COMMENT: Shale gas has great potential for SA

05 March 2012 - 02:45 By Tony Twine
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It is impossible to ignore the potential benefits of a large shale gas find in the Karoo.

The possible economic impact of shale gas extraction developments, downstream industries and induced demand from the income generated by gas finds representing only 4% to 10% of the suspected 485 trillion cubic feet reserve in the Karoo could generate massive contributions to the country's GDP.

Even at a conservative 10% of the estimated reserve, this resource could generate around 700000 jobs a year during a 25-year production phase and could add billions of rands in value to the GDP. I think the figures speak for themselves. I also think they are compelling enough not to ignore.

It makes sense to, at least, understand what kind of resource size we are looking at in the Karoo, and the only way to do that is to let companies like Shell explore.

Yes, there are environmental risks. But with that kind of resource, and that kind of revenue, there will be a lot of money available to manage risks.

Don't you think we at least owe it ourselves, and the people of this country - especially those without jobs and without electricity - to at least understand how big this thing is?

The gas, if not exported, can be used to generate electricity, which for a country that has a massive energy shortage, is a pretty significant solution. Indeed, we will need all sources of energy - renewables, nuclear, coal and gas - if we are to meet our energy needs.

The gas can also be used as a safe industrial, commercial and domestic fuel. It can be converted into liquid fuels as is done at Secunda. It can be used, with minimal adjustments to existing engines, as a transport fuel. It can also be used to provide the energy necessary in manufacturing fertiliser products.

All these options provide substantial value-adding, employment and remuneration opportunities.

The economic report we developed over a period of eight months presents a synopsis of what is known about the shale gas reserves of the Karoo, an overview of end-user energy supply in South Africa and the six most likely downstream economic uses by which further value could be added to any substantial gas reserves that may be discovered.

Apart from material inputs needed by upstream operators, economic opportunities would exist in terms of combinations of gas exports; electrical power generation; gas-to-liquid fuel conversion; gas as an automotive, industrial, commercial and domestic fuel; and fertiliser production.

Even if exploration were to start immediately, large-scale natural gas production would probably begin in 2020. The report contains conservative simulations of the extraction of two gas reserves of 20trillion and 50trillion cubic feet respectively, each spanning 25 years from 2020.

The production life would depend mainly on the size of the resources discovered, but could span a quarter of a century with some ease.

The 20 trillion cubic feet reserve scenario produces average value-add of R80-billion a year for 25 years, split between upstream value-add of R30-billion and downstream value added of R50-billion a year. The larger resource scenario of 50 trillion cubic feet sees value-add of R201-billion, with employment opportunities of over 700000 workers per year in terms of aggregated direct, indirect and induced labour requirements. Imagine what that could do to the country's employment figures?

The US Energy Information Administration estimates the size of the Southern Karoo Shale gas reserve at 485 trillion cubic feet, so these scenarios are highly conservative in terms of their assumed production volume.

An opportunity of this magnitude deserves to be properly scoped to allow for proper consideration of the risks and rewards of the project. These do not lie exclusively in the economic sphere, but no proper assessment can be made of either until exploration has at least begun.

The total upstream value added in scenario A (R760-billion) during the 25-year production life of the resource is 3.3 times the size of the South African mining sector's value-add during 2010. Resource Scenario B has upstream value-add of R2142-billion, equating to 9.3 times the value of mining GDP in 2010.

Combined upstream and down stream value-add in scenario A is equivalent to 83.3% of South Africa's GDP in 2010, while scenario B produces estimates of GDP contribution equivalent to 208% of the entire GDP.

Test scenario A indicates total production chain employment at an average annual rate of just over 290000 jobs, with scenario B resulting in average employment of just over 700000 jobs.

These synoptic value-adds and employment figures assume that no gas is exported, and that all the gas extracted is used for downstream value-adding purposes. The figures include direct and indirect and induced value creation and employment.

The first step in harnessing such a potentially transformational economic resource has to be either proving or disproving its size and location.

Only after that do prospects become bankable projects.

To download the full report, visit

  • Twine is an economist at Econometrix
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