Shell South Africa has a nationwide retail network of strategically located service stations as well as interests in many business areas including manufacturing, aviation, chemicals, LPG and, potentially, natural shale gas. But is South Africa prepared for the challenge of producing shale gas and is Shell prepared to wait for the country to be ready?
Over the past 18 months, the story surrounding South Africa’s shale gas industry development has been one with many ups and downs but in the early part of 2016, the picture has become slightly clearer with the government now seeming to back the growth of the industry and the big corporates looking to the future and how they can move forward with this exciting energy sector that has proved so successful in the USA.
The development of shale gas in South Africa goes back to 2009 when the Petroleum Agency South Africa (PASA) awarded Shell a Technical Cooperation Permit (TCP) for a one-year study to determine the Karoo’s natural gas potential. Early signs suggested that there was a plentiful supply of gas laying under the dry, arid Karoo desert – as much as 480 trillion cubic feet (TCF); some of the largest reserves in the world, but these figures have been disputed.
In December 2010, Shell submitted three separate exploration licence applications for areas of around 30,000 square kilometres each. These areas are in the Western Cape, Eastern Cape and Northern Cape.
All seemed to be on track for the fast and efficient growth of the market as SA looked to follow the example of America and profit from vast reserves, but development turned out to be slower than everyone wanted. The government are yet to award rights for development, the global oil price crash has caused many companies to revaluate their involvement in shale exploration and there are many groups that are opposed to shale gas exploration because of the nature of the techniques involved in releasing the valuable product.
The main method is of course ‘Fracking’ or hydraulic fracturing where exploration and production companies will drill into the earth before injecting a high-pressure water, sand and chemical mix into the well, breaking the rock buried deep in the earth and releasing the gas trapped inside.
Mineral Resources Minister, Mosebenzi Zwane said in January: “Currently South Africa is a net importer of energy sources such as crude oil, refined petroleum products and natural gas. It is estimated that the Karoo shale gas resources would mean South Africa has the fifth largest reserves, estimated at 485 TCF.
FRACKING FOR GAS
“We have taken a decision to diversify our energy basket in our pursuit to provide not only cost-competitive energy security, but also significantly reduce the carbon footprint and drive our industrialisation and beneficiation programme to grow the economy inclusively in order to create a critical mass of employment, amongst others.”
He also said that producing shale gas is not only a tool for economic growth, but something which should benefit everyone. He was speaking at a community engagement event in the Eastern Cape.
“It is my firm belief that the excitement we have about the discovery of this resource needs to be shared and also enjoyed by communities.
“We have also taken measures to ensure the farming community benefits from the development of shale gas, whilst the astronomy programme, such as the Square Kilometre Array (SKA) would not be affected through such development.”
The ongoing success of the SKA project and the impact that Shell’s work could have on that ground-breaking project have long been concerns but as far back as 2014, organisers of the SKA project have stated that the projects can cooperate.
“We’re looking for a co-existence with fracking,” said Science and Technology Department Chief Director for Astronomy, Val Munsami. “What’s very important is that there must be concurrence… from the Science and Technology Minister around any licences for exploitation and exploration around fracking.”
Just last month, the SA government said that it will give the green light in the next 12 months to companies looking to explore for shale gas. This comes as great news for Shell who have been patiently waiting along with a handful of other companies for the government to progress with license allocation.
At this time last year, the company was looking at scrapping its shale activities in SA thanks to ‘lower energy prices and delays in obtaining an exploration licence for the onshore Karoo Basin’; Country Chairman, Bonang Mohale was even quoted saying: “Capital is mobile and is looking for the best commercial terms everywhere else in the world. We were hoping that we would have had a licence (for Karoo) in 36 months” – this was after six years of waiting.
But now that the government has expressed an interest in exploring the shale industry, after years of under supply in the country’s energy business, Shell’s attention has been refocussed.
“One area of real opportunity for South Africa is the exploitation of shale gas. Shale gas regulations were published in the second quarter of 2015/16. Exploration activities are scheduled to commence in the next financial year. This will lead to excellent prospects for beneficiation and add value to our mineral wealth,” said Gugile Nkwinti, Economic Sectors, Employment and Infrastructure Development Cluster minister when briefing the media in March.
Clarification like this from a minister is exactly what the industry has been waiting for, albeit still not concrete. Even business advisory company, Teneo Intelligence was clear when detailing the problems caused by indecision: “At a time of low oil prices and exploration budgets being slashed, the onus is on governments to put in place clear and attractive investment conditions,” said senior vice president Anne Fruhauf.
“The longer the government takes to clarify fracking regulations, the less sense it makes for a company like Shell to maintain anything more than a holding operation in relation to its South African shale project.”
And then, of course, there are those that are against fracking, and this is a big concern for companies like Shell as well as the SA government. Getting local communities on board with projects like this has long been a desire for exploration and production companies and where they have succeeded in with this, operations have often run with less resistance.
