The strategic objective of this report is to present information and analysis that will provide a clear insight into the economic opportunities that may exist if a large gas find can properly be identified in the Southern Karoo.
This chapter provides broad background information to establish a context for the remaining information in the report.
· The Karoo region is frequently identified by the geographic extent of a region of natural vegetation. Geologically it is much larger, extending northwards to the Democratic Republic of the Congo.
· Natural gas is made up predominantly of methane, the least complex hydro carbon molecule. It differs from manufactured gas (aka town gas) which is distilled from coal, and also differs from liquefied petroleum gas which is made up predominantly of butane and propane.
· The Department of Energy has issued Technical Co-operations permits to a number of prospecting corporations, some of whom have applied to convert these into exploration permits to move their investigations from desktop research to field research.
2. Primary Energy Resources in South Africa
The objective of this section of the report is to provide a summary understanding of energy usage in South Africa.
· The South African economy is highly dependent upon electricity production for its industrial, commercial and domestic energy needs. Electricity production, in the hands of parastatal utility company Eskom, is dominated by coal as the primary energy resource.
· Installed generation capacity ahead of commissioning two new coal fired power stations at Medupi and Kusile between 2012 and 2014, indicates that coal has a 81% share of generation capacity, nuclear a 4.56% share, pumped storage 3.55% a share, hydro 1.5% share and gas turbines a 0.86% share. The power generation capacity outside of Eskom is recorded as 6.0% for municipalities and 2.0% for private companies.
· DOE intentions are to shift the balance of primary energy inputs to include 48% from coal, 14% from nuclear, 16% from renewable energy sources and 9% from open cycle gas turbines by 2030.
· Open cycle gas turbines are currently run by Eskom using diesel fuel, awaiting gas pipeline connections to Western Cape offshore fields.
· Low average rainfall (400mm per annum) and high evaporation contribute to a lack of perennial rivers necessary for hydroelectric power generation, with water availability in a dry country acting as a constraint to other power generation options.
· Natural gas presents as a convincing candidate to fuel peak load electricity applications with distinct possibilities for water efficient, lower carbon emission base-load power generation as well.
· As in the rest of the world, including the most developed economies, water and primary energy resources combine to determine the location of energy harnessing activities, like power generation, synfuel manufacturing, etc.
· Large shale gas deposits could augment primary energy supplies to both the electrical and automotive power environments which dominate the South African energy economy. Ideal for peak load electricity generation and several broad categories of downstream applications, such a large gas play could revolutionise the energy sector, and contribute to displacing energy imports and/or supplying additional energy exports.
3. Future Growth, Energy Demand and New Resources
The objective of this section of the report is to examine three possible growth scenarios as a background to provide a backdrop depicting economic activity levels and energy demand against which the economic impact of large gas deposits may be benchmarked. Gas exploration as at December 2011 is summarised, and the transformational potential of the suspected large Karoo shale gas reserve is introduced.
· Three scenarios of future growth were developed for comparison in this report and to act as scenario background against which the economic importance of shale gas may be estimated later in this report.
· The underlying growth rates for the economy was set at 3% p.a. for the low growth case, 4.5% p.a. for the mid growth case, and 7% p.a. for the high growth case. The low growth case lies above the median probability of potential outcomes, while the mid growth case has previously been estimated to represent the real boundary of potential growth for the South African economy, given medium and long-term constraints in the profile of its assets and resources.
· The high growth case is presented for interrogation simply because it is a politically favoured target growth rate, although planning details of how to achieve the rate are either scant or non-existent.
· The higher the overall level of growth in the three scenarios, the greater the growth emphasis is on the fungible productive sectors of the economy, notably mining and manufacturing, and the less the emphasis on growth being propelled by the tertiary or service sector of the economy.
· The 7% sustained growth scenario creates a profile of skill and capital requirements, that are unlikely to be supplied by surpluses available from domestic resources, implying skilled immigration and FDI inflow, both of very significant proportions. The transition towards this scenario is anticipated to take years and not even medium-term plans by the SA government appear to be based on such growth rates
· The energy requirements of the mid and high growth scenarios presented here leave little doubt that the partial or complete attainment of either of these scenarios will be heavily dependent upon and closely integrated with the expansion of the energy base available to the South African economy over decades to come.
· Work by the International Energy Agency on the subject of Energy Poverty during 2011 leaves little room for belief that substantial energy resources can morally be ignored without proper investigation and consideration.
