Wednesday, March 16, 2016

Progress Report: Shale Play in South Africa

Legal basisIn

June 2015, South Africa’s Department of Mineral Resources (DMR) published Regulations for Petroleum Exploration and Production (the Regulations) which introduced guidelines covering onshore hydraulic fracturing (fracking) to be read in line with the Mineral and Petroleum Resources Development Act, 2002 (the Act).

Exploration and production operations will now be subject to the additional requirements set out in the Regulations which cover areas including environmental impact assessment; well design and construction; management of water, waste and air quality; pollution incidents and decommissioning activities.

Key terms of the Regulations include:

1. An Environmental Authorisation under the Environmental Impact Assessment Regulations, 2014 is required before activities commence.

2. A hydrocensus must be conducted and there are restrictions on the proximity of drilling to existing water sources and various other protections for water resources.

3. The application for Environmental Authorsiation must include a detailed fracking programme.

4. Fracking can only proceed once the Petroleum Agency of South Africa (PASA) has approved the plans and well design.

5. The licence holder must notify PASA and the department responsible for water affairs in writing at least 5 days before commencing fracking.

6. During fracking, the licence holder must comply with a range of operational requirements including mechanical integrity tests.

7. A post fracking report must be submitted.

8. Certain listed substances are prohibited from use in fracking.

The players

In April 2011, a shale gas exploration moratorium was imposed on fracking by the South African government following protests by environmental groups. The moratorium, which affected applications for exploration licences in the Karoo Basin by companies including Shell, Bundu Gas & Oil Exploration and Falcon Oil & Gas, was lifted in 2012, following the recommendations of a ‘task team’ of experts that the government authorise fracking “under strict supervision” by a monitoring committee. Geological field mapping and other data gathering activities were also recommended.

Stalled applications recommenced in June last year, Irish company Falcon (who have entered into an exclusive cooperation agreement with Chevron) announced that it was entering negotiations with the government to agree terms for a licence to explore for shale gas in “September or October”. Bundu also announced that PASA had decided to proceed with processing its licence application following consultation with affected communities and other parties under the Act.

State of play

President Jacob Zuma has declared the South African government’s hope that “we will find practical opportunities to enhance the economic opportunities the shale gas sector has to present” and there appears to be a clear political will for shale exploration activity to proceed.

The publication of the Regulations certainly provides a clearer framework for exploration companies to frack once the relevant approvals are in place and the DMR is expected to take a decision on pending Karoo exploration rights in the coming months.

From a technical perspective, South Africa already has a developed power grid but underdeveloped onshore energy services (particularly in relation to drilling and pipeline infrastructure) and restricted access to water resources will need to be addressed together with the environmental concerns which have slowed progress to date. The absence of protection in the Regulations for trade secrets related to chemical compounds and other innovations used in fracking operations may also inhibit investment in the sector.

Next steps

The Regulations represent long-awaited progress towards the exploration and development of South Africa’s estimated 390 tcf of technically recoverable shale resources[1] which would curb its current power dependence on local coal and gas imported from neighboring Mozambique.

Environmental protests will continue but the development of shale is seen as vital for South Africa’s energy independence. The Regulations establish clear guidelines intended to address the concerns of environmental protesters and ensure that fracking is carried out responsibly and in line with best international practice.

Just this month, PASA said that it expects to make its recommendations on the first two (Flacon and Bundu) of five shale gas exploration license applications by early May. The regulator is also considering applications from Shell and two other companies. Once recommendations have been made by PASA, the Minister of Mineral Resources will be responsible for making a final decision on issuing the licenses.