The government plans to grant oil companies licences to begin exploring the Karoo for gas from as early as July this year.

NEWS ANALYSIS

Exploration of shale gas in South Africa is expected to commence as soon as July this year. Falling global energy prices have put oil companies under pressure to rethink investments, but exploratory drilling in the Karoo will almost certainly go ahead.

Timelines presented by the department of mineral resources to the National Council of Provinces in October indicate it is likely that regulations for shale gas exploration will be published in the Government Gazette in the next few weeks.

Exploration licences would then be granted – as early as July or August – and exploration could commence immediately thereafter.

Shale gas, should it be judged to be viable, will mainly be used to ­produce electricity and not fuel. It is for this reason the economics of investing in extracting shale gas remain favourable, energy experts told the Mail & Guardian.

Meanwhile, the minerals and energy sector is awash with uncertainty.

Amendment Bill
Last week the Mineral and Petroleum Resources Development Act Amendment Bill was returned to Parliament by President Jacob Zuma who, in a press release from the presidency, cited concerns that it would not pass constitutional muster but no further details were provided.

A petition submitted to the president by the Democratic Alliance’s parliamentary caucus chair last year raised constitutional issues about the Bill, such as inadequate public consultation and contravention of South Africa’s trade agreements.

In any event, oil companies have already published environmental management plans for comment, even though the Bill has not yet been amended.

Globally, investment in energy is under pressure. Some oil and gas producers are unable to break even at current prices, which have dropped to lows last seen in 2009, as a result of oversupply on the market as Saudi Arabia takes on United States oil and gas producers to secure market share.

Jeremy Wakeford, chairperson of the Association for the Study of Peak Oil South Africa, told the M&G this week that planned shale gas production in South Africa “will continue on its course irrespective of what’s happening in the global oil market”, and said it would be mainly used for electricity generation. “Companies will likely see economic value in continuing exploration, seeing where electricity prices are at, and if it’s used for electricity it’s not really a substitute for oil.”

Shale gas reserves
In 2013, the US Energy Information Administration (EIA) estimated there were 390-trillion cubic feet of shale gas reserves in South Africa – although there are a number of varying estimates.

The government says just 30-trillion cubic feet of shale gas is enough to meet half of the country’s current electricity generation requirement for more than 20 years.

According to the EIA, the average cost for US plants entering service in 2019 shows the cost of coal generation comes in at $60 per megawatt hour, whereas the cost of power from gas could be as little as $14.3 per MWh.

Given the downturn in commodities prices, companies such as Glencore and BHP Billiton have turned their focus to more developed assets and prioritised value for shareholders. Oil companies such as Shell also have to make portfolio decisions, said Chris Bredenhann, an oil and gas adviser at PwC Africa.

He noted that the applications for exploration licences, submitted more than four years ago, make “work commitments” that oblige companies to undertake a number of actions, such as drilling a certain number of wells, or risk incurring penalties – or even lose the licence altogether.

Energy prices
Although oil companies would be watching energy prices in relation to investment decisions, Bredenhann said South African shale was nowhere near the stage at which final decisions would be made, but “still they will have a question mark as to ‘should we do it, or should we wait?’ “

Kumbirai Gundani, an associate at Frost & Sullivan consultants, said that most exploration in shale gas is done to according to a budget that is itself adjusted as the oil price fluctuates.

But current challenges would not be enough to deter oil companies, he said. “Once they have an exploration licence they have it for three years and can renew it three times. No one gives up that opportunity. Fluctuating oil prices are known to the market, but it is important to have the licence that when it becomes viable you can start drilling.”

Oil majors were driven by reserve replacement, Gundani said.

Wakeford said: “Their share prices ultimately depend on the access they have to reserves in future.”

He added that finding new reserves in oil had become difficult, with investment in frontiers such as the Arctic not being justifiable at current prices.

Anti-fracking activists
Jonathan Deal, founder and chief executive of the Treasure the Karoo Action Group, said this week there had been a significant drop in exploration activity in the US even before the drop in the oil price.

“The wells are now proven to be depleting quickly, never mind this nonsense of 10 to 15 years of production for each well. The average well, even in the sweet spots, is lasting three years if you are lucky.”

Royal Dutch Shell, one of the applicants for a shale exploration licence in the Karoo, said it did not take a particular view on near-term oil prices and, with its strong balance sheet, took a longer-term view on financing and project economics.

“The decline in oil prices is very much part of the inherent volatility in our industry. We plan our strategy around an expectation of such volatility: the portfolio needs to be attractive and resilient in a wide range of circumstances,” the company said.

“It underlines the importance of our drive for better performance management, to keep a hold on costs and spending, to improve the balance between growth and returns and to improve our capital efficiency.”

In response to questions this week, the department of mineral resources said an announcement on the state of shale gas regulatory framework is imminent.

The department said “commodity prices, including those of oil, do affect the viability of development. However, it has to be pointed out that commodity prices are cyclical and this is taken into consideration in the assessment of the viability of the identified projects.”

Lisa Steyn is a business reporter at the Mail & Guardian.