Sequestered deep beneath Southern Africa’s onshore and offshore surfaces are their next trillion-dollar resource boon, lying in wait – if industry and government can manage downside risks. By some accounts, the world could be entering a ‘Golden Age’ of natural gas (natgas) led by aggressive Chinese consumption: a scenario in which the natgas share of energy consumption rises from 21% in 2010 to 25% or more of total usage by 2035.⁽²⁾ A comingling nexus of international image-management, public health and safety, and environmental concerns are stacking up, and concomitant shale gas discoveries are stoking hype that a shift may be on the global energy horizon.

And while North Africa has traditionally dominated continental oil and gas production and exploration (P&E) headlines, Southern Africa has the gas resources to defy expectations by stealing some of that spotlight, especially when the controversial hydraulic fracturing (fracking) process gets the green light in South Africa’s onshore bounteous shale plays situated in the coveted Karoo Basin landscape.⁽³⁾

While Mozambique is already leading the charge to export gas to Asia, South Africa’s potential gas assets are five times larger in volume.⁽⁴⁾ And on 16 June 2013, Angola’s first liquefied natgas (LNG) exports set sail for Brazil ⁽⁵⁾ with Asian buyers watching in the wings. Nevertheless, the proved amount of South Africa’s technically recoverable, largely untapped, largely onshore natgas reserves trapped in shale rock formations totals an estimated 11.04 trillion cubic metres (Tcm) of volume, the equivalent of about 390,000 trillion British thermal units (TBtu).⁽⁶⁾ In June 2013, the highly anticipated report estimating that value, ranked South Africa’s reserves at eighth largest in the world.⁽⁷⁾ To be sure, the ‘technically recoverable’ volume, by and far, overstates what is economically viable to release from ‘tight’ rocks.

But despite that South Africa’s energy needs may mean a largely domestic focus for its natgas development – and rightfully so – doesn’t preclude Asian interest. That China Petroleum & Chemical Corp. and PetroSA signed a cooperation framework in March 2013 is proof in the pudding.⁽⁸⁾ If South Africa’s coal industry is an indication of its trajectory, it will find a way to balance domestic needs against the draw of export growth.

This CAI paper examines three interrelated factors that are key in determining the impact of natgas on Southern Africa’s development. First, price reigns supreme. How sale prices stack up to the related costs of accessing and releasing natgas from Southern Africa’s complicated geography will inform how much gets extracted where and to what effect. Second, there are the regulations. These will have to mitigate the social and environmental side effects that draw a fever pitch of opposition. And third, the proportion at which the region keeps the resource versus the amount it exports (largely, to Asia) will weigh on its aggregate value to development.

Pricing Southern Africa into the market

The cost to produce the gas is one issue. The price it may fetch in domestic, regional, or international markets in the future is another. The overriding calculus is informed by a mélange of considerations including the proven scale of the economically recoverable gas, subsuming the extraction costs including resource and capital inputs, the costs of regulatory compliance and expected market value.

Local consumption is one piece of the puzzle. Regional natgas producers at the country level are more freely empowered to deploy price controls than in global sales.

While both have international investment interests onboard, including Asian players in each, Mozambique’s will to export ⁽⁹⁾ is by far clearer than South Africa’s. That’s because South Africa’s economy is 26 times larger and is home to a population twice the size of Mozambique’s, and uses 23 times the amount of electricity.⁽¹⁰⁾ (A paltry 16% of Mozambique’s population was estimated to have some level of access to electricity in 2013, compared to 80% of South Africans).⁽¹¹⁾ And perhaps most importantly of all, Mozambique’s natgas resources under development are offshore and ‘conventional’, i.e. – not trapped in shale rock formations.

By comparison, South Africa’s production is characterised by a small, but developed and growing level of offshore natgas production activity, with a flurry of exploratory activity taking place onshore, but with an uncertain future, given the contentiousness of fracking. Mozambique, on the other hand, recently discovered large offshore holdings, and has a more developed onshore natgas industry.

