Karoo Shale Gas Exploration & Petroleum Agency South Africa (PASA) 2009/10 Annual Report

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Mineral Resources and Energy

15 March 2011
Chairperson: Mr F Gona (ANC)
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Meeting Summary

The Mineral and Petroleum Resources Development Act came into operation on 1 May 2004. In terms if this Act, Petroleum Agency South Africa (PASA) received the mandate to be responsible for the promotion and regulation of oil and gas exploration and production in South Africa, as well as archiving all data.PASA issued four types of permits.
- Reconnaissance permit which allowed a company to undertake recon surveys, valid for 12 months.
- Technical Co-operation permit which allowed for exclusive study of the area, valid for 12 months and applicant had the exclusive right to apply for exploration rights.
- Exploration Right permit which gave applicant exclusive right to explore for and produce petroleum. Valid for three periods of two years each.
- Production Right permit which gave the applicant the exclusive rights to produce petroleum. It was valid for 30 years and was renewable.

Two challenges it was faced with was funding and having to report to two ministries: Departments of Mineral Resources (DMR) and of Energy It was the designated Agent for licensing according to the Mineral and Petroleum Resources Development Act (MPRDA), thus it should be provided with fiscal funding. Treasury refused to allocate funds, because PASA had not been promulgated directly by an Act of Parliament. Its statutory establishment was in progress. Its income from licensing would terminate upon conversion of all old order rights by 2010/11. From then on, it would operate off its reserves. Current reserves would be depleted by 2013/14

One of the mandates of PASA was to act as the state archive for geo-scientific information. It provided a comprehensive data management and library services. According to the laws that governed the data, all data belonged to the state after an applicant collected data The data owned by PASA at this stage was valued at more than US$9 billion. PASA was constantly working at improving its data services.

PASA was involved in South Africa’s claim for an additional total 1 870 000 sq km in sea area, spread over four regions.

Shale gas was a hydrocarbon gas that was found a type of rock called shale. Hydrocarbon gasses usually came from sandstone, therefore shale gas was unconventional. The hydrocarbon did not exit the shale spontaneously and the technology to mine the gas out of the rock was quite new. Gas was a cleaner and greener energy source that coal. Gas power stations could be switched off and on and were easier than coal, or nuclear. For South Africa it could also mean cheap electricity and jobs in rural areas.

The area to be explored in the Karoo basin, stretched over approximately 250 000 sq km. The technology needed for shale gas mining was the ability to drill horizontally, and hydraulic fracturing. It meant pumping a mixture of water, sand and chemicals down a well to fracture the shale under pressure. The sand and chemicals went into the fractures and allowed the gas to escape. The water was sucked out of the channel, and the gas was allowed to rise to the surface. Recovered water was stored in open pits, and could be reused or treated. The natural gas was piped to the market.

Members asked whether the ground water would be contaminated by shale gas mining and what would happen to the debris generated during the mining process. They asked where the Department of Environmental Affairs fitted into the picture and from where the water needed for shale gas mining would come in the Karoo. Members asked if this application would interfere with the spatial planning that the National Planning Commission was busy with, what the lifespan of such a mine was and what happened to the channel afterwards. The many questions on shale mining could not be answered and another meeting was planned with PASA.

Meeting report

Normal 0 Mr Jacinto Rocha, Chairperson of the Petroleum Agency of South Africa (PASA) introduced the presentation.

Petroleum Agency of South Africa overview
Mr Mthozami Xiphu, CEO: PASA, noted that the Mineral and Petroleum Resources Development Act came into operation on 1 May 2004. In terms if this Act the Petroleum Agency of South Africa (PASA) received the mandate to be responsible for the promotion and regulation of oil and gas exploration and production in South Africa, as well as archiving all data. PASA issued four types of permits:
- Reconnaissance permit which allowed a company to undertake recon surveys, valid for 12 months.
- Technical Co-operation permit which allowed for exclusive study of the area, valid for 12 months and applicant had the exclusive right to apply for exploration rights.
- Exploration Right permit which gave applicant exclusive right to explore for and produce petroleum. Valid for three periods of two years each.
- Production rights permit which gave the applicant the exclusive rights to produce petroleum. It was valid for 30 years and was renewable.

