TO FRACK OR NOT TO FRACK
TWO weeks before he died tragically of a heart attack in March this year, the economist Tony Twine made public the result of his research into “economic considerations surrounding potential shale gas resources in the southern Karoo of South Africa”.
Weighing in at an even 74 pages, this was heavyweight research, which lent an air of establishment legitimacy to the claim that “fracking” would change the game for South Africa by solving its energy problems for the foreseeable future.
Until then, the idea that gas – and the Karoo is thought to have the world’s fifth-largest reserve at 500 trillion cubic feet – could be liberated from the shale deep below the grazing sheep through “hydraulic fracturing” had been framed as a debate between farmers and conversations wanting to preserve the land and ruthless energy companies wanting to exploit it.
The report developed three scenarios. The first was predicated on all the gas being exported, the second on half of it being exported and the third on none of it being exported. Even if all the gas were to be exported, the model predicted as many as 161 943 jobs would be created in production and in industries supplying producers.
But the statistic which hit the sweet spot was the prediction that as many as 854 757 jobs would be created if the gas was not exported but rather used to provide cheap electricity and power to industry and homes.
The fact that this was the most optimistic scenario of six presented; that it would only come about if economic growth took place at levels not seen in democratic South Africa with all of the shale gas being utilized locally; and that the research making this projection was commissioned by Shell, was soon lost. Contrarian commentators, government officials and energy bulls quickly turned Twine’s most improbable outlying scenario into the mainstream consensus.
From then on, discussion about shale gas extraction would begin with phrases such as: “We’re talking about 800 000 jobs here,” or, “Look at what shale has done for the US which is no longer dependent on foreign oil.”
By the time the Treasure Karoo Action Group published a systematic critique of Twine’s paper in August, the horse had bolted.
The organization, representing farmers and others opposed to shale gas extraction, commissioned a response to Twine’s paper by De Wit Sustainable Options. It showed how the Econometrix report had been very careful to explain how uncertain it’s conclusions were.
Econometrix had said: “…estimates for gross fixed capital formation relating to the project and downstream activities generated or induced by the project must be viewed as extremely tenuous.” There were several other instances where Twine and his fellow researchers had warned that findings were “notional” and “illustrative rather than predictive”.
De Wit concluded: “The model is not designed for and cannot
give answers on key uncertainties such as the quantity of gas that can be
economically produced, the length of time gas drilling and production takes
place at any area, the nature and possibility of boom/bust cycles, the costs of
production, future gas prices, the longer-term environmental, health and social
external effects, and the financial costs of possible future environmental
liabilities to the state.”
But, by then, the horse had bolted.
It is not difficult to see how fracking attained this “magic bullet” status with government and business. The two decades since the fall of apartheid have been characterised by “jobless growth”. More people have been employed, but not enough to absorb new entrants to the labour market.
South Africa’s politicians are increasingly wary of the growing pool of disillusioned youth who are a potential recruiting ground for populist politicians such as Julius Malema and his Economic Freedom Front. Although publicly sneered at and dismissed, senior ANC leaders are privately worried about the populist threat, especially since their ally, Cosatu, appears to be disintegrating.
The rapid expansion of social grants, now distributed to some 15.5-million people, has kept this rebellion in check. But this sort of spending cannot be expanded forever – especially if the economy continues to stagger forward at a growth rate of only 2%.
Government has decided that it is going to bet on shale gas and is preparing to allow exploration to confirm the existence and extent of deposits in the Karoo.
It is solution which chimes nicely with its statist vision of heavy industry working closely with the state to create “decent jobs” as the answer to unemployment.
But is fracking the magic bullet it has been made out to be? Even as South Africa becomes bullish about shale extraction, there is growing criticism of its commercial viability in the US.
At the annual meeting of the Geological Society of America – a 125 year old organisation with a credible record – in Denver, Colorado, this week, the validity of claims about shale gas were questioned.
Among the presenters was Arthur Berman of Labyrinth Consulting Services, who argued in his abstract: “After 10 years of production, shale gas in the United States is a commercial failure. This is because decline rates are high, per-well reserves are lower than expected and costs are higher.”
The financial results of leading American shale gas company, Chesapeake Energy Corporation “calls the shale gas business model into serious question,” said Berman.
Instead of drilling holes, capping them and sitting back while the gas flowed well into the future, shale extraction had morphed into a “just-in-time phenomenon meaning that the drilling can never stop or production will plummet.”
