a Trillion Fracking Rands: what’s in it for me

Joshua Davis, writing about the founder of Bitcoin, notes that technology with a compelling story is hard to stop.  Taking this thinking a step further, when that technology solves a critical problem or need that society faces and pays enormous dividends to its patrons, its adoption becomes hard to prevent.

Viewing hydraulic fracking (the process of extracting natural gas from the ground) in this vein, with an understanding of South Africa’s pressing energy needs and the potential economic returns the shale gas deposits in the Karoo basin promise, my sense is that hydraulic fracking is bound to happen in South Africa (despite all the noise being made against it).  If this is the case, what are some considerations in ensuring that fracking is sustainably beneficial to ordinary South Africans?

In Report on investigation of hydraulic fracturing in the Karoo Basin, the Department of Mineral Resources projects enormous economic benefits from fracking in the form of massive employment opportunities and a trillion Rands worth of revenue towards SA’s Gross Domestic Product over the next 20-30 years. Yes, I said one trillion rand.  On average, shale gas is expected to contribute R33 to R50 billion per year to the South African economy.  Over and above this, government will earn revenue in the form of taxes, royalties, levies and licence fees.  Of all the potential result of fracking the Karoo, the trillion Rands in expected revenue really caught my attention.

Whichever way you look at it, a trillion Rands over the next 30 years sure sounds like a huge amount of money by any standard – this then begs the questions:

i)              What would a trillion Rands really mean to the ordinary South African?

ii)             How will the economic benefits of shale gas trickle down?

iii)            At what cost will South Africa “earn” this money?

What would a trillion Rands mean to the ordinary South African?

One aspect of the trillion rand benefit to most South Africans might be in the form of savings on the cost of energy. Domestic extraction of shale gas is likely going to offset foreign imports of oil and gas which over time may result in cheaper energy. As the Technical report by WWF (Saliem Fakir, 2015) notes, this will have balance of payment benefits entailing an increase in net inflows of monetary payments into the country that may translate into increases in income, consumption, saving, investment and tax revenue. If this happens, a marginal ease on each South African’s pocket is a likely result.

Also, if the potential value chain from extraction to consumption is properly developed, there will be an increase in job creation across sectors (Saliem Fakir, WWF Report, 2015). At a general level, South Africa is burdened by a major electricity crisis and an increase in shale gas production will likely translate into an ease of some sort on that strain.

How are the benefits of shale gas going trickle down?

As I slightly touched on, the mechanism through which shale gas benefits trickle down is important. How well this happens is dependent on a few things. An immediate part of it is that the infrastructure that will be put in place towards accessing the gas will impact on how it flows to the general economy.  This contributes to the price of the gas which, in turn, will influence its penetration into the domestic market. Ultimately, the price needs to be low enough to compete with coal, renewable sources and other forms of energy (Saliem Fakir, WWF Report, 2015). Other than these, there are a few other issues that will need to be well thought out and implemented.  Top of mind include political will, legality, safety, and (of course), environmental considerations. Given that much of this fracking would take place in the beautiful and unique Karoo, environmental considerations are key – especially since water contamination and thus public health and safety are very real concerns.

At what cost will South Africa earn this money?

Fracking the Karoo will have (initially) an unusually high cost of capital. Firstly, South Africa does not currently have the necessary infrastructure and critical skills (human capital) needed to establish this entire project. A huge capital outlay, therefore, will be required in the early years. This is further going to be compounded by exploration costs if the project is to be pushed further ahead.  Secondly, the funding of the shale gas extraction remains relatively vague. There is an indication that much of the project will be funded by the private sector (I assume by international energy companies) with a relatively significant contribution also coming from the SA government. Things such as exchange rates, sovereign credit rating and the opportunity cost of the funding will also contribute to the ultimate cost of capital.

To add to the cost of capital, there are other costs to consider. Environmental costs will form a significant part of total costs. Much of the areas on the Karoo targeted for fracking are relatively sparsely populated with regards to people and animals. However, as more hydraulic fracturing is conducted over time, drilling will tend to move towards fairly densely populated areas. This will increase the costs and will further be worsened by the challenges around the availability of water, the disposal/discharge/treatment of waste water, transportation of chemicalised water, prevention of displacement of aquifers, prevention of fracturing fluid migrating to drinking water sources and managing the possible transportation accidents.

Generally, the costs from the unknown impacts of seismicity, opportunity costs, costs of externalities and the supposed reclamations costs will push the total fracking bill up.  Significant regulatory costs arising from establishing the legal framework, oversight, monitoring and verifying compliance will also need to be factored in.

Also worrying are the financial risks on economic returns driven by the uncertainty of shale gas extraction in SA – much of the decisions on shale gas are based on estimates due to lack of country specific experience. In this case, every well that will be drilled will be in fact ‘a lottery’ (Saliem Fakir, WWF Report (2015). As Nick Gogerty puts it, “we respond to risk based on our perception of it.” Generally, as humans we have a tendency to under estimate risk and I fear that this might be what is happening with SA’s fracking situation. I think the financial risks of fracking have ‘naturally’ been underestimated and our response is likely going to mirror that. This mis-perception or underestimation might turn out to be extremely costly geologically, environmentally, financially or otherwise.

To sum it all up, when I think of fracking going ahead in SA, I am reminded of Jane Wood’s introduction to The Classic Magpie, where she refers to an observation made by Thucydides in his examination of the origins of the Peloponnesian War, that “human nature, being what it is, will do the same and similar things again” and that history is ktema es aei – a possession for always – because humans will always make the same mistakes. I hope that in our case, in this case, we will counter that part of our human nature and guard against the mistakes that have always riddled mankind for in this case, the cost will be extremely high if we do not.

Written by:

Simbarashe Mumera




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