But with the genesis of any such ‘Golden Age’ of gas contingent upon uncertain growth in China’s demand, as well as a bewildering array of prices even within China itself, gas industry players and government regulators will monitor what gas stocks fetch as a barometer of the natgas investment climate in Africa’s southern region.

China’s natgas activity ⁽¹²⁾

Importantly, the assumptions have provided for strong international interests at this early stage, headlined by Asian dynamics. The four ‘pillars’ of gas industry growth according to the International Energy Agency are:

1.     accelerating natgas demand out of China;
2.     slowing growth in global nuclear energy capacity;
3.     expanding natgas use in transportation;
4.     and expanding global natgas supply optimism.⁽¹³⁾

Some analysts are arguing that China’s demand alone will drive LNG demand in the near future.⁽¹⁴⁾ Although China is home to the world’s largest supplies of shale gas, the economic feasibility of its recovery is in question, as is their domestic technical capability to execute on fracking methods pioneered in the United States (US) and Canada. After the March 2011 triple crisis in Japan – hit with an earthquake, the resultant tsunami, and the Fukushima Dai’ichi nuclear meltdown and loss of radioactive materials containment – the following December had ushered in to China, a six-fold price increase from US$ 4.30 to US$ 25 per million Btu of natgas.⁽¹⁵⁾ Demand in China for natural gas between 2010 and 2011 had seen over a 20% year-on-year increase.⁽¹⁶⁾

But Japan’s decision to shut down its entire fleet of 50 nuclear power stations, and having only restarted two of them by mid-May of 2013,⁽¹⁷⁾ has had consequences for Southern Africa, too. Its announcement at the fifth quinquennial Tokyo International Conference on African Development (TICAD V) to support national investments with billions of dollars seemed like a wedge with which it would keep its options for investing in Africa’s energy and other commodities open while it internally assessed the future of nuclear programme.⁽¹⁸⁾ Apart from coal investments in Mozambique, Japan has sent national energy companies scrambling to weigh the prospects of more of the world’s LNG imports than any other country in 2012. As aforementioned, weak demand for nuclear power is a ‘pillar’ of a ‘Golden Age’ scenario; Japanese demand affects both the level at which supplies are sought and their resultant prices.

The largest construction company in the US, Bechtel Corporation, won the front-end engineering and design contract for Mozambique’s LNG facility in January 2013 and began initial activity in February.⁽¹⁹⁾ It’ll have the capacity to liquefy 5 million metric tonnes (MMT) of natgas per year; though will be built for an expansion of to up to 50 MMT capacity.⁽²⁰⁾

The LNG export terminal is billed as what will be upon its completion, the world’s second largest of such terminals in the world (at a cost of US$ 50 billion) and its current group of investors are eagerly awaiting the investment decisions of Japanese parties who seem to be stalling the process.⁽²¹⁾ Although gas isn’t scheduled to come online until 2018 when the project is completed, investors have been keen to solicit LNG importers in advance; in addition to resolving the nuclear power question, Japan is evaluating what will be its level of LNG imports from the US before committing to a particular level of imports from Mozambique’s Indian Ocean production.⁽²²⁾

Mozambique’s ‘Area 1’ investors ^(23,24) (see picture on right)

Mozambique’s ‘Area 4’ investors ⁽²⁵⁾ (see picture on right)

So notwithstanding Japan’s hesitations, the industrial activity in Mozambique surrounding natgas P&E is distinct from South Africa’s shale exploration by the presence of more numerous smaller, state-owned company players in partnership with a few larger multinationals.⁽²⁶⁾ In contrast, South Africa’s forestalled shale plays are being tending by a supermajor, Dutch Royal Shell, amid four other players.⁽²⁷⁾ Italy’s Eni is the largest of Mozambique’s non-Asian players. Other interests include South Korea’s Kogas, India’s BPRL, Japan’s Mitui E&P, and most recently, China’s CNPC who took a 20% stake in ‘Area 4’, the largest of the offshore gas plays, for US$ 4.21 billion.⁽²⁸⁾ Additionally, India’s ONGC Videsh and Oil India had revolved into and out of news surrounding Mozambique’s natgas development as a potential buyer of a 10-20% stake.⁽²⁹⁾ That was before they concluded a deal on 25 June 2013 to buy a 10% stake instead, sold to it by Videocon, also of India, for about US$ 2.5 billion.⁽³⁰⁾ Area 1 alone might have up to 1.8 trillion cubic metres of gas alone.⁽³¹⁾

