South Africa is not a significant producer of conventional natural gas. In fact, it is running a natural gas deficit. In 2010, only 25 percent of natural gas consumed was produced domestically. Taken together, natural gas accounts for just 3 percent of overall consumption. Coal, on the other hand, accounts for well over half of the country's energy needs, and almost all of this is produced domestically.
Energy Policy
With such an imbalance in energy sources, it should come as no surprise that Pretoria has prioritized energy security and diversification. Current government investments have favored coal, nuclear and renewable energy sources. Pretoria is considering an investment of several billion dollars to build a new nuclear power plant, with competing bids to come from China, France, South Korea and possibly Japan. There are two major coal-fired power plants currently under construction, and there are two existing coal-fired power plants being refitted. Furthermore, bidding is under way for alternative energy projects. The first round of bidding awarded 28 contracts to various companies worth $10 billion to $12 billion, and the second round for 31 contracts concluded March 18. These bids are part of a 20-year plan to have renewable energy sources account for 42 percent of electricity production by 2030.
Such efforts exemplify South Africa's goal of energy diversification and security. But notably absent from these efforts is the development of shale gas resources. Environmentalist groups have opposed any exploration of the Karoo Basin because it is located in a sparsely populated section of the country. As in other countries, opposition to hydraulic fracturing stems from water conservation issues. According to environmentalists, the process would compete for and contaminate water resources in the region.
Ultimately, it was the vocal opposition from environmentalists that led to the moratorium on hydraulic fracturing. While South Africa's ban on the practice — and by extension, the exploration of the Karoo Basin — could be lifted, investments appear to be focused on other energy sources in the immediate future.
Obstacles to Developing the Karoo Basin
Even if Pretoria had the political or economic will to develop its shale gas production capacity, success in this endeavor is far from certain. To quickly and effectively develop such reserves, five conditions must be met: There must be high concentrations of shale gas; technical expertise in extraction techniques and working knowledge of the local geography; established pipeline infrastructure; access to fresh water (to complete the hydraulic fracturing treatments); and huge amounts of capital. South Africa falls short on several of these conditions.
While high concentrations of shale gas are believed present in Karoo, the basin is a composite of complex geologic features, including volcanic sill intrusions, which possess no hydrocarbons but which increase the failure rate of drilled wells. This increases the risk involved in exploration, making the basin more difficult to develop.
Developing shale gas is an expensive endeavor — a single field can cost billions of dollars per year to develop — but obtaining capital would not likely be a problem. The South African government would be unable to finance shale gas exploration on its own, but there would be no shortage of energy companies willing to invest their time, money and expertise in exploration projects — assuming the South African government provides them sufficient investment conditions to make the return on investment they require. In fact, Royal Dutch/Shell and Falcon Oil and Gas have already expressed interest in operating in the Karoo Basin. Shell in particular would be ready to commence operations if and when the hydraulic fracturing ban is lifted.
However, because South Africa consumes so little natural gas, its natural gas pipeline infrastructure is negligible. A serviceable pipeline system would have to be constructed before large-scale shale gas production could take place.
Perhaps the greatest challenge facing South Africa's development of shale gas is posed by fresh water, millions of gallons of which is needed for just one hydraulic fracturing treatment. Water scarcity is already an issue in the semi-desert region in which Karoo is located. Most potable water there is sourced from underground aquifers, and much of the surface water is salinated. (Technically, it is possible to use salt water in hydraulic fracturing treatment, but it is a more complicated and therefore a less frequently used practice.) Moreover, chemicals used in the fresh water have aroused suspicions of water contamination in many environmental groups. It was this suspicion that in part led to the moratorium imposed by the government.
Unique Methodology
Should South Africa overcome these challenges and pursue domestic shale gas production, it is in a unique position to succeed with a technology that has yet to be widely exploited globally — GTL. South African energy company Sasol is at the forefront in pioneering this technology.
GTL is the conversion of coal or natural gas to liquid petroleum products, such as diesel or gasoline. The process entails breaking down the source material into its basic components called "syngas," a mixture of carbon monoxide and hydrogen. From there, the syngas can be reconstructed into a liquid product.
The GTL or coal-to-liquid (CTL) method has not gained popularity for several reasons. First, it is incredibly expensive. And while the technology is not new — Nazis used CTL in World War II — scaling the process up to commercially viable levels has been slow. Currently Sasol's GTL plant in Mossel Bay produces fewer than 50,000 barrels per day (bpd) of petroleum products — its other plant, of which it owns 49 percent, is located in Qatar and produces the same amount — while Pearl GTL, owned by Shell and also located in Qatar, has a capacity of roughly 140,000 bpd. (For reference, the Mossel Bay plant produces roughly 15 percent of South Africa's transport fuels.) More important, to be profitable, the method requires oil prices to be high but natural gas prices to be low, which appears to be the case currently.
Interestingly, it was apartheid that made South Africa one of the few countries to use GTL technology. It had abundant coal reserves to develop, and GTL was an opportunity to take advantage of those reserves and offset economic sanctions on the apartheid regime that limited its trading relationships with the international community.
Increased production from shale gas reserves would allow South African energy companies, already ahead of the pack in GTL technology, to expand production capabilities. However, this may not be enough incentive for the South African government to remove the hydraulic fracturing moratorium and allow for exploration of the Karoo Basin. At present, natural gas accounts for a small fraction of South African energy consumption, and current efforts to diversify the country's energy sources may keep it that way.
