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Systems Engineering in scenario based research: A shale gas field development study
Pieter W Stoker Faculty of Engineering, North-West University
[email protected]; 083 4422112
Copyright©2013 by PW Stoker. Published and used by INCOSE SA with permission
Abstract
It is reported, (Department: Mineral Resources, 2012) that the Karoo basin in South Africa
may have considerable technically viable shale gas resources. Even if a small percentage of
this resource is commercially viable (30 trillion cubic feet Tcf), development of the resource
will have a marked positive impact on South Africa’s economy, including job creation. The
report indicates many uncertainties and further work to be done. It is noteworthy though,
that the main recommendation of the report was announced by the Minister (Engineering
News, 2012), namely lifting the moratorium on exploration, while not yet allowing hydraulic
fracking to commence.
Against this background the paper reports a scenario based research project whereby the
Systems Engineering approach was followed to compile a System Development Specification
for a Multi-Well Pad (MWP), it being the lowest level “economic building block” in the
development of a shale gas field.
A system design was completed of an imaginary shale gas field. The project was set in a real
world scenario, which was designed with reference to the science of Scenario Modelling. A
narrative normative scenario, in the form of a Stakeholder Requirement Statement (SRS),
served as input to the system design process. The output of the process was documented in
a System Development Specification (SDS) for the development of shale gas in the Karoo.
Three scenarios were identified, but only one was studied, namely generation of 9.6 GW
electrical capacity using shale gas. The rationale behind this scenario was the replacement
of nuclear power, as contemplated by IRP2010, with power from shale gas.
It was found that power from shale gas could be delivered to the grid at R1/KW-h, including
CO2 taxation and healthy Internal Rate of Returns (IRRs) at multiple business levels that
would attract strategic investments in such business opportunities.
It was further found that the capital investment for shale gas power is approximately 31% of
that required for the same capacity generated by nuclear.
The paper concludes that Scenario Modelling, combined with Systems Engineering, offer a
powerful methodology that Government could use to determine the future of shale gas
development in South Africa.
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Introduction
To arrive at a credible shale gas development scenario, the underlying theory of Scenario
Modelling is discussed. Elements of Systems Engineering methodology is then mapped onto
the Scenario Modelling process, resulting in a scenario description couched in system
engineering terms. The outcome of this process was captured in a “Stakeholder
Requirement Statement”, included as Appendix A.
Interesting examples and some findings of the study are presented next, more specifically
system delimitation, functional analysis, shale gas field concept design, definition of
concepts and economic feasibility modelling.
Finally the paper draws conclusions in respect of the power of combining scenario and
Systems Engineering processes, including the role that such could play in support of
Government planning, policy and legislative outcomes.
Scenario based research – an overview
Herman Kahn, a futurist and military strategist, introduced scenario methodology as a
strategic planning tool around 1950. (www.hudson.org, accessed 11 April 2013). The
methodology has since developed markedly. A thorough overview of recent developments
in the theory of scenario methodology is presented by Kosow and Gassner, 2008. Key
findings of their overview are reported here and serve as basis for the shale gas scenario
study developed in the next section.
As to what a scenario is, the authors state a description that is implicitly shared by many
proponents, namely “a description of a possible future situation (conceptual future),
including paths of development which may lead to that future situation”. Kosow et. al. 2008,
p11.
Scenarios are not claimed to represent reality. They are hypothetical constructs of possible
futures, based on present knowledge. Scenario studies are distinct from prognosis – the
latter being an extension of the present to yield an expected situation in the future.
A plausible view of the concept “future” is that it is malleable – suggesting that the course of
future events is neither predictable and controllable nor chaotic, uncontrollable and
random. It upholds that intervention strategies could contribute to shaping the future. They
should be devised by those who can take action in accordance with their goals and decision
making processes.
Scenario methodology pre-supposes that numerous different alternative futures are always
possible. Ideally a scenario study should span the space of all possible futures. They are not
scientific in the true sense, but should always conform to criteria of good scientific work,
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such as logical consistency, a clear description of scope, an explanation of premises, and
transparency.
The purpose of scenario studies is to “generate a body of orientational knowledge which
can serve as a compass for lines of action in the present” Kosow et. al. 2008, p13.
Scenarios serve several functions:
• Generation of knowledge about the present and likely future state of affairs and the
limits of such knowledge, specifically unpredictabilities, gaps, dilemmas and
uncertainties.
• Facilitation of communication, based on the exchange of ideas between persons
with different perspectives.
• Aiding decision making and goal formulation. Questions such as “where do we want to
go from here?” and “what do we hope to achieve?” can be informed by scenario
studies. Normative ideal images of the future are created by scenarios.