Berman’s abstract concluded: “When viewed objectively, it is impossible to deny that shale gas has been a commercial failure in the U.S. Accounting tricks and unrealistic modeling assumptions are commonly used to make the case for abundant and cheap shale gas for decades but these are not grounded in fundamentals.”
Accounting tricks? Unrealistic modeling assumptions? That would never happen in South Africa, would it?
The real profits from fracking in the US appear to be coming from releasing “tight oil”, not the dry gas that is believed to lie in the Karoo shale.
Of course if the price of shale gas rises rapidly, US production will cease to be a “commercial failure”, but then shale gas wouldn’t be the cheap energy source that has been touted.
Shell itself has had to write down US $2.2 billion because of the poor performance of its shale operations in the US.
According to Reuters, CEO Peter Voser said on the sidelines of the World Energy Congress in August: “We didn’t get the results which we were expecting to get in the shorter term and we will therefore have to develop this a little bit more before we can take benefits from it.” He added: “It was clearly not as successful as thought.”
There are clear signals that shale gas exploitation in South Africa might also not be “as successful as thought”. Sasol has been quoted as saying that the cost of drilling a well in South Africa may be six times as much as that of drilling one in North America.
Add to this the likelihood that the state will insist on local partnerships – quite probably with well-connected consortiums of local businessmen – and the costs go up. Then there is the likelihood that gas prices will be state regulated. The minister of mineral and energy affairs has already said coal prices need to be state-controlled.
And, while such drilling operations might create local jobs, it is likely that many of the top level jobs will be imported from countries where there is experience with drilling such as the US and Canada.
Among the arguments for shale drilling is that gas could replace coal as a cleaner source of energy for electrical power generations. But such arguments seldom discuss the impact that this would have on the local coal mining industry, where tens of thousands of miners and others indirectly benefiting from the industry could find themselves out of work. Stated crudely, the Karoo might be flooded with high-tech foreign workers as South Africans loses local jobs in Mpumalanga.
The decision-making around fracking will set in motion months – possibly years – of conflict between government, energy companies and those who own the land on which the reserves are located.
Draft regulations for exploration have been issued and the public has until November 14 to respond. After that, the minister will have to decide whether to accept or ignore the large volume of arguments against fracking that are likely to be aired. Parliament will have to discuss them and, if the processes are completed, energy companies will be issued with licences to explore, probably only some time next year.
Then begins a new and complicated process as they identify the farms they would like to explore on and inform farmers in writing.
Activists such as the Treasure Karoo Action Group’s Jonathan Deal are preparing to fight exploration all the way. “There’s going to be a large volume of public comments. It’s not going to be a short or simple exercise.”
Energy companies are likely to find themselves stonewalled by Karoo farmers. “The farmers have been advised not to negotiate, but to hand it to the lawyers,” says Deal.
By the time the magic bullet is fired, it may be with a whimper, rather than a bang.
Statement by Ray Hartley, editor of the Sunday Times
THE minister of police has conceded that the arrest of Sunday Times journalist Mzilikazi wa Afrika was wrongful and has agreed to pay him R100 000 in damages and the newspaper’s legal costs.
Wa Afrika was arrested just days after the Sunday Times published a story exposing then police commissioner Bheki Cele’s involvement in a dodgy lease deal for new police headquarters in Pretoria.
Cele has subsequently been fired following several investigations which upheld the truthfulness of the story.
Wa Afrika was denied access to legal counsel for 48 hours. He was transported by police van to Mpumalanga without the knowledge of his lawyer and interrogated in the early hours of the morning.
No case was ever brought against Wa Afrika in court, and the Sunday Times believes that he was the victim of an outrageous act of intimidation by the police.
“This was a full-frontal assault on freedom to report on corruption and it is comforting that the minister has acknowledged the arrest was wrongful. However, no amount of money can make up for the pain and suffering experienced by Mzilikazi,” said Sunday Times editor, Ray Hartley.
STATEMENT BY SUNDAY TIMES EDITOR, RAY HARTLEY
The decision by acting Judge Nomsa Khumalo of the Pretoria High Court that the Sunday Times can publish the article “How Zuma got off the hook” represents a victory for free speech.
The judge ruled that the NPA had failed to argue that there were grounds for an urgent interdict against the newspaper and awarded costs to the Sunday Times.
