While the development of a shale gas industry in South Africa and neighbouring countries has commonly been described as an economic game changer, legal services firm Webber Wentzel director and oil and gas African exploration and production head Kenny Paton notes that the exploration and production (E&P) of shale is different to the E&P of conventional natural gas from a technical, commercial and regulatory perspective, and should be viewed as such.
Speaking at the Amabhubesi Shale Gas Conference, held in Randburg, Johannesburg, in July, Paton said the next 18 months to three years would be critical to determine the exact scope and trajectory of the emerging industry.
What makes unconventional shale gas different, from a technical perspective, is that the classic E&P model, which entails exploration, appraisal, development and production, does not fit well, as shale gas requires continuous appraisal.
Further, the environmental risk of producing shale gas through hydraulic fracturing, or fracking, is “closer to home” and must be thoroughly considered before embarking on any shale gas project.
Commercially, shale gas E&P differs from that of conventional gas in that it requires a longer period of continuous investment. This demands a different business model and a joint venture structure is required to take account of this. Paton also believes that the South African supply chain is probably inadequate.
Lastly, from a regulatory perspective, the licensing regime is based on the classic four-phase model of exploration, appraisal, development and then production, which will require new flexibility for shale gas.
The development of shale gas also brings with it the need for companies to hold onto larger blocks or areas for longer, which will require a different approach to relinquishment.
Despite these challenges, Paton says South Africa’s shale gas potential is significant as the country boasts the eighth-largest shale gasfield in the world, with an estimated shale gas reserve of 390-trillion cubic feet in the Southern Karoo area.
As a result, South Africa’s shale gas potential holds advantages for employment and a significant increase in South Africa’s gross domestic product, as well as government revenue. It will, therefore, enable government to focus its spending on, amongst other things, housing, infrastructure development and reducing the unemployment rate, says Paton.
He adds that, while the development of a Gas Utilisation Master Plan in South Africa will provide planning certainty and a clear route to market for shale gas development, challenges in developing shale in the country are a result of the lack of exploration drilling and results, individual ownership of minerals and water as well as challenging economics due to likely high environmental regulation standards.
Also speaking at the conference, Webber Wentzel oil and gas partner Jonathan Veeran highlighted the regulatory challenges facing shale gas development as a result of uncertainty surrounding how the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill will relate to the unconventional gas developments.
He points out that, under the current regime, a person may apply for a reconnaissance permit, a technical cooperation permit, an exploration right and a production right.
However, under the new regime, should the MPRDA Amendment Bill be signed into law, a free carried interest provision, which entitles the State to an automatic 20% free carry interest in all new E&P rights, will come into play.
The implementation of the MPRDA Amendment Bill will also see the introduction of the State option provision, in which the State is granted the right to acquire a further seemingly unlimited participating interest.
Additionally, the strategic mineral provision may prohibit or restrict the granting of E&P rights for petroleum and petroleum products that have been classified as strategic minerals at any time, while the historically disadvantaged South Africans (HDSA) participation provision, which may require an applicant for an E&P right to comply with the HDSA ownership requirements of the Mining Charter, will also be included in the current legislation.
Meanwhile, the MPRDA Amendement Bill does not contain a transitional provision, or so-called grandfathering clause, which protects the rights and interests of existing rights and permit holders under the MPRDA, despite having invested in the upstream industry at a time when such a requirement did not exist.
The new regime will also see the elimination of the Petroleum Agency of South Africa. Instead, these functions will be transferred to Department of Mineral Resources regional managers, explains Veeran.
He believes that a way forward can be achieved for the MPRDA Amendment Bill to unlock the investment required by the private sector to find and bring into production the substantial resources potential in South Africa, both offshore and onshore.
It could include a quasi-contractual block- by-block interim solution under which the South African government may negotiate bespoke terms within the parameters of the amended MPRDA.
“This approach could provide the certainty which is currently lacking under the Bill.”