IDEAS21

The end of February saw the expiry of the one-year moratorium on shale gas exploration in South Africa that was imposed by Mineral Resources Minister Susan Shabangu. The Shale Gas Task Team established by the Minister is due to present its report to Cabinet by the end of March. Thus, the great debate over shale gas and fracking – hydraulic fracturing – is set to hot up once again.

Thus far, the polarised debate in South Africa has been waged primarily between those keen to exploit a potentially vast source of energy and those worried about the environmental and health implications of fracking. What has yet to be adequately discussed is the economics of shale gas production. While it is still very early days in South Africa, experience in the US – where the modern shale gas industry is nearly a decade old – is a useful point of departure.

Many pundits have presented shale gas as a game changer in the US energy market. Certainly, shale gas production has risen dramatically, from less than one-billion cubic feet of gas a day (bcfd) in 2003 with the advent of horizontal drilling and fracking to almost 20 bcfd – about a fifth of US gas consumption – by the middle of last year.

As a consequence, the price of gas has fallen precipitously, from spikes of over $12 per thousand cubic feet in 2006 and 2008 to under $2.50 per thousand cubic feet at present.

But this early success has led to exaggerated claims about the future potential of shale gas, and also conceals problems that are emerging in the industry.

The first problem concerns resource and reserve estimates. Resources refer to the quantity of gas that could theoretically be extracted using current technology, while reserves have to be commercially viable at today’s prices. Experience in the US has shown that only about 10% of the total area of a gas-bearing shale formation yields economically productive wells.

The US Potential Gas Committee estimated in April 2011 that the country’s probable mean resources amounted to 550-trillion cubic feet. Arthur Berman, a Texas-based petroleum geologist who has extensively researched the gas industry, suggests that about half these are likely to become commercial, to be added to the 273-trillion cubic feet of existing proved reserves.

And in its 2012 Annual Energy Outlook, the US Energy Information Administration (EIA) downgraded its technically recoverable shale gas resource estimate by 42%.

Thus, contrary to claims by the industry – and frequently echoed by the Obama administration – the US does not have 100 years’ worth of natural gas reserves at current consumption rates, but more like 23 years, says Berman.

The second problem with the industry hype is that the overall decline rate for US natural gas wells is estimated at 32% a year, and the rate is considerably higher for shale gas wells – between 63% and 85% in the first year, according to Canadian gas expert David Hughes. This means that well drilling activity has to be maintained continuously just to keep the rate of gas output constant.

But drilling is an expensive business. Writing for Foreign Policy magazine, Chris Nelder cites analysis that “finds that nearly all operators need at least $4 per thousand cubic feet to break even while drilling new wells in existing plays, and at least $8 when one includes all costs, including leasing of gasfields, overhead and debt service”.

So, at current prices, many companies are running at a considerable loss. In late January, one of the largest shale gas producers in the US, Chesapeake Energy, announced its intention to reduce drilling; since then, others have followed its lead.

Berman warns that the US shale gas industry is exhibiting all the classic signs of a bubble, just like the gold rushes of the nineteenth century.

Berman and his colleague, Lynne Pittinger, have concluded that “shale gas will remain an important part of the North American energy landscape but its costs will almost certainly be higher, and its abundance less than many now believe”.

There are two lessons for South Africa. Firstly, the EIA’s technically recoverable resource estimate for South Africa of 485-trillion cubic feet is both premature – the figure was based purely on a desktop study compiled prior to any exploratory drilling – and potentially misleading, since technically recoverable reserves are usually much greater than economically recoverable reserves. Nonetheless, if just 10% of the technically recoverable reserves were economically viable, this would represent ten years of South Africa’s total primary energy supply, or provide feedstock for gas-to-liquid fuel production equivalent to nearly 50 years of current petroleum consumption. However, the second lesson from the US experience is that the consumer price of shale gas would likely be considerably higher than many people currently hope.

These economic considerations need to be weighed against potential environmental and social costs and benefits, and compared with alternative energy sources. These issues will be explored in subsequent columns.

Published in Engineering News, 16 March 2012

http://www.engineeringnews.co.za/article/shale-gas-debate-needs-a-dose-of-economic-realism-2012-03-16

The majority of our country’s politicians and economic commentators have painted themselves into a corner of empty promises and ineffectual policies by telling us the only way to create jobs and reduce poverty is to grow the economy at much faster rates.