The story by a award-winning investigations unit (Stephan Hofstatter, Mzilikazi wa Afrika and Rob Rose) is based on over 300 pages of leaked documentation, which show that top prosecutors were convinced they had a winning case against Jacob Zuma. Despite this, the then Acting head of public prosecutions, Mokotedi Mpshe overuled them and dropped the charges in 2009.
The story includes details of secret representations made by Zuma’s lawyers to the NPA and a series of internal memorandums in which top prosecutors argue strongly against dropping the charges despite claims that the prosecution was tainted by political interference. Their argument was essentially that political interference should not trump the merits of the case which they believed to be strong enough for a successful prosecution.
Sadly, the NPA has said it intends bringing a fresh court action against the Sunday Times this week on the grounds that the documents were illegally obtained. This too will fail because the documents were leaked to the Sunday Times and are demonstrably in the public interest.
Instead of trying to keep vital information away from the public, the NPA would do well to heed the constitution’s call for an “open” society and its protection of freedom of expression. Its dogged attempts to protect certain political leaders from public scrutiny are raising serious doubts about its ability to serve the public with the independence and integrity required of a prosecuting authority.
What is chilling is that if the Protection of Information Bill is passed in its current form, this sort of reporting will become illegal.
Our future and our way of life are at stake By Ray Hartley
The rise of the movement to place in power Jacob Zuma at best an incompetent, at worst a man who believes it is acceptable to take bribes poses a grave risk to this country.
To date the political battle between President Thabo Mbeki and Zuma has been cast as simply another political power play. It is more than that.
It threatens to unstitch the political and economic fabric which has been so carefully sewn into place over the past 11 years.
The ascendancy of Zuma from icon of the left to mass populist figure has just begun; it is hard to see how those within the ANC who remain opposed to corruption will turn the tide.
They have allowed Zuma to seize the initiative and have failed to offer the public a credible leadership alternative to fill the vacuum which Mbeki will leave when he steps down in 2009.
They appear to be relying heavily on institutional action to save the day, waiting for the criminal justice system to deliver a knock-out blow by finding Zuma guilty of corruption.
Zuma and his growing band of supporters are meanwhile outflanking them by challenging the very foundations of these institutions.
They are fighting for and winning the battle to have the Scorpions stripped of their independence.
They are openly striking at the credibility of the judiciary and demanding that they have a veto over who is appointed judge *1 in Zuma’s trial.
They have already discounted a guilty verdict and made it plain that they will see Zuma as a martyr around whom to mobilise in the event of such a verdict.
They are, in short, a few steps away from power.
Which begs the question: what will they do when the levers of the state are in their hands?
The answer ought to frighten those who cherish this democracy. It is not a difficult scenario to sketch. The likely platform of such a presidency has already been frequently aired in public it’s just that nobody has been paying attention.
Zuma would be a heavily indebted president. He would owe political favours to the curious alliance of ultra-left and/or dishonest politicians who are pinning their hopes on his ascendancy.
The first assault of a Zuma presidency would be on the independent institutions of democracy, with the greatest effort going into the destruction of the power of independent prosecution as exemplified by the Scorpions. Zuma has already made it plain that he holds the Scorpions in contempt.
Institutions such as SARS, which would threaten the successfully prosecuted but newly rehabilitated elite, would find their independence curtailed.
Parastatals would likely find themselves under new and less independent management as the crony state takes hold.
Credible, skilled persons holding office in such institutions would flee to the private sector, or abroad.
This would, in turn, open the society to corruption on a massive scale. Without the diminishing prospect of judicial consequences, the scale of graft and fraud in the public and private sectors would escalate.
The populists have made the delivery of services to the poor one of their causes, but, ironically, service delivery would all but cease as the state machinery stuttered to a halt, mired in corruption and bereft of skills. The poor would suffer, perhaps all the more harshly because of the cloak of anti-poverty that the state would wear.
Businesses needing to interact with the state would find themselves forced into cronyism. Those that did not play along would find themselves isolated.
The media, that part of it still willing to expose and confront corruption, would find itself operating in a hostile political environment.
Zuma would be indebted to the left; its new-found populist leaders, such as Zwelinzima Vavi and Blade Nzimande, would be likely to find their way into the Cabinet, where their anachronistic economic fantasies could become reality.
Labour liberalisation is likely to be reversed in favour of a highly regulated labour market in which job protection would be further entrenched.
Against this background, the disincentive to employ would increase.
Inflation targeting would be abandoned in favour of the left’s frequently expressed desire for a low-interest rate-led growth path.
