I’ve been closely following the Karoo shale gas opportunity. The deeper you get your teeth into the subject, the more excited one becomes. Shale gas has transformed the US’s energy equation. And if the Karoo find is even one tenth of the initial estimate, it will be a game changer for South Africa. Today we spoke to Jan-Willem Eggink, the Shell executive seconded to Cape Town from Libya to keep a close watch on the SA shale gas opportunity. Shell has staked out an area the size of KZN province for exploration. It is getting closer to drilling the first well. – AH
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ALEC HOGG: Shell’s Karoo fracking plans have catalysed a battle between government, farmers, and conservationists. Jan-Willem Eggink, General Manager of Shell South Africa’s Upstream business joins us for more. Well Jan-Willem, it’s good to have you on the program particularly after the new legislation came through. You can now go ahead and explore. Just going back a little, the understanding was that once you got the green light you’d be investing something around $250M in six exploration wells in the Karoo. Is that the number?
JAN-WILLEM EGGINK: Maybe a small correction to what you just said: we don’t have a license yet to start operations in the Karoo. We’re still waiting for the licenses to be awarded to Shell. The legislation, the MPRDA (Minerals and Petroleum Resources Development Act) as it’s called, is being amended as we speak and is still doing its rounds. We’re still waiting for the final draft to actually be published. With respect to your question, the minimum commitment that Shell makes for these programs is around six wells, which is around $250M – R2.5bn, roughly.
ALEC HOGG: It’s a substantial investment. You must have an understanding or an idea that there’s something pretty good down there.
JAN-WILLEM EGGINK: We would like to prove that, actually. What we like about this project is the fact that it really answers the challenges South Africa is experiencing. South Africa’s challenges have been very well outlined in the National Development Plan – Trevor Manuel’s plan – inequality, poverty, education, unemployment, but also energy. This actually answers the questions and the challenges South Africa has with energy. Are we sure that the gas is there? No, not at all. There’s also a good chance that it’s not there, but that’s why we need to drill these wells. The longer we wait to drill these wells, the longer the potential game changer to South Africa would actually be delayed.
ALEC HOGG: Jan-Willem, just to go back on some of the statistics that have been provided: the EIA in the United States initially said that there were 480 trillion cubic feet (tcf) of gas under the Karoo. They recently adjusted that to 390 tcf. We do know that during the Apartheid Era, SOEKOR drilled many holes in the Karoo. How reliable is any of this information?
JAN-WILLEM EGGINK: I think we have to treat these volumes quoted anyway with a lot of caution, because this is an exploration project. We first have to drill the wells to see whether the gas is actually there. Then we have to test these wells to see how much gas they can flow and whether the flow is commercial. Only then can we make an assessment as to whether or not there’s a commercial prospect. Obviously, we have to take into account the cost of pipelines to bring the gas to a power plant somewhere or to bring it to an industry site like Coega, with pipelines. We have to take all that into account before we actually know whether this is a commercially attractive project for Shell. The volumes behind this are based highly on estimates of what this area could have. The SOEKOR wells that were drilled for oil in the ‘60’s, they were not really interested in gas at the time. The wells found the shales. Maybe they found some gas, but we still don’t know whether there’s enough gas and whether we can flow it at commercial rates.
GUGULETHU MFUPHI: We recently got news that the South African government will be able to acquire 20 percent free carry stake in oil, as well as gas explorations. How might that impact Shell with its fracking venture in South Africa?
JAN-WILLEM EGGINK: That’s a very good question. The experience that Shell has in the world is that we actually like to work together with national governments, and this is also what the government here has made very clear. They would like to partake in these ventures, so we actually encourage that. The question is of course, how to do that. I understand that they are asking for a 20 percent free carry interest. The question really is that is filled in. That’s at the discussion that the industry – not only Shell – is having with the Department of Mineral Resources, and I have full trust that we will, at the end of this, come to a mutually acceptable way of working together in which both South Africa and the industry will win. I think we will get there.
GUGULETHU MFUPHI: On that – you mentioned the 20 percent. The first point is do you think that 20 percent is too much or too little? Not only that… South Africa has been plagued by a lot of negative media attention. How do you hope your relations with government might unfold and maybe change in the months to come?
JAN-WILLEM EGGINK: Well, the 20 percent – it’s difficult to say whether it’s too much or too little. I think I would like to go back to my point first – made earlier. It is important that the state participate in these projects. That is something we’ve learned in the world in many projects all over. As I tried to explain to you initially, the 20 percent depends on how it’s filled in and how it’s structured, and then I can maybe make a statement. Is it a lot? Yes or no… At this point in time, while discussions are ongoing still with the ministry, it would be a bit premature to say anything about it. What we need obviously as investors, is clarity on terms, stability of these terms going forward and we need attractive terms. We have to put these all together at the end of the day and say, “Do we have all of these in place – yes or no?” The discussions with the ministry are key in that respect.
ALEC HOGG: When are you likely – given the processes that we’re going through now – to start drilling your first exploration wells?
JAN-WILLEM EGGINK: What happens initially is, if you get the licenses awarded…if it could be by the end of the year we have to start first with an environmental impact assessment. This environmental impact assessment will cover the exploration well that we intend to drill. There will be consultation with the people in the Karoo because we want to listen to what their concerns are and answer their questions. Environmental impact assessment will take one and a half years to two years maybe, in total. If we receive/are awarded licenses today, maybe the first well will be drilled in year three in the Karoo.
ALEC HOGG: It’s some time off, then. I want to get back to the numbers that the EIA are putting out there: 390 trillion cubic feet. It would give South Africa the eighth biggest resource in the world – two thirds of what the United States has, and we know how that’s changed that economy. Where do they get these numbers?
JAN-WILLEM EGGINK: Well, usually geologists make these estimates. I’m a geologist, too. They’d make a regional estimate of what could be in the Karoo area. The Karoo area is a geological basin and you can make reasonable estimates of what this could be. I don’t think the number is too important. I think if there were 100 TCF or 50 TCF that would already be a lot. I come from Holland and live here in Cape Town, but in Holland, we have 100 TCF gas field that has made Holland rich for 50 years already. By comparison, Mosselbay, the gas to the liquid plant there – Petro SA – was commissioned on 1 TCF, so if you have 50 TCF that would be great news. That is also what the Econometrix Report actually estimated. If there were 50 TCF, you get a lot of revenue to the state. You get many jobs – hundreds of thousands of jobs not only with the ordinary gas industry, but also with the new industries that will pop up because there’s security of supply, and in addition to that of course – a significant boost to the GDP. This could be a real game changer if the gas is there to be produced commercially.
ALEC HOGG: We have quite a long road to walk, though, until we know that.
JAN-WILLEM EGGINK: Yes, I would like the roads to be as short as possible. In the meantime, we may be able to bring in LNG. That is another option – to bring in gas earlier into the country, which is also something Shell is interested in doing. That would also be an option. At least fill in increased amounts of energy that we believe will happen in this country, rather than producing more coal, which produces a lot of CO2, but use clean gas that will be very good in addition to renewables, which South Africa should also be focusing on.
