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Is shale gas in South Africa’s future?

According to the US Energy Information Administration’s recent ‘World Shale Gas Resources’ report – South Africa is estimated to have 390 trillion cub feet of recoverable shale gas – the eight largest shale gas resource in the world.  This resources, which exists mainly in the Karoo, has been the source of much debate and contention.  In April 2011 the South African government has introduced a moratorium on licensing and shale exploration, based mainly on environmental concerns of the effects on the water table in an area which is already considered ‘water scarce’.

However, in September 2012, with the lifting of the moratorium, Royal Dutch Shell submitted applications to explore for and develop shale gas resources in the Karoo.

According to Jon Mainwaring of Rigzone, “the lifting of the moratorium came with the proviso that pending applications for exploration rights would not be processed and awarded until regulations regarding unconventional exploration were published. The regulations were finally published in October 2013, which means that companies who have made applications for exploration permits now expect these to be awarded by the end of this year.”

Another potential stumbling block in the development of shale gas is the proposed mineral resources legislation which could see the government holding a 20 per cent “free carry in any hydrocarbon projects, both onshore and offshore, while also giving it the right to acquire the remaining 80 percent of these projects at a predetermined price”.  This proposed legislation has been criticised by the Offshore Petroleum Association of South Africa on the basis that it will negatively affect investment into the country’s oil and gas industry.

This criticism has since been noted by South Africa’s new mineral resources minister, Ngoako Ramatlodhi, who told the UK’s Financial Times in mid-June that he has already advised the country’s president not to sign the controversial amendments.

Clarity, however, is still required on what companies who invest in South African shale gas exploration and development can expect to yield in terms of reward for their risk, but the progress outlined above appears to indicate that South Africa is edging closer to developing its shale gas resources and a serious shale gas industry.

Mainwaring reports, “If this happens, it could lead to the creation of between 300,000 and 700,000 jobs in South Africa over a 25-year period due to the boost that cheap shale gas would give the country’s economy, according to Johannesburg-based economic consultancy Econometrix. This estimate is based on just 48.5 trillion cubic feet of shale gas being developed.

Econometrix argues that not only would shale gas producers, consumers and the government (via tax revenues) benefit from the development of the industry but that there would be a knock-on effect for energy-intensive industries thanks to lower input costs.

Companies interested in developing the Karoo shale include not only Shell but also France’s Total S.A., Exxon Mobil Corp. and Chevron Corp. Chevron signed a joint venture deal in December 2012 with junior energy firm Falcon Oil & Gas Ltd., which has a Technical Cooperation Permit giving it exclusive rights to obtain an exploration permit covering 7.5 million acres in the southern part of the Karoo basin.

The next step will be for the South African government to begin awarding shale gas exploration permits to oil and gas firms. Falcon believes that this will take place at some point during the remainder of 2014.

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