Insights

A fracking boost for the South African economy

Inspiring gas exploration across the globe

The production of commercial and shale gas has been regarded as a major breakthrough in the oil and gas industry in the last decade, with hydraulic fracturing (i.e. 'fracking') being seen as an alternative energy source for a country like South Africa where energy resources are running low.

Hydraulic fracturing (commonly known as fracking) is the process of extracting natural gas from shale rock layers deep within the earth by making cracks (fractures) in the rocks formed by the pressure build up from pumping water, sand and chemicals down a well which is drilled into the rock. These cracks enable the release of shale gas.

The production of commercial and shale gas has been regarded as a major breakthrough in the oil and gas industry in the last decade. The successful roll out of the Barnett Shale, a shale gas producing well in Texas, United States of America (USA) using fracking has inspired gas exploration in South America, Africa, Australia, Europe and Asia.

According to Economist Intelligence Unit research (refer to available table for download), South Africa has the fifth largest technically recoverable shale gas resources in the world, concentrated in the Karoo region. China has the largest shale gas resource in the world; however the USA is the world leader in extracting gas and oil from shale. According to the United States Information Administration, fracking has revolutionised USA oil and natural gas production. Last year, shale provided 29% of USA crude oil production and 40% of its natural gas production. Further advancements in shale gas and oil production could mean that the USA will meet all of its energy requirements by 2030. This is a remarkable progression as the USA was for decades the largest oil importer.

In South Africa fracking has been the subject of heated debate. In 2010, international oil companies such as Shell SA, Bundu Gas & Oil and Falcon Gas & Oil, applied for shale gas exploration permits in the Karoo. In April 2011, a shale gas exploration moratorium was imposed by the South African government as a result of environmental groups such as Treasure the Karoo Action Group (TKAG), which believe fracking will cause irreparable damage to the Karoo’s biodiversity and underground and ground water reservoirs. This moratorium was however lifted by government in July 2012 based on the recommendations of a task team led by the CEO of Petroleum Agency SA and comprised representatives from the Departments of Environmental Affairs and Water Affairs, Science and Technology, Energy, Mineral Resources, the Petroleum Agency of South Africa, Council for Geoscience, SKA South Africa, Water Research Commission, and ESKOM.

The global demand for energy continues to rise and Brent crude oil prices have been on an upward spiral since 2010. There are around ten million South Africans that have no access to any form of energy and South Africa is currently facing an imminent energy crisis as the demand for energy outstrips the supply. 85% of South Africa’s current electricity originates from coal and therefore shale gas, with a cheaper cost and a relatively smaller carbon footprint could well be a long-term solution to South Africa’s crippling power situation. According to Gideon Steyl, Associate Professor at University of the Free State (UFS) Faculty of Natural and Agricultural Sciences, exploitation of a 24-trillion-cubic-foot resource will power about 20 GW of combined cycle gas turbines, generating about 130 000 GWh of electricity a year over a 20-year period. This is more than half of current electricity production. The Karoo shale gas report detailed the fact that if the estimated reserves of shale gas in the Karoo is accurate, South Africa could enjoy 400 years’ worth of energy supply. This means that South Africa’s energy woes should come to an end and energy supply should significantly increase. This is important, because the new coal-powered plants under construction, Medupi and Kusile, will only provide a short breathing space. Increased generating capacity is required to accommodate future economic growth as well as to replace old power stations whose coal reserves will soon be exhausted.

Shale gas could also be diversified into an energy source for industrial and residential heating and chemical feedstock production. This will result in reduced oil imports which will have a favourable balance of payments effect.

In addition to the contribution to our diminishing energy resources, fracking will also contribute to relieving the increasing unemployment crises. Econometrix economist and principal analyst in the Karoo shale gas report, Tony Twine, indicated that shale gas exploration will satisfy the country’s future energy needs and will have a significant contribution to GDP, adding up to R200 billion (US$ 23 billion), and the establishment of up to 700,000 jobs. But at what cost? Currently the shale gas resources being explored are in the Karoo, an already fragile ecosystem which is under threat. Activists have been campaigning to prevent fracking but despite their resistance and pleas, fracking, turning into a reality, may be inevitable.

Fracking in South Africa will require significant initial capital investment and a sizeable budget will be required to maintain the infrastructure. The Energy Information Administration warns that turning technically recoverable resources into commercially viable production depends on the variations in their geologic structure. Economic recoverability also depends on the costs of extraction and the price received for natural gas. The body warns that small local variations can make gas extraction uneconomic. It calculates that a shale-gas well costing twice as much to develop and producing only half what a typical well in the US does is unlikely to be economically viable at current prices. So it is impossible to predict the potential value of developing South Africa’s resources until there is more certainty to how much can actually be extracted economically. It only requires a relatively small proportion to be economically extractable for the effect to be very significant. The economic consultancy Econometrix estimates if just 5% of South Africa’s resources are economically recoverable, this will add more than R80bn, or 3.3% a year, to gross domestic product for 25 years. This, Econometrix notes, is nearly double the total current contribution of coal mining to the economy. Government tax revenue would increase by R35bn a year. If 10% or 20% of the reserves can be turned to account, the long-term economic benefits for South Africa would be enormous.

In conclusion, fracking is seen as an alternative energy source for a country that has a significant energy shortage. One just wonders what the long term costs will be and whether or not there are better alternative sources of energy. What is certain is that the fight to save the Karoo is not over and if fracking goes ahead the quiet Karoo towns will be changed forever.

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