South Africa’s Sasol is taking steps to join the global search for shale gas.

Shale has for long been considered a rock too difficult to drill, but the breakthrough of horizontal drilling and hydraulic fracturing has opened up shale along with the gas that it harbours.

Shale gas is a natural gas in sedimentary shale rock formations, the shale acting as both the source of the gas and the gas’s reservoir.

Sasol has let it be known that its explor-ation arm, Sasol Petroleum International (SPI), has submitted a joint application with Statoil ASA, of Norway, and Chesapeake Energy Corporation, of the US, for onshore petroleum exploration rights in the Karoo Basin.

In the US, Chesapeake drills in the Marcellus region, where it is in joint venture with Statoil, and also in the Barnett region over North Texas and Oklahoma.

The Marcellus is a massive shale formation underlying parts of the states of New York, Pennsylvania and other states and has become a hotbed of drilling activity.

The Sasol-Chesapeake-Statoil application, for the proposed exploration of shale gas resources in the Karoo, is expected to take about 12 months to process.

The move by Sasol and its partners heralds the first South African participation in the so-called global ‘shale gale’.

The technology to extract natural gas from shale has improved dramatically in recent years, leading companies into regions where resources were thought to be depleted.

Last week, the Financial Times of London reported that “the shale gas rush” had made its way over to the UK from the US.

Simultaneously, news wire service Dow Jones reported from the US that energy executives were forecasting that shale gas would play a big role in meeting future energy demand.

Discussion on the role of shale gas also stole the show at this month’s IHS Cambridge Energy Research Associates (Cera) conference, in Houston, which was supposed to be dominated by oil development trends.

“The shale gale has shifted natural gas from a constrained resource to an abundant one with wide-ranging implications for the energy future in North America,” IHS Cera chief energy strategist David Hobbs was quoted as saying.

Reuters reported from Canada that the emergence of shale gas has made such an impact that the government of Alberta province had backtracked on its oil and gas royalties because the “massive new shale gas discoveries” in the US and Canada’s British Columbia were threatening to make the production of Alberta’s smaller conven- tional gas reserves uneconomical.

The Economist reported from London that economies of scale and better techniques had halved the production costs of shale gas.

The French news agency Agence France-Presse said that the new techniques had more than doubled North America’s discovered gas resources to 85-trillion cubic feet.

Oil & Gas Eurasia added that the “shale gale” has the potential to be a “game changer” and quoted IHS Cera chair- person Daniel Yergin as saying that “it’s simply the most significant energy innovation so far this century”.

The New York Times quoted ConocoPhillips CEO Jim Mulva as saying that shale gas was “nature’s gift to the people of the world”.

The Wall Street Journal quoted Statoil, one of Sasol’s partners in the South African search for shale gas, as being optimistic about the progress of the joint venture with Chesapeake in the prospective Marcellus shale region of the US.

“The more we see it, the more we like it,” Statoil CE Helge Lund was quoted as saying.

But Lund was cautious about the progress of shale gas elsewhere, and said that Statoil still wanted proof that the success of shale gas in the US could be replicated in other countries.

On a patch of farmland east of Liverpool, Igas has drilled one of Europe’s first shale gas wells for “uncon-ventional” gas. The investment banker involved said that a year ago applying for licences to drill into big slabs of shale rock would have been regarded as foolhardy, but, currently, he was receiving regular invitations to conferences on shale gas.

Igas has taken leases on shale in north Wales and north-west England, joining the rush of companies large and small in countries such as Poland and Germany seeking to replicate a boom in the US that has captured the industry’s imagination, a Financial Times report said.

It added that the rush of European interest in shale underscored wider awareness of a change in the outlook for gas supplies and that the surge in US production had meant that the world had gone from running out of natural gas to being drowned in it.

Environmentalists Stepping In

Environmentalists may slow things down, however, with the Delaware Daily Times reporting that environmentalists are demanding that authorities stop granting drilling permits in State forest land in the Marcellus region.

Because shale ordinarily has insufficient permeability to allow significant fluid flow to a well bore, most shale is not a commercial source of natural gas. Shale gas production in commercial quantities requires fractures to provide permeability.

Shale gas has been produced for years from shale with natural fractures; the shale gas boom has been due to modern tech- nology in hydraulic fracturing to create extensive artificial fractures around well bores.

Horizontal drilling is often used with shale gas wells to create maximum borehole surface area in contact with the shale.

Water, sand and chemicals are pumped into the ground under pressure, to crack the shale and create gaps so that the gas can flow out.

Water’s use in both hydraulic fracturing and the disposal and treatment of produced water has emerged as the top environmental issue, particularly as the centre of gravity of development moves from the traditional oil and gas producing areas to the more densely populated US north-east.

Shale gas is one of a number of “unconventional” sources of natural gas, like coal-bed methane.

In the US, this process of fracturing, or ‘fracking’, has already caused environ- mental concern with some politicians worried about possible contamination of groundwater.

Gazprom international business head Alexander Medvedev has been quoted as saying that he is counting on environmental concerns to derail ambitions to bring shale gas technology to Europe.

Sasol’s Advantage

While the prospect of large new supplies of natural gas has caused the gas price to fall, the shale gas phenomenon has already caused the price of Sasol’s gas-to-liquids (GTL) products to rise, because Sasol is effectively producing ‘oil’ and not gas.

In converting gas into oil using GTL technology, Sasol effectively speeds up Mother Nature by a couple of million years and current crude oil prices expressed as a multiple of natural gas prices show Sasol’s GTL to be in a sweet spot (see graphic).

“The reason why the GTL price has shot up is that there’s new technology being developed in the US that enables the extraction of gas out of shale, which was previously not economic,” Sasol CEO Pat Davies explained to Mining Weekly in a video interview.

“It’s quite a radical shift and it’s having an impact on gas prices around the world,” Davies said.

This has also allowed Sasol’s GTL to gain a competitive advantage over liquefied natural gas (LNG).

“This puts us in a very good space. We make our money in GTL in the price of gas versus the price of oil, because we take gas and we convert that into oil, so the bigger that gap, the more money we make,” Davies told Mining Weekly.

“If there is shale gas in the Karoo, and if it’s economically extractable, that will provide opportunities to supply gas into our own facilities or to on-sell it to others. It’s a great business opportunity, but a long-term one,” he added.

SPI MD Ebbie Haan said that the additional gas resource potentially provided Sasol with a low-carbon feedstock.

“It’s an exploration licence and, thereafter, we will look at the economics and what it means in hardware, and that will be a longer-term project,” Haan said.

The exploration application was submitted in November.

Sasol’s strategy is an organic growth strategy, with SPI the exception and SPI being the one area of Sasol where significant acquisitions are envisaged in gas to help facilitate more GTL projects.

But a strategy is within an environment, and there’s been an important change to the environment – the shale gale.

Sasol makes its money from the difference in the gas price and the oil price in that it converts gas into oil.

Thus, the bigger the gap between gas prices and oil prices, the more money Sasol makes out of its GTL offerings.

The reason the gap has widened is the shale gas phenomenon.

Whereas Sasol has for long had a unique competitive advantage in GTL, it is also moving ahead against LNG, which is sold as gas and not as oil, as GTL is.

“We supply into the oil market, which is much bigger, which has led to my colleagues and me getting a lot more interest in our GTL technology and I have no doubt that those phone calls, letters, emails and requests for visits are going to turn into deal flow in the coming years,” Davies told Mining Weekly.

To watch a video in which Sasol CEO Pat Davies tells Mining Weekly Online’s Martin Creamer that the company has applied to explore for shale gas in South Arica’s Karoo basin, click here.