The upshot of all of this would be a deterioration in South Africa’s sovereign rating as global agencies re-rated the country’s debt-worthiness.
This would increase the cost of capital for the state and for state-owned enterprises which would diminish the resources available for the delivery of services.
The poor, unable to enter the stratified job market and without the support of efficient state agencies to deliver welfare, health and education services, would eventually rise up.
Political risk would increase and the state would find itself without the institutional wherewithal or the political will to reverse the trend.
South Africa would find itself unable to deal with a collapsing Zimbabwe as the left asserted its agenda of economic isolation.
The spectre of corruption past would haunt the head of state, who would be privately mocked by his peers as he assumed his seat on the world stage.
South Africans who think the Zuma carry-on is an amusing piece of showmanship, wake up. Your country is facing ruin.
AFTER months of prevaricating, the ANC has finally charged its Youth League leader, Julius Malema, for his outrageous behaviour.
In a statement issued on Friday, the chair of the party’s disciplinary committee, Derek Hanekom, said Malema would be charged with “various violations of the ANC constitution, including bringing the ANC into disrepute through his utterances and statements on Botswana and sowing divisions in the ranks of the ANC”.
It is clear that the straw which broke the camel’s back was Malema’s stated intention to interfere in the internal politics of Botswana.
Malema said earlier this month that the neighbouring country was a threat to Africa because it was discussing a possible military base with “imperialists”.
“That puppet government [of President Ian Khama] is going to undermine the African agenda.”
He went on to call for Khama’s removal in a “democratic manner.”
“We know that Botswana is in discussions to open a military base for the imperialists and the present government of Botswana has the potential to co-operate in this manner,” he said.
That a leader of some stature in South Africa’s ruling party should announce plans to topple a neighbouring government is clearly totally unacceptable and the ANC is right to take Malema to task.
What is less clear is which of his other “utterances” will be dealt with.
Will the ANC have the courage to rein in Malema for his bombastic calls for nationalisation which have seriously damaged this country’s prospect of attracting foreign direct investment?
Will the party have the courage to call him to order over his outrageous racist statements which run counter to the party’s philosophy of non-racialism?
Having finally grasped the nettle, the ANC would be wise to go all the way, to mix a metaphor.
This is a fight to the death. If Malema survives unscathed because of weak prosecution or a reluctance to bring the full might of party discipline to bear, he will emerge stronger than ever.
He will then make a very damaging bid to unseat the party leadership at its Manguang conference next year, leading to more uncertainty over leadership and the direction this country is taking.
South Africa is a robust democracy, but the ANC must understand that the messages its senior leaders send out are taken to be the views of the governing party.
The consequences for South Africa of Malema’s attack on the fabric of society have already been severe. Let’s hope this action is not too little, too late.
THE launch of the National Health Insurance plan has taken South Africa another step down the road to becoming a welfare state which seeks to redistribute resources from its tax base to a population which faces dimming job opportunities.
As the Financial Mail pointed out this week in an editorial under the banner “Welfare state by stealth”, South Africa now pays social grants to 15 million people.
There are countries where this approach has been successful. The Scandinavian nations have a high tax rate in exchange for which all citizens enjoy access to cheap or free health care and education.
They have done so while their economies have been competitive global players that have created employment and kept tax revenues coming.
Then there are other, less salutary examples. Health care in Cuba and North Korea is free, but the price has been industrial stagnation under repressive regimes which have encouraged desperate poverty.
The question which remains unanswered is which direction South Africa will take. There are very loud voices within the ruling party which would like to see the destruction of the free market and “bourgeois” freedoms enshrined in the constitution. They believe in a hegemonic state of the Cuban stripe.
These loud voices are no longer on the “outside”. President Zuma himself believes that the media enjoys too much freedom and that the constitution is overly liberal.
His youth league leader, Julius Malema, is allowed to develop and propagate a doctrinaire Stalinist vision for this country with only the meekest censure.
The ANC’s economic policy approach — a free market model with a firm regulatory hand and a socially responsible state — is being openly challenged and there are very few voices arguing for the status quo.
Even powerful figures such as Cyril Ramaphosa, who have done well for themselves in business, are unable to criticise nationalisation without first subjecting business to a rhetorical tongue-lashing, such is the power of this lobby.
Whichever welfare model South Africa ultimately adopts, it will be a bold experiment because just 10 percent of the population — five million people — pay the taxes that are being allocated to these ambitious projects.