• Examination of the potential effectiveness of alternative strategies. Scenarios serve
to test the reliability, robustness, and effectiveness of policies.
A key objective of the Kosow study was to find the “lowest common denominator” between
the multiplicity of scenario methods. The authors found this in the form of 4 phases through
which any scenario study should progress:
• Phase 1: Identification of the scenario field. For what purpose is the scenario to be
developed? What are the issues? What must be integrated? What is outside scope?
• Phase 2: Identification of key factors. Define the key factors or descriptors of the
scenario. They should describe the scenario field and should provide the means for
the scenario field to impact the world around it.
• Phase 3: Analysis of key factors. Key factors are subjected to analysis to find what
possible future characteristics are conceivable. Analyses contain intuitive and
creative elements, aimed at envisioning the future development of key factors.
• Phase 4: Scenario generation. Experience suggests that it is good practice to
generate 3 to 5 different scenarios for any one study. For example, “Status quo
scenario”; “Go for it scenario”; “Doom and gloom scenario”; “Pie-in-the-sky
scenario”.
A further objective of the Kosow study was to identify a framework for characterising the
wide spectrum of scenarios found today: At the highest conceptual level scenarios could be
characterised as either explorative or normative and either qualitative or quantitative.
Explorative scenarios investigate “what will happen if” questions. They start with the
present and contemplate the future should the “if” materialise.
4
Normative scenarios investigate “what do we want the future to look like” questions. They
start with the future and contemplate what we should do in the present to realise the ideal
future.
Quantitative approaches use mathematical constructs and models. Qualitative approaches
rely on narrative techniques and logical argumentation. Obviously hybrid approaches are
also commonplace.
It is appropriate in this summary of scenario methodology to include a few words on scope.
Scenario complexity should be limited to allow meaningful synthesis. (Kosow et.al. 2008
p35) reminds that “Their aim, after all, is to keep numerous different factors simultaneously
in view in order: 1) to observe their interactions and 2) to be able to develop overall images
of future situations”.
As with any other research instrument, criteria are needed against which the quality of
implementation of scenario methods could be determined. These are summarised by Kosow
et.al. as:
• Plausibility. Developments presented must be regarded as possible. The path to the
future must be conceptually feasible.
• Consistency. Development of factors within a scenario must be consistent with one
another. They should be mutually supportive and not contradict one another.
• Comprehensibility and traceability. Enough detail to be comprehensible. Avoid
excessive detail which could cloud comprehensibility due to complexity.
• Distinctness. Alternative scenarios in a given study are clearly distinguishable.
• Transparency. In defining scenarios, it should be clear who decided or carried out,
what, why and how.
• Degree of integration. The extent to which a scenario integrates the interactions of
factor development on different levels should be provided. Are causal relationships
accounted for?
• Quality of reception. Scenario should be readable and understandable, also to the
layman.
• Participants. Participants/stakeholders should be complete and credible.
Three categories of scenario techniques are identified by the authors as follows:
• Trend extrapolation. “The scenario is supported primarily and even exclusively by
trends which already exist or have already existed and by their projection into the
future”. (Kosow 2008 p44)
• Systematic-formalized scenario techniques. The departure point of these scenario
types is a clear definition of key factors. These are then varied and combined with
one another to provide a bounded spectrum of possible future scenarios.
5
• Creative-narrative scenario techniques. These techniques are characterised by the
explicit implementation of creative techniques, intuition, and implicit knowledge.
The scenario process itself becomes a communication process and/or a participatory
approach. Three sub-techniques are identified: Intuitive Logics, Morphologic Analysis
and Normative Narrative. The latter is ideal when a desirable normative future is
contemplated. As such it can be viewed as an explorative technique.
Hybrids of these techniques are often found. They further do not stand in isolation and use
many established and proven techniques and methods, for example trend analysis, cost-
benefit analysis, models and simulation, and many more. In this paper, scenario
methodology is supported by the principles and approach advocated by Systems
Engineering. This will be done with reference to a shale gas field case study.
Shale gas scenario description
The broader context
The policy adjusted Integrated Resource Plan of 2010, (IRP2010, May 2011) envisages by
2030: new generation capacity from coal (6.3 GW or 15%); nuclear (9.6 GW or 23%); Import
Hydro (2.6 GW or 6%); Gas Combined Cycle Gas Turbines (2.4 GW or 5%); Peak Open Cycle
Gas Turbines (3.9GW or 9%) and Renewables (17.8GW or 42%, made up by wind 8.4GW,
Photo Voltaic 8.4GW and Concentrated Solar 1GW).
IRP2010 is vague on where gas feedstock would come from. It states that a decision on gas
infrastructure should be made soon, citing that a Liquefied Natural Gas (LNG) terminal
needs to be developed, “unless a suitable domestic supply is developed.” (IRP2010, p16).
