Grab shale gas opportunity, but avoid opportunism
- Ivo Vegter
- 20 May 2014 12:14 (South Africa)
I had the pleasure, in recent weeks, to chair the Shale Gas Southern Africa conference in Cape Town, and address a luncheon at GeoConvention 2014 in Calgary. The former convened many of southern Africa’s geologists, geophysicists, hydrologists and engineers, while the latter came at the invitation of the Canadian Society for Petroleum Geologists, which is one of the joint organisers of an annual convention in Calgary, Alberta, on the frontier of Canada’s vast oil and gas fields.
In this column, I’d like to highlight some of my conversations and discoveries. It is written far from home, in rural idyll outside Edmonton, the capital of Alberta province. It will be a sketch of my thoughts based on my notes and impressions.
One thing that became clear to me in recent months is that the South African government ought to fast-track the process to issue shale gas exploration licences, and resist the temptation to grab too wildly, too early, at potential revenues.
The benefits of oil and gas development to economic progress and prosperity are very clear in a region such as Canada’s oil sands. At the same time, potential environmental risks appear far from obvious or widespread, and the industry happily coexists with local families and the farming community.
The province of Alberta, which lies immediately east of the Rocky Mountains, is the oil and gas heartland of Canada. It has long been famous for conventional oil and gas, and famously begun to develop its huge oil sands reserves about a decade ago. Existing operations are viable at an oil price above about $60, and new projects need a price of $80 to break even. The price of Brent Crude, as we speak, hovers around $110. Alberta also has significant shale oil and gas reserves, which has been at the heart of the US energy boom that began in 2008.
Oil and gas wells coexist happily with the important agriculture sector in Alberta, Canada.
A recent report by the Canadian Council of Academies that explored the risks of shale gas development cited the Alberta Energy Regulator’s environmental monitoring programme as the “gold standard” for credibility, transparency and a commitment to science. It takes a play-based approach, dividing the region into watershed sectors, rather than trying to micro-manage individual wells. This significantly simplifies the burden of regulation, which otherwise might overwhelm the regulatory bureaucracy, while still ensuring a high level of risk management and accountability.
Because of their high visibility, oil sands are tarred (if you’ll excuse the pun) with a broad brush by green activists. In reality, however, they contribute only modestly to Canada’s environmental burden. They represent only 6.5% of Canada’s greenhouse gas emissions, which is not much more than residential emissions, less than agriculture emissions, a third of industrial emissions, a fifth of the emissions of other fossil fuels, electricity and heat generation, and less than a quarter of the emissions of the transport sector. It represents 3.5% of the greenhouse gas footprint of the US coal-fired power sector, and only 0.1% of global greenhouse gas emissions.
Despite the image of large-scale open-cast mining, the active footprint of oil sands operations is 715km2, or about the equivalent of one medium-sized city. It represents only one 200th of the land covering the oil sands, and is 4,475 times less than Canada’s boreal forests, which extend a massive 3.2 million km2. By comparison with South Africa, the Karoo proper covers about 400,000km2, while the eponymous geological basin extends about 600,000km2, and shale gas development is far less invasive than oil sands mining.
Oil sands producers recycle between 80% and 95% of all the water they use, and they account for about 7% of the total water allocation. Even when combined with conventional oil and gas, the petroleum sector represents less than municipal water consumption, less than a third of commercial water use, and about one fifth of the water allocated for agriculture and irrigation.
A drill crew goes through routine safety training exercises on one of the historic Leduc #1 oil wells near Edmonton, Alberta.
In Canada, mineral rights are, like in South Africa, owned by the state, and leased to exploration and production companies on similar terms. Contracts involve strict environmental regulations, a set level of equity participation on both a free-carry and paid-for basis, payment of royalties to the state, as well as ordinary corporate taxes.
Phil Esslinger, co-chair of the Canadian Society of Petroleum Geologists and senior geologist at Cenovus Energy, tells me that Alberta recently tried to jack up royalties demanded of oil and gas companies. The goal was to satisfy lobby group demands that the province earns “its fair share” from the boom. Almost instantly, prospectors started to up sticks and move operations to the neighbouring provinces of British Columbia and Saskatchewan, where the costs of production were lower, forcing Alberta to rethink its policy.
At the Shale Gas Southern Africa conference, in March 2014, Poland was the subject of a similar discussion. That country, wedged between Germany and the former Soviet states of Belarus and Ukraine, rose to international prominence early in the US-led shale boom that began around 2008, because its government openly welcomed the development of its domestic reserves. It was eager to reduce its dependence on expensive imports, especially from the swaggering imperialism of Russia’s gas monopoly, Gazprom. However, during the heady days of vast shale gas estimates unconfirmed by actual exploration, it proposed far too high a tax levy. The petroleum industry turned its back on the country’s promising reserves. After all, there are many countries with exploitable shale basins, and the petroleum industry is not in the charity business. Panicked, the Polish government is now offering a multi-year tax holiday, in the hope of luring exploration companies back.
A “fair share” of nothing is nothing, Esslinger pointed out. Besides, he asked rhetorically, who do they think drives the prosperity of Alberta’s businesses, the growth of its cities, and the value of its residential properties?
It is hard to find anyone in Alberta that does not take a positive view of the province’s oil and gas industry. The spin-offs range far and wide, from local construction, engineering and oil services industries, to restaurants, accommodation and transport companies.
I spent a few days with an uncle of mine, who supplies materials to hundreds of schools in the region. He says that even in small provincial towns, accommodation is always at a premium, and it is sometimes hard to find vacancies amid all the oil and gas crews.
The only person I encountered who disagreed with the majority was a book store clerk. She responded to my request for a copy of journalist Ezra Levant’s latest book on shale gas, Groundswell, by trying to sell me Jeff Rubin’s jeremiad, The End of Growth. Rubin might think buying two books at once betrays a naïve optimism about the future of modern civilisation, but he appears to be in the minority here on the oil patch.
All indications are that shale gas can be safely produced, and can supply plenty inexpensive, effective and efficient energy. Gas-fired power stations are quick and cheap to build, clean to run, and reliable in any weather. All things considered, they beat most competing sources of energy: they’re cheaper than nuclear, cleaner than biofuel, safer than coal, and more reliable than renewables. Gas is efficient as a feedstock for industrial furnaces and, eventually, residential heating, both of which could significantly ease the burden on our creaking electricity supply. It can safely be transported using pipelines, and South Africa has excellent homegrown experience of turning natural gas into liquid for transportation fuel or bulk export.
The Leduc #1 Interpretive Centre outside Edmonton, Alberta has a wonderful collection of historical oil and gas equipment.
South Africa needs to know whether its massive domestic reserves are economically viable and safely extractable, which requires exploration. It faces competition from all over the world, both as a supplier on the international oil and gas market, and in terms of available skills and equipment in this global industry.
There is no reason to further delay exploration, and every reason to expedite the licence process. Importantly, government should resist the temptation to grab at more than it has already claimed on behalf of the national treasury. Tax and royalties are not the only way for society to benefit from oil and gas development. The spin-offs of the industry – ranging from direct employment, indirect benefits for suppliers and contractors, infrastructure development, skills advancement in science, engineering and construction, and gaining an abundant domestic supply of efficient, clean energy – are myriad.
If government confidently fast-tracks the licensing process, and South Africa is lucky enough to find its shale gas reserves to be commercially viable, I’ll wager we’ll be able to travel through the Karoo in a decade or two, and get exactly the same sense of frontier-town optimism that I encountered last week in Calgary and Edmonton.
But don’t take my word for it. Go to Canada and see for yourself. I can highly recommend a visit. DM