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Govt statements leave key shale gas players confused

21st March 2014

By: Anine Kilian

Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – In his State of the Nation Address last month, President Jacob Zuma reiterated government’s belief that hydraulic fracturing (fracking) would be a game changer for the South African economy, while Mineral Resources Minister Susan Shabangu announced in January that government would move ahead decisively, yet responsibly, with the exploration of shale gas in the Karoo basin.

There has been some confusion regarding the Minister’s statement, however, as she published two notices in the Government Gazette in February, one halting shale gas exploration and the other granting licences in the country.

The first notice states that no exploratory licences will be granted until an appropriate law is in place. In essence, the restriction under Notice No 71 stipulates that the use of hydraulic fracturing may not be authorised until appropriate amendments to the current regulations have been promulgated.

The second, and more complicated, notice, Notice No 72, concerns Shabangu’s intention to restrict the granting of all new onshore and offshore applications received from February 3, 2014, for a period of two years.

Law firm ENSafrica oil and gas expert Dr Luke Havemann explains that the reasons given for the potential two-year moratorium are open ended. He says there has been some speculation that, during this period, the department will attempt to get its regulatory and legislative framework in order.

He says the reasons for the moratorium, as published under Notice No 72 in the Government Gazette are “. . . for the national interest and the need to promote the sustainable development of the nation’s petroleum resources”.

Havemann points out that South Africa does not have the most appropriate legislative and regulatory framework regarding fracking and the Mineral and Petroleum Resources Development Act (MPRDA) has been heavily contested on several fronts.

“Commentary on the MPRDA has for years been highly critical of the Act’s aim to regulate terrestrial mining and oil and gas. Many, including myself, believe that [the] oil and gas [industry] should have its own . . . specific legislative and regulatory framework,” he notes.

PwC director Chris Bredenhann agrees and states that, while mining and oil and gas exploration are extractive activities, they are managed differently.

“Based on this, there may be benefits to managing terrestrial mining and oil and gas separately and to establishing dedicated and specialised functions that ensure com- pliance,” he says.

South African Oil and Gas Alliance CEO Ebrahim Takolia tells Mining Weekly that the oil and gas industry is at a primary stage of development and the country does not yet have a significant upstream oil and gas industry.

“We need to have appropriate legislation, separate from the MPRDA, that encourages the development of a domestic upstream industry in the oil and gas sector,” he says.

Takolia adds that, by encouraging the upstream industry and incentivising exploration, the country has a greater chance of finding shale gas or offshore oil or gas, as more exploration will enhance the chances of discovery.

He stresses that, since an average exploration project for shale gas will amount to R10-billion in risk capital, legislative clarity is important to demonstrate an appropriate level of return for the capital invested.

Bredenhann points out that the moratorium was extended because fracking regulations have not yet been finalised.

“Government seems to be committed to the development of South Africa’s shale gas potential, but is taking a measured approach towards the potential environmental impacts,” he notes.

He adds that the restriction on new licences relates to new applications, while companies that submitted applications before the original moratorium was put in place, such as energy and petrochemicals company Shell and Australian oil and gas explorer Challenger Energy subsidiary Bundu Gas & Oil Exploration, will be able to continue with their application process.

“I sense that government wants to avoid a gas rush and speculative applications. I think the future of shale gas exploration is still posi- tive – given the potential size of the prize – but the regulatory uncertainty, with regard to not only fracking but also the current development of the Gas Act, the MRPDA and the Gas Master Plan being developed, must be removed to encourage ongoing investment and development,” says Bredenhann.

He points out that Shell and Bundu will not be able to proceed with exploration because the environmental and fracking regulations have not yet been finalised, adding that these companies have been issued with technical cooperation permits, which only allow for desktop work on the fields, with no form of actual drilling allowed.

“They applied for exploration permits, but the moratorium was introduced before these could be issued. As a result, they must hold off on further exploration activities,” Bredenhann notes.

He feels that the benefit of a two-year moratorium on the applications for exploration will mainly aid in ensuring that environmental impact has been properly considered.

Further, the development of a Gas Master Plan can result in a potential benefit, as the plan may recommend that the industry pursue a certain direction, which might be considered during this moratorium period, adds Brendenhann.

Takolia says, although shale gas could significantly alter South Africa’s energy sector, there are many hurdles that need to be overcome before the country reaches that stage.

He agrees that clarity needs to be reached on the legislative framework and emphasises that exploration needs to start confirming whether explora- tion potential can actually be converted into gas reserves.

“Should exploration yield large enough amounts of economically extractable gas that can be used for power generation and other industrial and consumer uses, it can be a game changer,” Takolia stresses.

He adds that South Africa can develop baseload power and peaking electrical power gene- ration capacity from shale gas and, importantly, can convert the shale gas into liquid fuels using new gas-to-liquid technologies.

“This could eliminate South Africa’s Budget deficit,” Takolia says.

DEVELOPMENTS IN UK
The UK recently thwarted the European Union’s (EU’s) attempts to set legally binding environmental regulations for its newly proposed shale gas industry, which could impact on potential shale gas development in South Africa.

