Shell gets cold feet on SA shale

Uncertainty over new regulations prompts rethink by global group

MULTINATIONAL oil and gas company Royal Dutch Shell is pulling its top shale-gas man out of South Africa, an indication that companies are growing increasingly frustrated with government delays over shale-gas legislation.

This week, Business Times was told that Jan-Willem Eggink — whom Shell sent to South Africa from Libya to monitor South Africa’s shale gas opportunity — would be pulled out of the country in coming weeks. Other highly skilled staff would follow him.

“While government is sitting around farting, these companies are shifting their money away from South Africa and our economy will lose billions,” said a member of parliament, who declined to be named.

Shell said on Friday that as part of a review due to falling oil prices, the company had adjusted its activities in shale oil and gas opportunities outside of the Americas.

It also said it had adjusted staffing in local exploration in South Africa. The company said it needed clarity on legislation and technical regulations in the country before making any further decisions.

“Should attractive commercial terms be put in place, the Karoo project could compete favourably within Shell’s global shale gas and oil portfolio. We will continue our ongoing consultation with government [and] industry about the long-term opportunities of shale gas exploration and the regulations that will govern this industry,” it said.

But the parliamentary source said: “Shell will resist saying it publicly, but they have given up on the government getting it together any time soon to fix the position of oil and gas companies in the Mineral and Petroleum Resources Development Act [MPRDA] or to release fracking [hydraulic fracturing] regulations.”

The redeployment of senior staff by Shell signals a lost opportunity for South Africa. In initial shale gas exploration in the Karoo alone, Shell would have spent a minimum of R2.5billion.

Sean Lunn, who leads negotiations with the government on behalf of oil companies on exploration legislation, said countries compete within the global portfolio of energy companies and therefore whichever projects rank best would receive the high-risk exploration budgets.

Legislative certainty is a significant factor in projects being given the goahead, he said.

An industry spokesman explained that “basically, these companies are told to play soccer on a field without any lines, with only two poles instead of goalposts and not enough linesmen. A company like Shell operates in 90 different countries. If they are not making money in South Africa and the government is not getting its act together, then that money can very easily be allocated elsewhere.”

The biggest hiccup in terms of legislation for upstream oil and gas exploration is the stake that the South African government wants to take in terms of black economic empowerment and the terms that the state demands, which include a 20% free stake in exploration projects before companies have recouped their costs.

For the most part, oil and gas companies are happy to hand over the 20%, but only after they have recovered drilling and exploration costs that run into billions.

This has been included in the amendments to the MPRDA that were

While government is sitting around farting, these companies are shifting their money away from SA

sent back to parliament in December, after the government tried to push them through just before elections in May last year.

Without that legislation in place, Shell and other companies are unable to acquire a licence, and, even if the legislation is pushed through today, the companies interested in shale gas development would still need to do an environmental impact assessment that would take another two years.

Shell is not the only oil and gas major that is fed up. Last year, US oil and gas explorer Anadarko Petroleum said it had halted spending on exploration in South Africa until it could get more clarity on changes in the country’s laws.

Aside from the 20% free stake, the government is also interested in raising its share in future projects by acquiring greater stakes in successful projects through production-sharing agreements or by buying in at an agreed price.

Things are not looking much better on the downstream side of the industry, as oil and gas companies have been talking to the government since 2009 to get guarantees and regulations in place to upgrade refineries to produce cleaner fuels.

To upgrade the country’s refineries to make clean fuels would cost about R40-billion. Companies need support from the government and final regulations on specifications for clean fuels. This is now expected only in 2017.

But the government has approved the Burgan clean fuels storage project in Cape Town. This will open the door for other countries to dump their excess product in the country.

Chairwoman of Chevron (trading as Caltex) Nobuswe Mbuyisa is con- cerned: “This will definitely have a negative impact on our refineries and is threatening the viability of the industry.”

The company has estimated that the impact could amount to $20-million a year if the government does not assist in the upgrades and put certain regulations in place.

But while these debates continue, essential oil and gas experts are packing their suitcases and leaving.