http://www.engineeringnews.co.za/article/frontier-energy-2011-04-01

Energy companies are showing increased interest in shale gas resources around the world, including in South Africa. However, the opposition is also fierce and appears to be growing. In South Africa, Shell has attracted most of the attention, notwithstanding the fact that others are planning to explore for unconventional gas in the Karoo region. As part of Shell’s efforts to deal with the opposition, the energy group recently hosted a group of international media representatives on a tour of one of its shale gas heartlands in North America. Engineering News Deputy Editor Chanel de Bruyn participated in the tour.

Operators in the Haynesville shale area of North America, which is located on the border of east Texas and western Louisiana, are rushing to secure leases and keep their foothold in the region.

Global oil and gas producer Shell, which holds an interest in seven onshore unconventional gas plays across North America, from Canada down to Texas and Louisiana, told journalists during a recent site visit to some of its North American operations that there had been a tremendous amount of activity among operators to secure leasehold over the past few years.

Shell and its 50:50 joint venture (JV) partner in the Haynesville shale play, oil and gas exploration and production services company Encana, have signed thousands of leases over the past few years, one of Shell’s operations managers, Bruce Palfreyman, says. Operators pay mineral rights owners anything from a few hundred dollars to thousands of dollars as an upfront bonus to secure a three-year lease that will allow them to explore for gas.

Palfreyman says prices vary and depend on what stage of its life cycle a gasfield is in, as well as the expected economic viability of the field. Extensions to the contracts are also common if gas production starts within that three-year timeframe. The mineral rights owners then become entitled to gas production royalties, which range between 18% and 25%.

He notes that shale gas production among all producers in the Haynesville shale area has grown from zero to four-billion cubic feet a day within a two-year period to the end of 2010.

Shell Upstream Americas development VP Paul Goodfellow labels the shale gas expansion as a “revolution” for the energy market. He adds that Shell’s strategy is to secure its position in the top natural gas resource plays in North America before exporting the technology to other regions of the world.

It has already started looking at explor- ation for shale gas in Europe and in the Karoo region of South Africa, where it has applied for exploration rights on three properties of 30 000 km2 each and plans to drill 24 wells over the 90 000 km2.

As part of its application, the company will submit a final environmental management plan to the Petroleum Agency of South Africa (Pasa) in mid-April.

Early last month, Pasa CEO Mthozami Xiphu said the agency expected to hold up to four onshore licensing rounds for shale gas in the Karoo before the end of 2012. The first licensing round is expected to start by the second half of this year.

He added that a final decision on Shell’s application for an exploration licence in the Karoo was expected before, or during, August this year.

Other companies, such as South African petrochemicals group Sasol and diversified global miner BHP Billiton, have also made a quick entry into the field by securing a foothold in North America’s shale gas resources.

In fact, last month, Sasol concluded a second R7,4-billion agreement with Talisman Energy, of Canada, to acquire a 50% interest in the Cypress A shale gas asset, located in the Montney basin of British Columbia. It also indicated that the two companies might pursue a bigger gas-to-liquids (GTL) development plan than had initially been envisaged, based on the enlarged joint asset base.

Earlier in March, the JSE-listed group concluded a R7,55-billion deal to buy half of Talisman Energy’s Farrell Creek shale gas asset, which is also located in the Montney basin – the deal was initially announced in December.

Sasol, which aims to apply its proprietary GTL technology to exploit what could be a sustained and growing gap between the price of gas and that of other transport fuel products, indicated that it could seek to scale up its GTL aspirations in western Canada.

Following the Farrell Creek purchase, the JV partners confirmed that they would study a 48 000 bl/d GTL facility based on the gas reserves at Farrell Creek. However, Sasol told Engineering News that, while the base case of 48 000 bbl/d remained, the partners would also assess the option of a 96 000 bl/d plant.

Fear and Loathing

However, citizens and environmental groups in many countries are concerned about the possible negative impacts that hydraulic fracturing, or fracking, which is the method used to gain access to the shale gas, can have on the environment.

