What shale gas could mean for Southern Africa

The shale gas debate rages on across Europe, Asia, and North America, but one ponders how the already resource rich Southern Africa fits into this equation. What is there, what is the potential and what could it mean from an economic and geopolitical standpoint?

One country already known to possess great potential that can be released by fracking is the economic powerhouse of the region South Africa. Estimates from the United States Energy Information Administration (EIA) in 2011 ranked South Africa as 5th out of the top 12 countries with technically recoverable shale gas resources.

Primarily large local coal deposits drive South Africa’s energy sector at the moment, with almost 70 percent of South Africa’s energy being supplied by coal. With minimal deposits of conventional oil and natural gas, oil is imported primarily from the Middle East and West Africa and refined locally. South Africa’s strong synthetic fuels industry has allowed it to diversify its energy sector by producing gasoline and diesel fuels from coal and natural gas deposits.

There are numerous factors encouraging South Africa to exploit shale gas in order to support its economic growth and energy sector by furthering primary energy supplies across the South African economy, particularly in the automotive and electrical industries. Sustainable energy generation is a challenge that South Africa faces. Eskom Holdings SOC Ltd., which generates 95 percent of the national electricity, lacks R225 billion ($21.9 billion) needed for the construction of new coal-fired power stations to meet national demands for electricity. The shale gas reserves in South Africa present an opportunity for the cultivation of a resource that will allow South Africa to meet all of its energy needs, be beneficial to balance of payments and open South Africa up as a major player in the exportation of shale gas. However, there has been a delay in the country from moving forward from desktop research of shale gas reserves to an exploration phase, but at the same time makes gauging the full potential of South Africa’s economically recoverable resources with precision difficult.

Politically, the U.S. because of its expanding and knowledgeable shale gas industry, stands as a strong potential partner to South Africa in terms of helping South Africa develop its shale gas industry. Internal capacity building is part of this equation and will help strengthen already strong U.S.-South African relations. Companies and shareholders interested in shale gas in South Africa may want to consider investing into programs that facilitate domestic capacity building. The shale gas sector in South Africa is still in its nascent stages and therefore, internal capacity building not only offers a long-term investment return opportunity, but also offers a means with which the interested companies can conduct exploration and potential economic production.

Given that the economic and energy environments of South Africa are too unlike these in the U.S., replicating U.S. standards, regulations and business models could prove unfeasible. Nevertheless, building from already existing U.S. shale gas models, opens U.S.-South African relations to noteworthy partnership.

Prospects outside of South Africa’s borders

The prospect that shale gas holds extends further into the Southern Africa due to the growing demand of electricity for the region. While this demand is highest in South Africa, other Southern African countries are experiencing growing needs for stable power supply for economic growth. Countries such as the Democratic Republic of Congo, Zimbabwe, Tanzania, Mozambique, Rwanda, Malawi, Botswana and Namibia would benefit from alternative sources of energy should South Africa begin exploration and extraction of shale gas in the region. Notably, should South Africa’s reserves prove to be substantial, while a certain portion would go towards domestic consumption a substantial amount could be made available for export. Currently, South Africa supplies electricity to a number of its neighbors including Zimbabwe and Mozambique. This places strain on the South African grid which is already near capacity. Having an alternative source of energy in the form of shale gas would ease some of this pressure and also diversify the South African energy grid. The grid is currently powered through the use of coal fired power-plants for 90 percent of South Africa’s needs.

The increase in energy supply would have a positive effect on the Southern African region as a whole in terms of energy security and economic productivity. Currently the regional bloc Southern African Development Community (SADC) has 13 member nations as part of the Southern African Power Pool (SAPP). As early as 2008 South Africa alone was experiencing rolling blackouts due to the pressure of demand on the existing capacity. The installed capacity of 43,000MW Megawatts (MW) was not enough to meet the excess demand of 38,700MW plus with an additional 10 percent in reserve capacity. The demand for SADC as a whole was 47,000MW with an installed capacity of 55,000MW, and no desired reserve of 10 percent. By the end of 2012 SADC was running out of surplus energy to meet demand entirely with annual average increases of 3.6 percent, and predictions noted that by the end of 2013 this surplus would diminish entirely. Low levels of electrification are experienced throughout the SADC region with an average of 25 percent electrification. There has been little progress in increasing these due to the massive amount of investment needed for power projects. New power generation and transmission capacities need to be upgraded in order for stations to be able to meet the increasing demand.

Apart from South Africa there could be other possible opportunities in the shale gas sector of Southern Africa. However, due to the lack of exploration in the shale gas industry of the SADC region to date there has been little confirmation of possible reserves and prospective locations. There are a few SADC areas of special note (see below link to read more).

In all cases Africa has substantial room for growth in shale gas exports to the global and local market. Its local production will also be able to power the needs of the continent at more competitive prices. It will also fall in line with the aims of states on the continent, such as South Africa, to become more energy efficient and move away from carbon based fossil fuels. Shale gas to power the electric grid will also result in greater access to power for some of the continents poorest nations. It will thus also help to alleviate the pressure that currently exists in many countries on the continent to meet domestic electricity demand. Should shale gas begin to have greater influence in Africa it could prove of substantial benefit not just for the continent but the world at large. With South Africa in the lead in a shale gas revolution, Africa will also start to play a greater role in the global energy arena.

Article adapted from the recent LINK Advisory special report “Shale Gas in South Africa: Opportunities and Implications,” which can be accessed by clicking here.