It was located under the Ministry of Mineral Resources - linked to the Ministry of Energy through the Central Energy Fund (CEF).

On the West Coast, south of Alexander Bay was the Ibhubhesi gas field being explored for natural gas. In the Waterberg in the North West, there was exploration for coalbed methane. At Secunda Sasol, there was the Evander gas field, being explored for biogenic methane and the latest application was for shale gas exploration in the Karoo basin. A moratorium had been placed on any further development regarding exploration in the Karoo basin, to ensure appropriate governance.

Other activities of PASA were the SA Extended Continental Shelf Claim, Upstream Training Trust (UTT was founded in 1997 as a non-profit organization funded by PASA and explorers, established to generate interest and develop skills amongst South African youth in the geosciences) and its CSR Programme (Crisis Relief and prevention Programme. As part of this program it partnered with Habitat for Humanity in building houses at Emfuleni in the Western Cape).

Finance
Ms Olivia Mans, CFO: PASA, said that there was a trend of decreasing income for PASA. The anticipated revenue for the next financial year was only R6 million. Its challenges for 2009/10 had been:
(a) Funding: It was the designated agent for licensing according to the Mineral and Petroleum Resources Development Act (MPRDA), thus it should be provided with fiscal funding. Treasury refused to allocate funds because PASA had not been promulgated directly by an Act of Parliament. Its statutory establishment was in progress. Its income from licensing would terminate upon conversion of all old order rights by 2010/11. From 2010/11 it would operate off its reserves. Current reserves would deplete by 2013/14.
(b) It had to report to two ministries: Departments of Mineral Resources (DMR) and of Energy (DOE). It had to be decided whether it would stay with the CEF, or become part of the DMR or the DOE.
 
Data Management
Mr Viljoen Storm, Information Services Manager, PASA, said that one of the mandates of PASA was to act as the state archive for geoscientific information. It provided a comprehensive data management and library service. It had a library subscription service, and G&G textbooks and magazines, it had tape copy and transcription services, it provided a document and record management service, seismic data management services, core layout, sampling and viewing services.

According to the laws that governed the data, all data belonged to the state. After an applicant collected data, it was kept confidential for four years. All newly acquired data had to be supplied to the agency and all data had to be returned at relinquishment.

The data owned by PASA at this stage was valued at more than US$9 billion. PASA was constantly working at improving its data services, keeping the data alive, transcribing it into current formats and technologies, arranging it for faster access etc.

South Africa’s Extended Continental Shelf Claim Project
Ms Ntsiki van Averbeke, General Manager: Promotion, PASA, said that the UN Convention on the Law of the Sea (UNCLOS) was adopted and ratified in 1982. South Africa currently had land territory of 1 220 000 sq km. South Africa owned sea area of 1 540 000 sq km around its coast. South Africa was claiming an additional total 1 870 000 sq km in sea area, spread over four regions. It also scored a comprehensive geophysical and bathymetric data set.

Shale Gas
Ms Jennifer Marot, PASA Manager, Frontier Geology, said that shale gas was a hydrocarbon gas that was found in shale, which was a type of rock. Hydrocarbon gasses usually came from sandstone, therefore shale gas was unconventional. The hydrocarbon did not exit the shale spontaneously and the technology to mine the gas out of the rock was quite new. One of the positives about shale gas was that most countries in the world had potential gas shales, so it was a natural resource that was spread evenly and countries could achieve energy independence. Gas was a cleaner and greener energy source than coal. Gas power stations could be switched off and on easier than coal, nuclear. For South Africa it could also mean cheap electricity and jobs in rural areas. Shale gas was being mined extensively in the US, and Europe and to a lesser degree in South America, India, China Australia, and Mongolia.