The presence of national companies is significant because they operate in execution of national energy commodity procurement interests, which means they’re often willing to pay more for their stakes in operations, as well as sell resources back to their countries of origin at a loss.⁽³²⁾ For Mozambique, the presence of Asian state-owned oil and gas companies or private companies operating with government incentives hardens investment interests to develop its offshore natgas resources with more cost and risk-tolerance than normal. But whether this degree of price indifference within the Asian markets is a sustainable model is another question. What this brings to bear on South Africa’s natural gas development interests made known thus far is that global price levels would have a deeper impact on P&E investment in the absence of (Asia’s) state-owned enterprises.

Treading water in the natgas-environment debate

Ramping up natgas P&E and consumption is an environmental conundrum. Different-interested parties herald it as either humanity’s energy salvation in the face of global warming and pollution, or as the next underappreciated salvo of self-inflicted poisoning. And the war of natgas is being waged at the global level. In other words, the debate surrounding natural gas’s bona fides as ‘clean’ energy is hotly contested.

A 730-page report on global shale resources says that China may have over 360 trillion cubic metres of natgas trapped in its rocks, which is more than the US and Canada combined despite that North America has led the natgas boom.⁽³³⁾

But Canadians residing near to fracking wells are lighting their tap water on fire, evidence of methane contamination,⁽³⁴⁾ and a Chinese farmer said that his chickens stopped laying eggs after exploratory fracking began in his region.⁽³⁵⁾ Anecdotes like these and worse have stoked skepticism and outright opposition to the notion of natural gas as a deliverance from environmental disaster.

So, when it comes to its onshore shale gas holdings, South Africa, among regional players in natgas P&E seems to be proceeding most carefully of all because it’s been busy mulling and internalising a more holistic schedule of the potential costs related to drilling and fracking, beyond what are more readily held out as its benefits.

That, and South Africa’s local environmental activism has been adept to keep the administrations’ attention and bind its hands on the fracking issue. Even with powerful supermajor interests (Shell) waiting on the sidelines, groups like the Treasure Karoo Action Group (TKAG), through activism including legal action, has won the de facto extension of a fracking ban in South Africa that was formally lifted in September 2012.⁽³⁶⁾ Jonathan Deal, TKAG’s chairman, won the 2013 Goldman Prize, the ‘Nobel Prize of the environment’, for thwarting fracking efforts in the country. “It has frustrated them immeasurably – our government and the companies that have made applications to frack – and at this stage, I don’t think things are looking too bright for them”, he said in an April 2013 interview.⁽³⁷⁾ Deal advocates for solar power and energy conservation as an alternative to natgas development and is recycling his US$ 150,000 in winnings toward sustaining the group’s opposition efforts; as a part of his grassroots efforts, Deal educates the Karoo’s citizens, going about in a T-shirt that says, “Get your fracking hands off our Karoo.”⁽³⁸⁾ But so far, alternative forms of energy, even in their largest examples around the world, have failed to achieve a scale of even a considerable fraction of the output of fossil-fuel fired power generation.

And as suspected, gas supermajors like Shell are minding their environmental reputations in China over fracking,⁽³⁹⁾ where talk of public health and environmental concerns are closely monitored by the Communist Party as the most important among issues that could endanger public opinion of its developmental policy.

