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.