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Mar 02, 2012

Strong economic case for lifting shale exploration ban, economist argues

Econometrix economist Tony Twine and Shell country chairperson Bonang Mohale on the macroeconomic case for fracking in the Karoo. Camera Work & Editing: Darlene Creamer.
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The material macroeconomic, energy security and employment benefits that could potentially flow from developing the southern Karoo’s shale-gas resources offered a compelling case for government to consider lifting the current ban on exploration, a leading South African economist argues.

Speaking at the release of an economic modelling exercise completed by Econometrix, but bankrolled by hydraulic fracturing (fracking) proponent Shell, Tony Twine said fracking could add between R80-billion and R200-billion to the country’s yearly gross domestic product (GDP) if only a small portion of the speculated shale resource base was exploited.

The figures were based on the exploitation of either 20 tcf over 25 years, or 50 tcf over the same period, at a constant natural gas price of $8/mcf (thousand cubic feet), which was higher than the prevailing price of around $5/mcf.

The figures selected for the two scenarios equated to 4% and 10% respectively of the estimated resource size, which was currently estimated by the US Energy Information Agency as being 485 tcf, or the fifth largest globally.

Twine said that between 300 000 and 700 000 upstream and downstream jobs could be generated from what would be an entirely new industry, which could account for between 3.3% and 9.6% respectively of total GDP in 2010 terms – larger than the contribution from coal mining in the year, which stood at 1.8%.

Energy security was another key theme explored, with the study noting that, converted to oil equivalent, the estimated resource base would have the energy equivalent of 400 years of South Africa’s fuel consumption of around 500 000 bbl/d.

“This is indeed a large resource. The problem is that we’re not sure that it's there,” Twine said.

In the context of anticipated energy growth in South Africa, shale gas development could be a ‘game changer’, as the exploitation of a 24 tcf resource could power about 20 GW of combined cycle gas turbines, generating about 130 000 GWh of electricity per year – more than half the country’s current production.

But to firm up the real potential of shale gas, exploration was required, as the “macroeconomic modelling indicates very firmly to us that we need to think twice about simply dismissing the potential of the Karoo gas as not being worth the risk on ecological grounds, on social grounds, on technological grounds on legal grounds”.

Twine stressed that it was not in his competence to speak definitively on the ecological issues being raised in the public debate. But he argued that, besides the macroeconomic tailwinds, the internal rates of return associated with possible fracking operations were sufficiently large to ensure that developers paid attention to mitigating all the key risk factors, particularly the environmental risks.

Shell country chairperson Bonang Mohale said the group remained keen to move ahead with exploration and spend up to $200-million in a prospecting campaign that would involve the drilling of up to 24 wells in a 90 000 km2 area.

He said that this commitment remained despite the uncertainty surrounding fracking in South Africa and the fact that the moratorium had endured for more than 12 months.

Shell was expecting further clarity once Cabinet had applied its mind to a task team report in either March or April. The decision might also be held back until after the Square Kilometre Array sighting announcement, which was anticipated in early April.

The Econometrix report follows on from a national polling research report, also commissioned by Shell, to test the views of South Africans on the possible exploration of gas in the Karoo. Ipsos Markinor released findings indicating that the majority of the 2 000 respondents were in favour of determining the presence of gas in the Karoo, but that they would like job creation, economic development and environmental issues to be addressed.

Mohale would not be drawn on what Shell had spent on the reports, but said the company would “be prepared to spend whatever it takes to educate . . . to shed more light” on this subject.


But the opposition to fracking was also well organised, with the Treasure the Karoo Action Group (TKAG) having recently also formalised relations with US antifracking group, Water Defense.

It had also made legal progress in action taken against Mineral Resources Minister Susan Shabangu, who filed an answering affidavit in a matter brought by the TKAG, which was seeking to have the identities of the members of government fracking advisory task team disclosed.

It also dismissed the results of the Ipsos Markinor opinion survey, commissioned by Shell, saying that opinion polls fail to factually address the issues being considered by government and should be irrelevant to any outcome of the task team’s “fact-based” investigation.

In response to questions posed by Engineering News Online regarding the Econometrix report TKAG chairperson Jonathan Deal questioned the validity of the report's description of the upstream and downstream jobs as ‘permanent’ and ‘sustainable’ on the basis that no aspect of the fossil-fuel industry could be so described.

He added that the Econometrix report appeared to 'cherry-pick' data and reports from elsewhere. "We wonder if the author has considered data available from the US, in which actual industry studies reflect that shale gas wells fall to subeconomic levels in an average period of 36 to 48 months, and that, on average, they operate at approximately 20% of the first-day yield after 12 months."

Deal said there was still a lack of scientific and economic consensus on fracking globally and that, "until this debate is more settled" particularly in the US, the Econometrix "projections could be viewed only as an opinion".

"There is undeniably, a requirement for a thorough cost-benefit analysis of shale gas mining in South Africa," he added, but said TKAG had grave reservations on the depth and scope of the Shell-sponsored study.

An independent study, framed within a strategic environmental assessment, would encompass aspects that must be settled before taking a decision as to whether or not shale-gas mining is the best, and only way for South Africa to sustainably address its energy, employment and revenue needs.

Edited by: Creamer Media Reporter
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