The Minister of Finance, Pravin Gordhan, said in October last year that the economy must grow by seven percent a year. The Democratic Alliance maintains that a growth rate of eight percent is necessary. In November the Development Bank of Southern Africa said GDP must grow by 10 percent a year for a decade to create the 5 million jobs targeted by the government.

And yet in the national budget presented by Mr Gordhan on Wednesday, the 2012 growth forecast was revised down to 2,7 percent from the 3,4 percent projected last October. The growth rate is now forecast to increase moderately to 3,6% in 2013 and 4,2% in 2014.

But even these projections seem overly optimistic in the face of several near-term threats to the global and local economic outlook.

The first risk is that the Euro zone will sink into recession as a result of its sovereign debt crises and associated fiscal austerity measures. President Zuma has correctly warned that SA will not be able to escape the economic troubles in Europe, given that the region is our largest trading partner.

The so-called ‘economic recovery’ in the United States has also yet to deliver anything meaningful more than three years after the financial crisis. The US unemployment rate lies somewhere between 9 and 20 percent, depending on which definition you choose. Even powerhouse China’s economy seems to be coming off the boil, and the country may face a bursting real estate bubble similar to the one that landed Japan in the economic doldrums in the 1990s.

The second major category of risks consists in festering geopolitical tensions. The hottest spot of the moment is as usual the Middle East. The violence in Syria continues to escalate and threatens to draw in troops from other countries. But Russia and China – wary after the west’s military intervention in Libya – have drawn a line in the sand by vetoing the UN resolution calling for Syrian President Assad to step down.

More ominously, the hostile war of words between western powers and Iran over the latter’s nuclear programme continues unabated. The Israeli leadership is still threatening a ‘pre-emptive’ military strike on Iran’s nuclear enrichment facilities. Meanwhile, the United States and Europe have imposed stringent economic sanctions against Iran, whose economy and populace are now clearly suffering.

Should this situation spiral into another regional conflagration, it will have devastating economic consequences for the globe as a whole and for SA in particular – around half of our oil imports are sourced from Iran and Saudi Arabia. Iran has vowed to respond to an attack by closing the Strait of Hormuz, the world’s preeminent oil ‘choke point’ through which one third of the world’s seaborne oil is shipped.

The third – related – risk to the world and SA economy is another spike in oil prices, which in 2011 averaged a record high of $111 per barrel. Already, the price of oil is acting as a brake on the global economy. Spare oil capacity is now minimal and any further disruption to supplies could send prices towards or even above $150.

Most of these medium term threats are symptomatic of deeper underlying trends, namely the depletion of cheap and easily accessible resources and the degradation of ecosystems that provide vital services to human societies.

World oil production has been essentially flat for seven years and looks set to begin its inevitable descent with the next few years. This will be followed by peaks and declines in many other key resources, including coal and rock phosphates. Water and food are becoming increasingly scarce, thanks in part to climatic changes and land degradation, while the world population continues to grow by over 70 million a year. An increasing frequency and severity of natural disasters – many of them climate related – are adding to the economic stresses.

As a result, economies across the world are paying much higher prices for energy and many other raw materials, which is exacerbating financial imbalances and putting extra strain on highly-indebted countries.

In short, the world is encountering ecological constraints on growth. And in the absence of continuous growth, our debt-based monetary systems falter and implode. Thus without a return to cheap and abundant energy – which would require miraculous technological breakthroughs and a war-time effort to roll them out – debt crises and associated socio-political ructions are going to snowball.

So does this gloomy global trajectory mean that the poor of our country are destined to live in worsening deprivation and misery, and that their ranks will be swelled as more households drop out of the middle class?

If current mind-sets, values and policies prevail, the answer is probably ‘yes’. Exceptional socio-economic circumstances call for real paradigm shifts and radical policy innovations. SA needs to abandon its narrow obsession with GDP growth and adopt the broader goals of economically, socially and ecologically sustainable development.

We need an expansion of sectors that are labour-absorbing and energy and resource efficient, such as repair, maintenance and recycling, small-scale agro-ecological farming, localised production-consumption systems, decentralised renewable energy generation, and so on. We need to reduce our dependence on unsustainable industries such as primary extraction, urban sprawl, and financial speculation. In other words, the quality, type and sectors of growth are crucially important.