Operators pump a mixture of water and sand under high pressure into a shale form-ation. While about 99% of the mixture is made up of water, some of the mixtures also include gelling agents to carry the sand to the bottom of the well to keep the fractures open and allow the gas to flow more freely.

Foremost is a concern over the possible impact that fracking will have on water resources, with some reports claiming that this can negatively impact on underground water aquifers.

The World Wide Fund for Nature (WWF) South Africa states in a position paper on shale gas that fracking poses “extensive” contamination risks, particularly for groundwater.

“Interference with ancient geological formations may not only release methane into aquifers, but also cause new connections between aquifers. It would take many years to develop a reasonable understanding of the consequences of such risks,” the WWF South Africa adds.

Further, the conservation body emphasises that South Africa does not need unconventional gas to meet its growing energy demand, as there are more viable and sus- tainable energy development options avail- able to it than shale gas.

In addition, it says, harnessing unconventional gas is carbon intensive and the gas is “possibly no better than coal” in terms of greenhouse-gas emissions.

The exploitation of shale gas would present a further barrier to achieving a truly sustainable energy supply and achieving the opportunities and benefits of a transition to renewable energy.

“We believe the possible short-term gains would squander the long-term economic and environmental sustainability of the Karoo and South Africa’s low-carbon economy objectives. We are concerned about localised economic impacts for other sectors, which do not seem to have been considered, including the agriculture and tourism economy of the Karoo and the prospects for winning in our bid for the global Square Kilometre Array (SKA) radio telescope project,” the position paper highlights.

The Department of Science and Tech-nology’s deputy director-general, Val Munsami, recently warned that Shell’s plans to explore for shale gas in the Karoo could potentially impact on South Africa’s chances of being awarded the SKA.

If South Africa won the bid, the SKA would be located in the Northern Cape. A decision on the project is expected to be made early in 2012.

Meanwhile, the Treasure the Karoo Action Group, which represents a number of farmers and other stakeholders in the Karoo region, has also repeatedly voiced its concerns over plans to explore for shale gas.

It notes that not only could fracking impact on the groundwater resources, but that the exploration for shale gas could also negatively impact on the botanical biodiversity in the Karoo.

Assurances
However, Shell is adamant that it can conduct fracking in an environmentally sustainable way, insisting that it takes water management and other environmental concerns into consideration from the start of any exploration operation.

It emphasises that steel casings are inserted into the drill holes up to thousands of metres below water aquifers, which will prevent harmful chemicals used in the fracking process from entering the aquifers.

Further, Goodfellow says that the company is supportive of fully disclosing exactly which chemicals are used in the fracking process, noting that most of these are chemicals that people have around their households.
The US Environmental Protection Agency is also currently reviewing whether fracking has a negative impact on groundwater resources.

Meanwhile, there is also concern about the amount of water that is required to execute fracking jobs, especially in water-scarce areas such as the Karoo.

Palfreyman notes that about 22,7-million litres, or about six-million gallons, of water is needed to complete each fracking job.

He says that Shell will investigate ways of recycling and reusing water in water- scarce areas, although he admits that this is challenging for the operators.

However, in the Haynesville area, where the company is able to buy plenty of runoff water from the surface owners of nearby properties, the used water is trucked to Texas, where it is disposed of in depleted gasfields.

Palfreyman says that this is regulated under federal laws in this region.

Only 15% to 20% of the water that is pumped into the wells in Haynesville is initially recovered after fracking begins, making it uneconomical to recycle. Shell plans to further investigate potential options to recycle the water during this year.

Palfreyman notes that the remainder of the water is recovered over the life cycle of the well, a period of between 25 and 30 years.

Shell has also come under fire for promoting investment in fossil fuels rather than renewable-energy sources, such as wind and solar, with critics saying that these forms of energy are cleaner and safer to access.

Goodfellow defends Shell’s position, saying that shale gas provides an immediate next opportunity to move towards a sustainable energy future.