The area to be explored in the Karoo basin, stretched over approximately 250 000 sq km. The technology needed for shale gas mining was the ability to drill horizontally, and hydraulic fracturing. It meant pumping a mixture of water, sand and chemicals down a well to fracture the shale under pressure. The sand and chemicals went into the fractures and allowed the gas to escape. The water was sucked out of the channel, and the gas was allowed to rise to the surface. Recovered water was stored in open pits, and could be reused or treated. The natural gas was piped to the market.

The challenges were groundwater contamination, surface footprint, dust and noise pollution and water usage and disposal. Mitigation was possible, but expensive. The role of PASA was to promote and regulate oil and gas exploitation for the benefit of all South Africans. All developments had to be had to be environmentally and ecologically sustainable. PASA had to ensure a measured approach based on factual evidence.

Discussion
The Chairperson asked whether due process had been followed in the tabling of this Annual Report. According to the Committee Secretary, the Annual Report had not been tabled in Parliament.

Ms Marot answered that it had been tabled for the Department of Energy with the CEF Group as holding company.

Mr L Greyling (ID) found it strange that a separate agency looked at oil and gas whereas the Department of Energy licensed other mineral resources. One could question the wisdom of that arrangement in the light of the financial problems that PASA was experiencing.

Mr G Morgan (DA) had questions regarding shale gas. He said that currently there was no policy on hydraulic fracking in South Africa. The MPRDA stated that the applicant had to demonstrate its technical ability to do it as it was supposed to be done. How could the country be sure that PASA itself had the technical ability to assess the environmental management plan and the applicant’s bona fides? PASA was a small agency with an uncertain financial future.

Mr H Schmidt (DA) said that R23 million was mentioned in the presentation. What happened to the R23 million? The Agency was financially questionable. How could it fulfill its brief properly? It depended on Treasury. Treasury set a pre-condition that PASA had to be a statutory body. Why could he not recall it ever appearing before the Portfolio Committees on Minerals and Energy or Mineral Resources? Did it have something to do with its status as a non-statutory body? Did it report indirectly to the Minister and not directly to the Portfolio Committee? Why had PASA never submitted Annual Reports to the Portfolio Committee?

The Chairperson said that PASA was in a healthy state financially. He wanted to know what the status of the discussion was between PASA, National Treasury and the Ministry regarding finance in the future. It was a known fact that Treasury did not easily agree to parting with money, especially when the entity had reserves, unless the entity could present a convincing business case. How far was the process that would legalise PASA?

Mr Njikelana, Chairperson of the Portfolio Committee on Energy, asked regarding the policy, legal and regulatory framework, whether PASA could say that it was operating within the law, while it was not established by an Act of Parliament? While unsure of its status, did it have the right to give out exploration and mining licences?

Mr C Gololo (ANC) asked why PASA fell under the Ministry of Mineral Resources if it was not promulgated by an Act of Parliament.

Mr Rocha replied that PASA had been designated by an Act of Parliament and it was recognised in terms of an Act of Parliament. There was a debate between Treasury, DMR and DOE about whether institutions had to be established by an Act of Parliament. The thought at the time had been to establish the organization and then to wait and see whether there would be a real need for it. The reason PASA was not established like the others, was that ten years ago, there was very little activity around oil and gas exploration. The Ministry was basically waiting to see whether there would be a need for it. Now there was more of a need to have this organization, PASA, because there were applications for shale and methane gas exploration. Government could now start thinking about establishing it as a full blown state-owned enterprise (SOE). PASA was not unlawful. The MPRDA allowed the Minister to designate an organ of state. PASA was an organ of state. It was legitimate.

Mr Xiphu replied that PASA was promulgated by an Act of Parliament. Its establishing directive fell under the Central Energy Fund (CEF) Act. It was designated under the MPRDA and the Gazetted Establishment Notice was published on 8 June 2004 by the then Minister of Minerals and Energy.

Mr G Morgan (DA) remarked that the size of the area intended for exploration for the mining of shale gas was vast. Why did PASA accept such big applications? As an MP, he was concerned about spatial planning, which was part of the brief of the National Planning Commission under the leadership of Minister Trevor Manuel. By accepting this application, PASA became the entity deciding how land would be used, before the National Planning Commission could complete its spatial planning. This was deeply problematic. Why did PASA declare a moratorium on new applications?