Gas generation is planned to be on-line in 2019.
With reference to the improvement of South Africa’s infrastructure, the National
Development Plan (NDP Executive Summary - not dated) calls for “Constructing
infrastructure to import liquefied natural gas and increasing exploration to find domestic gas
feedstock (including investigating shale and coal bed methane reserves) to diversify the
energy mix and reduce carbon emissions.”
On the development of economic infrastructure the plan suggests that exploration should
commence to determine economically recoverable coal seam and shale gas reserves. If
shale gas reserves are proven to be exploitable in an environmentally sustainable way, gas-
to-power projects should be fast tracked.
On the subject of nuclear power the executive summary is silent. However the full plan
(NDP 2011) calls for the re-assessment of the desirability of nuclear power investments,
stating that financing of nuclear projects will pose major challenges. The plan requires that
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all possible alternatives to nuclear be explored “including the use of shale gas”. (NDP 2011
p147). Replacing nuclear by gas would require 9.6GW CCGT (Combined Cycle Gas Turbines).
Chapter 4 of the NDP elaborates on South Africa’s carbon intensity. It states that shale gas
could make a meaningful contribution to reduce the country’s emissions, suggesting that
gas could contribute about 20GW to the grid. (It is interesting to observe that this number
equals the allocation to nuclear plus the amount of coal generation that will be phased out
in the foreseeable future, namely 10GW). The plan suggests that shale gas be used only if its
environmental costs and benefits outweigh the current costs and benefits associated with
the county’s dependence on coal (or with the alternative, nuclear power).
Designing shale gas scenarios the SE-way
Kosow’s phased approach to scenario development is subsequently interpreted and applied
in the context of Systems Engineering science. The study reported in this paper was done as
an integral part of a post graduate course in Systems Engineering.
Phase 1: Identification of the scenario field. The purpose of developing shale gas
exploitation scenarios is to assess the feasibility of this resource as a means to supplement
South Africa’s energy needs. As evidenced by the background information stated above,
high level Government policy documents make far reaching proposals on the future
possibilities of shale gas (albeit subject to further study). The question is whether the
authorities really understand what the implications are of pursuing such a solution?
Scenario methods, specifically the Normative Narrative technique, will contribute much to a
better understanding of the implications of such proposals. They could provide visibility in
respect of business drivers, support infrastructure needs (including their integration and
management), environmental issues, and many more.
Note that a scenario of NOT exploiting shale gas was considered outside scope. In
identifying the scenario field, the overarching issue was – what are the requirements of key
stakeholders in respect of a future shale gas project, and how can these requirements be
met?
Phase 2: Identification of key factors. According to the systems approach, key factors which
will influence the development of shale gas should be ascertained from stakeholders. The
latter was identified as National, Provincial and Local Government; shale gas project
sponsor(s), licensee, licensor, local communities, suppliers, clients, workforce, anti-groups
and the media. These stakeholders each have their own requirements and needs. For
example, Government wants affordable electricity, a sustainable environment and job
creation; sponsors require return on investment; local community wants employment and
so forth.
The Systems Engineering approach is widely recognised to be particularly strong in the area
of stakeholder requirement definition and analysis. The methodology also excels in
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“translating” stakeholder requirements into a system solution that would best satisfy and
balance the needs of stakeholders. Implementing the systems approach in the scenario
process was thus accomplished in the form of:
• A Stakeholder Requirement Statement (SRS), providing a narrative normative
description of the scenario field as well as key factors as viewed by stakeholders.
Taking the clue from the NDP, namely that the exploitation of shale gas requires
further study, the SRS also requires specific work to be done to provide visibility and
substance to identified factors.
• A System Development Specification (SDS), essentially a technical baseline and road
map to realise stakeholder requirements and needs, using a program-unique format.
The SDS served as a vehicle to document the output of phase 3.
Phase 3: Analysis of key factors. Three Systems Engineering processes are applicable in this
phase: Stakeholder Requirement Definition, Requirement Analysis and Architectural Design.
In the shale gas case study intuitive and creative elements found their way into concept
definitions, for example concept of business operations, concept of social responsibility,
concept of deployment, concept of environmental responsibility, concept of investor return
and concept of localization. Quantitative analysis focussed on the characterization of the
business case. Of course the latter depends on the utilization concept of the gas resource
and the architectural design underpinning such utilization. This is best done in the context of
a number of defined scenarios, as suggested by the next phase of scenario methodology.
Phase 4: Scenario generation. Scenario generation is not a linear process. It follows from the
above mapping of the systems approach onto the scenario methodology process that it is
iterative. Scenarios drive alternative business cases. Architectural design considers
alternative solutions, aimed at optimising the business case associated with a particular
scenario.
