Q&A: SHELL UPSTREAM - JSE MAGAZINE

Q&A: SHELL UPSTREAM

Jan Willem Eggink, general manager of Shell Upstream’s SA operation, on fracking in the Karoo, oil and gas legislation and the potential of offshore drilling

Q&A: SHELL UPSTREAM

Q: Things appear to have been a little quiet in recent months. Is this deceptive? What has Shell Upstream been doing in the last six months or so?
A: As you know we’re obviously not drilling in the Karoo yet and are not quite clear about when we will be able to start. The demonstration effect of the first couple of wells will be important in showing Karoo people there is nothing to fear.

Remember though that even once we have a licence, the utilisation of tight gas from the Karoo is a decade off. Minister Ramatlhodi [of Mineral Resources] has stated that shale gas licences will be awarded in 2015 but before that happens, both shale gas regulations and the overarching legislation need to be finalised.

Q: Speaking of the regulatory framework, what was Shell’s response to the Minerals and Petroleum Resources Development Act (MPRDA)?
A: The MPRDA was passed by the National Council of Provinces immediately before the [May] 2014 elections. The new minister, however, did the right thing, we think, by asking the president not to sign it into legislation and has started a reappraisal.

We provided comments on the draft legislation on several occasions, both to the department [of Mineral Resources] and to the parliamentary portfolio committee. We stated then that we require clear rules and regulatory stability in order to make investment decisions. We also need to know that the terms are attractive so we can obtain an adequate return on investment. This is still the case.

Judging from their presentations, other companies put forward very similar suggestions. The shale gas regulations [technical regulations for petroleum exploration and exploitation] also need to be finalised. They were gazetted for comment in October 2013 and we are currently waiting for the next draft. The government has said it would consult in early 2015 and will hopefully then finalise the regulations and award licences.

Q: In the form approved by Parliament, the MPRDA gives the government a 20% free carried interest. Was this the essence of your problem with the legislation?
A: Twenty percent is a pretty high request. It would be carried through the whole project, from exploration to development and production. That would have been without any financial contribution from the SA government, which would effectively make it an additional tax. This would mean that some prospective projects would not be attractive.

You have to remember that Shell is not a single, undifferentiated entity. I need to take a proposal back to the Hague and effectively sell it to the people within Shell who control investment. They are looking at a whole raft of investment opportunities around the world with SA as only one option. For me to even approach them, the prospect has to be attractive. SA has to ‘stack up’ against other projects.

Q: Of all the deepwater frontier acreage allocated recently, only Total actually started drilling, off Agulhas. They’ve given up. Is this because of the MPRDA issue?
A: I can’t speak for Total but their press release does say the problem was very strong currents. That said, the MPRDA does need to be sorted out before things can move ahead. We are not opposed to state participation in projects at all. Quite the opposite. In our operations around the world we prefer to partner with national oil companies. They have the necessary experience in their own countries and knowledge about how to deal with the issues.

Q: In 2012, Shell acquired frontier deepwater exploration acreage in the Orange basin. What is happening there?
A: We acquired the exploration permit in February 2012 and intended extending it into the second phase this year. We’ve been doing the seismic imaging and have acquired a lot of data including some very encouraging stuff from the northern part of the area. The modelling suggests we are looking at oil-prone rather than gas-prone deposits.

The seismic studies suggest that [drilling] is the obvious next step but it also depends on what happens with the MPRDA. We need greater clarity on the possible returns. A well costs $200 million to drill, and global stats for frontier acreage suggest that only one-in-seven wells find oil. The mid-ocean conditions – meaning the currents and waves – make this technically difficult. It requires a huge rig, which is more expensive.

‘Decisions in this industry seldom revolve around short-term fluctuations’

Q: What role do you see gas playing in SA’s energy mix?
A: Shell has projected a doubling in the demand for energy between 2000 and 2050. This is the global figure. As a company we are very keen on renewables but we see these providing only about 50% of future energy demand, because of the baseload issue. On the fossil fuel side, the future is gas. It’s clean, it’s cheap and gas-fired power plants can be built very quickly. I believe that is a very good [baseload] complement to renewables and that SA should go this route.

Q: So what would the next step be for SA?
A: The first steps should involve liquefied natural gas [LNG] which can be supplied by either Angola, which already has capacity or by SA being an early mover in Mozambique. There is talk about supply pipelines but distance is against this. Mozambique’s gas fields are offshore in the far north of the country. The international experience is that pipelines are not viable over 2 500 km. So my suggestion would be to construct decanting plants at one or more of the developing ports – Saldanha Bay, Coega or Richards Bay. If SA was to decide to import LNG, it could be ready within three years.

It isn’t really appropriate for me to comment on nuclear power. One of the great things about gas is that development can be incremental. If shale gas comes on-stream – and we don’t even know if we have a commercial resource in the Karoo yet – it could be fed much more easily into the system as one more component of a modular approach.

‘Shale gas could be fed much more easily into the system as one more component of a modular approach’

Q: That brings us back to Karoo shale gas. Are there are still misunderstandings out there about the issue? What about international best practice? Can we tap into experience from elsewhere, perhaps avoiding some of the mistakes made, for instance, in the US?
A: To return to your very first question, which was about what’s been happening in recent months, part of the answer to that is that I have continued to travel the Karoo, listening to people’s voices. I’ve had a lot of meetings with groups of farmers. I don’t mind this at all: if I was a Karoo farmer I would be asking questions too. At the end of these meetings I often hear them say things like: ‘Oh, that doesn’t sound so bad’. However, there is still a lot of misinformation out there.

This is not new technology, you know. We have a lot of experience and can make it work safely and cleanly. You asked about best practice – we have incorporated this into the company, embodied in our publicly available specifications for tight gas. These set standards for dealing with water, communities and technical issues, like how we seal the wells. The main lesson of the US experience is to not allow in the sorts of operators who cut corners. For example, the companies who won’t check well integrity or redo the cementing of a wellbore if it is compromised. Here the situation is very different compared to the US. Landowners there possess mineral rights, and when it comes to sinking a well to see if they have viable gas deposits, owners often go with the cheapest – not the most technically skilled or experienced – operator. In a nutshell, we’ll be using all our experience gained from our operations in the US, China and Ukraine when we drill in SA.

Q: The price of oil has fallen dramatically recently. How does this affect both the Karoo and Orange basin ventures? On a wider scale, has SA ‘missed the moment’?
A: Decisions in this industry seldom revolve around short-term fluctuations. However, the current oil price could affect both in that we – and other investors – will be looking more critically at investment decisions than we did when the price was over $100/barrel. Did SA miss an optimal moment? No one knows. There hasn’t been a lot of activity across the sector thanks to regulatory uncertainties, and only Total has drilled in deep water. But the companies are still around, waiting.

By Kerry Dimmer
Image: Matina Steyn