Lights Out: The Case for Fracking in South Africa
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By the time 2019 rolls around, citizens in South Africa might not have lights, air conditiong, or television. And you thought that cultures always move forward.
South Africa is in the precarious position of having only one company, state-owned Eksom Holdings, producing all of its electricity. Even worse, the country's demand for electricity is expected to outpace supply by early 2019.
Natural gas, however, is the simple solution to the nation's problem. Natural gas can be used to create electricity to power homes and office buildings. But one thing is stopping oil and gas companies from drilling for natural gas - the endangered black rhinoceros.
Drillers have discovered that South Africa's pristine, untouched karoo region is home to major deposits of natural gas, but environmentalists are concerned that drillers will harm the region and its endangered wildlife.
According to The Wall Street Journal:
Some energy and environmental-affairs officials have said they weren't opposed to fracking but in April 2011 a moratorium was imposed on exploration in the Karoo after an uproar from environmentalists. The hiatus would give the government time to formulate a plan for production in the Karoo. The Department of Mineral Resources is due to present a report (in August) to the president's cabinet, which will determine the fate of fracking.
Why are so many environmentalists up in arms about fracking? Fracking – hydraulic fracturing – is the process where companies pump millions of gallons of a mixture, consisting of water, sand, and chemicals, into rock in order to capture natural gas.
The process has been harshly criticized, with individuals and groups claiming that dangerous material is left in the ground – or worse – makes its way into homes. Some have even claimed that natural gas has come out of their kitchen faucets, and that they can light this water on fire.
Nevertheless, South Africa has access to the natural gas it so desperately needs. The question is whether or not the government will grant drillers access it.
Failed Attempts at Drilling
Royal Dutch Shell (NYSE: RDS-A) estimates that the Karoo reserve houses 450 trillion cubic feet of natural gas – enough to make an energy company salivate. The company believes that the prospects of drilling are many, but the firm must first get past South Africa’s ban on drilling exploration wells. To date, Royal Dutch Shell has not been able to drill in the karoo.
Chesapeake (NYSE: CHK) has also been hampered. Chesapeake teamed with Sasol Ltd., an African company, and Statoil, a Norwegian firm to study the region for drilling. If the moratorium on drilling were lifted, the companies would likely form a joint venture to drill in the Karoo and would be able to sell the natural gas to the state so that it could produce electricity. However, Chesapeake has yet to profit from the venture.
Another company interested in the Karoo is Falcon Oil & Gas. Last year Falcon hoped to obtain a license to explore a 7.4 million-acre area for gas. But South Africa’s ban has also stopped Falcon cold.
One company that is omitted from this discussion is ExxonMobil (NYSE: XOM), the United States’ largest driller of natural gas. Exxon may be making a wise decision here – let the speculators obtain the initial permits and do the lobbying – then jump into the drilling after the initial licenses come in. Either way, Exxon already has its hands full with drilling in the rest of the world.
The Energy Conundrum
If South Africa hopes to allow drilling, they should act quickly. In 2010 Anadarko Petroleum (NYSE: APC) discovered a rich area of natural gas in Mozambique, one of the poorest nations in Africa. With this discovery, current estimates now rank Mozambique as having the 11th richest natural gas reserve. So at the risk of watching drillers run to neighboring countries, such as Mozambique, South Africa should decide quickly.
Perhaps the biggest problem that South Africa faces in regards to drilling is its energy consumption. Eksom Holdings produces all of the country’s electricity, but the company is not going to be able to keep up with rising demand. Assuming a 4% increase in the annual demand for energy, South Africa will not be able to meet demand by early 2019.
To fix this solution, the country would need to create more electricity – and therefore needs a steady supply of natural gas. South Africa may not wish to endanger the beautiful ecosystems or endangered rhinoceroses, but soon the country will need to choose between the two.
If South Africa decides to keep its ban on fracking in the karoo region, South Africa will need to import natural gas from a company like Anadarko, an expensive play, or to come up with an alternative source for electricity. Otherwise part of South Africa will be lights out.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.