The shale gas case study relied on the Normative Narrative technique. An imaginary shale
gas field was created in a real world setting. Alternative utilizations of the gas resource were
subsequently considered, again with reference to real world possibilities.
Figure 1 summarises the above iterative interaction between Systems Engineering and
Scenario Modelling in the context of the four phases advocated by the proponents of
Scenario Modelling.
8
Figure 1. Iterative interaction between Scenario Modelling and Systems Engineering
Shale gas scenarios defined
The processes depicted in Figure 1 lead to the definition of the following overarching
scenarios:
• Scenario 1: “Shale Gas Field as Independent Power Producer” (SGF-IPP). In this
scenario the output of the entire gas field is converted to electrical power and fed
into the grid.
• Scenario 2: “Shale Gas Field output to Petro-SA” (SGF-PetroSA). Output of the entire
gas field is fed to Petro-SA’s Gas-to-Liquid (GTL) facility in Mossel Bay.
• Scenario 3: “Combination of S1 & S2” (Combo). This scenario provided for a flexible
combination of scenarios 1 and 2.
As noted earlier, the study was done as an integral part of a post graduate course in Systems
Engineering, using an inductive teaching method. Approximately 20 students enrolled in the
course. As departure point of the course the class was confronted with a “Stakeholder
Requirement Statement for the development of a shale gas field in the Karoo”. (Refer
Annexure A). Please note that the information contained in this document serves the
academic objective of Systems Engineering teaching. Nothing contained in it bears any
resemblance to reality or should be construed to represent a proposed project.
Students were required to follow the systems approach and compile a System Development
Specification (SDS) of a shale gas field, using Multi-Well Pads (MWPs). The latter was
identified as the “lowest level economic building block” in the development of a shale gas
9
field system. Due to time constraints, the SDS was developed for scenario 1 only, namely
SGF-IPP.
Some examples and findings of the study are presented next. Names of students who
completed the course are listed in Appendix B and are hereby acknowledged for their
contributions to the contents of this paper.
A Systems Engineering approach to shale gas development
System delimitation
The System of Interest (SOI) for scenario SGF-IPP is shown in Figure 2.
Figure 2. Identification of the System of Interest: Scenario SGF-IPP
The Multi Well Pad was identified as the lowest level economic building block of the System
of Interest. Operations support systems include well drilling systems, fracking systems and
maintenance support for these systems. Community systems include towns affected by the
project, land owners and communities residing in close proximity to MWP operations.
10
The systems approach calls for thorough consideration of all elements comprising the SOI.
Furthermore, proper interfaces between the SOI and related systems need to be identified,
described and considered in the analysis of the SOI. The case study considered these issues
and documented their outcome in the SDS.
Functional analysis (Kleynhans, 2013)
As always, functional analysis was an effective tool to describe shale gas operations from a
life cycle perspective. Top level functional flow of shale gas life cycle operations is shown in
Figure 3.
Figure 3. Level-1 FA. Shale Gas Field Operations. Life cycle view
Multi Well Pad operations, mapped onto SGF operations, is shown in Figure 4.
Figure 4. Level 1 FA. Multi Well Pad Operations. Life cycle view
11
Deeper level analysis then followed. For example, “conduct drilling operations”, shown in
Figure 5.
Figure 5. FA Drilling operations
Functional Analysis was finally “made tangible” by including pictures of real equipment, for
example Figure 6.
Figure 6. FA was supported by pictures of real equipment
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Shale gas field concept design
Kleynhans 2013, generated hypothetical locations of MWPs in the target shale gas field
identified in the SRS. Please refer to Figure 7. Shale gas field area is approximately 2,000
square kilo metre. The blocks show a 1km x 2.5km sub-surface footprint of a typical MWP.
The surface footprint of a MWP site is typically 1 hectare, or 0.4% of the sub-surface
footprint of the pad - a mere dot on the scale of Figure 7.
Figure 7. Hypothetical locations of MWPs. (Source: Kleynhans 2013)
Block clusters are arranged in configurations that are typical for a gas field. Obviously, in real
life the location of MWPs will be determined after thorough exploration of the field. Red
blocks indicate pads which are economically viable. Yellow blocks have the potential to
deliver economically viable gas, but are eliminated from further consideration due to one or
more of the following reasons:
13
• They are located in in-accessible mountainous terrain;
• They are located in ecologically sensitive areas;
• The cluster is too small. Its Estimated Ultimate Recovery (EUR) does not warrant the
cost associated with its logistics. (Roads, water supply, power and gas lines).
The “physical presentation” of the shale gas field gives the scenario a “real life” feel.
