The race is on to unlock a massive shale formation that could single handedly reverse the country’s struggling economy…
They call it the Karoo, a so-called “semi-desert” – an arid region that experiences intermittent rainfall during the year.
Blanketing parts of Western and Central South Africa, the desolate Karoo is roughly the size of Montana.
But by next April, this region could soon be bustling with activity.
You see, in the past few years, there’s been a growing interest in the untold wealth which lies beneath the Karoo ~ enough natural gas to power the entire country for decades.
But in early 2011, an exploration and production moratorium was put in place while the South African government conducted environmental studies on energy development in the region.
By September 2012, the moratorium had been lifted, with exploration rights to be granted within months.
While not yet commercialized, the shale reserves found in the region could potentially make the Karoo the eighth largest gas field in the world.
Like many other shale regions in the world, the story has been much the same.
Karoo had been identified as oil or gas-bearing for decades. But the technology at the time made it unfeasible to extract the fuel trapped in the shale rock.
Fast forward to present day — technology has now advanced to a point where shale oil and gas have become economical enough to extract…and South Africa’s government is desperate to turn their own prospect into reality.
Why now, you ask?
Well, if not for the simple fact that a full quarter of the country’s population is out of work.
Statistics South Africa reported the unemployment rate in the second quarter rose 0.5% to 25.6% – equating to roughly 4.7 million people.
Just imagine if we had the same unemployment rate here in America… that would be over 78 million people without jobs.
Further pressuring the South African government to push forward with development plans in the Karoo is the fact that the continent’s largest economy has been growing at a snail’s pace since the recession.
GDP grew by just 0.9% in first quarter of this year.
Year on year, expansion has remained flat at 2.0%, with a combination of declining manufacturing, mining, and farming pulling down growth.
Both the World Bank and the International Monetary Fund (IMF) have slashed their growth forecasts in South Africa for 2013 to between 2.0 – 2.5% from 2.8 – 3.2%.
Needless to say, a solution is sorely needed…and quick.
Enter the Karoo
Already a significant economic lifeline to the South Africans, the Karoo produces the majority of the country’s wool and mohair, and is also a major producer of sheep and ostrich meat.
And pretty soon, it can add shale gas to its resume.
The EIA estimated that the play could contain gas reserves of 485 trillion cubic feet, which could power South Africa for four centuries.
The ability to develop that much gas could mean as many as 700,000 new jobs created, according to Johannesburg-based research group, Econometrix.
Of course, as with other shale plays in the world, there are opponents including the many farmers and land-owners in the Karoo who fear the potential environmental impacts of hydraulic fracturing.
However, if the current government does decide to give the Karoo the go-ahead, exploration regulations could be passed by the end of its ruling term this coming April and production could begin within a decade.
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One company that’s hopeful they will be granted exploration rights very shortly is Royal Dutch Shell Plc (NYSE:RDS.A). Shell has applied to explore the area, which if approved, would involve drilling up to 24 exploration wells over three years.
For investors looking for higher-risk, higher-reward play, small cap Falcon Oil & Gas Ltd. (TSX:FO) is also awaiting permits to begin drilling.
Falcon was granted a technical cooperation permit in 2009 for 7.5 million acres and has a partnership with Chevron Corp. to pursue the Karoo. The company anticipates exploration rights over their acreage will be awarded in the second half of 2013.
The bottom line is: both companies are confident that permits will be granted.
With a quarter of South Africa’s population out of the job, its government can’t afford not to turn their desert into an energy oasis – in spite of the opposition.