The Select Committee on Land and Mineral Resourcespmg-assets.s3-website-eu-west-1.amazonaws.com/170613SAOGA.pdf · • Shale Gas exploration and development are however difficult

The Select Committee on Land and Mineral

Resources

Overview of the Onshore Shale Gas Industry and key implications for the MPRDA

Amendment Bill process

13 June 2017

Presentation Overview

• Overview of SAOGA

• Overview of the SAOGA Shale Gas Association

• Executive Summary

• What is Shale Gas

• Key attributes of an onshore Shale Gas industry

• Benefits of an onshore Shale Gas industry

• Considerations and challenges of an onshore

Shale Gas resource

• The programme, timelines, costs, financial risks

and investment considerations

• MPRDA Amendment Bill considerations/proposals

SAOGA Shale Gas Association Confidential – not for distribution

SAOGA is a non-profit organization dedicated to promoting the development

of South African Oil & Gas industry and the supply of Oil & Gas products and

services.

The primary focus is to grow the Oil & Gas sector through investment to

drive economic opportunity and benefit businesses in the upstream and

midstream oil and gas services value chain.

We facilitate between the public and private sectors influencing

attractiveness, investment and developing capacity & skills

This will develop South African jobs, expertise and capacity and be

catalysts for localised economic development as well as national

productivity.

South African Oil & Gas Alliance

SAOGA Shale Gas Association

Confidential – not for distributionSAOGA Shale Gas Association

Executive Summary

• Onshore Shale Gas exploration could potentially help to address and sustainably diversify South Africa’s energy

needs, help drive new supply chain and value chain industries providing significant job opportunities and help towards

alleviating poverty.

• In the USA, the shale gas boom has to date resulted in a material boost to the economy with sustained low gas prices

and the creation of more than 600,000 direct jobs and a further 2.2 million supporting and induced jobs.

• Shale Gas exploration and development are however difficult and costly, especially in a frontier environment such as

the Karoo without a proven hydrocarbon system and no existing gas infrastructure.

• To attract the large sums of much needed enabling investment to explore RSA’s Shale Gas potential and if proven

commercially viable, develop its full potential, requires an enabling, supportive and stable legislative, regulatory and

contractual framework.

• The Shale Gas Industry supports the DMR’s MPRDA amendment proposal, with a couple of key supportive

modifications that stand to benefit South Africa. The proposed additional amendments (slides 18 & 19) will afford the

DMR Minister sufficient flexibility to give Shale Gas the best possible chance to be explored and developed to its full

potential.

• If in the success case where material volumes of Shale Gas reserves are proven and its development considered

feasible, the maximum economic and employment benefits to South Africa will be realised (as in the USA) through

lower gas prices.

• Many RSA industry options and supply chain and value chain business can only be unlocked with low gas prices.

• The higher the State participation level in the Gas Upstream sector, the higher the investment hurdle and in turn the

breakeven gas price, resulting in gas resources not being explored and developed.


What is meant by Shale Gas?

• Natural gas trapped between shale layers

• Low porosity & ultra-low permeability

• Requires hydraulic

fracturing to release the

gas

Shale Gas means natural gas deposits trapped in low porosity and ultra-low permeability deep

shale rock layers across the sedimentary basin, requiring specialist technological solutions for

extraction, including the use of hydraulic fracturing combined with horizontal drilling techniques

and / or multiple deviated wells.


Key Attributes of a Shale Gas Industry in RSA Context

• Shale gas is an unproven resource - RSA has never drilled wells specifically exploring for shale gas (Soekor wells in 1960’s

did not explore for shale gas)

• Likelihood of a resource existing that can be commercialized is very low - average 90% risk of failure: Unproven resource,

lots of initial technical, operational and cost challenges

• 10+ years, 30+ wells and up to US$1bln of risk capital to assess viability and commerciality, prior to development and gas

production

• No Eureka! discovery moment – requires continuous drilling of a large number of wells throughout production phase costing

billions of US$ (US$4 to 5 bln per trillion cubic feet of gas)

• Gas development and commercialisation challenges given lack of:

• Shale gas services and skills to support activities

• available specialist equipment

• gas systems and infrastructure to transport or monetise the resource

• Compliance with the South African onshore Technical Regulations

• Time consuming processes (EIA, public participation, comprehensive permitting)

• No industry Windfall! possibility – unlikely for high commercial risks to translate into high rewards; eventual profits likely to

be “regulated” by driving the RSA gas price down to unlock as many as possible gas market opportunities

• The greater the reduction in gas prices, the more far reaching the economic opportunities and benefits for South Africa -

many industry options can only be unlocked with low gas prices


Benefits of a Shale Gas Industry for RSA

• Development of supply chain and value chain businesses – an indigenous

industry

• Significant employment opportunities for all skill levels

• Contributes to domestic energy goals

• Diversification, 42% carbons emissions reductions by 2025,expansion, security

• Energy demand forecast to double by 2030 (by 40GW)