Mr Greyling said that PASA was too pro-exploration. How was PASA working with the Department of Environmental Affairs? Because the Minerals and Petroleum Resources Development Amendment Act had not been put into operation, the environmental issues had not been taken over by Environmental Affairs and that responsibility still rested with PASA. He felt that the integrity of the process in terms of making sure that the ground water was protected, had to be respected, and he was not sure that it was happening in this case. Environmental Affairs had to be involved.

Mr Morgan said that he was disturbed by what he perceived as PASA’s bias towards the procedure.

Mr Greyling agreed that for SOEs, shale gas presented a huge game change. However it could cause a bigger game change if the Karoo groundwater resource was contaminated. PASA promoted and regulated exploration. Where was the environmental lobby? He asked whether it was not crucial for the country to do a proper study of the geology and the acquifers in the Karoo first, before giving licences to anybody.

He mentioned that other concerns he had was that fracking would be done here at a depth it had not been done before. What did the research say were the possible implications of that? An article in the New York Times said that in the USA, wastewater treatment plants could not handle the huge volumes of water it had to treat, and the levels of radiation in the water had increased.

Mr Morgan said, while taking everything into account, when the highest decision-making body in a country that had been drilling for decades, started to say :”Let’s look at fracking and its effect on drinking water”, South Africa had reason to be to be cautious.

Mr E Lucas (IFP) said that the Karoo was a desert with obvious water shortages. The water necessary for shale gas drilling was an obvious challenge.

Mr Schmidt asked, with the shortage of water in the Karoo, could sea water be pumped inland to be used?

Mr Morgan asked why it was not possible to demand information on drilling sites up front, and do a full Environmental Impact Assessment (EIA) at the start? Farmers in the Karoo were worried that their farms would be drill sites.

Mr Gololo enquired about waste management when doing drilling and fracking. What would happen to the debris generated during these processes? Would it be sold to construction companies or used in rehabilitation of the mining areas?

Mr M Sonto (ANC) asked where the fracking plants would be put up and why? What would happen to the drilled holes after mining stopped?

Mr Morgan asked what was to stop an applicant who won exploration rights to drill in multiple locations? Was there a limitation on the number of wells that could be drilled?

Mr Schmidt said from what he understood, it was an expensive process. “When the price of gas went up, the production became economically viable.” What was its real impact on the US economy?

Mr Rocha replied that the Agency came to the meeting with no position on shale gas. The application by Shell was lodged in December 2010. It had to submit a draft Environmental Management Plan by April, 2011. From April, PASA would have to consult with the Departments of Water Affairs and  Environmental Affairs, in order for them to participate in that process. PASA was waiting for Shell to come back to it at the current stage. PASA had no position for or against shale gas exploitation. What Ms Marot presented was what she had been reading on the subject, and to some degree she expressed her opinion as an expert, which she had the right to do.

Mr Greyling said that he had heard reports in the media that there would be three licensing rounds before the end of 2012. What did that mean?

Mr Rocha replied that the official representatives of PASA evaluated the application. The Board of PASA as a technical committee, after the PASA managers evaluated the application, expressed their view and expressed a recommendation. A technical committee of the board re-evaluated the same application. That committee consisted of technical experts on petroleum and related issues. From the committee, it went to the Board. At Board level it was debated and discussed, after which a conclusion was reached on which recommendation had to be made to the Minister: Yes or No. There was no bias. The presentation made would be theoretical and hypothetical. He noted the concerns that people were raising. The concerns would assist PASA in evaluating the proposal when it was submitted. For example, if the water issue became insurmountable, it could be a reason for PASA to say no. The concerns that were raised did not mean that PASA was not able to respond to the issues when they were presented.

Mr Morgan said that the law as it stood determined that PASA both promoted exploration and decided who received licences. There was an inherent conflict of interest within this arrangement. Who was watching PASA, in terms of the need for checks and balances in government?

