In early September, the South African government approved the lifting of a moratorium on the exploration of shale gas in the Karoo region of South Africa. The moratorium was imposed in February last year pending an investigation by government into the environmental and social effects of hydraulic fracturing in the Karoo.
Shale gas is hydrocarbon gas extracted from a class of sedimentary rocks consisting of very fine-grained particles. Hydraulic fracturing, or fracking, is the process used to drill horizontally and to break open the shale and extract the gas by applying force using fluids and chemicals.
Fracking could be of serious interest to many major companies in India and elsewhere that are either in the oil and gas industry or supply goods and services to this industry.
According to the report on hydraulic fracturing released by the South African Department of Mineral Resources (DMR), the US Energy Information Administration has made a first pass estimate of a technically recoverable resource of 485 trillion cubic feet of gas in the Karoo Basin. In the assessment of the Petroleum Agency SA, it is still impossible to quantify the extent of the resource at this stage but it is potentially very large.
Hydraulic fracturing originated in the 1990s in the Barnett Shale, around Dallas, Texas, and it has been successful in the US. It expanded the gas reserves and production capacity in that country to such an extent that US gas prices have since declined and the US has evolved from a net importer of gas to a net exporter of gas.
The lifting of the moratorium on hydraulic fracturing in the Karoo Basin has been extremely controversial in South Africa from an environmental perspective due to: the large volumes of water used during the process of hydraulic fracturing; the lack of knowledge in relation to the nature and toxicity of the chemicals injected into the soil; the potential pollution of water resources; the treatment and disposal of waste fluids; and the potentially large footprint of any development.
From a regulatory perspective, exploration for shale gas is to some extent currently covered by South Africa’s Mineral and Petroleum Resources Development Act, 2002. The term “petroleum” in that act covers all forms of natural gas, including shale gas.
The act seeks to strike a balance between the potentially competing interests of the surface right holder and the mineral right holder. It provides for payment of compensation for loss or damage suffered by landowners, lawful occupiers or surface right holders as a result of prospecting or mining operations. Compensation is determined by agreement between the parties, failing which, by arbitration or by a court.
South African law prohibits unreasonable refusal by the landowner or surface right holder to allow prospecting or mining operations to occur and provides for expropriation of land as a last resort. Furthermore, under the Mineral and Petroleum Resources Royalty Act, 2008, a royalty is payable to the government as a custodian of the minerals and petroleum.
Concern has been raised that the existing regulatory framework may not be adequate to deal with all the implications of the hydraulic fracturing process. However, the DMR, in the South African government report, identified several jurisdictions with mature regulatory systems governing onshore oil and gas operations which could be adapted for application in South Africa. These jurisdictions include Colorado, Louisiana, Texas and Pennsylvania in the US; Alberta in Canada; and possibly Queensland in Australia.
The report recommends that a more detailed and specific system of regulation be put in place, together with mechanisms for coordination among the various interested government departments, to ensure integrated and consistent enforcement. Law firms and stakeholders will be engaging with the South African government and the DMR to ensure that appropriate legislation is implemented to deal with fracking.
Thus far, companies such as Shell, Sasol and Falcon Gas and Oil have all applied for shale gas prospecting licences in the Karoo. In view of the lifting of the moratorium on exploration, it is likely that licences will be granted to one or more of these companies. If the exploration bid is successful for these companies, the government is betting on economic stimulation, job creation and poverty alleviation for the country. A new industry will be created for South Africa, together with new challenges.
Robert Appelbaum is head of the South Asia Group at Webber Wentzel where Saﬁyya Patel is a partner. Webber Wentzel is one of the leading corporate law ﬁrms in Africa and the South African member of ALN, an established group of Africa’s 12 foremost law ﬁrms.
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