Logistics design of the field as a whole was now possible. This in turn supported the
development of the business case for the gas field. Population demographics and statistics
of nearby towns Graaff-Reinet, Aberdeen and Willowmore were called on to analyse human
resource availability. The impact of operations on job creation, local infrastructure, wealth
creation and the environment were cast in a real setting, making analysis tangible, credible
and most important – pre-active. The latter stands in contrast to environmental impact
assessment, which is usually done much later in the system life cycle, as part of licensing.
Definition of Concepts
Definition of concepts as indicated by Systems Engineering practice relates to scenario
analysis in the sense that it provides for a high level description, a type of vision, of what the
future should look like. Concepts in Systems Engineering serve as frameworks within which
architectural design should be conducted to define a road map (System Development
Specification) to arrive at the conceptual targets.
Two concepts that were defined by the team are of particular interest: concept of business
operations and concept of social responsibility.
Concept of Business Operations
The SDS defined the following concept of business operations, underlying rationale being
the creation of many independent smaller businesses, each with an entrepreneurial
character. This in turn was designed to enhance job creation and spread the opportunities
and wealth that will emanate from the development of shale gas as widely as possible. The
approach advocated here stands in sharp contrast to a multi-national licensee following a
“winner takes all” strategy. The challenge of course is how to realise this “broad based
economic development” vision.
The SDS specifies:
a. “The Concept of Operations specified herewith reflects the requirements of the Shale Gas
Field (SGF) licensee. It focusses on operations relating to business management of the SGF
operation as a whole. b. The SGF business model requires the establishment of business units for the following
operations:
• Multi Well Pad • Drilling and Casing • Completion
14
• SGF waste management services • SGF water utility • SGF gas utility • SGF electricity utility • SGF power station • SGF maintenance services • SGF road infrastructure • Environmental management and rehabilitation services • SGF materials, production and business management services • SGF personnel services
c. Business units identified in b) could be legal entities in own right. d. More than one service provider may be contracted for any one of the business units
identified in b), thereby encouraging competitive practices. e. Service, material, and such other exchanges between business units shall be at arms-
length, expecting each business unit to be profitable in own right. f. The licensee shall conduct shale gas field exploration and act as system integrator
responsible for overall operations, including Government liaison, liaison with
landowners, social responsibility, training, quality and such other expert services. For
these services it shall collect royalties, franchising fees or service fees as the case may
be.”
Concept of Social Responsibility
The challenge here was to break the paradigm that social responsibility is a “handout to the
poor”; a “deed of good” to the surrounding community. Based on the common knowledge
that education is the only means to break the poverty cycle, the SDS specifies the following
concept of social responsibility:
a. “As a statement of principle, social responsibility shall be earned by the community so
served. b. The licensee’s social responsibility shall be directed to education and training and the
creation of education and training opportunities for the communities in and adjacent to
the shale gas field. c. In lieu of b) social responsibility projects could include building of schools, upgrading of
the infrastructure of existing schools, hiring of additional teachers, teacher training
programmes, bursaries for tertiary education, building of adult training facilities,
building of artisan training facilities and providing financial support towards the
operation of such facilities. d. Success or otherwise of investments contemplated in c) is deemed to be a contract
between the licensee and its communities and shall be measured by monitoring pupil
grades, number of pupils trained, absence of teacher strikes, and other such indicators
of a stable and productive learning environment. e. Social responsibility investments shall not be made outside the domain of training and
education. f. In lieu of a), social responsibility investment shall be withdrawn if receiving communities
fail to deliver on the metrics specified in d).”
15
Clearly the two concepts elaborated above support one another: The latter concept builds
human capacity and capability through broad base training and education. The former
concept assumes availability of educated and trained persons to embark on and follow
through on entrepreneurial business opportunities.
Economic feasibility modelling
MWP gas flow prediction is an important component of economic viability modelling.
Duman, 2012 analysed the economic viability of shale gas production in the Marcellus Shale
in the USA. He based his study on the widely used hyperbolic decline equation:
q(t) = qi*(1+b*Di*t)^(-1/b), where
q(t) = production rate at time t (m3/h)
qi = production rate at time = 0 (m3/h)
Di = initial nominal decline rate at time=0 (1/month); Typical value = .06
b = hyperbolic exponent; Typical value = .9
t = time (months)
Applying the above formula yielded a typical annual well production as shown in Figure 8.
Expected Ultimate Recovery (EUR) of the well over a 15 year period amounts to 133 million
cubic meters. It is possible to re-stimulate the well, say after 10 years. Duman reports that
this is an expensive undertaking, quoting re-stimulation cost to be in the order of 60% of the
original fracking cost. Re-stimulation would typically result in a renewed initial flow no more
than 40% of the original initial flow. This option was not considered in the economic
feasibility analysis.
