South African shale gas economics: Analysis of the breakeven shale gas price required to develop the industry

Abstract

Is Karoo shale gas an economically viable option for providing the gas needed for the South African power grid? Dispatchable power generation is essential for the implementation of a renewable based electric grid system. Natural gas-fuelled generation is proposed to meet this need, with the gas being sourced from the Karoo. However, no exploration has been conducted on this resource and it is not known if it can be produced economically. Based on information from shale developments in other parts of the world and using publicly available information, this analysis calculates the likely price that this gas would require to be economically viable. The likely steps in the process to get to commercial development would be a baseline survey period, a period of exploration and appraisal drilling, followed by a pilot development. The extensive exploration programme would take about four years and likely cost over USD 450 million. This would be followed by a pilot production programme costing approximately USD 180 million. Once commercial development is achieved, a price for the gas of USD 13.67 per GJ would be required. There are a number of factors, including well recovery, well costs, royalties and operating costs that could add to this price and make this gas development less attractive. Highlights South Africa has significant shale gas potential in the Karoo. Internationally, LNG delivered prices are currently below USD 10 per GJ. South Africa shale gas breakeven price would be over USD 13.7 per GJ. An extensive and expensive exploration programme is required prior to development.