• Coal (CO2 challenges), nuclear & diesel (cost challenges), renewables (intermittent)

• Boost to local economic activity and income as well as national tax revenue

• The lower the investment hurdle, the greater the chance of commercial

discoveries, the greater the reduction in gas prices, the more far reaching the

economic opportunities and benefits for South Africa


Socio-Economic Benefits

Fair compensation for landowners – rent, loss of crop

Job opportunities for local communities

Corporate Social Investment

Training and development

People – Skills Development

Supplier Development

Enterprise Development

Access roads, infrastructure

Potentially early connection to electricity or gas grid


Dramatic Impact Of USA Shale Gas Revolution

Source: EIA

bcm

Imports

2009800

2010

Tight gas

Shale gas

Alaska

0

200

400

600

1990 2000 2020 2030

Associated gasOffshore

Conventional

CBM

Sharp Reversal of Declining Production… and Material Reduction in Gas Price

Henry Hub Natural Gas

Price

US$/MMBtu

15

10

5

2000 2005 2010 2015


Shale Gas Economic benefits – USA Examples

Shale Gas developments have had a profound impact on the USA economy.

Examples of significant economic benefits from Texas and Pennsylvania:

Drilling activities support significant employment and economic activity in a wide range of sectors and required skill levels:

Construction, drilling and trade sectors account for the bulk of direct employment and economic benefits

Administrative & waste management services, transportation & warehousing, health & social, and hotel & food services sectors feature

prominently in indirect and expenditure induced employment and economic benefits.

Example of Household Savings:

Residential electricity and gas bills in Pennsylvania are US$245 million lower as a result of gas production from the Marcellus.

Data Sources: Barnett: The Perryman Group – A Decade of Drilling – prepared for The Fort Worth Chamber of CommerceMarcellus: The Pennsylvania State University

Timeframe 2001 – 2011

(Cumulative)

2010 2010 2020

Projections

Gas Volume Produced (tcf) >9 1.8 ~0.5 >6

GDP Contribution (US$) 80.7 billion 13 billion 11.2 billion 20 billion

Gain in local and state taxes (US$) 10.6 billion 1.6 billion 1.1 billion 2 billion

Employment Benefits

(FTE = Full Time Employment)

700,000

person-years

120,000 FTEs ~140,000

FTEs

>250,000 FTEs

FTE to Well Ratio Total Average Direct Indirect Induced

Barnett Shale 50 29 7 14

Marcellus Shale 58 29 11 18

USA Shale Gas Projects

(Estimated Recoverable Gas Reserves)

Barnett Shale – Texas

(40 tcf)

Marcellus Shale – Pennsylvania

(489 tcf)


Affordable Gas drives significant (RSA) Industry Development

Natural Gas extraction and processing

Pipeline transportation & Local Gas Grids

Power Generation National Power Grid

Gas Synthesis

GTL (Fischer-Tropsch Process)

Methanol Synthesis

Fertilizer (Urea)

LNG Export

Domestic, Commercial& Industrial

Distributed Power Generation

Industrial

Domestic & CommercialCNG

(Compressed Natural Gas)

•Cooking•Heating•Cooling

Examples:•Mining•DRI & Steel•Food Industry•Glass•Car Factories•Cement/Brickwork•Pulp & Paper•Refineries•Plastic

Transport Fuel

LNG(Liquified Natural Gas)

•Cars•Buses & Trucks•Trains•Boats/Barges

Global Gas Markets

Transport Fuel

Chemical Industry

DME (LPG substitute)•Cooking•Heating•Power generation•Transport Fuel

Transport Fuel

Lubricant Base Oils

Chemical Industry

•Ultra clean diesel

•Kerosene (Jet Fuel)

•Naphtha

~98% CH4

To some extent

achievable with

LNG import

Only achievable

with low cost

indigenous gas

from gas

exploration and

development


Contributing Elements Driving Shale Gas

Project Success or Failure?