Before the moratorium was lifted, Shell even commissioned a third-party company, Ipsos, to do a poll in February 2012 in which it asked 2,000 South African adults their opinions on shale gas exploration.⁽⁴⁰⁾ Shell’s website reports: “In fact, 73% of South Africans polled were in favour of gas extraction in the Karoo and 61% believe that Shell are technical experts at what they do.”⁽⁴¹)

A different company document goes on to guarantee that “Nobody will go short of fresh water because of our [Karoo Basin] operations; either in the exploration phase, or if there is any further development. This is a legally binding commitment.”⁽⁴²⁾

In China and everywhere else fracking is considered an option for natgas P&E, the largest question mark hanging ominously over its safety has to do with water conservancy. Given the ubiquity and importance of water resources, there is an understandable skepticism invoked by companies like Shell, who claim that they are far better able to fine-tune their fracking operations to prevent water contamination than are smaller or newer players.

But despite natgas E&P stoppage onshore, the government wants to increase the role of gas in national power generation from accounting for just 3% of the 2011 total to comprise 11% of electricity in 2030.⁽⁴³⁾

In power generation alone, the planet used 73,125 TBtu of energy in 2011.⁽⁴⁴⁾ If all of South Africa’s shale gas were extracted, it could fuel the planet’s energy generation for 5 years and 4 months at its 2011 level. Although a fraction is feasible to produce, its value doubtless still orders in hundreds of billions of dollars – a figure environmentalists will struggle to defeat in the long term, in light of its marketed environmental advantages at the stage of power generation.

By May 2013, South Africa’s Department of Energy had drawn up amendments to the Gas Bill that would bring shale gas E&P as well as storage and distribution under new regulation; they have set the financial year-end as the submission target date for that legislation, after a period of public review and comment.⁽⁴⁵⁾ The draft allows for an expanded role for the National Energy Regulator of South Africa ⁽⁴⁶⁾ who had been prevented from entering an area where an illegal gas operation was suspected to have been taking place.⁽⁴⁷⁾ But the public are being solicited their views on how to improve the Gas Bill and Energy Minister Dipuo has said in May 2013 that fracking in Karoo would probably proceed.⁽⁴⁸⁾

Where coal is king, gas-fired power generation involves fractional emissions: 50% or less of coal’s carbon dioxode intensity; 33% or less the nitrogen oxide emissions as coal; 1% of coal’s sulphur oxides output; negligible mercury; no particulates; and no solid waste.⁽⁴⁹⁾

With a nuclear power build programme under review with potential help from China,⁽⁵⁰⁾  (taking some pressure off gas demand for power generation) there’s a possibility that natgas development in South Africa could lead to export-ready products in around a decade.

So even if Royal Dutch Shell and other private majors remain the primary investors in South Africa, Asia’s energy-hungry growth markets and population centres will be watching closely as potential export destinations. That’s because the world and Asia in particular need more energy in general, and also because environmental, health, and image reasons are pointing more and more toward gas as a viable alternative to coal and oil. The success of regulations to hold natgas developers to high environmental standards will determine the pay-off.

To save it or to ship it: Managing risks to capture opportunity

While there are distinct benefits for using natural gas for regional development by retaining it for transportation and power generation, Asia has an incentive to encourage its export from Southern Africa. Mozambique will use its energy commodities, namely coal and natural gas to fuel export-led economic growth, even while its population, the vast majority whom live without electricity, shares some of their anemic 2,300 MW with South Africa.⁽⁵¹⁾ Meanwhile, South Africa will likely continue to diversify its energy mix out of coal, even whilst bringing new globally ranked, large-scale coal-fired generation capacity on-line with construction ongoing at Medupi and Kusile Power Stations.

Angola is already a world-class energy commodities provider with oil producing windfalls from trade with China and elsewhere, and with LNG export already underway. Southern Africa’s coal lands on distant shores all over Asia in addition to sustaining regional power exchange. Regional coalbed methane is yet another undeveloped resource lying in waiting.

