Fracking Masterclass – Shell’s reality check on “game changing” Karoo deposits

In this fascinating interview, veteran Shell executive Jan-Willem Eggink delivers a masterclass in Fracking, or Hydraulic Fracturing as the industry prefers to call it. He does his best to downplay hype around the Karoo Shale Gas deposits, explaining that all we have to go on right now are Soekor’s wells drilled half a century ago reinforced by geological guesstimates. There may well be lots of gas to be fracked. Then again, it might also have mostly been dissipated by the volcanic formations. Shell is prepared to take a $200m punt – but believes chances of a bonanza are not much above its global success ratio of 2 in 10. Eggink says it is important to manage expectations because even if Shell’s exploration hits the jackpot, it will be a decade before South Africa derives any direct benefit in energy prices. – AH

JAN-WILLEM EGGINK: In the Karoo, we have shale. We know that because the Soekor wells that were drilled in the sixties were available for us to look at. But they are very old wells – 50 years old – and the data you get from these wells is not very good. For us it’s key to drill a few wells to get more information and on the basis of that we can see what the rocks look like at two to three kilometre depths, as well as whether we can extract gas from it in commercial quantities.

ALEC HOGG: When you say the data’s not that good, what does it tell you?

JAN-WILLEM EGGINK: Well, it tells us that the shale is there but we can’t read proper measurements on it. We can’t see whether there’s still gas in it because they have been exposed to the surface. You need fresh data to actually, do measurements. In addition, all the electrical data that you get if you drill the well is much more modern nowadays than what was used in the sixties.

ALEC HOGG: But surely, there’s something, from what was drilled in the sixties, which is useful?

JAN-WILLEM EGGINK: Yes, we know that the shale is there and we can measure for example, how much organic material is in it. But again, this is all old data explored 50 years ago and we would rather have fresh data, and do proper measurements.

ALEC HOGG: Clearly, the EIA in the United States though, has made estimates about South Africa. Firstly, it came out with a very substantial estimate. Then they trimmed that down a little bit. Where would they get their estimates from, or how would they calculate those?

JAN-WILLEM EGGINK: Well, what they do is the same as we do. We do basin studies, so we look at the geology of the entire Karoo. Then we measure what the thickness is of the shale (it’s an estimate) because we have some data points. These are the old wells and we have some seismic data. That’s all the data that may be helpful. On that basis, you can model what could be there and I think that is what has happened with the EIA as well. They came with an estimate of 480 tcf, which they trimmed down to 390 trillion cubic feet. That’s a humongous amount of gas. In Holland (where I come from), I live on top of the Groningen Gas Fields. It was discovered in the sixties and put on stream, and Holland is rich already for 50 years because of that gas field and that’s 100 tcf. I would say that if South Africa finds 50 to 100-TCF, it would be very good.

ALEC HOGG: That alone, would make it worthwhile. From your perspective though, Shell doesn’t throw money around. Being a Dutch company, you’ve been around a long time. You’ve also been extremely cautious with making investments. Yet, in this case, the last time I saw you, you were spending $200m in exploration.

JAN-WILLEM EGGINK: Yes. We committed to the Government that if we could get the licenses, we would drill six wells. The cumulative costs that we’ve made by the end of these six wells would be in the order of $150m to $200m. Don’t forget that this industry costs a lot of money. If we build one well off shore, where we also have an Orange Basin to drill, one well is $200m on its own. These wells are extremely expensive to drill. On shore, it’s a bit cheaper so we can drill maybe, six wells. With the additional costs – $150m to $200m.

ALEC HOGG: We know that the Americans have been at the shale gas for a long time – for decades now – and consequently, they’re ahead of the game, from the exploration etcetera. Is there any other part of the world that has been able to replicate what the Americans have done? Obviously, they haven’t brought anything to production yet – are they close to it, though?

JAN-WILLEM EGGINK: A little bit. The big advantage in America is that the infrastructure is there, so you have oil and gas fields already being produced. It’s a rich country. They’re capable. There are many capable and skilled people. What we’re trying to do is reasonably novel. Shell is also trying other countries. In China, we are currently drilling quite a lot of wells. We have a little bit of success but also cases where it doesn’t work. It has therefore not yet been replicated on the scale that we see in North America. South America (Argentina) looks good but there, it’s all exploration phase.

ALEC HOGG: So where are you, in South Africa, as far as those proposed six wells are concerned?

JAN-WILLEM EGGINK: Well, we’re waiting to obtain the licenses. Before these licenses would be granted, we believe that we need clarity Mineral, Petroleum & Resources Development Act (MPRDA) as well as clarity on the Hydraulic Facturing regulations, which are still not officially gazetted.

ALEC HOGG: Let’s go on to the MPRDA. There was a lot of concern when a last-minute change was introduced there, which effectively, gave Government 20 percent free carry and an option on the balance of 80 percent of the equity at an ‘agreed price’. Were you one of those who objected to this? We do know that Exxon Mobil and Total certainly did.