He emphasises investments should still be made in renewable energy but believes that unconventional gas, such as shale gas, could be used to manage the interruptible nature of renewable-energy sources.

He notes shale gas is the cleanest fossil fuel and an efficient form of energy supply. In North America, it is affordable, available and abundant, which means that it can provide energy security as well as create jobs.

Locally, Frost & Sullivan energy and power business unit leader Cornelis van der Waal says that, if, South Africa finds shale gas resources and if it is able to produce this form of energy in an environmentally sustainable manner, it makes sense to pursue this as an energy source.

He emphasises that South Africa has to consider all alternative energy sources, especially given the expected impact of the proposed carbon tax, which will likely result in a 40% increase in electricity costs.

“Certainly, from what we require to drive economic growth and continuously deliver electricity at a fair rate, we need something other than renewables at a baseload level,” he comments.

At present, renewable energy forms cannot be used as baseload power, as these sources cannot be guaranteed to be available on a 24/7 basis.

Further, Van der Waal believes that nuclear energy has a very important role to play in South Africa’s energy future, but he highlights that, given the recent events at the Fukushima Dai-ichi nuclear plant, in Japan, there will be a lot of resistance from the public.

He points out that the current concerns around nuclear power are likely to blow over in time and says it is important to distinguish the events in Japan from those in other regions.

Van der Waal highlights that the Fukushima Dai-ichi plant is an older, generation one nuclear reactor that is not geared to modern challenges. Newer-generation reactors are far safer and far more controlled, but the need for greater security and control is, nevertheless, always a priority.

In addition, South Africa can consider importing natural gas from its neighbours, Namibia, Angola and Mozambique, but this will have a negative impact on its balance of payments, he says.

Van der Waal adds, however, that the need for shale gas as an energy source can-not be looked at in isolation, as the impact of harvesting this energy source on the communities surrounding these operations and its impact on the environment are equally important.

Meanwhile, Goodfellow emphasises that there are still facts about hydraulic fracturing that have to be communicated to the public before proper debates can be held.

He indicates that, while there is still some opposition to this form of technology in the US, communities closer to Shell’s current operations have started gaining a greater under- standing of how the technology works and its potential impacts.

These communities are generally more positive about the oil and gas industry and the value that it can add, he says.

However, many organisations and indivi- duals in South Africa remain opposed to fracking in the Karoo.

Shell believes that it will be able to create many jobs locally, but, in the interim, it is committed to conducting environmental-impact assessments and other independent studies prior to drilling any wells.

Cost Savings
Meanwhile, Palfreyman notes that, while natural gas is expected to play a much bigger role in North America’s energy future, natural gas prices are still very low.

It costs between $8-million and $11-million to drill and fracture one well. Operators in North America are seeking ways to reduce costs, and one of the best ways of achieving this, says Shell, is to reduce the number of days spent on drilling the wells.

Shell has made some progress in shortening the timeframes for drilling these wells. The company has managed, in some cases, to reduce this to an average of 45 days, down from the average of 60 days it took when Shell started exploration work a few years ago.

The average fracking job takes between three and six days to complete.

Equipment

Shell outsources the hydraulic fracturing jobs in the Haynesville area, as well as other regions in North America, to energy sector products and services provider Halliburton.

The equipment, which is housed in mobile units, includes up to 20 or more high-pressure pumps, machinery that controls the amount of sand that is mixed into the pumping fluid, a blending unit to mix the water, sand and chemicals, and a mobile control centre from where the entire operation is managed and monitored.

Shell South Africa Upstream communications manager Kim Bye Bruun says that, if the company is awarded exploration rights in the Karoo, it will most likely have to import certain technologies and equipment, as well as the expertise of those able to operate the equipment, during the initial exploration stages.

However, the company will make an effort to source ancillary services locally, or through companies with an established South African presence.

“While a number of these jobs will require specialised expertise, it is likely that, over time, if gas is discovered and confidence grows that there are sufficient volumes to develop, there will be further opportunities for local employment, training and services generation,” he adds.