Chevron Taps Into Shale Potential

BMI View : Chevron ' s entry into South Africa ' s nascent shale gas market follows the country ' s lifting of a m oratorium on fraccing. With significant shale gas potential and a government that is increasingly open to shale gas exploration and production (E&P), South Africa could invite m any more players to establish a presence in preparation for an eventual opening up of acreage for shale gas E&P. We also note that shale gas may not be the only area in which the South African upstream could attract growing interest. It could also benefit from the heightened appeal of East Africa, as demonstrated by ExxonMobil ' s decision to begin exploration off the country ' s eastern coast.

Chevron is the latest major industry player to take a stab at realising gains from South Africa ' s shale gas potential. On December 12 2012, it signed an agreement with Toronto-listed junior Falcon Oil & Gas to jointly cooperate in gain ing unconventional exploration rights in the Karoo Basin. At present, Falcon only has a t echnical c ooperation p ermit (TCP) for 7.5mn acres (30,351 sq km) of land in southern Karoo , which it is seeking to upgrade to an e xploration p ermit.

Under this agreement, Chevron will be Falcon ' s exclusive partner for five years , as the pair work towards obtaining exploration permits. In return, the US supermajor will reimburse the Dublin-based junior for US$1mn in cash - to cover costs it previously incurred when undertaking activities across its Karoo acreage. Falcon is thrilled by Chevron ' s participation and claimed it is an ' encouraging endorsement… in the potential of the Karoo ' , as stated in its press release. More importantly for the independent, Chevron ' s ' extensive experience in commercially and sensitively developing unconventional oil and gas resources ' makes its participation valuable as part of Falcon ' s quest to exploit Karoo ' s shale resources.

Shale All Around

Chevron ' s shale partnership in South Africa follows a government decision to lift a moratorium on hydraulic fracturing (fraccing) - the controversial practice used to extract shale oil and gas - in September 2012 ( see our online service, September 10 2012, ' Shale Gas Advances As Ban Ends ' ). The government decision was driven both by economic necessity and the potential of the country ' s shale gas resources.

South Africa Shale Potential: Among The World's Greatest
Technically Recoverable Shale Resources By Country (bcm)

According to the US Energy Information Administration (EIA), South Africa could have the fourth largest technically recoverable shale gas resources in the world - at 13.6trn cubic metres (tcm). Most of this is concentrated in the Lower Ecca Group, within the southern portion of the Karoo Basin. Falcon has also provided extensive information about the Ecca Group's shale potential to support the prospectivity of its acreage. There are three potential Permian-age gas shales in the Ecca Group, among which the most promising is the Whitehall formation.

Given this potential, it is not surprising that companies such as Chevron are taking the opportunity to gain access to South Africa's shale gas potential. Besides smaller independents such as Bundu Oil & Gas, which has applied for rights for a 'significant shale gas prospect' in the Eastern Cape Province, the world's major shale gas players are also looking to establish a foothold. Royal Dutch Shell was quick to praise the government's lifting of the fraccing ban as the move supports its exploration ambitions in unspecified regions of the country.

Statoil could also make a greater effort to push into South Africa in the near future. In 2009, it signed a two-year study agreement with major (but now embattled) US shale gas player Chesapeake and South Africa's national oil company (NOC) Sasol -under which it planned to study shale resources in the Karoo Basin. The fraccing moratorium introduced in 2011 could have left its plans in limbo but with the ban lifted, the Norwegian NOC now has the regulatory green light to proceed and build on its non-US shale acreage.

Although environmental concerns about possible groundwater contamination in water-scarce South Africa are still significant ( see 'Shale Gas Advances As Ban Ends', September 10), shale gas exploration and production (E&P) is likely to receive greater government support than before. This follows from a study into shale gas, released in September 2012, which showed how 840bcm of shale gas production could yield one trillion rand (US$117bn) in income for South Africa - at current gas pricing and currency exchange rates. Minister in presidency, Collins Chabane, was quoted by Bloomberg as saying that the country needs to consider shale gas to address its energy requirements and import-dependency. Energy minister Dipuo Peters also said he backed shale gas production as long as it can be done safely (quoted in an interview in May 2012).

South Africa is now looking to establish a monitoring committee as well as to strengthen its current regulatory framework for shale gas E&P. According to official estimates, this could be ready by H213. Exploration permits would most likely be handed out once measures are in place to assuage public concerns about the effects of fraccing. With the government appearing to be preparing for shale gas E&P activities, companies that already have a presence will be ready to begin exploration when the country officially announces it is open to commercial shale gas production.

Putting Eggs In Different Baskets

Shale gas is not South Africa ' s only hope as the country attempts to secu re its energy supply . It is als o looking offshore, with ExxonMobil being the latest major player to undertake exploration activit y after gaining a 75% operating interest in Impact Oil & Gas ' Tugela South Exploration Right in the Zululand Basin on the east coast of Africa. Pending regulatory approval, the US supermajor will also take a 75% stake in any exploratory permits that Impact may be awarded for the Tugela North, West Bredasdorp and Transkei/Algoa areas . With exploration along the east coast of Africa having produced hydrocarbon s windfalls for companies, the eastern coastline of South Africa could attract greater industry attention as firms look south to replicate successes in Mozambique and Tanzania.

Not Enough Oil…
South Africa's Oil Production, Consumption & Net Import Requirement* ('000b/d)
… And Not Enough Gas Either
South Africa's Gas Production, Consumption & Net Import Requirement ('000b/d)

In the long-run, rising upstream interest in the country could help it alleviate its growing oil and gas import bill. We forecast that oil and gas demand will increase from 610,000 barrels per day (b/d) and an estimated 5.2bcm in 2011 to 694,000b/d and 8.6bcm respectively in 2016. With the consumption growth rate set to outpace any increases in output, the country's total petroleum import bill could increase from an estimated of US$26.7bn in 2011 to US$27.6bn by 2016.

This article is tagged to:
Sector: Oil & Gas
Geography: South Africa

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