Fracking! Government wants to get cracking
The contentious question around shale gas keeps creeping up on the agenda and with the South African Government’s promises of decreased unemployment an ever-present energy supply issue and the varying groups of lobbyists constantly on the increase, it seems that neither fracking nor discussions regarding the topic are going to disappear anytime soon. Here we look into some of the challenges and aspects around shale.
It is not only the current critical shortage of energy in South Africa (worsened by the delays at the Medupe and Kusile power station construction projects) driving discussion, but also increased energy requirements from industry and urbanisation as well as the need for cheap and efficient energy. Renewables
such as solar and wind – while extremely clean and constantly reducing in cost per watt – still remain expensive as well as rather inefficient in relative terms,
not to mention the fact that this form of energy generation still remains very limited in terms of the number of projects/capacity coming online.
It became abundantly clear from President Zuma’s State of the Nation address that energy is a key priority for South Africa and that shale gas is absolutely on the agenda. The country’s current energy shortage, excluding requirements for the next 10 years which we need to take into consideration, is already estimated by some sources to be in the tens of thousands of Gigawatt hours. Suffice it to say that the shortage is immediate and growing and that there is a dire need for solutions which can be delivered in an environmentally friendly manner and gain political consensus. From this perspective, shale gas might look like a good “fix” as it – from a pure production perspective – could be up and running relatively quickly. (The realities surrounding the entire process and logistics etc is discussed later.)
Governments position likely stems from three key factors:
- Meeting energy demand which is at critical levels and slowing economic growth
- Unemployment: the immediate effects on employment are expected to be significant and would be felt in the upstream, supply chain and importantly also downstream operations.
- Attracting capital: this would be expected to ensure continued foreign direct investment (FDI) in sustainable capital projects.
These are likely the reasons motivating governments’ eagerness to progress with the shale gas project(s).
That said, many aspects have to be considered and remain to be discussed before any action is taken:
- Skills: Fracking brings the demand for specialised skills and there needs to be an active skills transfer program to avoid only using expatriates
to run and manage these sites and create sustainability.
- Ownership: Current draft legislation sees government taking a 20% share in any fracking venture with the right to purchase another 30% at “market
related prices”. This needs consideration because on average in the industry, these multi-million dollar investments in exploration have a 40-75% chance of failure. Doing so reduces the incentive and increases risk significantly for any investor. Both for risk-reward in production as well as the as yet unclear valuation to be used for the purchase of a future 30% share.
- Capital: significant capital for the investments in exploration and production is likely to come from offshore. Many global majors are probably keen on investing, but aside from the ownership issue above, the question is whether we are able to incentivise them on keeping cash (profits) in-country.
As this impacts the real impact and contribution to the local economy.
- Supply chain & downstream transportation/processing: The extraction of gas is really only a small part of the total challenge. If we look at where
these known deposits sit, the challenge would be how to find and manage many suppliers in remote locations such as the Karoo and more importantly how to plan and handle storage and transportation to where it is needed. This will also require the funding of infrastructure etc. Is there capital and
consideration as to who will fund this (whether rail or improved roads etc).
- Land ownership: Given that mineral rights in most cases belong to the government and that, as individuals, we typically have a fear of the unknown and many questions over the possible environmental impact, there is little incentive for people to support such ventures and it is likely that private
land owners will push back wherever they can.
- Potential Environmental impact: There are two key environmental concerns, firstly; where does all the water come from (fracking requires significant
quantities)? Secondly; in some systems it is claimed up to only 50% of the fracking fluid is recovered as the rest remains underground and it is argued that this can leach into soil and ground water. (This is now being mitigated through closed-loop systems, greener chemicals, well construction standards and is highly dependent on the seal rocks and general geological structure and remains highly contentious). Fracking fluids contain a number of chemicals that perform a multitude of functions such as acting as carriers, preventing corrosion, viscosity regulators, stabilisers etc. Can this potentially lead to short or even longer-term environmental issues? This question is hard to answer as many factors play a role and again,
the long –term consequences are as yet not proven. Would, for example, there be funds set aside for possible environmental issues that do occur?
Alternatives: Ideally we would use this discussion as a segue to a broader conversation around all types of energy production and the sustainability from an economic, environmental and political aspect. In general, fracturing cost efficiency is high compared to other renewables which has also prompted the high focus. Here we should consider the real opportunity costs and impacts of various forms of generation, including renewables, nuclear and co-generation, as well as their longevity.
Unfortunately for now renewables are relatively more expensive but could it nevertheless be the time to make that step-change and invest in improving the technology and using the abundance of, for example, sunlight we are blessed with, given that enough energy can be produced form 10 minutes of sunlight to power the earth for a year? A number of interesting alternatives are already emerging throughout the country including hydroelectric facilities such as the one on Johann Rupert’s L’Ormarins wine farm, the various sugar-cane bagasse that already powers multiple sugar mills in the country and other projects in the first three rounds of the renewable energy program for independent power producers (IPP’s).
And finally: It’s not all about creating new forms of energy generation
We mustn’t forget that as significant as energy creation is, energy saving through tight measures could lead to savings that are equivalent to a generation project in itself.
Various sources allude to Eskom’s Integrated Demand Side Program having saved over 2,000 MW of energy through their initiatives which is
noteworthy. The continued efforts and technology improvements (such as LED lighting, solar heating etc.) should be a clear part of any strategy.
From the above it becomes clear that there are many issues that need to be addressed and this list is by no means exhaustive. The key here is to ensure
all key stakeholders are involved and all possible options and ramifications considered. It is likely to be a lively debate as government aims to provide the energy as well as jobs it promised whilst pitted against those with environmental concerns as well as rival political parties.