 Inventions enabling gas to be liberated from shale deposits through hydraulic fracturing (fracking) has transformed the US energy equation – and with it the psyche of those living in the world’s largest economy.  With gas and electricity prices having already halved in price, America is embarking on a strategy of “Re-shoring” of manufacturing, bring back factories which  had been  “Off-shored” to lower cost countries over the past few decades. The UK has been the first nation to follow America’s lead, with Prime Minister David Cameron making a strong statement in Davos last week about how it will be applying the US innovation to develop Britain’s substantial shale gas reserves. According to the US’s International Energy Agency, South Africa’s Karoo Basin has one of the largest shale gas deposits in the world. The first company to stake its claim was Australian-listed Challenger Energy, which secured rights over what looks to be the most attractive part of the resource. The other players are multinational Royal Dutch Shell and the Falcon/Chevron partnership. Challenger has played a low profile until today when CEO Robert Willes came through to the CNBC Africa studio for our interview on Power Lunch. It promises to be the first of many. It’s a pity that potential investors need to go through exchange control regulations to buy the shares in Australia, but a secondary listing on the JSE is being considered.  – AH    Â
ALEC HOGG:  Australian oil and gas explorer Challenger Energy has applied for a right to explore for shale gas in South Africa’s Karoo. Joining us in studio is Robert Willes, the Chief Executive of Challenger Energy – first mover advantage. When I was having a look at the Karoo shale gas deposit you guys seemed to have the cream, in other words, the part very close to the Outeniqua Mountains. How big an area do you have secured?
ROBERT WILLES: Well, it’s actually our subsidiary Bundu that’s put the application in, but we’ve applied for a million acres, which is about 400,000 hectares.
ALEC HOGG:  Just give us an idea. How long would it take you to drive along that amount of land?
ROBERT WILLES: Well I guess it depends on the roads, but I guess you could probably drive 45 minutes to an hour – something like that – quite easily, from side to side of the block.
ALEC HOGG:  So it’s a big block.
ROBERT WILLES: It’s a big block, yes.
ALEC HOGG:  You were the first mover. Shell came in after you. They are spending 200 million dollars – they’ve told us – in exploring. What’s your budget?
ROBERT WILLES:  Well, it’s a little bit early to say exactly what any activity is going to cost in this are because of course, it’s the first time anybody has carried out any activity of this type in South Africa. It may be that some of the technology will have to be imported from overseas – at least, in the first instance, so we have a relatively simple and straightforward initial program, but I’d probably hesitate to put a price on it just now.
ALEC HOGG:Â Â Is it going to be of the order of 200 million dollars?
ROBERT WILLES: No, I don’t think it’s going to be that size. Proportionately, of course, Shell has a much greater application area than Bundu does.
ALEC HOGG:  I ask this because there are three players. There are yourselves – independent, Shell – who we know is a multinational and then Falcon, who Chevron have joined. If you were the first mover, presumably you would have gotten the juiciest part of this deposit. Are you going to bring in a multinational as a partner?
ROBERT WILLES: Well, we’re working on farming discussions at the moment, so we’re not working on a partnership strategy. It’s a little bit early for us to release any further information on where we are with that, but as soon as we’ve reached a point in those discussions where we’re able to make an announcement to the market, we will.
ALEC HOGG:  That seems to make sense. This is a huge potential project.
ROBERT WILLES: Well, we’re certainly looking for a good strategic partner and I think we’re headed the right way with that at the moment.
ALEC HOGG:  Why did you select the area that you went for…in other words, down the bottom?
ROBERT WILLES: Well, it’s interesting that you ask that. The reason that area was selected was because there were about five or six sokor wells that were drilled through that area in the late 60’s and there was some seismic as well. All of those wells had some gas shows in them. Of course, that wasn’t what they were looking for in the day. They were probably looking for something more conventional. There was one well in particular, which is the one that’s in the centre of our application area where…actually, when they drilled that well, they got a strong flow of gas to surface. That is pretty unusual and extraordinarily encouraging in this field because this was a vertical well, it wasn’t fracture stimulated, and it flowed gas to surface. I think they flowed it for four hours before they shut it in.
ALEC HOGG:Â Â So there could be natural gas in addition to shale gas.
ROBERT WILLES:Â Well, the gas clearly flowed out of the shale, so there is therefore no doubt that there is gas in place.
