South Africa Finally Wakes Up To Its Resource Potential

South Africa has the second largest economy on the African continent, but it is not a major oil producer. It does have a very large coal industry, as well as sizable natural gas production. But for liquid fuels, it has been largely dependent on Middle Eastern and West African imports.

Import dependence has also led to a relatively sophisticated synthetic fuel industry. About 90 percent of the country's domestic consumption comes from coal-to-liquids and natural gas-based synthetic fuels.

Prior estimates peg South Africa's oil reserves at just 15 million barrels. However, several companies are exploring off South Africa's coast, on the premise that those figures underestimate what truly lies beneath.

Offshore

Statoil (NYSE: STO) announced at the end of October that it was farming into an operation with an ExxonMobil (NYSE: XOM) subsidiary in South Africa. The agreement gave the Norwegian firm a 35 percent stake in a project in the Tugela South block. ExxonMobil controls 40 percent of the venture, and Impact Africa Ltd. controls the remaining 25 percent.

The foray into South Africa is a first for Statoil. The venture will conduct 3D seismic surveying over the next two years, and the data gleaned from the surveys will inform the companies' next steps. "It represents access into a frontier basin where we believe we see indications of an active petroleum system and which has impact potential," regional vice president for Statoil, Nick Maden, said in a statement.

The upside is higher for Impact Africa, which was founded in 2009 by a team of experienced geoscientists, and the company focuses on Africa-only oil assets, with a specific focus on offshore sections in South and West Africa.

Impact Africa has sought to acquire stakes in offshore blocks and then look to larger companies to do the leg work of drilling new projects. That is what it is doing in several areas of offshore South Africa.

Tugela South is a block that encompasses over 9,000 square kilometers and is located in water depths of over 1,800 meters. The companies conducted 2D seismic surveying in 2011 and 2012, which "revealed a number of exciting prospects," as Impact describes it. 

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Impact also controls a 100 percent stake in the Tugela North, and after combing through some seismic data, the company is applying for an exploration right. It has sent a request to ExxonMobil to be the operator.

A similar situation applies to a few offshore blocks a little southwest of the Tugela South location. Impact has the rights to the Transkei and Algoa blocks off South Afirca's southeast coast, and like the Tugela, Impact is trying to obtain an exploration permit and it has asked ExxonMobil to head up the job.

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Finally, from Impact's perspective, they have the rights to the West Bredasdorp, another section that holds oil potential. To the east of the block is the Sable oilfield, which is owned and operated by PetroSA, South Africa's national oil company. That field is located at shallow depth - just 100 meters of water. PetroSA has produced over 25 million barrels of oil from there. That gives Impact Africa confidence in the resource potential of its West Bredasdorp asset. Again, Impact has applied for an Exploration Right and wants ExxonMobil to be the operator.

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South Africa's offshore potential is not massive, but it has been relatively unexplored to date. As the best acreage gets picked over around the world, companies start to move down their list. South Africa is looking more attractive than it once was. There will likely be quite a few exploration wells drilled in the next few years, but for now, low oil prices could keep activity subdued.

Shale Resources

According to the U.S. Energy Information Administration, South Africa has 89 trillion cubic feet of shale gas reserves, the eighth largest in the world. Exploiting them has an obvious attraction. One study suggests that producing 50 trillion cubic feet of shale gas, or about 12.8 percent of the total, could yield $20 billion in economic activity, adding about 0.5 percent to GDP each year for the next quarter century. It would also create 700,000 jobs, a very urgent need for the country.

Also, South Africa is seeking alternative sources of electricity supply in order to reduce its coal consumption. It also imports natural gas from Namibia and Mozambique.

The country's shale hopes largely center around the Karoo basin, located in the heart of South Africa. There are several shale formations located within the Karoo, including Whitehill (211 Tcf), Prince Albert (96 Tcf), and Collingham (82 Tcf).

Several companies received Technical Cooperation Permits (TCP) for the Karoo, which is a sort of precursor to an exploration permit. Falcon Oil and Gas (CVE: FO) holds a TCP for 7.5 million acres. Royal Dutch Shell (NYSE: RDS.A) also obtained a TCP.

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Problems With Shale

To date, regulatory uncertainty has held exploration companies back. In 2011, South Africa issued a moratorium on shale exploration over concerns of environmental contamination. The moratorium was lifted over a year later, but the government was slow to process permits. In October 2014, South African regulators said that they would begin processing exploration applications. Only this past spring did the government issue clarified rules on drilling and fracking in South Africa's shale basins.

Shell had applied for an exploration permit for South Africa's Karoo shale basin, but decided to shelve plans earlier this year. One major concern is over water - the Karoo region is arid and dry. Another reason that Shell put off its shale push in South Africa has been the collapse in energy prices. On top of that, Shell had been waiting six years for regulatory approval.

The South African government sought a 20 percent stake in exploration ventures without compensation. With low crude prices, international companies are moving capital to more attractive locations.

The slow pace of designing a governance structure for its shale resources has held back shale development. But with some of these problems answered recently, companies could begin to move forward. Now, if only oil prices would cooperate.

Conclusion

South Africa remains a frontier region for oil and gas development. The shale gas resources are in place, but there are question marks surrounding whether or not those reserves can be produced economically. Still the need for South Africa is obvious - it is largely dependent on coal for not only electricity, but also for liquid fuels, a unique predicament that is hard to find elsewhere in the world. Producing domestic natural gas reserves will allow it to displace coal in both its power markets (which suffer from blackouts) and also cut the cost of liquid fuels. It would also slash the reliance on imports, and meanwhile, it could provide a jolt to the economy through foreign investment and job creation.

But for years, South Africa could not get out of its own way. Just as the government has clarified regulations, the collapse of crude prices inflicted a lot of damage on the budgets of international oil companies that were looking at South Africa. There is less money now for exploration budgets, and very little for frontier regions that present risk.

Statoil's entry into the offshore sector is a promising development. And the future remains very bright for onshore shale. It is the near-term where the uncertainties will remain.