Red tape puts brakes on fracking
Oil and gas industry executives and environmentalists were all aflutter when Mineral Resources Minister Mosebenzi Zwane recently delivered a speech in the Karoo town of Richmond, suggesting that fracking for shale gas would go ahead.
In reality, the matter remains inert — it is yet to overcome the persistent challenges of unpassed legislation, an energy price slump and a strong anti-fracking lobby.
Bonang Mohale, the chairperson of Shell South Africa — which has the largest interest in shale gas production in the Karoo — said although the company welcomed the minister’s comments, “our understanding is the minister has made a decision in principle; we are yet to be provided with an exploration rights agreement [or] licence”.
Even if licences to explore are issued, it does not mean exploratory drilling in the Karoo will begin because it requires significant investment — and, Mohale said, a supportive, clear and stable legal, fiscal and regulatory environment.
Amendments to the Mineral and Petroleum Resources Development Act — which was sent back to Parliament in early 2015 — must be signed into law. Then technical regulations specific to hydraulic fracturing must be finalised. The commercial terms are yet to be negotiated. Parallel to all this are the processes relating to the National Environmental Management Act.
Independent consultant Rob Jeffrey said: “It is vital to get on with really discovering whether or not this stuff exists in economic, payable quantities. If, through an Act of Parliament, the amendment Bill is signed into law, players can proceed with a degree of certainty.”
Yet, Tilden Hellyer, an energy and environment analyst at business consulting firm Frost & Sullivan, said there is no real urgency to get gas off the ground. “We have movement on the gas-to-power programme, commissioning of previous rounds of the renewable energy independent power producers procurement programme, the Ingula pumped power station, and coal-fired units at Medupi. In reality, the power supply to the grid is sufficient.
“In 10 years, should the economy grow, optimistically coupled with the decommissioning of the Eskom coal fleet, the answer would be different. A healthy economy will have a higher demand for power, which natural gas could be substituted for.”
But Chris Bredenhann, PwC’s advisory oil and gas leader for Africa, said: “If you are competing for limited capital in a low oil price environment, you need to make yourself as attractive as possible — so the [Act] changes are quite important.”
He noted there were more pressing issues to be dealt with in South Africa’s energy landscape.
Niall Kramer, chief executive of the South African Oil & Gas Alliance, said there is not enough relevant and empirical data about what lies beneath the Karoo’s surface — “that’s what exploratory drilling can give you”.
For one, there may not be any gas. The mineral resources department now estimates the recoverable resource of shale gas in the Karoo Basin to be as much as 50‑trillion cubic feet, but these indications date back to the 1970s when the Southern Oil Exploration Corporation came across gas deposits.
But Philip Lloyd, a professor at the Energy Institute at the Cape Peninsula University of Technology, has posited that lava could since have moved through the shale, heating it up and destroying the gas.
Then there is a question of whether the gas can be economically extracted.
The economics of fracking differ from one shale “play” or formation to another. “You might have a play that can be profitable at an oil price of below $40 a barrel; some geologies are much more challenging,” said Kramer.
Shell’s Mohale added: “This morning, crude was trading at $54.74 a barrel. Of course it has a bearing, because when the oil price goes too low it affects our investment case and appetite to commit to long-term investments because the internal rate of return is compromised.”
Bredenhann said the economics of shale production need to be understood in line with the changes to the Act when they are signed into law. The draft amendment Bill proposed a 20% free carried interest to the state on all new oil and gas ventures. Even at a price workable in another territory, the fiscal regime could mean it is not workable here, said Bredenhann.
Subject to obtaining the required rights, permits and environmental authorisations, Mohale said Shell planned to drill a few exploratory wells to indicate whether shale gas is present. This new data would inform further exploration plans to assess the quantity of gas. “Should the project prove to be commercially viable, we believe that we have a significant role to play in developing the project to its full potential.”
He said Shell has been committed to this project since 2009, and “that we have not finalised it yet can only be an opportunity lost to ordinary South Africans in terms of jobs, revenue to government and the extent to which the economy could have been helped in its growth”.
But anti-fracking lobby groups dispute the extent of hydraulic fracturing’s economic benefits. They cite evidence that the potential for environmental damage through fracking, particularly its possible impact on the Karoo’s water resources, is far too big a risk.
To get fracking off the ground, the government will have to move with caution, given that anti-fracking groups will seek to challenge the process. Already, the Treasure Karoo Action Group and AfriForum have approached the high court to review and set aside regulations for petroleum exploration and production that came into effect in mid-2015.
They claim the mineral resources minister is no longer authorised to make such regulations, and that scientific research was not taken into account when drafting them. The applicants also maintain that the public participation process was inadequate.
“Currently, regulation is lacking, which raises a red flag,” said Hellyer. “Such regulation should be written off the back of scientific studies; it should then be put forward to the public for consultation and announcements ought to be made when the process is complete.”
David Forfar, head of the oil and gas sector group at law firm Bowman Gilfillan, warned the process would never be straightforward and the lobby against fracking would also not make it easy. Luke Havemann, a senior oil and gas associate at the firm, said it was inevitable there would be challenges to hydraulic fracturing, but noted that court applications would not necessarily stop decisions from being made in the interim.
Although the amendment Bill is yet to be signed, that doesn’t stop the department from granting licences under the old Act, Forfar said.
Yet, even where licences are granted to explore offshore, companies have done nothing. “They have been reluctant to invest without regulatory certainty,” said Forfar.
Multinational mining, metals and petroleum company BHP Billiton has relinquished its exploration block off the South African coast but bought blocks elsewhere. Last year it won bids to acquire 12 blocks in the Gulf of Mexico. Shell has abandoned its South African offshore well to concentrate its efforts in the Karoo.
“The pace of business is quite frenetic. Every year we look at our portfolio and we make a determination based on what information we have at that time,” said Mohale.
“The world has become intensely competitive. Most governments are hugely encouraging; they are seeking foreign direct investment and they make it easy for it to come there.”