ALEC HOGG:  Just to give those who aren’t as close to it – because in South Africa it’s been an environmental debate up to this point, and the economic debate hasn’t really been put on the table apart from Tony Twine. What has fracking/hydraulic fracturing done to America or for America?
ROBERT WILLES: Well, clearly hydraulic fracturing has made an enormous difference to the United States of America and there have been many reports as to what that is doing for the US economy. In essence, it appears that it is creating a dramatic turnaround, and it is moving the US into a fair degree of energy self-sufficiency. This will make a dramatic difference to the world going forward, as well as to the US economy, of course.
GUGULETHU MFUPHI:Â What kind of difference could it make to the South African economy?
ROBERT WILLES: Well, I think it would be very interesting to see. You refer to Tony Twine. Econometrics put together a report I think, in 2010. They modelled a couple of different scenarios. Interestingly enough, those scenarios are both very much smaller developments compared to the amount of technically recoverable resource that the US Energy Information Agency estimates might be there. I believe they ran two scenarios: one at 20 trillion cubic feet and one at 50 trillion cubic feet. The EIA estimates there could be a technically recoverable resource of 370 trillion cubic feet so clearly; it can only be a fraction of that scale and still be very interesting. In these two scenarios, they estimated very substantial increases to South Africa’s GDP and enormous job creation.  I believe, from memory, that a 22CF scenario was estimated to create around 300,000 jobs and a 52CF scenario around 700,000 jobs.
ALEC HOGG:  A game changer, as it has been for the United States and apparently is going to be for Britain as well. When we were in Davos last week David Cameron was shouting about fracking, but there’s the other side – they’re the environmentalists. There is a professor from Free State University in Bloemfontein who cautioned us on this program by saying ‘it’s a different type of geology. Don’t think that what we have there is necessarily able to be brought to surface’.
ROBERT WILLES: Yes, I’m not sure why he would necessarily think that. Clearly, part of the exploration process will be to establish – firstly – what resource is in place and – secondly – what it may be economically viable to recover. Right now, we have data from those wells drilled in the late sixties and seismic of similar vintage, because no exploration rights have yet been granted. There has been no opportunity to carry out any further work on site, but these results are encouraging, particularly the well that I described that has flowed gas to surface. We can see there’s gas in place. We don’t know yet quite what the economic viability is going to be, but that is the purpose of the exploration program.
GUGULETHU MFUPHI:Â Will you be doing anything to address the environmental concerns?
ROBERT WILLES: Well, it is early days in terms of community consultation. We have engaged in that and we will engage in much more going forward, so we will work with the communities going forward to try and allay concerns as far as possible. The consultation that we’ve engaged in so far…the sort of messages we’re getting back are that people understand the significance of this for South Africa, so they certainly see that if this is what it is hoped to be, then there is good reason to proceed with it. People do have some legitimate concerns I think, given what they’ve heard – particularly from environmentalists. We have tried to explain to them what hydraulic fracturing is, what will be involved with this, we will try to continue to give them reassurance going forward, and that we will do this to best international standards, so we will meet or exceed all the local standards. I guess what we’re hearing as well from many people, is that they’re very interested in the job creation opportunities in the community as well.
ALEC HOGG:  No doubt, if it’s only 200 bought as you said earlier…at ten percent, it would be 300,000 jobs, so if it is what the Americans say it is…wow. Robert, the question from an investment perspective is the penny is dropping in South Africa. People are understand at last what could be there – not least, the government. You listed on the Australian Stock Exchange. We have exchange control in South Africa. Do you have any thoughts on a secondary, or a listing on the Johannesburg Stock Exchange?
ROBERT WILLES: Well, I certainly think it’s something that we will think about in the fullness of time. We have no firm plans at this point in time, but it may be that there will an appropriate time and it may be that that would be a good thing for Challenger to do, so I can’t reveal any particular plans at this point.
ALEC HOGG:  Your BEE partner Don Ncgube, has been very successful in the various operations he’s brought to the stock market. Real Africa was a highly successful initiative. I would have thought that from his perspective, he might be agitating for this.
ROBERT WILLES: Well not so far, but anyway, we’ll see.
ALEC HOGG:Â Â How did you select him?
ROBERT WILLES:Â He was actually selected before I joined the company.