Mr Rocha replied that he could present to the Committees with confidence that whatever decision PASA would make on shale gas, would be compliant with the law. The law stipulated that PASA had to promote and regulate the sector and that was what it was doing, irrespective of the confusion and mistrust around it. It had been given these functions in terms of an Act of Parliament in spite of whatever views one might hold for or against it.

Mr Lucas said that it was necessary to look at other forms of energy, but the safety of water and the integrity of the environment had to be taken into account. What progress had been made regarding off-shore drilling? Was it promising? Were there returns on the investment made?

Mr Lucas asked whether there were there sufficient volumes of shale gas to make the process economically viable. One might start something and not get the return on investment. Exploration results were needed in order to make an informed decision.

Mr Sonto said that there was the view that the Karoo had energy resources. The exploration was not clear about the reserves. What was the lifespan of the reserves?

Mr Lucas did not understand the technology of drilling, casing and fracking. How did it happen? Did the gas come to the surface spontaneously? Was it pumped? There was a need to look at the technology and process carefully before deciding for or against. The availability of finance was a factor. Investors would not invest blindly. They needed guarantees.

Mr Sonto noted that the presenter said that the gas power station could be switched on and off, but it was unreliable. This gas was supposedly cleaner, etc. Why would we venture into it, if it was unreliable?

Mr Sonto agreed with those who said it was good for the country to explore alternative sources of energy. However there was a need to interrogate the processes so that it did not lead to losses for the country.

Mr Sonto said he wanted to understand the historical origins of this gas. He wanted to know about countries, other than the US, where it had been successful and had a long lifespan.

Mr Njikelana asked whether the Committees could get a detailed report on shale gas production.

Mr Schmidt said that the presentation made an interesting remark about the 2009/10 highlights about BEE Production Rights. He understood this to mean that PetroSA as a state entity would receive 10% preferential treatment. If that was true, why did he have to believe the Minister when she said that the state-owned mining company would not receive preferential treatment? He asked whether PASA had been consulted about its role in the bigger state-owned mining company or whether it was expected to form part of the state-owned mining company. It was moved from the CEF Group of companies to a freestanding company.

Mr Rocha replied that the matter of PetroSA owning 10% was a political decision. PASA had to implement the political decision. There was a big difference between the state owned mining company and the state oil company. If there was a move in Government towards merging the two, it would happen in the future. At this point, the two were separate. The political office bearers would decide, it would happen and when it did, PASA would have to deal with it. PASA had no control over that situation.

Mr Xiphu replied that Mr Rocha had spoken about the 10% stake that would go to PetroSA. It was not 20% BEE. It was 10% state and 10% BEE. The 10% that belonged to the state would be operated by PetroSA, which was a national company. In some countries the state stake was bigger, but South Africa was not well endowed. It was very humble. It wanted to come close to the Hard Rock Minerals and Mining Charter. It was not as well endowed in the oil and gas field as it was in the hard rock minerals field. Even PetroSA as a state stakeholder would buy into that right, and would foot their part of the bill for production costs.

Mr Sonto wanted to check the skills needed in the exploration process of this energy resource. Would PASA be able to retain the skills, given the young age of the agency?

Mr Xiphu replied that acquiring and retaining the skills needed in the process of exploration was a challenge. South Africa did not have many geo-scientists. Hence, the need for the Upstream Training Trust. The operators had to contribute towards this Trust, which contributed towards skills development and training in the geosciences. It encouraged students to study natural science from matric upwards. It offered internship positions in the geosciences. A number of people who had come through the programme had passed their Master’s degree and others had proceeded to PhD level. PASA did not hold on to them with contractural agreements. Skills were a problem PASA was dealing with internally. The organisation‘s organogram was structured so that it included people in training. Many geoscientists were close to retirement.

Mr Njikelana said that he became jittery when he heard about privately owned data. In what way was data collected that made it privately owned, and how was that area regulated?

