Changing South Africa's Energy Landscape

By Jon Carter
Thursday, October 17th, 2013

We know how productive shale operations have been across North America. Because of fracking, the U.S. will be able to surpass Russia as the world’s number one oil producer this year. But despite the benefits of fracking to local communities and national economies, some governments around the world, like France, will still not permit it.

South Africa was one such country – until there was a lift on the nation’s fracking moratorium in 2012.

But oil companies are going to have to go through a long, arduous process in convincing the government that fracking is the way to go.

One year after lifting the ban, the South African government has proposed various regulations for shale drilling in the desert region of Karoo – said to contain 485 trillion cubic feet of shale gas reserves. If fully developed, it will be enough to supply sales for the country for 30 years.

Even though the ban has been lifted, production is virtually non-existent, and there is little incentive – such as tax breaks and programs – for companies to start.

But critics have noted that the main problem with this legislation, known as the Mineral and Petroleum Resources Development Act, is that it is considered incoherent by outside investors, and the proposals are not industry specific, Mondaq reports.

Interested parties like Royal Dutch Shell (NYSE: RDS-A) have applied for permits, but they may have to go through some tough legislative measures.

Companies that want to drill in South Africa will also have to meet guidelines established by the American Petroleum Institute – disclosing what types of chemicals that will be used in fracking and allowing oversight over what type of equipment is used.

The Karoo is home to a wide variety of animals, and it has been treated as an environmentally sensitive area. Energy companies will have to prove themselves worthy in a country focused on conservation and protecting sensitive lands.

Environmental groups are already opposed to the measures, and you can expect lengthy court battles to follow.

South African Energy

South Africa imports most of its oil and relies heavily on coal – depending on it for around 90% of its energy economy. It is one of the top coal mining nations in the world, but the government is hoping to reduce its reliance on coal in an effort to reduce pollution.

And since coal has not been performing well in the energy markets due to stiffer regulations and lower demand, now is the time to begin a conversion to natural gas.

The government is concerned with conservation, but for the time being, leaders have a higher focus on reducing carbon emissions.

South Africa is fostering deals with nations like South Korea and France to determine locations for nuclear power plants by the end of this year.

Through nuclear power and natural gas, the nation will be able to cut most of its coal assets and join the shale gas bandwagon. Other nations like China are cutting down on coal to reduce emissions as well, and the Polish government is not giving up on finding commercially attainable hydrocarbon reserves.

The South African government will use the gas mostly for domestic consumption, but if there is room for exports, it may have some competition ahead.

East African countries like Mozambique and Tanzania are gearing up to export liquefied natural gas within the next decade. Companies like Exxon Mobil (NYSE: XOM), Statoil (NYSE: STO), China National Petroleum Company, and Mitsui (OTC: MITSY) of Japan have all been sniffing around East Africa.

If South Africa wants to attract the same attention and mimic the shale drilling success of North America, regulations and restrictions must be scaled back.

South African Investment

In terms of investing in South African energy, you’ll have to wait and see how hard the government will enforce regulations and how companies react to them.

East Africa may be getting plenty of attention, but there is concern about supply gluts. If South Africa can catch up to East African countries and obtain a surplus of natural gas, the government would be wise to allow exports in order to keep prices higher and bring in an extra source of revenue for the nation.

Natural gas may not be the most sought after commodity for drilling companies in the United States due to low prices, but countries embarking on shale drilling would be wise to convert shale gas into LNG to export to nations that value the commodity, including South Korea and Japan.

South Africa already exports energy to neighboring African nations. It could be helpful in supplying natural gas to poorer parts of the continent.

Domestically speaking, exports and local supply can also foster greater economic development and play a role in helping with infrastructure and providing more energy to the less fortunate.

Until the government crafts clearer policy, there could be significant delays in production. But don’t give up hope; if South Africa can tap into its reserves, the nation could be one of the most prosperous shale producers in the world.