Those opposed to fracking in the Karoo made their intentions clear in March, saying they would quickly challenge the government, in the High Court if necessary, to halt the progress of Shell and the other oil corporates who are interested in investing in the region.
Jonathan Deal, CEO at Treasure Karoo Action Group (TKAG) in the Eastern Cape said: “They have overlooked the fact that the shale gas regulations are the subject of a High Court application brought against the Department of Minerals Resources by AfriForum and TKAG as an alliance. Effectively and logically, those regulations are under attack by terms of being completely and wholly inadequate to regulate something like shale gas exploration. If they go under those circumstances and still see fit to issue exploration licenses, we will have the way cleared for us to approach the High Court for urgent release to have the exploration licenses set aside so government has still got a lot of work to do – not the least to involve some High Court activity before they can make promises like that.
“I think, as a community, those that are truthfully informed and understand what fracking has done overseas and how little it has been able to deliver at the hands of local communities in terms of benefits, and what risks it has brought with it are very concerned. I think the big elephant in the room in South Africa at the moment is something that is facing every single person in this country- that is that we have a water shortage. So for our government to even consider an activity that takes place in above and around our very precious water source which has the potential to pollute it, is really nonsensical,” added Deal when speaking to SABC.
But despite the claims of those who are opposed to the development of a shale gas industry in South Africa, the government is unwilling to ignore the potential investment that Shell and similar companies could bring. Some reports have suggested that even the initial investments, aimed at just exploration, could be as much as R2.5 billion. The company told IOL last month that it was monitoring the situation and was ready to invest if a viable environment presents itself. “We will continue our ongoing consultation with government, industry and the people of South Africa about the long-term opportunities of shale gas exploration and the regulations that will govern this industry,” Shell said.
“Should supportive petroleum legislation and attractive commercial terms be put in place, the Karoo project could compete within Shell’s global shale gas and oil portfolio.”
Fortunately for Shell, the business has strong assets in South Africa including an excellent supply chain, a robust brand and strong, visible leadership in the form of Mohale.
LEADERSHIP
In 2015, at the Future CEOs event in Johannesburg, Mohale spoke of his own credentials and those of Shell, leaving the aspiring young leaders in the audience in no doubt that the company is in good hands and the decisions it makes are in the interest of all stakeholders.
“Even if you hate me, you cannot deny the extraordinary results that have been achieved because I’ve always known that to be the best you have to go the extra mile and work the extra hour.
“This company has been in this country for 112 years and we employ around 20,000 people across various businesses. Last year, we made earnings before expenses of $384 million.”
In a country going through an energy crisis and with the need for a long-term solution as soon as possible, supporters of the shale gas initiative are keen to have an experienced global operator on their doorstep.
Mohale said in 2012, after the fracking moratorium was lifted, in an interview with Moneyweb: “We will now bring electricity, we will bring jobs, we will create small and medium enterprises and we’ll generally stimulate the economy.
“This technology is being deployed in four continents, it is 60 years old. We are a responsible company that has a brand to protect. We are going to continue to work with all the stakeholders in the Karoo, including TKAG, to look at improving the quality of lives of the majority of the people.”
And hopefully progress will be swift as the energy industry continues to battle through what has been a tough period thanks to falling oil and commodity prices.
“All the data out there is suggesting higher supply and lesser demand for oil, and that could only mean lower prices,” said Phillip Streible, market strategist at RJO Futures in Chicago in a recent statement.
After a brief period of stability, global oil prices have once again dropped and in March the price was sitting at around $35 a barrel with some predicting the price to drop to $20 in the near future. Other reports suggest that the US now has some of the largest stock piles of oil that it has ever had. This of course makes life difficult for companies likes Shell and can hamper investment into new projects. For consumers, the news might be more welcome and some sources have suggested the low price might even cause pumps at fuelling stations to drop the price by as much as 59 cents per litre.
In West Africa, Shell Nigeria, a sister of Shell South Africa, realised success in October when it announced the start-up of the Bonga Phase 3 project – an expansion of the Bonga Main development, with peak production expected to be some 50,000 barrels of oil equivalent. The Bonga field, which began producing oil and gas in 2005, was Nigeria’s first deep-water development in depths of more than 1,000 metres. Bonga has produced over 600 million barrels of oil to date.
Andrew Brown, Shell’s Upstream International Director, said: “This new start up is another important milestone for Bonga, adding valuable new production to this major facility.”
These signs of commitment to Africa, along with the plans to begin with shale gas exploration in the near future, mean that people can be sure that Shell has a long-term future in Africa that is set to be profitable or both the continent and the company.
“Shell is committed to South Africa and determined to build our business with all communities that endorse our license to operate. In the years to come we will continue to conduct our business according to our core values of honesty, integrity and respect for people,” the company says.