Mr Xiphu replied that as Mr Storm had stated, data belonged to the state. PASA gave a licence to the operator to collect the data for a period of time. In order to protect that operator’s investment the data was available to the state only, not to anybody else. It was done to prevent one operator from riding on the back of another one. Data collection was extremely expensive.

Mr Gololo asked if PASA was working with the geo-science departments who were also doing exploration.

Mr Xiphu replied that PASA did collaborate with the Council for Geosciences. The CEO of the Council for Geoscience was one of the Directors of PASA. It did share information. When looking at something like coal-bed methane. The Department regulated the exploitation of coal and PASA regulated the exploitation of methane. The two bodies traded information as a matter of course. The two bodies also collaborated on the carbon capture initiative. For this PASA served on the board with the Council for Geoscience. The assessment process necessitated collaboration with related state departments. As part of the assessment, PASA solicited their input and interacted with them, for example the Departments of Water Affairs, Environmental Affairs and Science and Technology.

Mr Njikelana asked to what extent did PASA consult with stake holders in the private sector around exploration and research or share expertise and information with global players?

Mr Xiphu replied that PASA only interacted with government departments. When PASA received an application, it put a notice in the newspaper explaining the application, and invited responses and comments from all affected parties to be submitted to PASA within 30 days. PASA then forced the applicant to have meetings with these affected parties in order to explain its case. PASA did not deal with these affected parties directly. Both the Shell and Falcon Oil applications were currently at this stage. This process was from where the commentary in the newspapers had emanated.

Mr Xiphu replied that PASA did collaborate globally and interacted with other scientists through a number of organizations like the American Association of Petroleum Geologists (AAPG), and others. In 2005, the RSA hosted the World Petroleum Congress, through collaborating with, and being a member of it. There was a South African National Committee of the World Petroleum Congress. PASA collaborated both in terms of the production of documentation as well as in research programs with partners internationally as Ms Marot’s presentation showed.

Mr Njikelana said that the presenter on shale gas said that South African coal was rather dirty. South African coal was sought after globally, because of the quality. What was the real nature of the quality of South African coal?

Mr Gololo said that the presenter on shale gas said that there was a lack of infrastructure. What about the pipelines that Eskom was going to put up to transport fuel and gas?

Mr Gololo said that it was his first encounter with the Continental Shelf Claim Project. He was not aware of the Prince Edward Island or that they belonged to South Africa. Were they populated? Was it only used for exploration purposes? Were there mineral resources?

Mr Sonto said, regarding the presenter that spoke about the Continental Shelf claim, that she spoke about the continents but the slide pointed to South Africa. Before this experiment was entered into, what was South Africa’s standing as a maritime country? The lines indicated the borders of South Africa’s territorial waters. What did the speaker mean when she said that the country gained territorial waters?

These questions remained unanswered.

The Chairperson said that the meeting had lost time and underestimated the importance of the input. He asked whether the delegation could return on 23 March 2011 to continue the discussion and answer the questions. The emphasis would be on the matter of shale gas. He was impressed with the amount of work that PASA had put into the presentation. PASA was an asset that the Portfolio Committees were not aware of. It put the country in a better position to address challenges around energy supply. It was claimed that shale gas was clean. However, the same was said about nuclear energy, but the natural disasters in Japan damaged the nuclear power stations, causing nuclear fallout. The Portfolio Committees needed more time with PASA, as it needed to understand clearly what the pros and cons were regarding shale gas production.

The Chairperson said that the CEO spoke about the social and labour plans in his report. They would like to know more about how those were being monitored in terms of their implementation. He asked whether PASA would return on the 23 March 2011.

Mr Rocha replied that PASA would come back on the 23 March 2011 to continue the discussion. The more dialogue happened, the more clarity and the more trust was created.

Mr Xiphu agreed that PASA would come back for a follow-up meeting to answer questions. It would liaise with the Committee Secretary about an appropriate date. PASA would come prepared to provide answers to the questions. To Chairperson Gona, he said he was grateful for the positive comments made about PASA doing much with limited means. PASA would come back.

The Chairperson proposed that the remainder of the questions would be answered on 23 March 2011 and the meeting was adjourned.

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