Although there have been welcome steps taken toward a ‘green economy’ in several recent policy documents, such as the New Growth Path and the Industrial Policy Action Plan, implementation has lagged behind rhetoric. This is partly due to obstruction from powerful vested interests – most notably the ‘minerals-energy complex’ – which are taking SA further down an unsustainable, resource-intensive and polluting path.

But almost all the policy frameworks – aside from the largely ignored National Framework for Sustainable Development – are still operating within an outdated paradigm. The green economy should not be seen as a subsector of industry. Rather the entire economy – agriculture, manufacturing, construction, services, etc. – needs to undergo a fundamental transition to sustainability on a scale equivalent to the earlier agricultural and industrial revolutions.

There are many ways that our economy and policies could be reoriented to deliver more genuinely sustainable development and to bolster society’s resilience to economic and financial shocks.

The first step must be to reduce unnecessary wastage of energy and materials and to boost efficiency and resource productivity throughout the economy.

The government is right to allocate massive funds to infrastructure spending. But this should be geared much more toward renewable energy and more sustainable transport systems such as integrated rapid transit, passenger and freight rail, and non-motorised transport in cities – and less on expanding export rail lines and ports that assume the global economy will continue to grow for decades.

As identified in the National Planning Commission’s Development Plan, the extension of basic services to the poor needs to be accelerated, including clean water and sanitation, health care, affordable electricity and quality education. If we can build world-class soccer stadiums and a high-speed railway, why can we not achieve these fundamentals?

Unemployment could be tackled by massively expanding the Department for Social Development’s Community Work Programme and the various “Working for… ” programmes – such as water, wetlands, fire, energy, etc. These labour-absorbing activities also help to rehabilitate ecosystems that provide essential public goods and services to society.

The crucial agriculture sector must gradually be weaned off fossil fuels and adopt practices that restore degraded soils and conserve scarce water. An army of small-holder organic farmers needs to be trained with a mix of indigenous and modern knowledge and skills.

In the construction sector, sprawling housing developments on the outskirts of cities need to give way to high-density urban redevelopments, sustainable human settlements involving mixed land-use zoning, and green building techniques and materials.

Where will the money come from to fund these programmes?

The government’s fiscus can be augmented through appropriate taxes on resource rents, including a windfall tax on the super-normal profits of synthetic fuel producers and mining companies. Fiscal incentives – mixes of taxes and rebates – can be used to promote firm and household-level green investments. Profligate state spending on bloated salaries and elite privileges must be reined in.

Even more importantly, the transition to a sustainable and more equitable economy urgently requires serious monetary system reform. An obvious place to start is a financial transactions tax to bring speculative capital down to earth where it may be put to productive use. We should also follow the example of Brazil and North Dakota’s state banks, which rightfully place the enormous power of money creation in public hands rather than leaving it to private commercial interests.

If ecological limits mean that we cannot grow our way out of poverty and unemployment, then we must share our way out. The poor need to consume more for their basic needs to be met, while the wealthy should consume less to reduce their ecological footprints. Businesses can contribute to reducing inequality by capping executive pay and introducing employee ownership schemes. Government officials should be held accountable for their use of public funds and receive performance-related remuneration.

This need not be viewed as a fanciful wish list in the face of entrenched ideologies, cultural norms and institutional relations. Rather, it is hopeful call to action for human beings individually and collectively to evolve their consciousness and behaviours in response to a fundamentally changing reality.

Published in the Cape Times, 13 March 2012

To mix the favourite metaphors of the departments of transport and energy, transport is the heartbeat of the economy, but energy is the lifeblood. Transport in South Africa is overwhelmingly dependent on liquid petroleum fuels. Petrol, diesel, jet fuel and heavy fuel oil provide 98% of the energy used by the transport sector and electricity contributes the rest.

Thus transport planning, which is intrinsically long-term given the life span of infrastructure, must be based on a realistic assessment of energy and oil security. Although there have been some welcome shifts in South Africa’s transport policy and planning in recent years, some aspects are still heading towards dead ends.

The International Energy Agency has stated repeatedly that the era of cheap oil is over. Data from the United States Energy Information Administration show that conventional crude oil output has been on an “undulating plateau” since 2005.

The production of unconventional oil, which includes extra-heavy oil from Venezuela’s Orinoco deposits, Canada’s tar sands and shale oil in areas such as North Dakota in the US, has increased in recent years. But this has come at a much higher marginal cost of production and an even higher cost to the environment in the form of massive pollution and greenhouse gas emissions. In short, the oil industry is scraping the bottom of the proverbial barrel in an age of “extreme oil”.

