Dig deep: Shale gas reserves have the potential to dramatically reverse the domestic energy deficit

The natural gas profile of South Africa shows an obvious imbalance. According to the US Energy Information Administration (EIA), the country produced 1.27bn cu metres of natural gas in 2011, but consumed more than three times that amount – some 4.5bn cu metres. Imports from Mozambique made up the difference between domestic demand and supply, with 3.3bn cu metres transported by pipeline over the year.

The country’s reserves of natural gas are much smaller when compared to major African producers such as Algeria (4.5trn cu metres) and Egypt (2.2trn cu metres) and show a steady trend of decline, according to BP’s “Statistical Review of World Energy”. However, despite the imbalance in the current scenario, many in the energy sector expect to see gas play an increasingly important role in the future.

The Karoo

The Karoo Basin covers an area of a little over 379,000 sq km in central and southern South Africa, extending across much of the distance between the commercial capital, Johannesburg, and Cape Town, on the nation’s southern tip. The semi-desert expanse was settled by Europeans in the mid-1700s, and the agricultural activity on which they subsisted continues to form the economic basis of the area, more recently augmented by a growing tourism business built on the Karoo’s natural beauty and historical heritage.

Until recently the subsurface topography of the Karoo was largely unexplored, and the widely dispersed boreholes left behind by state-owned oil firm Soekor from the mid-1960s were drilled in a search for oil rather than gas. While the presence of shale gas in the energy environment of that era was of little interest, the technological advances that have since made the extraction of shale gas economically viable have significantly altered its status. The increasing energy autonomy of the US, the world’s second-largest energy consumer, has already had an impact on exporters elsewhere, and as the country gears up to export its shale gas output to consumer countries, producers in the Middle East and Russia are potentially facing an excess of supply.

The Potential

The interest that surrounds the current exploration activity in the Karoo stems from the size of its shale deposits and their potential to transform the nation’s energy sector. The scale of the shale gas resources in the Karoo were most recently established in a June 2013 study carried out by the EIA.

Whilst acknowledging that the precise totals will change with time, the report identifies a vast amount of shale gas in South Africa: some 44.14trn cu metres of risked gas in place and 11.04trn cu metres of technically recoverable resources. The EIA’s study focused on the Ecca Group, a Permian-age, organically rich area that contains a number of promising formations. Of these, the Whitehill Formation and its thermally mature black shales, which can be traced across most of the Karoo Basin, emerges as the most promising structure with regard to future extraction, containing an estimated 5.98trn cu metres of recoverable shale gas. Whitehill is followed by the Prince Albert Formation (2.72trn cu metres) and the Collingham Formation (2.32trn cu metres). The findings of the report endow South Africa with the eighth-largest technically recoverable shale gas resources in the world. Such a sizeable gas play has the potential to revolutionise the energy sector by displacing energy imports and perhaps even providing for additional energy exports.

A report by South African consultancy firm Econometrix published in March 2012 highlighted some of the potential economic benefits that might follow from the successful exploitation of Karoo. Working on a conservative scenario of 566.3bn cu metres, the report estimates that R80bn ($9.75bn) could be added to the economy, a figure that rises to R200bn ($24.38bn) if the exploitation of 1.4trn cu metres resource is assumed. According to the report, the average annual government revenue from the 566.3bn cu metres and 1.4trn cu metres scenarios would be around R35bn ($4.26bn) and R90bn ($10.97bn), respectively, and the development would create between 300,000 and 700,000 permanent jobs over a period of 25 years.

In a country where 8m citizens have no access to electricity and energy demand is expected to double by 2050, the possibility of reversing the growing energy deficit is an attractive one. Shale gas also has a wide range of potential uses beyond electricity generation: it is safe and can be converted into liquid fuels by processes similar to those already being carried out by Sasol at Secunda. It can also be used in the fertiliser manufacturing and transport industries. Bonang Mohale, the chairman of Shell South Africa, told OBG, “Shale gas exploration will be instrumental in meeting South Africa’s growing energy demand, which currently exceeds supply, and will help spur employment in new regions.”