Havemann explains that there are currently nine EU directives governing the exploration and production of onshore gas in Europe. An additional tenth directive, with a new set of rules, was proposed. This set of rules came about as a recommendation on how to deal with shale gas.

“There was pressure from the UK and other countries, including Lithuania, Poland, the Czech Republic, Slovakia and Hungary. UK Prime Minister David Cameron was in favour of using the current regulations, as he believes they are sufficient and that binding EU regulations would create a barrier to investment in the UK,” he states.

Havemann adds that Cameron was acting on the advice of the representative body for the UK onshore oil and gas industry, United Kingdom Onshore Operations Group, and has been informed by various agencies and bodies in the UK, for example, the Department of Energy and Climate Change, the Health and Safety Executive and the Scottish Environmental Protection Agency.

“There is strong support for Cameron saying that the UK does not need EU-level shale gas regulation. The battle is not over, however, as there is still a lot to be sorted out with regard to fracking regulations in the EU,” he cites.

He further notes that the UK is currently within its rights to elect not to conform to the current set of principles contained in the recommendation prepared by the European Commission (EC). However, there are arguments in favour of EU-level binding laws. European Commissioner for the Environment Janez Poto ˇcnik believes that EU-level regulations should be in place because, among other things, pollution does not follow political boundaries.

“Others in favour of EU legislation state that the current directives and legislation were put together before high-volume hydraulic fracturing was a reality and, therefore, updated regulations are required anyway,” he says. Havemann points out that this could impact on South Africa’s shale gas industry, as it could influence the shale- gas-related deliberations taking place at government level.

He notes that, as government is considering the regulation of fracking, it will benefit from having the principles set out in the current EU directives and EC recommendations at its disposal, adding that a comparative analysis of regulatory regimes is always useful.

“The effort that was put into the EU directives is praiseworthy, and is based on input from some of the leading experts in the field,” says Havemann.

ENVIRONMENTAL IMPACT
Takolia notes that when it comes to the potential environmental impact of fracking, South Africa is no different from other parts of the world that have significant shale gas potential, with lobby groups and environmental activists voicing their opinions against shale gas exploration.

“It is important to have this debate now to assess the costs and benefits of shale gas extraction from an environmental and economic perspective, but if South Africa is still debating whether we should extract shale gas in five years’ time, and we only implement extraction in ten years, it will be too late,” he says.

Takolia further notes that the US has made significant progress with regard to shale gas extraction, which means that South Africa can use tried and tested technologies to extract shale gas and mitigate potential environmental risks.

OPPOSITION
Antifracking environmental lobbyists are vehemently opposed to Shabangu’s comments regarding shale gas exploration, with many, such as Treasure the Karoo Action Group (TKAG) and AfriForum arguing that the Minister’s comments on shale gas mining are irresponsible.

AfriForum and the TKAG state that the Minister’s announcement is a disappointment in terms of the promises she has made regarding public consultation on the matter.

“To date, no effective public consultation has been undertaken by government on shale gas mining in South Africa, despite repeated calls from various stakeholders. Even though government mentioned that consultation will take place in Karoo towns, those proposed meetings have been cancelled,” says AfriForum environmental affairs head Julius Kleynhans.

He adds that various organisations and individuals have submitted detailed comments on the proposed draft technical regulations on shale gas exploration and extraction released late last year.

“There has, to date, been no discussion on the proposed amendments to the regulations, which are based on American Petroleum Institute standards. The fact that South Africa’s laws may be based on the same standards that have proved so problematic in the US is a serious concern,” argues Kleynhans.

He adds that South Africa will have to weigh several complex factors when assessing how to best proceed with exploiting its shale gas resources, with water management presenting the most significant risk.

Mining Weekly reported in March that an inter-Ministerial committee, led by Shabangu, has been focusing on the public comments and inputs for the draft regulations, which include the terms for an environmental- impact assessment. These stipulate that water resources should not be polluted. They also propose drafting a geological map of the Karoo basin, which could indicate potential structural problems.

The draft regulations were open for public comment after being approved by Cabinet on October 9 last year. Proponents of shale gas exploration, together with lobby groups against fracking, submitted extensive documents containing the motivation and substantiation for their respective arguments.

Water and Environmental affairs Minister Edna Molewa stressed that the exploration stage would identify problems and that government would take into account water and environmental concerns. She added that the final regulations would guide government on the exploration of shale gas.

“We are now at a stage of exploration and not exploitation,” she noted.

While remaining sensitive to environmental concerns, she said people would need to work out how to coexist in the future. Farmers in the Karoo have been opposed to fracking in the area and have repeatedly raised concerns, including water scarcity, the potential toxicity of the water and environmental degradation.

However, Molewa said it was likely that exploration would go ahead.

“We regard fracking as helping the country to deal with carbon emissions reductions. While working within the environmental considerations, if we find shale gas, we do think it will be a game changer for the country,” she said.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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