Oil is running out
Mature oil fields are depleting at an average rate of more than 5% a year and many analysts expect total liquid fuel production to enter terminal decline within a few years.

Meanwhile, world oil exports have been declining at about 2% a year since peaking in 2005 as oil exporting nations, such as Saudi Arabia and Iran, consume a growing share of their own crude.

Biofuels are proving more damaging to global society than they are worth by pushing up food prices and incentivising the destruction of old-growth forests.

In the face of stagnant oil supply and rapidly rising demand in the emerging economies, oil prices have trended steeply upwards, from less than $40 a barrel in 2004 to $111 on average in 2011 and more than $120 now. Tension in the Middle East threatens another “super-spike”, perhaps above $150 a barrel.

In South Africa a new oil refinery will not improve energy security in a future of diminishing world crude output and rising prices. And although a third of our petroleum fuels are produced by Sasol and PetroSA from coal and gas, consumers pay prices benchmarked on international oil prices.

We have been warned
In the past few years we have had ample warnings of what the continued dependence on imported oil will mean, such as bitumen shortages, petrol stations running dry, aeroplanes grounded and farmers losing crops. These energy developments should be critically informing the government’s infrastructure planning for road, air and rail transport.

Expenditure on the maintenance of the existing road network is necessary, especially before the costs of bitumen and diesel rise even higher. But, in the context of peak oil, spending on new roads for the most part does not make long-term sense, including the R25-billion allocated by the treasury in the current budget cycle for new national roads.

The Gauteng Freeway Improvement Project, which is projected to cost R20-billion, represents a massive misallocation of resources. Following public opposition to the road tolling, the government has decided that taxpayers will bail out the South African National Roads Agency Limited — and subsidise Gauteng motorists — to the tune of R5.8-billion. All this money should rather have been spent on more efficient mass transit. We can only hope the same mistakes are not repeated in other parts of the country.

Government policy regarding air transport is even more questionable. The Airports Company of South Africa has, in recent years, spent billions upgrading the OR Tambo and Cape Town international airports and building the brand-new King Shaka International Airport in Durban. Although useful during the 2010 World Cup, how will these upgrades benefit South Africa in a future characterised by massive debt deleveraging in the Western economies combined with surging fuel prices?

Moreover, the national carrier, SAA, recently asked the government for a R6-billion “recapitalisation” — read bailout — to improve its cash flow and fund the purchase of a fleet of 20 new aircraft. Management says it expects the airline to make a loss in the 2012 financial year, mainly as a result of — you guessed it — high oil prices. Why should South Africa’s beleaguered taxpayers continue to subsidise a loss-making entity with a bad management record that serves a privileged minority?

Finally something is being done about rail infrastructure
Fortunately, there is some good news on the transport policy front: rail infrastructure is at last starting to be overhauled. Transnet has embarked on a R300-billion capital expansion programme. However, most of this is geared towards expanding capacity on coal, iron-ore and manganese rail lines to boost exports. Only R7.7-billion has been budgeted for expansion of Transnet’s general freight capacity, which should progressively take the place of road-based freight transport.

Passenger rail is making a comeback. In late February the department of transport announced that the government would soon issue a tender for 7 200 new train coaches and locomotives, to be procured in the next 20 years at a cost of R128-billion.

Although that might sound like a lot of money, consider that South African households spent R67-billion on private motor vehicles in 2010 alone. So, from a societal cost perspective, two years of new car purchases would be equivalent to the entire passenger rail upgrade.

The other bright light is the development of integrated transit systems in major cities, led by bus rapid systems in Johannesburg and Cape Town. Fully loaded buses are far more energy efficient than single-occupant cars.

In the 2012 Budget Review R300- billion was pencilled in for a proposed high-speed rail link between Gauteng and Durban. Given its huge price tag — and the strong likelihood of cost overruns — this should be a low priority relative to the provision of mass transit in cities and upgrading existing freight rail.

In their seminal book, Transport Revolutions, Richard Gilbert and Anthony Perl argue persuasively that we electrify our transport systems and power them increasingly with renewable energy.

This task is both monumental and pressing — and thus each rand spent on unsustainable oil-dependent infrastructure will cost the nation dearly in terms of future constrained mobility and economic losses. The government must urgently reconsider its transport strategies.