Figure 8. Annual well production as per hyperbolic decline equation
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Gas price obviously drives the profitability of a MWP. (Kosow 2008) reports that gas prices
in the USA dropped from about USD10/1000ft3 (R3.20/m
3 at R9/USD) to around USD4-
5/1000ft3 (R1.30 - R1-60/m
3 at 9R/USD).
NERSA recently set a maximum price for piped gas at R117.7/GJ. Assuming a heat value of
36MJ/m3 for shale gas, this calculates to R4.21/m
3. The set maximum price caused an
outrage amongst gas clients, claiming that South Africa has one of the highest gas prices in
the world (http://www.fm.co.za/economy/2013/04/04/sasol-gets-its-way. Accessed 8 May 2013).
NERSA’s defence was that R118 is a ceiling price, and that consumers should negotiate a lower price
when contracting with Sasol.
Referring to the concept of business operations, the economic viability of two business units
are reported henceforth, namely the MWP and shale gas power station. (All values in 2012
Rand, and where converted to dollars, at R9/USD.)
Multi Well Pad
According to the business model, MWP operations are franchised by the system integrator
(entity licenced by Government to explore for and extract gas in a particular area). The
systems integrator provides training and technical support, including exploration results,
and receives an agreed royalty payment for these services. Payment amount is determined
as a percentage of gas produced.
The following assumptions were made:
• Well life time was 15 years with EUR per horizontal line=133 million m3.
• Well yield over time as per hyperbolic decline equation.
• 12 horizontal lines per MWP.
• Site preparation, drilling, casing and completion cost are capitalised and expended
up-front: Rm 801 in total.
• Carbon tax at R120/ton CO2 equivalent, increasing at 5% per year for 6 years.
• MWP royalties payable to franchisor: 25%.
A discount percentage on NERSA set maximum price was then calculated which yielded a
real Internal Rate of Return (IRR) of 40%. (Hurdle IRR for a MWP specified in the SRS). The
selling price of gas to the power station was thus determined at R2.86/m3.
Gas Power Station
Gas field output was piped to a central Combined Cycle Gas Turbine (CCGT) facility, located
near Aberdeen. The facility was sized to produce 9.6 GWe power. The idea was to
determine if the shale gas scenario reported herein could eliminate (or postpone for several
decades) the need for nuclear power.
17
The following assumptions were made:
• 12-line MWPs were commissioned at a fixed rate of one per month.
• Unit size of CCGT set: 250MWe at USD1,200/KWe, or Rm 2,700 per unit.
• 40 units (total capacity 10GWe) were installed over a 15 year period.
• Facilities infrastructure for 40 units was constructed up-front at an overnight cost of
Rm 32,400.
• CO2 taxation as for the MWP.
Selling price of electricity to the grid was subsequently determined such that the total
investment in the project (Rb140.4) met a 10% real IRR. The selling price calculated to
1R/Kw-h. This price can be construed as the levelised cost of electricity for the shale gas
generation option. It includes CO2 taxation and a healthy real internal rate of return (10%)
that would typically be a pre-requisite for a private entity to enter the market.
Interesting to note the sensitivity of investor IRR hurdle rate on cost of electricity to the
grid: For a real IRR of 6%, it calculated to R0.915/KW-h
With the above ramp-up, the scenario gas field has a life time in excess of 20 years. Total
investment cost per KWe amounts to R14,000 (or USD1,555/KWe). Approximately 35% of
total investment cost (for the power station) will be made up-front, with the balance spread
over 14 years.
Compare the above with nuclear overnight cost estimates, ranging from USD4,000/KWe-
USD7,000/KWe. (IRP2010) estimates nuclear at USD5,000/KWe, more than 3.2 times the
amount estimated for shale gas by this study.
It all comes together in the System Development Specification
The Systems Engineering post graduate class of 2013 delivered many novel and innovative
solutions towards achieving the normative narrative scenario described in Appendix A. Time
and space does not allow reporting on all of them. System delimitation, functional analysis,
shale gas field concept design, definition of concepts and economic feasibility modelling
reported above serve as examples of work underlying concomitant requirements
documented in the SDS.
Referring to Figure 1, the Scenario Modelling process produced a Normative Narrative
description of the ideal future where shale gas is monitised in a responsible way. Systems
Engineering baseline documents, more specifically the SRS and SDS, where generated
iteratively with the Scenario Modelling process, thereby giving qualitative and quantitative
substance to both the ideal future scenario and the road map to achieve this ideal future.
The latter took the form of a SDS.
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In conclusion some of the “things that should be done now” to achieve the envisaged future
of shale gas development in South Africa are presented.