· An article by Brian Kantor can be seen to conclude that the desktop assessment of the Karoo shale gas reserve places it as a transformational opportunity for the South African economy and those who depend upon it for a livelihood.
· Proper assessment of the reserve is necessary, with physical exploration superseding desktop studies before economic assessment and cost benefit analysis both inside and outside of the pure economic sphere and across other disciplines can be properly undertaken.
· These points inform the assessment of the researchers that growth and development in the South African economy is highly likely to be energy resource hungry, even if supply and demand side efficiencies are achieved.
4. Economic Opportunities and Safeguards in the Gas Supply Chain
This section seeks to provide a link between micro economic concepts, such as industry and sector relationships with the potential gas industry, thinking relating to price formation and gas industry economic regulation.
· Viewing the production process of extracting and converting primary energy resources to end user products is assisted by production column analysis. The analysis forms a first step in identifying sectoral and product value, adding opportunities downstream of the extraction activities which bring the gas to the surface.
· There appear to be six main application clusters for natural gas within the South African context. They include exports of the gas, use of the gas as an industrial, commercial and domestic energy source, the generation of electricity, use as an automotive fuel, conversion to liquid fuels and as an energy feedstock for fertiliser production.
· Judging by existing experience in the limited natural gas market in South Africa, there is likely to be a significant level of price regulation within any expanding gas market in South Africa from regulators like PASA, NERSA and GSA. Commercial considerations, international benchmarking and investment considerations all form part of the price regulation framework.
· The greater the proportion of gas that is exported, the less is the downstream value added potential that exists.
· Suppliers of consumable items to the gas exploration and production phases should enjoy demand increases as a result of the gas related economic activities. It appears likely that the exploration phase will be supplied with imported capital equipment rather than locally produced equipment because of the specialised nature of the work to be undertaken. Local content within capital requirements should naturally evolve with any expansion of the project beyond the exploration stage – downstream capital requirements would probably begin to receive investment funding once resources are measured and geographically located, and gas production plans set out.
· Economic opportunities exist downstream of the gas producers in the form of moving the gas to wherever it is needed for end use. Methods include pipeline networks, LNG and CNG processing and distribution.
5. Macro-Economic Impact Scenarios
This section of the report introduces and describes the logic and output of the macroeconomic model created specifically for this research project.
· As noted previously, a significantly large and geographically diverse literature covering the production of shale gas around the world exists. Where these studies do address macro-economic concepts like contributions to gross value added, employment and fiscal revenue, those estimates are often based on aggregations of highly detailed micro economic data, which information is clearly available in those respective public domains.
· The combination of the information supporting such studies is ex-post rather than of a forecast nature. This compares with the prospect that the mature phase of Karoo shale gas production may well be a minimum of 15 years away, which makes for insurmountable hurdles in translating or transposing approaches in the foreign literature to the South African context.
· Another major difference lies in the fact that many of the developed and some of the developing world’s gas resources are located in economies with well-established downstream gas driven value adding industries which are almost entirely absent from the South African economic landscape.
· With no macro-economic model structure readily transferable to the South African environment, the researchers configured a model designed to convert conceptualised large gas finds to macro-economic impact scenarios. The model is essentially Keynesian in structure, treating upstream gas production values as an injection into the existing flow of income of the domestic economy.
· A multiplier effect is calculated and the value of gross production is distributed across gross value added, intermediate consumption, compensation of employees, employment levels and fiscal revenue generation.
· Values for variables defining the resource sizes were informed by material discussed earlier, with values and multipliers and ratios derived predominantly from national accounts data from the SARB, data from Statistics SA’s input end-use tables were also used, as was data relating to employment and remuneration. Two test scenarios relating to gas resources of 20tcf and 50tcf respectively are presented. Within each of these scenarios, a major driving assumption is the proportion of gas that may be exported, and therefore not be available for downstream value adding.
· Even if all the gas recovered is exported, downstream production in the economy does not reduce to zero. This is because the economy would still produce intermediate consumption goods used by the upstream activities and there would be rounds of induced demand generating domestic production.
· Benchmarking the model scenarios against the projected macro-economic growth scenarios discussed in section three of the report reveal the macro economic impacts of such large potential gas resources to be substantial, relative to both the last known full year of macro-economic data (2010), and relative to projected macro-economic values by the midpoint of mature production assumed in these scenarios (2035).
The modelled scenarios offer some quantitative support for the contention that large gas finds could be “transformational,” for the South African economy. Similar expressions of it being a “potential game changing” development are also supported.
By Tony Twine