Play by Play: Karoo Basin

This continent’s oil and gas frontiers have produced some of the world’s most exciting discoveries in recent years. Africa Oil & Power’s Play by Play series takes a look at the emerging hotspots, their resource potential, and their future prospects.

In any list of top unconventional plays for oil and gas, one and only one play stands out in the whole of sub-Saharan Africa: South Africa’s Karoo Basin. This is not without reason. A 2013 study by the United States Energy Information Administration (EIA) places recoverable shale gas and coal-bed methane (CBM) reserves at 390 tcf, with potential for increase. This positions South Africa as the eighth biggest shale gas reserve holder in the world.

Most of the country’s reserves are located in the Karoo Basin, which in itself, encompasses three quarters of South Africa’s territory and the whole of Lesotho, although the prospective areas for shale assets are much smaller and concentrated in the southern half of the country, in a semi-arid biodiverse environment.

Plays of the Karoo

Three main shale plays have been identified in the basin. The most promising area is the Whitehill Shale, which is estimated to hold up to 211 tcf of technically recoverable shale gas resources. The Collingham Shale is expected to hold up to 82 tcf of technically recoverable shale gas. And the Prince Albert Shale is thought to hold up to 77 tcf of technically recoverable shale gas. The three plays cover an area of 60,000 square miles each and all belong to the late Permian period with depths between 5,200 and 10,000 feet.

The area’s geology is of particular interest due to the wide presence of mature black shale, a sedimentary rock with an abundant presence of organic and carbon matter.

Above ground, things play differently. The prospective areas of the Karoo suffer from limited infrastructure including lack of road networks, distribution capability or access to oil and gas workforce. Further, while Transnet owns most of the country’s pipeline network, this network does not cover the Karoo. The arid nature of the region would also cause difficulties in accessing the water reserves necessary for technologies such as fracking. The word Karoo itself means “thirsty land”.

Above Ground

Other factors are, however, at play here. South Africa is prone to power shortages and relies mostly on coal for power generation. The country is today a net importer of natural gas, mainly from Mozambique. South Africa’s commitment to reduce its carbon footprint by 34% by 2020 imposes further limitations on its coal dependency and that has justified a governmental impetus in moving forward with shale gas and CBM production. On the other hand, the Karoo region is considered a pristine biodiverse area and popular groups have been strongly voicing their opposition to potentially damaging production techniques. This issue is of considerable importance for the government as well, and it justified an 18-month moratorium on fracking between 2011 and 2012, as the government assessed the viability of using this technique.

karoobasinmap-1

Shale gas-to-power is a motivating factor for the government, which believes that power generation can be, in the beginning, done on-site and connected directly to the national grid, for at least 2 GW of capacity. This would imply that development could move forward without the need for investment in new pipelines. To promote infrastructure development and de-risk investment, a new Infrastructure Development Act was signed in 2014, streamlining development, speeding-up approvals and simplifying land expropriation processes.

While the lack of competition from conventional assets in South Africa is potentially positive for investors, it also means the industry does not have the built-in advantage of access to equipment and and production infrastructure, not to mention workforce, particularly with experience in unconventionals. The exception to this lack of indigenous know-how is South-African private exploration and production company Sasol. The company is developing its own unconventional assets in Canada and has acquired expertise that could be translated to the South African play.

Players and Legislation

The lack of fiscal incentives for the industry may change with new legislation. South Africa’s Department of Mineral Resources moved forward with new regulations in 2015, establishing the pre-requisites for fracking in the country, which include the mandated need for a work plan to be approved by the regulator, the Petroleum Agency of South Africa.

And despite the challenges, the Karoo has already attracted some experienced players.

Anglo-Dutch Shell holds by far the largest acreage, covering 71,400 square miles surrounding an 11,600 square mile area held by Falcon Oil in cooperation with Chevron. A joint venture between Sasol, Chesapeake and Statoil covers an area of 34,000 square miles to the north east. Other areas include Anglo Coal’s 19,300 square mile area to the east, and Bundu Gas and Oil Exploration’s 1,235 square mile area north of Port Elizabeth.

These are all Technical Cooperation Agreements (TCP), designed for initial evaluation of the acreage. Shell, Falcon and Bundu are waiting on exploration licenses to start drilling, but with the delays in environmental and technical policy, permits have been stalled. The government indicated in early 2016 that exploration permits will be awarded in 12 months. Companies have shown confidence that the areas will be licensed by the end of 2016, even though some of them, like Shell, have been waiting for at least six years. First exploration wells are not expected before 2018.

The country’s ability to attract investment in the Karoo Basin will also depend on the ongoing parliamentary revision of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill, under discussion in parliament for years. It is set to define the new baseline for a model production sharing agreement and will separate requirements for mining and petroleum companies, but delays have further increased uneasiness among investors.

The Karoo is in many ways an unknown entity. Only five wells have been drilled in the play, and they all date back to the pre-1970s, and all of them revealed gas shows. As further wells are drilled, the clearer the play’s potential will become and better assessments of the Karoo’s commerciality can be made. Regardless of what the future holds, this is by far the most interesting unconventional play in sub-Saharan Africa, and a potential game-changer for South Africa’s upstream and power sectors.

Join the conversation on Capital Raising and the Gas Industry at the AOP Investor Forum in London, May 10, 2018