• Subsurface conditions

• Sales prices to be achieved

• Costs incurred by the project

• Fiscal terms, including legislative and regulatory requirements

• Upfront Costs:

• Location (remoteness)

• Development Costs

• Standards, Quality

• Access to Markets

• Liquidity

• Premium / Discount

• Quality

• Overall Gov. Take

• Stability

• Downside protection

• Upside Sharing

• Success Volumes

• Probability of Success

• Hydrocarbon TypeSubsurface Fiscals

CostsPrices


Typical Shale Gas Industry Timelines

Time sensitive activities

• Compliance with obligations in Technical Regulations

• Environmental impact assessments

• Public participation

• Extensive permitting

Exploration

(3 – 5 years)

Appraisal

(2 – 3 years)

Pilot

(2 – 3 years)

Development

(20 – 30 years)

• Phased development

program

• 100-1000’s of wells

• 1000 wells equate to

ca. 3 to 5 tcf

• 10’s of horizontal

hydraulic fractured

wells

• 3D seismic

• Several horizontal wells

• Fracs and tests• Regional studies

• Few vertical wells &

coreholes


Costs and Associated Risk

Estimates:

• $10 to 20 million+ – cost of one exploration well (depending on

depth and length)

• 10+ years and 30+ wells – time to reach a development decision

• Up to $1billion* – cost for a development decision

• 10% - average initial probability of success in frontier exploration

• $4 -$5 billion per trillion cubic feet (“tcf”) of gas - development

cost with successful commercial extraction*

• $1 - $2 billion per tcf of gas produced – infrastructure

investment required for gas commercialisation

• US$5 - US$7 billion – total investment cost associated with a

10% equity stake in every 10 tcf * successful shale gas

production, conversion and transportation to market

* Estimates by Wood Mackenzie

0%

50%

100%Risk of failure

Annual Expenditure

Failure Risk Expenditure

Time


Shale Gas Investment Considerations

With life cycles of 30-40 years and high upfront investment, considerations include:

• 10% initial probability of success

• Clarity, attractiveness and long term stability of the fiscal and contractual terms

• Incentives to acknowledge frontier exploration

• Timelines for either proving commerciality or exit/relinquishment

• Scarcity of capital, competition for capital and competing projects

• A high investment hurdle -> a high breakeven gas price -> gas remains

undeveloped -> potential local and national economic benefits do not

materialise


Key MPRDA Amendment Bill Considerations

Overarching Key Industry Requirements

• Clear and attractive legislative and fiscal framework providing assurances and stability for the duration of the entire project

• Incentives encouraging frontier exploration with a clear and favourable/ commensurate level of required state participation from the

beginning

• As the industry matures over time, fiscal & legislative terms can be amended for new entrants given infrastructure will be developed,

failure risk should reduce and a capacity to reduce costs should exist

Operation Phakisa “four wheels on the car” + one more

1. Clarity on the level and terms of State Participation “Carried interest”

2. Additional State participation

3. Clarification on the Historically Disadvantaged South Africans (“HDSA”) participation

4. Long term contractual certainty from exploration through to production

5. Exploration right (“ER”) Timelines stipulated for renewal


MPRDA Amendment Bill Proposals

• The Shale Gas Industry very much supports the DMR amendment proposal with the following few key additional requirements:

• Incorporation of a Shale Gas definition to allow for addressing a few Shale Gas specific challenges and

provisions

• Section 86A (9) and (10) - Incorporate the necessary flexibility for downward adjustment of the State

Carried Interest during the Exploration Phase to support Shale Gas exploration investments and ultimately

a more competitive gas production cost and consequential market price

• Section 81 (4) - Time sensitive activities for an onshore shale gas programme include compliance with

technical regulations, extensive public participation, EIA and permitting. Propose to amend the exploration

timelines for an initial 5 years with an additional 2 * 3 years (total of 11 years) rather than an additional 3 * 2

years (also a total of 11 years). The overall timeline remains unchanged

• BEE participation in the Petroleum Industry and especially Shale Gas Industry need to reflect the required

State Carried Participation Interest (not applicable for Mining) and be commensurate with the level of

commercial risk and scale of continuous and long term investment requirements (far greater chance of

failure and investment levels compared to Mining)


MPRDA Amendment –

Negotiation scope for an Early Downward Adjustment

Insert a new subsection (10) in Section 86A - State participation in exploration and production rights:

(10) The Minister may make the downward adjustment referenced above in subsection (9) prior to the

notarial execution of an exploration right granted in terms of section 80 or a renewal thereof in terms of

section 81 for a Shale gas project, in respect of a corresponding production right, after consultation with the

applicant and the Minister of Finance, where such earlier adjustment is shown to be necessary by the

applicant with specific reference to the following factors:

• the nature and scope of the project;

• financial and economic profile of the project;

• the degree of risk assumed by the holder throughout the projects; and

• national interests.


Thank you !!!

The SAOGA Shale Gas Association is looking

forward to further and continuous collaborative

and constructive engagements with Parliament

and Government to settle the relevant legislation

and related regulations with the aim of creating an

active and successful Shale Gas Industry in South

Africa with potential far reaching energy security

and economic development benefits.


Documents

The Select Committee on Land and Mineral Resourcespmg-assets.s3-website-eu-west-1.amazonaws.com/170613SAOGA.pdf · • Shale Gas exploration and development are however difficult