Exploration & Production

By 1970 five wells had penetrated the Ecca Shale interval. Each showed gas, with the Cranmere CR 1/68 well reaching 52,102 cu metres per day from its test zone of 230-235 metres, suggesting that the Karoo’s shale may be gas-saturated. However, the more recent exploration of the Karoo has come about as a result of technical cooperation permits (TCPs) issued by the Petroleum Agency South Africa, which authorise research into shale gas potential. Dublin-based Falcon Oil and Gas, a specialist in unconventional plays, was an early entrant into the Karoo, obtaining a 30,000-sq-km TCP along the southern edge of the basin. More TCPs were acquired by Australian firm Sunset Energy, which is known today as Challenger Energy, for a 4600-sq-km block; a joint venture between South Africa’s Sasol, American player Chesapeake Energy and Norway’s Statoil obtained a permit for 88,000 sq km; and Anglo-American subsidiary Anglo Coal has 50,000 sq km. The largest TCP was granted to Royal Dutch Shell and covers some 185,000 sq km. In 2011 Shell announced that it plans to invest $200m in its Karoo exploration activities, and the company has since taken the lead in the public debate surrounding the potential development of the Karoo area.

Concerns raised during the course of this debate resulted in the government imposing a moratorium on shale gas exploration in April 2011, which was lifted in September 2012 after the results of a study showed that an exploration programme could be carried out safely. However, exploration and production activity in the Karoo remains at a very early stage. In February 2013 Shell revealed that the first drilling rig to be used in its efforts to find financially viable shale gas is at least two years away, and commercial production will not commence for another eight to 10 years. Before drilling can begin, Shell will embark on a comprehensive environmental, social and health impact assessment, which is expected to take two years.

Challenges

While the required drilling depths for the Karoo’s shale gas resource – between 1.68 km and 3.05 km for the Whitehill Formation – present no significant challenge for a nation that has run gold mines to almost 4 km in depth, some technical difficulties remain. The Karoo Basin contains significant areas of volcanic intrusions, which in some cases may diminish the quality of its shale gas resources. In practical terms, the presence of volcanic material, or sill intrusions, in the sedimentary bed may limit the use of seismic imaging and make the process of exploration and recovery more challenging. Typically, the valuable organic content in areas that surround the sills is diminished, lost entirely or converted to graphite. The most extensive and thickest sills are found in the Ecca Group, in which the most promising formations are located.

The question of water usage in the extraction process has also emerged as a potential challenge. The large volume of water that will be used in the hydraulic fracturing, or fracking, process by which the Karoo’s shale gas must be recovered is frequently criticised by conservationists in their calls for a ban on development in the area. Concerns have been raised regarding sourcing water in this relatively arid region, possible competition with agriculture for scarce water resources and how toxic wastewater will affect the environment, groundwater table and wildlife. Gas firms have responded to questions surrounding the water issue by publicising water strategies in which they aim to mitigate the effects of the extraction process by: avoiding shallow groundwater altogether; utilising alternative water sources such as brackish seawater or grey water; importing water by rail or road; and consulting with local experts to develop water plans on a per-well basis. Other environmental concerns remain, however, such as the potential for fugitive methane emissions, habitat loss and fragmentation, and the effect of increased human activity in the area on wildlife populations.

Proponents of fracking, meanwhile, counter such arguments by pointing out that natural gas has been successfully produced from deep underground shale formations in the US to the satisfaction of the US Environmental Protection Agency and other environmental experts such as the US Groundwater Protection Council. Mohale said, “A stable natural gas supply for power generation also reduces dependence on coal, which has a range of negative side effects.” The debate surrounding the potential benefits and dangers of shale gas extraction in South Africa is likely to go on for some time and will continue to be vigorously contested.

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The Report: South Africa 2013

Energy & Utilities chapter from The Report: South Africa 2013

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