Conclusions
The paper makes a case for combining the sciences of Scenario Modelling and Systems
Engineering in an endeavour to influence Government planning outcomes, policy decisions
and legislative implementation of such policies. To this end, it is concluded that:
• Broad Based Economic Empowerment (BBEE, not BBBEE) could be achieved by
implementing the concept of business operations proposed in this paper.
• Follow-through on concept formulation using Systems Engineering tools such as
functional analysis, concept design and economic feasibility modelling, create a
credible baseline for pivotal economic drivers, such as the price of electricity as
informed by a particular technology.
• Narrative normative scenarios contemplate “things that should be done now” to
arrive at the ideal future. This is illustrated by the statement of fact in paragraph 2.3
of the SRS: “The Licensor has been mandated by the “Shale Gas Development Act”,
Act 23 of 2015.” Government could pursue such an instrument to achieve at least
some of the positive outcomes of shale gas development in South Africa, as
documented in the SDS.
References
Kosow H, Gassner R. Methods of Future and Scenario Analysis: Overview, Assessment, and
Selection Criteria. German Development Institute. Bonn, 2008. http://www.die-gdi.de
Electricity Regulations on the Integrated Resource Plan 2010 – 2030. Government Gazette
no. 34263, Vol. 551. Pretoria. 6 May 2011.
National Development Plan 2030. Executive Summary. National Planning Commission.
Department: The Presidency, Republic of South Africa.
National Development Plan. Vision for 2030. National Planning Commission. Department:
The Presidency, Republic of South Africa. November 2011.
Kleynhans E. Internal report. Faculty of Engineering, North West University. Vanderbijlpark.
May 2013.
Integrated Resource Plan for Electricity. 2012-2030. Department of Energy. Government
Gazette. Volume 511, Number 34263. Pretoria. May 2011.
Duman RJ. Economic viability of shale gas production in the Marcellus shale; indicated by
production rates, costs and current natural gas prices. Masters Thesis. Michigan Technology
University. School of Business and Economics. 2012
APPENDIX A
Stakeholder Requirement Statement (SRS) for the
development of the SGL shale gas field in the Karoo
1. Background
Shale Gas Limited (SGL) holds the shale gas prospecting and development
rights for area 013ER shown in Figure 1.
Figure 1. Source: Government Report - Investigation of Hydraulic
Fracturing: Report of the Working Group.
Area 013ER is approximately limited by (32.24.00.S;19.54.00.E, top left
corner) and (33.00.00.S;20.44.00.E, bottom right corner). Promising
exploration results have been obtained in the area around the N9
connecting Graaff-Reinet and Willowmore. The technical recoverable
resource of this area is estimated at 55 Trillion cubic foot (Tcf).
Commercially recoverable resource for the same area is estimated at
17.5%, or 9.6 Tcf. Consequently SGL will launch its first operations here.
SGL plans to establish a total of 400 multi-well drill pads in the area, with 6-
10 wells per pad. Assuming an Estimated Ultimate Recovery (EUR) per well
of 3 billion cubic feet, yields 9.6X10^12/3*10^9=3200 wells.
The purpose of this document is to record the requirements of all major
stakeholders in the above project. This will serve as a baseline for the
development of the identified gas field. The document will be presented to
a Systems Engineering Task Team (SETT) who will be requested to compile a
System Development Specification (SDS) for a Multi-Well Pad (MWP), the
latter being the fundamental “economic building block” of the venture.
2. Stakeholder requirements
Eleven classes of stakeholders have been identified. Their requirements are
documented herein under:
2.1 Sponsors
a) Sponsors in the context of this document are meant to be investors
and or institutions providing the initial capital for the project.
b) The sponsors require an Internal Rate of Return (IRR) greater than
20%.
c) The confidence level for attaining requirement 2.1.b should be
better than 90%.
2.2 Licensee
a) The licensee is SGL, an investment holding company which holds the
rights to explore and develop the 013ER gas field.
b) SGL has entered into a license agreement with the Department of
Minerals of the South African Government.
c) The license agreement imposes a multitude of obligations on SGL,
which the task SETT should consider in performing their work.
d) The sponsors hold SGL accountable for achieving the investment
performance specified in 2.1
The SETT shall:
e) Do a concept design of a MWP, using the approach and principles
advocated by Systems Engineering methodology.
f) Conduct an in depth analysis of the economic performance of a
typical MWP. It is proposed that the MWP is the lowest level
economic entity in the integrated development of the gas field.
Consequently it is envisaged that a MWP should have an IRR of at
least 40%.
g) Identify and specify the interfaces of the MWP to all related systems.
Related systems include (amongst others) the road access system,
electricity supply system, telecommunications system, water supply
system and community system.
