A preliminary report by the World Wide Fund for Nature-South Africa (WWF-SA) has described shale gas as a marginal resource that remains reliant on a high gas or oil price and reasonable tax incentives, and may not provide as “cheap” a source of domestic energy as contended by private firms and State agencies.

Designed to frame the economic issues pertinent to shale gas in South Africa, the ‘Framework to assess the economic reality of shale gas in South Africa’ report looked to develop a model through which the geological, environmental, technological and financing factors of local hydraulic fracturing (fracking) for shale gas could be assessed and the economic viability of shale extraction ultimately determined.

The fund believed that the case for the successful, economic extraction of the gas in South Africa could not be solely based on the US and Canadian experience, which was not necessarily commensurate with the South African context and conditions.

WWF-SA said on Tuesday that public discourse on the potential of shale gas in South Africa had historically focused on the environmental and social implications of its extraction, with comparatively little attention given to the critical assessment of whether or not fracking would be commercially viable.

Based on its preliminary assessments, the fund maintained that the commercial financial viability of shale gas would be “challenging”, while the success of its extraction would depend on good knowledge of the geology, efficient application of the technology, the pricing of gas and measures to deal with the short-term and long-term environmental impacts.

“These [drivers] can well facilitate the economics of shale gas or prove to limit and hinder the success and commercial viability of fracking. In the interim, the conclusion we draw is that the full commercial exploitation of shale gas in South Africa seems like a distant, if not unlikely, prospect,” it stated.

HIGH-LEVEL CONCLUSIONS
Noting that its assessment adopted a more conservative view of shale gas prospects owing to the lack of local data, the organisation said the assumption that local shale gas would be “cheap” reflected misunderstanding of gas monetisation in the US and was not applicable to South Africa.

“Preliminary findings from drilling attempts in other countries have shown that extraction costs have been higher than anticipated… and the economic viability of shale gas extraction is based on the success rates of drilling and fracking techniques.

“Break-even margins are dependent on cost reductions in well development and
completion, effectiveness and efficiency. The levels of cost-savings that can be achieved are [thus] uncertain,” the report read.

WWF-SA further noted that, owing to its inherently marginal economics, the incentive to export the gas would most likely be a greater probability under South African conditions, as the arbitrage value to the highest-paying market was the only economically viable option for shale gas extraction if domestic gas prices could not compete with export prices and other energy sources.

Moreover, the export prospects of shale gas in South Africa would likely grow if integration into the domestic economy and high levels of beneficiation were not forthcoming or had long lead times.

“There is a possibility that if the economics of shale gas works out, it could be a complementary component of an offshore and regional integrated gas market.

“[However], on its own, shale gas is likely be a tough prospect because of other needs like pipelines, storage and other infrastructure,” it outlined.

The fund emphasised that high environmental standards around extraction would be essential during extraction of the resource, while the decision to frack had to be measured in terms of the various trade-offs.

“These include benefit to the fiscus, job creation, localisation potential, environmental impacts and the long-term sustainability and resilience of the South African economy,” it noted.

Interestingly, WWF-SA found that the balance of private-versus-public interest would also influence the gas’s economic viability, as the tension between these two contending interests was not always easy to resolve.

Water acquisition costs and the treatment of wastewater would, meanwhile, add additional burdens to cost management, as water treatment was essential to ensure the disposal of harmful chemicals, such as bromide, radium and arsenic.

“These disposal costs are not well established at present and will be determined by the chemical composition of flowback water and the model and technology of the treatment regime that would have to be applied to safely dispose of wastewater,” stated the report.