prices and prices within Europe and Japan,” Lings said.
“As a consequence of this price difference, many companies have recently expanded or are considering expanding their US operations to take advantage of lower energy costs.”
But in South Africa the potential for gas is not just about shale gas and fracking in the Karoo. Regional natural gas finds by neighbours such as Mozambique pose significant opportunities for South Africa, especially when it comes to meeting electricity needs.
Van der Waal said gas-fired power produces fewer carbon emissions and is better suited than coal power to a power grid that includes renewables — gas-fired power stations can be ramped up or down more easily to fit in with the variations of supply from green energy sources.
But, he said, South African policymakers urgently need to develop coherent strategies relating to gas.
The department of energy has released the first draft of its Integrated Energy Plan (IEP), the overarching policy document meant to guide energy planning in South Africa, which it discussed in Parliament last week.
However, the strategy for gas, including a gas infrastructure plan, is likely to be made available only by the end of this year, according to the department.