2.3 Licensor
a) The Licensor is the Department of Minerals of the South African
Government.
b) The Licensor has been mandated by the “Shale Gas Development
Act”, Act 23 of 2015.
c) Apart from the requirements imposed by the act in b), the Licensee
shall be compliant with all other relevant legislation as outlined in
reference 5.a
The SETT shall:
d) Take the current and expected future legislative environment into
account when executing the work requested herein.
2.4 Adjacent communities
The SETT shall:
a) Propose means to enable communities in close proximity to MWPs
to share in the economic benefits of projects.
b) Investigate and recommend a business model which will effect 2.4a.
The business model may be based on a franchising concept.
c) Quantify the required investment to implement the business model
in 2.4b and community’s expected economic gains.
d) Propose a master plan to implement the business model in 2.4b.
2.5 Regional Government
a) Regional governments in the project area are concerned about the
impact which the development will have on the region’s
infrastructure, specifically roads, traffic, water and electricity supply.
The SETT shall:
b) Investigate the collective impact of the integrated project (estimated
at 400 multi-well pads) on the region’s infrastructure.
c) Propose a Concept of Operations (CoP) and a Concept of Support
(CoP) for the integrated project, covering its full life cycle including
phase-out and return to green field condition.
d) Make recommendations for future work to refine and implement
the two concepts designed in 2.5c.
2.6 National Government
a) National Government has set specific priorities for the project -
amongst others job creation, localization and broad based
empowerment.
The SETT shall:
b) Propose a Concept of Poverty Alleviation (CoPA) for the integrated
project, covering its full life cycle.
c) Estimate the expected direct and indirect financial gain that the
Fiscus would receive from the project.
d) Provide a Rough Order of Magnitude (ROM) of the investment that
will be required to upgrade the region’s infrastructure and
implement the various concepts.
2.7 Suppliers
a) Suppliers refer to all entities which are likely to supply equipment
and services to the project.
b) SGL have not yet had the opportunity to engage with this group of
stakeholders. The SETT is requested to note and document any
requirements that this group may have.
2.8 Clients
a) Clients refer to entities which are likely to buy the natural gas
produced by a MWP.
The SETT shall:
b) Develop a gas price prediction model, which will serve as input to
the quantification of a MWP’s IRR as required in 2.2f.
c) Perform ROM calculations to validate the realism of the output of
the pricing model for an electricity generation scenario using Open
Cycle Gas Turbine (OCGT) technology.
2.9 Workforce and labor unions
The SETT shall:
a) Identify, describe and propose resolutions to those project attributes
which have an important bearing on the wellness of the MWP
workforce.
b) Obvious “issues” falling in this domain include housing, sanitation,
training and education, health and health care, salaries and wages
and post-project livelihood.
c) Propose an interface management mechanism between SGL and
relevant labor unions.
2.10 Institutions opposing shale development
The SETT shall:
a) Conduct a structured interview with at least one anti-shale gas
organization and document their concerns and views.
2.11 Media
The SETT shall:
a) Prepare a press release on the project and its salient findings.
b) Depending on the success of the project, invite the press to sit in on
the final project presentation.
3. Verification
The SETT shall:
a) After analyzing and synthesizing the requirements set in SRS, either
recommend a change to or otherwise incorporate such requirements
into the SDS.
b) Define a means to verify each of the key requirements so included.
4. Notes
It was outline in the Module assignment that the work conducted by the
SETT will be presented at the INCOSE SA-conference in August 2013.
Herewith a provisional abstract of the conference paper:
“It is reported by (Department: Mineral Resources, 2012) that the Karoo
basin in South Africa may have considerable technically viable shale gas
resources. Even if a small percentage of this resource is commercially viable
(30 trillion cubic feet Tcf), development of the resource will have a marked
positive impact on South Africa’s economy, including job creation. The
report indicates many uncertainties and further work to be done. It is
noteworthy though that the main recommendation of the report was
announced by the Minister (Engineering News, 2012), namely lifting the
moratorium on exploration, while not yet allowing hydraulic fracking to
commence.
Against this background the paper reports a scenario based research
project whereby the Systems Engineering approach was followed to
compile a System Development Specification for a Multi-Well Pad (MWP), it
being the lowest level “economic building block” in the development of a
shale gas field.
The outcome of the research is not yet available, but will be included here
at a later stage.
The value of the paper to the INCOSE conference resides in the
methodology that was followed. Notions such as Stakeholder
Requirements, Concept of Operations and Concept of Support take on a
unique character in the set scenario. The paper further introduces a new
notion, namely Concept of Poverty Alleviation (CoPA), arguing that this
theme is of critical importance for South Africa”.
5. References
a) Investigation of hydraulic fracturing in the Karoo basin of South Africa.
Department of Minerals, RSA Government. (Available on efundi)