Published in the Mail & Guardian, 9 March 2012

http://mg.co.za/article/2012-03-09-barrelling-down-the-wrong-track/

For most of the past couple of centuries of industrial capitalism, the majority of economists, politicians and citizens in general have taken energy supplies for granted. The exceptions were local energy constraints, periods of war, and infrequent incidences of politically-driven supply disruptions such as the 1970s oil shocks triggered by the Arab Oil Embargo and the Iranian Revolution.

But in recent years, two huge challenges to our energy situation have loomed increasingly large and are forcing people to give energy the serious consideration it deserves. The first is anthropogenic climate change, which the majority of scientists ascribe mostly to the burning of fossil fuels. The second challenge – which is still the elephant in the room – is the rapid depletion of cheap and easily accessible reserves of oil, coal and gas.

A Dutch researcher writing on TheOilDrum.com website recently made available a useful data compilation providing global primary energy consumption by energy type (see Figure). An analysis of historical energy patterns shows an astonishing growth in energy consumption and highlights our current dependencies.

World energy consumption 1830-2010

In 1830, the Industrial Revolution was just two generations old in Great Britain, was in its infancy in Germany, and was still in gestation in the United States. Total global energy consumption rose from approximately 24 exajoules (10^18 joules) in 1830 to over 550 exajoules (EJ) in 2010. In the past century alone, energy consumption has grown by a factor of ten. On a per capita basis, energy consumption quadrupled between 1830 and 2010.

In 1830, biomass accounted for over 95 percent of the world’s energy supply. Even today, much of the poorer developing world’s population still relies on traditional biomass fuels like wood and animal dung for cooking and heating. Despite the enormous growth in fossil fuel use over the past century, consumption of biomass energy has continued to grow each year, rising from 23 EJ in 1830 to 63 EJ in 2010. A surge in the last decade is largely due to a huge expansion of ethanol and biodiesel production, driven mainly by government subsidies.

Britain was the first country to exploit its coal reserves in the late eighteenth century, at first mainly because it was running short of wood. Globally, coal replaced biomass as the largest source of energy as recently as 1905. Ironically, the fastest growth in coal consumption occurred in the early part of the new millennium, as China ramped up production to feed its break-neck industrialisation.

Commercial oil production began in the U.S. in 1859, but did not overtake biomass energy until 1955. Oil superseded coal as the dominant energy source in 1964, and still provides the greatest share of primary energy today at over a third.

Natural gas has been the relative late-comer amongst fossil fuels, but has grown rapidly since the 1950s. Where it is abundantly available, it has become the fuel of choice for home heating and increasingly for electricity generation.

Commercial nuclear power generation, derived from the fission of enriched uranium atoms, began in 1954. It was historically the fastest growing new energy source, taking just 12 years to progress from 1 EJ to 10 EJ. But nuclear power has levelled off since 2000, and faces an uncertain future after Fukushima.

Hydroelectricity generation kicked off in the 1870s but has grown very slowly, reaching 12 EJ in 2010. Other renewable electricity generation from solar, wind and geothermal energy sources amounted to just 2 EJ in 2010 – invisible on the figure. This is equivalent to the energy obtained from coal in 1848 and from oil in 1912, shortly after the launch of the model-T ford car.

The figure clearly shows how dependent our industrial society is on fossil fuels. In 2010, 80 percent of the world’s primary energy supply was derived from fossil fuels, 11 percent from biomass, 5.5 percent from nuclear energy, 2.2 percent from hydropower and just 0.4 percent from solar, wind and geothermal energy.

Humanity is now reaching an epic turning point in its energy history. World conventional crude oil production has been basically flat since 2005, and unconventional oil and biofuels have only added marginally to production rates since then. An increasing number of analysts are expecting world liquid fuels output to begin declining within the next few years as discoveries of new oil fields cannot keep up with the depletion of old fields. And a number of recent academic studies have thrown serious doubt on the common assumption of abundant coal reserves.

Installed capacity of renewables like solar and wind have been recording spectacular growth rates in excess of 20 percent a year for several years, but this is off an extremely low base. The transition from depleting and polluting finite fuels to renewable sources of energy represents a monumental and urgent transition for humanity.

Published in Engineering News, 2 March 2012

http://www.engineeringnews.co.za/article/a-century-of-addiction-to-fossil-fuels-2012-03-02