JAN-WILLEM EGGINK: Yes. What we did is we were part of this Phakisa exercise. I don’t know if you heard about it. This was a six-week exercise where we sat together with Government and discussed, amongst others, the MPRDA because it was an Oil & Gas stream as part of many streams because Phakisa was about attracting more value from the oceans. We looked at the MPRDA and some of the concerns that we have as an industry were addressed in this forum in the six weeks, but we haven’t really had commercial discussions with the Government on whether this would work for us. For instance, it’s important to understand: if we do a well offshore in very deep water at $200m, that will be requiring completely different fiscal terms as compared to one in very shallow water because these wells will be cheaper. If you compare it to onshore…Onshore, we have to drill many wells but they may be cheaper. However, we still need a significant amount of money invested before we can produce and the production actually comes up very slowly. In my books, the fiscal terms have to reflect not only the risk, but also the financial exposure that the companies take to actually, embark on these activities.

ALEC HOGG: Is there an appreciation now, in Government, of this fact?

JAN-WILLEM EGGINK: I think so. I think the Government understands it. The Minister has also gone out saying that he understands their concerns and he’s keen to address them. As part of the Phakisa exercise, there was an undertaking to have another type of Phakisa 2 session set up, which still has to start.

ALEC HOGG: And the MPRDA has been postponed, too. It hasn’t been signed into law, which, I guess is also a positive development.

JAN-WILLEM EGGINK: Yes. As far as I know, the President hasn’t signed yet.

ALEC HOGG: Because the Minister said, ‘please don’t’.

JAN-WILLEM EGGINK: That’s what I heard – yes.

ALEC HOGG: Operation Phakisa: you’re involved there because you are looking to drill off the coast. How prospective is that area?

JAN-WILLEM EGGINK: We’re proposing to drill off the West Coast, close to Namibia. How prospective is that? We think there’s a chance to find some oil and gas. That’s why we’re prepared to drill a well. That’s an investment of $200-million. You don’t do that if you don’t believe in it.

However, the success rate of frontier exploration in the world (and this is frontier exploration) is between 10 and 20 percent so the biggest challenge is that it’s not there.

ALEC HOGG: The reason I was thinking about the East Coast, which you don’t have any prospective opportunities, is it seems to make sense if you can just go South from Mozambique where they have wonderful gas fields, that it has to extend into South African waters at some point. Is that the way it works in the Oil & Gas industry…that logic actually does pertain?

JAN-WILLEM EGGINK: No, logic doesn’t pertain. No, this is a different geological province where you can’t just extend the Rovuma basin in the North of Mozambique, which is 3 000 kilometres from even South Africa at the northernmost part of South Africa, to the geological basins that we have on the East of South Africa. That being said, the interest of the industry in the off shore in South Africa has been ramped up because of the discoveries in Mozambique, obviously. However, so far not one well has been drilled. Total drilled the wells south of Mossel Bay in very deep water but unfortunately, they had to stop operations, as I understand it, for technical reasons.

ALEC HOGG: Jan-Willem, in the 1960’s and 1970’s, the Apartheid Government desperately sought oil. They drilled all over the place in the Karoo and offshore, because that would have given the Apartheid Government an invulnerability (in their minds, anyway). Are there indications from the work that was done at that time – and leaving the Karoo aside for a moment – that this is a prospective area?

JAN-WILLEM EGGINK: The wells that were drilled offshore were mainly in very shallow water because I don’t think the capability was there in the sixties, to drill in very deep water. The acreage we have off shore called Orange Basin, close to Namibia, is in water depth of between 500 metres and three kilometres. We would, in all likelihood, drill at one-and-a-half to two kilometres water depth. The capability was not there in the sixties, so we have very limited information on anything deeper.

ALEC HOGG: So it’s complete frontier, as you say.

JAN-WILLEM EGGINK: It’s complete frontier, yes.

ALEC HOGG: Why would you drill there in the first place?

JAN-WILLEM EGGINK: Our ecological evaluation suggests that there may be a source rock, as we call it – that is, a rock that produces oil and gas. We believe there may be traps that actually hold oil and gas and we believe the timing is good – or could be good. In our global portfolio, we have ten or 20 of these opportunities. They all have ten to 20 percent risk and if our risking is right, out of these 20, maybe two or three will work and we have to recoup the investment that we do in the others that fail, from these discoveries. That’s the way this ‘risk’ business’ works. I find it very fascinating. That’s why I’ve worked in exploration for 30 years already.

ALEC HOGG: Getting back to the Karoo: a very low percentage chance of actually finding something there.

JAN-WILLEM EGGINK: Yes. I don’t want to go into exactly how much chance there is because I think it’s very difficult to assess in these areas. What we know is that there’s a complicating factor in the Karoo and these are the volcanic intrusions. They’re called dolerites. They may complicate the matter because you have these hard banks that you have to drill through and there may also be… We have been hitting up the source rock so the shale gas…the shale layers to such an extent that the gas is already expelled so there is some additional technical risks beyond what we might see in cases in North America.

