Rolling blackouts are no longer an unwelcome fact of life for South Africans as they were four years ago, but the rising cost of power remains part of every-day reality.
Eskom, the state utility, last month said the average price of electricity will need to rise by 16 per cent every year until 2018. If the energy regulator grants the increases, power will cost around eight time more in 2018 than it did in 2008 when demand outstripped supply. A big part of the increase will be required to pay for higher coal costs, Eskom said.
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Provisions for replacing ageing infrastructure will make up another big chunk.
It was unwelcome news for consumers. The utility is already treading a fine line between balancing demand with supply; it has installed capacity of 41,000MW compared with peak winter demand of around 37,500MW. The company is building new plants and the government also has a plan to roughly double electricity capacity by 2030, which includes building six new nuclear power plants.
Vital is finding new sources of power. Many experts believe the best source is gas. The country is already exploring in Namibia and Mozambique but it lacks the necessary infrastructure to import liquefied natural gas. One answer could be shale gas – trapped in rocks thousands of feet below the surface – in the Karoo, the semi-desert that covers more than 100,000 square miles of South Africa’s Cape region.
The potential prize is huge. According to America’s Energy Information Administration, South Africa has 485 trillion cubic feet of technically recoverable shale gas resources, most of which are located in the Karoo Basin, ranking as the fifth-largest in the world. Proponents believe commercial production from the country’s shale reserves could be the answer to its power shortages and dependence on coal.
Some of the energy industry’s biggest names, notably Royal Dutch Shell, as well as independents such as Falcon Oil & Gas, applied for exploration permits for the area in recent years. Progress stalled when the government imposed a moratorium in April 2011 pending further studies amid a growing environmental backlash against the technique used to extract the gas from the rock.
Hydraulic fracturing or fracking involves pumping gallons of water, chemicals and sand at high pressure into the rock deep underground to release the trapped gas. Concerns from environmentalists have focused on the contamination and depletion of water – a big concern in this instance, given the arid nature of the Karoo.
This September, however, South Africa became the first country to lift a moratorium on fracking following a report into the issues. The decision has put the Karoo firmly back on the map as a potentially significant source of domestic energy yet also sparked concerns that the pristine landscape – home to the threatened black rhinoceros – could be irrevocably damaged.
“South Africa’s economy is being restricted by the limits on its power supplies. This is a market that would greatly benefit from an alternative domestic energy sources,” says Simon Ashby-Rudd, global head of oil and gas at Standard Bank.
The government has so far only allowed exploration, excluding fracking, and said it will set up a monitoring committee to ensure the regulatory framework and oversight mechanism are strengthened. “Once all the preceding actions have been completed,” fracking would be authorised “under strict supervision of the monitoring committee,” the report into the merits of fracking said. The process may also be halted in the event of “any unacceptable outcomes”.
Environmental campaigners, however, remain to be convinced, fearing fracking could damage aquifers in the Karoo, destroy its ecosystem and threaten agriculture. Many draw parallels with the mining industry whose legacy they say is tainted with inconsistent compliance. Treasure the Karoo is campaigning to get fracking blocked.
The industry insists it is aware of the high stakes. Shell, which has said it hopes to invest $200m to explore in the Karoo and – subject to approval – has plans to drill at least six wells within the first three-year licence period, acknowledged in September that there are “genuine concerns about where we will get the water from and what are we going to do to make sure we do not contaminate the aquifers near the surface in an area that needs water to desperately”.
Eric Oudenot, a principal in oil and gas for Boston Consulting Group, says water usage “will probably be a key concern if there is large-scale development”.
There are other challenges, including the limited amount of geological data that is available. “We are at the very early stages of gathering data but the potential is enormous,” says Philip O’Quigley, chief executive of Falcon Oil & Gas.
One of the biggest hurdles is the size of South Africa’s domestic oil and gas service industry. There are just 120 onshore rigs in the whole of Africa compared with 120 in the prolific Marcellus shale basin in the US.
Of the 120, 90 per cent are in North Africa, points out Mr Oudenot. Plans are under way to help meet the challenge. South Africa Oil and Gas Alliance is an initiative to develop the country’s exploration and production services sector by building industry capacity, as well as developing policy and infrastructure. Warwick Blyth, the alliance’s chief executive, last month told an audience in London that the country was “well-positioned to play a hub role” as energy opportunities spread across the sub-Saharan region.
The challenges are great, but so is the prize. The government will need to weigh up the potential prize of energy independence with the environmental risks.
For hard-pressed South Africans, shale will not provide any immediate relief to expensive power: even if all goes to plan, most industry experts say commercial production is at least 10 years away.