While the super-rich can easily afford this growing burden, the middle classes are under pressure. Rising education, health and security costs are causing those traditionally loyal to the ruling party to seek political alternatives. Perhaps most sobering is the fact that, unless economic growth miraculously takes off, we are setting ourselves up to borrow on a large scale to finance a very expensive state just as the world wakes up to the consequences of accumulating debt.
THE state is continuing to seek ways of ameliorating possible future job losses which may or may not result from Walmart’s investment in Massmart.
It would like the R100m set aside for this purpose increased to R300m. This newspaper has in the past questioned the wisdom of the state taking its own regulatory authority to court because this will make South Africa even less of a global destination for real investment.
But there is a secondary effect which this tinkering will cause — the distortion of the business environment for retail.
Just last month Pick n Pay — a direct competitor of Walmart’s — announced it was cutting 3000 jobs without a murmur of dissent from government.
There was no demand for the creation of a fund to ameliorate the results of this decision. Apparently job shedding by wholesome South African companies is not frowned on by the anti-imperialist lobby.
What this in effect means is that Walmart is paying a penalty for a possible future transgression while actual job-shedding goes unpunished.
No company should make a decision to shed jobs lightly and the state is entitled to ask serious questions when thousands are to lose their jobs.
But legislating against this or imposing fines in anticipation of it happening is not the way forward. All this does is make South Africa’s labour market less competitive, causing us to lose out on the jobs that further foreign investment would bring.
Distorting the market with piecemeal interventions smacks of ignorance and arrogance.
*This is a draft leader for the Sunday Times
1. Captain America’s superhero outfit was made in China.
2. Captain America no longer aspires to be an investment banker.
3. Captain America can spend up to US $500 bn chasing a bad guy through the desert without catching him.
4. Captain America is always hitting on Batman for a tenner. It’s annoying.
5. Captain America is now the only American who can fly himself into space.
6. Captain America is and always will be white. Even when the president is black.
7. Captain America has quietly moved his support staff offshore for tax reasons.
8. Captain America’s other car is an SUV. But that’s parked because of the gas price.
9. Captain America can never find Captain Africa’s home on a map.
10. Captain America knows how to get you to talk.
I hope Captain America can muster enough irony to chuckle over this. Maybe not.
PRESIDENT Jacob Zuma’s decision to abstain from public discussion on matters of great public importance is reinforcing the view that South Africa has no decisive leadership.
Over the past several weeks, devastating criticisms have been levelled at several of the government’s most senior leaders.
The public protector, Thuli Madonsela, has released her final report on how key leaders wrongly consented to the signing of two dodgy leases to the tune of R1.78-billion for police buildings in Pretoria and Durban.
Her report makes it plain that, between them, the Minister of Public Works, Gwen Mahlangu-Nkabinde, and police commissioner General Bheki Cele flouted regulations, ignored tender rules and seriously abused the trust placed in them to use public money wisely.
In Mahlangu-Nkabinde’s case, Madonsela specifically directed the president to take action. In Cele’s case, she called on the Minister of Police, Nathi Mthethwa, to act.
Zuma has not only failed to act, but has offered no explanation of how he intends to deal with this matter, showing contempt for Madonsela and for the public.
There are other signs that Zuma is failing to exercise presidential authority.
Three of his ministers have decided to challenge the ruling of the Competition Commission on Walmart in what can only be described as an act of immature political defiance against a government structure.
That a foreign investor can one week be allowed by a regulator appointed and regulated by the government to invest, only to find that the government challenging its own decision the next, is deeply perplexing.
That the Minister of Finance, Pravin Gordhan, is not part of this action suggests that it does not enjoy the support of Zuma’s entire cabinet.
It is worth asking if the absence of leadership has become so grave that Zuma no longer has authority over all his ministers.
Zuma’s strength is his ability to bring together those who disagree. His weakness is that he is unable to take a position which might alienate one or another member of the coalition that brought him to power in Polokwane.
Thus the ANC’s youth leader, Julius Malema, is able to say or do almost anything without consequences.
Left-leaning ministers who see foreign investors as evil imperialists are allowed to go to court to challenge decisions made by government bodies.
And appalling financial decisions such as those made by Cele and Mahlangu-Nkabinde go unpunished.
Zuma had better wake up to the fact that he is putting his weakness on display. He will not survive as leader unless he shows he has the mettle for the job.
@This is a draft leader for the Sunday Times
I am Ray Hartley, the editor of The Sunday Times in South Africa.
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