ALEC HOGG: But we do know that some of those wells were gushers of gas that came through.

JAN-WILLEM EGGINK: In South Africa?

ALEC HOGG: In the Karoo, yes.

JAN-WILLEM EGGINK: I wouldn’t say these are gushers. They showed some gas and I think there was one well that was tested, which produced a little bit of gas. You need to test these wells properly, though. You have to test them for a longer duration than only a few hours and we believe (and everybody knows) that you need to hydraulically fracture these rocks – make very thin fractures in these rocks, as thick as a hair – to release the gas. Of course, that was not done in the sixties.

ALEC HOGG: So it could be a game changer, but it certainly isn’t a fat pitch and something that you can just smack out of the park. It isn’t a guarantee that there is shale gas down there in the first place?

JAN-WILLEM EGGINK: No, not at all. I think everybody needs to manage expectations here. Some people talk about Karoo shale gas as if it’s there. That’s not the case.

ALEC HOGG: The Government seems to be talking about it as though it’s there and certainly, the aggression with which the legislation has been tackled would suggest that, too.

JAN-WILLEM EGGINK: I’m not sure whether they all assume it’s there. I don’t think so. Most of the people in Government that I speak to are very cognizant of the fact that there is a chance it’s not there at all. What they all agree on however, is that we need to drill some wells to find it out and I think that is the urgency that I hope is now transpiring into Government.

ALEC HOGG: Is Government itself looking to drill wells? We do know that it’s quite interested in becoming more involved in the Oil & Gas sector.

JAN-WILLEM EGGINK: We would favour Government to actually participate with us because that’s a learning that we have in the world. To have Government participation is actually good. I’m not aware that Government wants to drill these wells on their own. I would argue that you actually need the technical knowledge to do that. Hydraulic fracturing is not something that you can do if you haven’t done it before. You need the technical skills to do that.

ALEC HOGG: And you do have those skills…

JAN-WILLEM EGGINK: We have these skills, for sure – yes.

ALEC HOGG: Where have you been fracking in the world?

JAN-WILLEM EGGINK: Most of our work has been done in the United States, but we’re currently doing these in other countries as well such as China, as I told you where we’re exploring actively for shale gas. Other examples are Ukraine, Tunisia, and we’re trying to do some business in Russia so there are actually many places where we do this.

ALEC HOGG: Is the geology in any of those areas similar to the Karoo?

JAN-WILLEM EGGINK: Geology is never the same. Carbon copies don’t exist. As I told you, in this case, there are dolerites, but there may be other circumstances that are better so it’s always a trade-off of one against the other. However, what you need is to drill wells. As long as we don’t drill wells, we’re talking hypothetical gas and we don’t know.

ALEC HOGG: And the timing of the process from here…

JAN-WILLEM EGGINK: If we would get licenses then we have to do an Environmental Impact Assessment first, before we can drill any well and that will involve extensive consultation with the people that would be affected. That would take one-and-a-half to two years in our books and then you can maybe drill the first well. The exploration phase lasts nine years, as a maximum. You have phases – extension phases and the maximum is nine years. I think that before we go into successful development that actually produces commercial amounts of gas, it’s at least ten years from now. That is why it’s so important for the country to look at earlier gas options as well, such as liquefied natural gas to bring that in earlier, to already seed the market with customers for gas so that if the shale gas comes in, in 10 or 15 years, you’d already have the customers.

The crude oil price has fallen sharply of late - but as fracking shale gas is a long-term venture, it has no impact on Shell's plans
The crude oil price has fallen sharply of late – but as fracking shale gas is a long-term venture, it has no impact on Shell’s plans

ALEC HOGG: And with that kind of time span, the decline recently in the oil price from $100 to below $80 at the moment, wouldn’t even register.

JAN-WILLEM EGGINK: We are investing in the longer term so I’m fully aware that the current oil price is around $80.00. If we invest in countries or in projects, we look at low, mid, and high case and test whether these projects are robust against all these cases. Of course, the robustness test against the low case is very important. The price where we’re at now is roughly at the low price that we earmarked but again, we invest for these projects for tens of years. You therefore have to look at the average price over that period, to assess whether you can make money – yes, or no. An occasional drop of an oil price to $80.00 should not harm these projects long-term if the price goes up to $100.00 again, afterwards.

ALEC HOGG: It’s complicated. You don’t know yet what it’s going to cost you to get the gas out, even if there is gas there in the Karoo so it’s quite a process from here. Why do you take a risk like this?

JAN-WILLEM EGGINK: We like South Africa because we know that if we find the gas, it could be a lot and the attraction in South Africa is that it’s a stable country where the energy is required. And it’s easy to get rid of gas in South Africa because there’s a dire need for energy and everybody knows that.

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