Capstone Green Energy Corp (fka CGRNQ)

[Seasound]

Fracking Debate Racks South Africa

A version of this article appeared August 6, 2012, on page B1 in the U.S. edition of The Wall Street Journal

By DEVON MAYLIE

JOHANNESBURG—Africa's biggest economy is running dangerously short of energy, even as the country sits atop what geologists say could be substantial gas reserves.

South Africa's shale-gas reserves are estimated to be among the world's largest, but the region is home to rhinos and a telescope project.
More

The Source: Timing Is Everything on Fracking Call

South Africa, like the U.S. and other countries, is caught in a debate over hydraulic fracturing, the process of shooting millions of gallons of water, sand and chemicals into underground rock to release hard-to-access deposits. Multinational energy companies want to use fracking to release shale-gas reserves in this country's Karoo region. But environmentalists are fighting fracking in the Karoo, a pristine, arid expanse that is home to the threatened black rhinoceros and the planned location of a $1.87 billion telescope.

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 this month to the president's cabinet, which will determine the fate of fracking.

"It's what we call 'the F word' in our industry," says Philip O'Quigley, chief executive at Falcon Oil & Gas Ltd., which has applied for a right to explore for gas in the Karoo. "It's an emotive industry."

A consultant's report last year for the U.S. Energy Information Administration estimated South Africa's recoverable shale-gas resources at 486 trillion cubic feet, which would make them the fifth-largest in the world. A report on behalf of Royal Dutch Shell RDSB -0.06% by a South Africa research firm this year estimated the reserves at 450 trillion cubic feet.

Shell says exploration in the Karoo by other oil companies, mostly in the 1960s, identified "gas-bearing geological formations" but weren't deemed commercially attractive because they were found deep below the earth's surface. Today, new technology such as fracking could change that calculus, the Anglo-Dutch company says.

"Many in the industry do believe in the enormous potential of the Karoo," says Falcon's Mr. O'Quigley.

Jan Willem Eggink, Shell's South Africa general manager for exploration, says the company needs to explore to determine how it could extract gas from the region. But that can't happen as long as the moratorium bars drilling exploration wells.

Falcon last year sought a license to explore for gas in a 7.4-million-acre area, about a third the size of Ireland, but has been hobbled by the moratorium. Shell and Bundu Oil & Gas (Pty.) Ltd., a South African company that teamed up with Australia's Challenger Energy Ltd., CEL.AU +5.71% also have applied for exploration licenses.

Tapping its gas reserves is essential to South Africa. The continent's primary industrial engine imports 60% of its gas and oil needs. Nearly all of the country's electricity production comes from state-owned utility Eskom Holdings Ltd., which has struggled to keep pace with demand. Energy shortages in 2008 led to rolling blackouts, disrupting manufacturing and the country's crucial mining industry. Eskom says it risks running out of electricity while it builds two coal power stations. Even after those are built, the country will need more energy capacity by 2019 or face rolling blackouts again.

Even if the moratorium is lifted, South Africa still must entice anxious investors.

South Africa's Sasol Ltd., SSL +0.58% in partnership with U.S.-based Chesapeake Energy Corp. CHK -1.06% and Norway's Statoil STO +0.45% ASA, carried out initial studies that Sasol says weren't encouraging. Sasol, the world's largest producer of motor fuel from coal, says it wants to keep exploring.

Shell says there might not be as much gas as geologists have predicted. The company estimates that it would spend $200 million to drill six wells for the first stage of exploration and that moving the Karoo to production would take about 10 years. "The longer we wait, the longer it takes to get the benefits," Mr. Eggink says.

And the more environmental opposition could emerge.

Treasure the Karoo is campaigning to get fracking blocked. The environmental group says it will lodge an appeal with the Department of Mineral Resources if fracking is permitted or if exploration licenses are awarded.

Another complication arose in May, when South Africa won rights to host a radio telescope in the same area where Shell wants to frack. The project requires that industrial activity be located miles away for the telescope to work.

Meanwhile, neighbors are sprinting ahead with gas exploration. Texas-based Anadarko Petroleum Corp. APC -0.28% in 2010 made a discovery that could put Mozambique, one of Africa's poorest countries, in the big leagues of natural-gas producers. Estimates of the offshore discovery's size would rank the country as the having the world's 11th-largest natural-gas reserves.

A version of this article appeared August 6, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Fracking Debate Racks South Africa.