No wonder, then, in musings about the potential impact that natgas development could have on Southern Africa, it’s fashionable to say that it’ll be a ‘game changer’. On 14 May 2013, Brian Dames, the CEO of state utility provider, Eskom, called it that.⁽⁵²⁾ Madagascar and the Comoros Islands have major international oil and gas players on scene, too, with Mozambique discoveries stoking ever more interest – covered by Platts as a ‘game changer’.⁽⁵³⁾ Sasol called the Karoo find a ‘game changer’ back in 2010.⁽⁵⁴⁾ Undoubtedly a dozen others throughout government and industry have exercised the cliché, too. What’s important, however, is that natgas development change ‘the game’ in the right way. (But it’s probably best not to refer to this as a game at all).

As Southern Africa is called to exploit gas resources in a way that few have resisted, the ‘Golden Age’ of gas has to come with a set of ‘Golden Rules’ ⁽⁵⁵⁾ of gas, as the leading intergovernmental organisation on energy has contended. Regulations must function as reliable shepherds that guide the industry through what may be a minefield of potential hazards, forsaking of self-defeating development. The draw of Asian demand and the presence of state-owned enterprises, operating both within the frame of profit-motive and national interests cannot become an underlying incentive for a race to the bottom. Likewise, majors and supermajors operating on traditional business principles must be held to the same high standards, even where responsibility and compliance are going to be costly. Finally, regional governments have to be held to their commitment to transform resource wealth into a better transmission for human development whether they use gas as an internal boon to clean(er) power generation than coal or at the cutting edge, for use as a transportation fuel.

Almost nothing about a ‘Golden Age’ of gas automatically assures a net-positive outcome; it is not all on its own a foregone conclusion. But if managed properly, the development of what appears to be Southern Africa’s next trillion-dollar resource bounty contains growth potential for energy security, improved environmental quality and public health – all above and beyond its direct and indirect economic benefits. Global energy demand, at which Asia is a growing vanguard, represents risks and opportunities that vigilance will determine to be either Southern Africa’s next boon or bubble. The parties arguing the sides of this debate need to acknowledge each other’s counter-points. Anything else is just more hot air.

Written by By Christopher Walker (1)

NOTES:

(1) Contact Chris Walker through Consultancy Africa Intelligence’s Asia Dimension Unit ( asia.dimension@consultancyafrica.com). Edited by Martin Hirtenfelder.
(2) ‘Are we entering a golden age of gas?’, International Energy Agency, 2011.
(3) ‘Natural gas in Africa: The frontiers of the Golden Age’, Ernest & Young, 28 September 2012.
(4) ‘Southern Africa’s oil and gas opportunity’, AT Kearney, January 2013.
(5) ‘Angola LNG ships first cargo to Brazil after 18 months delay and US$ 10 billion spent’, LNG Journal, 16 June 2013.
(6) ‘South Africa analysis: Natural gas’, US Energy Information Administration, 17 January 2013.
(7) Ibid.
(8) Burkhardt, P., ‘Sinopec, PetroSA sign framework for S. Africa’s biggest refinery’, Bloomberg, 26 March 2013.
(9) ‘Emerging East Africa energy: Natural gas developments: Mozambique and Tanzania’, US Energy Information Administration, 23 May 2013.
(10) ‘”South Africa” and “Mozambique”’, CIA World Factbook, 10 June 2013.
(11) ‘Electricity, percent of population with access – Base case’, Pardee Center for International Futures via Google Public Data, 4 October 2012.
(12) Graphic compiled by AAMM with data from ‘China: Natural gas’, US Energy Information Administration, 4 September 2012.
(13) ‘Are we entering a golden age of gas?’, International Energy Agency, 2011.
(14) ‘Gas price gain in China seen as boon to Asia LNG: Energy markets’, Bloomberg Businessweek, 17 April 2013.
(15) Ibid.
(16) Ibid.
(17) Hiroko, T., ‘Japanese reactor is said to stand on a fault line’, The New York Times, 15 May 2013.
(18) ‘Japan pledges US$ 32 billion aid for Africa to boost investment’, Reuters, 31 May 2013.
(19) Oirere, S., ‘First LNG projects under way in Mozambique’, Engineering News-Record, 11 February 2013.
(20) ‘Bechtel wins FEED contract for LNG project in Mozambique’, World Construction Network, 21 January 2013.
(21) Adelman, J., ‘Japan uncertainty hindering Mozambique LNG deals, Anadarko says’, Bloomberg, 13 June 2013.
(22) Ibid.
(23) Graphic compiled by AAMM with data from ‘ENH “not interested” in Rovuma stake sale’, Upstream Online, 11 June 2013.
(24) ‘ONGC, OIL buy 10% stake in Mozambique gas field’, IBN Live: CNN IBN, 26 June 2013.
(25) Graphic compiled by AAMM with data from Jewkes, S. and Navach, G., 'Eni opens up Mozambique gas riches to China', Reuters, 14 March 2013.
(26) Campbell, M. and Swint, B., ‘Shell shut out as Africa gas trove lures Asian states: Energy’, Bloomberg, 17 April 2013.
(27) Burkhardt, P., ‘S. Africa shale-gas permits unlikely in 2013 on appeals’, Bloomberg, 26 April 2013.
(28) Campbell, M. and Swint, B., ‘Shell shut out as Africa gas trove lures Asian states: Energy’, Bloomberg, 17 April 2013.
(29) Zinjing, W., et al., ‘India group said top bid for US$ 6 billion Mozambique Gas’, Bloomberg, 30 April 2013.
(30) ‘ONGC, OIL buy 10% stake in Mozambique gas field’, IBN Live: CNN IBN, 26 June 2013.
(31) Ibid.
(32) Campbell, M. and Swint, B., ‘Shell shut out as Africa gas trove lures Asian states: Energy’, Bloomberg, 17 April 2013.
(33) ‘Technically recoverable shale oil and shale gas resources: An assessment of 137 shale formations in 41 countries outside the United States’, US Energy Information Administration, 13 June 2013.
(34) Kaufman, R., ‘Methane on tap: Study links pollution to gas drilling’, National Geographic Daily News, 9 May 2011.
(35) Dumaine, B., ‘Fracking comes to China’, Fortune, 29 April 2013.
(36) ‘Goldman Prize for South African anti-fracking warrior’, BB News, 15 April 2013.
(37) Ibid.
(38) Ibid.
(39) Dumaine, B., ‘Fracking comes to China’, Fortune, 29 April 2013.
(40) ‘South Africans want more information on shale gas exploration’, Shell, 20 February 2012.
(41) Ibid.
(42) Eggink, W., ‘Shale gas – myths and facts’, Shell, November 2011.
(43) Moolman, S., ’Plans afoot to increase the role of gas in SA’s energy mix’, Creamer Media’s Engineering News Online, 31 May 2013.
(44) ‘Key world energy statistics 2012’, International Energy Agency, 2012.
(45) Odendaal, N., ‘Shale gas to be included in amended gas bill’, Creamer Media’s Engineering News Online, 16 May 2013.
(46) Ibid.
(47) ‘SA shale gas has massive potential’, IOL Daily News, 17 June 2013.
(48) Ibid.
(49) ‘Natural gas: Electricity from natural gas’, US Environmental Protection Agency, 30 April 2013.
(50 Campbell, K., ‘Chinese companies unveil their nuclear energy offers to South Africa’, Creamer Media’s Engineering News Online, 24 May 2013.
(51) Flak, A. and Mapote, W., ‘Mozambique power supply constrained until 2020’, 26 April 2012.
(52) ‘Gas a game changer for SA: Eskom CEO’, Times Live, 14 May 2013.
(53) ‘East Africa: Energy outlook: ‘Natural gas: A game changer’, Platts, 2013.
(54) Creamer, M., ‘Large shale gas find in Karoo would be “game changer” – Sasol’, Creamer Media’s Mining Weekly, 19 July 2010.
(55) ‘Golden rules for a golden age of gas’, International Energy Agency, 2012.