PRESENTATION TO THE SELECT COMMITTEE ON LAND AND MINERAL RESOURCES (NATIONAL COUNCIL OF PROVINCES)

1. PRESENTATION TO THE SELECT COMMITTEE ON LAND AND MINERAL RESOURCES (NATIONAL COUNCIL OF PROVINCES) V227, 2nd Floor, Old Assembly Building 28 October 2014

2. Presentation outline Background Legislative Framework What is shale gas? What is Hydraulic Fracturing? Scope of Regulations Concluding Remarks

3. Background In February 2011 the DMR imposed a moratorium on the processing of new applications for reconnaissance permits, technical corporation permits, exploration rights and production rights. An interdepartmental team was convened to investigate and submit a report on the potential environmental risks associated with hydraulic fracturing as well as the negative and positive social and economic impacts of shale gas.

4. Background cont… Cabinet approved the report on the “Investigation of Hydraulic Fracturing”, with the following key recommendations: The establishment of an inter-departmental committee to augment the current regulatory framework to mitigate any negative environmental impacts associated with Hydraulic Fracturing; and A need for collaboration between the Departments of Mineral Resources and Science and Technology to explore mechanism for the co-existence of the Astronomy Research Projects and development of shale gas in the Karoo.

5. Background cont... The inter-departmental committee has developed draft Technical Regulations for Petroleum Exploration and Exploitation to address the following: augment gaps identified in the current regulatory framework governing exploration and exploitation of petroleum resources, particularly in relation to Hydraulic Fracturing prescribe good international petroleum industry practices and standards that will enhance safe exploration and production of petroleum The draft Regulations have been published for public input and comment. The Department is in the process of consulting interested and affected communities.

6. Legislative framework Upstream oil and gas activities governed by the following primary legislation: Mineral and Petroleum Resources Development Act,2002(Ac No.28 of 2002) National Water Act,1998 (Act No.36 of 1998) National Environmental Act,1998(Act No.107 of 1998) Astronomy Geographic Advantage Act,2007(Act No.21 of 2007) National Environmental Management Waste Act,2008(Act No.59 of 2008) National Radio Active Waste Disposal Act,2008(Act No.53 of 2008) The Regulations are meant to augment existing legislative framework Not exhaustive on their own and must be read, where applicable and relevant, with other applicable legislation.

7. What is shale gas Form of natural gas that is found trapped within shale formations; Shale layer typically lies between 1500 – 4000m below surface and is overlain by thick and tight geological formations that may act as a barrier to protect ground water. Because it is found in low or no permeable formations, it’s production is enhanced by Hydraulic Fracturing. Shale gas therefore requires special completion, stimulation and production to achieve economic production.

8. What is hydraulic fracturing? Hydraulic Fracturing is the pressurized injection of a mixture of water, chemicals, and sand in underground formations(rocks with low or no permeability) to allow natural gas and oil to flow more freely from rock pores to a production well.

9. Hydraulic fracturing cont… The use of hydraulic fracturing is perceived to have the attendant risk of polluting sources of drinking water by fracturing fluids and/ or methane and induced seismic events. Current industry well construction and integrity practices as contained in American Petroleum Institute (API) standards ensure the protection of underground sources of drinking water from impacts related to oil and gas exploration and production activities, including hydraulic fracturing. The key objective of the Technical Regulations is to incorporate the well construction and integrity standards and practices into our regulatory framework governing the exploration and production of oil and gas.

10. Scope of the regulations The aspects of the draft regulations will not apply only in respect of hydraulic fracturing but will apply generally to issues relating to petroleum exploration and production with a special emphasis on hydraulic fracturing. Stimulation of a reservoir by way of hydraulic fracturing is not confined to unconventional gas or exploration and production operations, it is also applies to conventional gas.

11. Scope of the regulations cont… Conventional Gas – Gas trapped in rocks that are permeable allowing gas to travel upwards towards a lesser pressure until it reaches a trap where a well can be drilled to extract the hydrocarbons. Unconventional Gas – Gas trapped in impermeable rock which cannot migrate to a trap to form a conventional gas deposit i.e. Shale Gas, CBM and Tight Sands.

12. Salient provisions of the regulations Assessment of the Geology and Geohydrology of the Area – Regulation 4: To understand possible threats associated with hydraulic fracturing one must understand the geology of the location targeted. Understanding the geology of the area also helps regulators to determine appropriate protective regulatory measures. Assessment of Geohydrology helps with understanding of the character, availability and quality of groundwaterand for such knowledge to be incorporated in the well engineering design.

13. Salient provisions cont… Casing Standards – Regulation 12-16 (Cont) installing a steel pipe (called casing) and cementing this steel pipe into place is the primary method used for protecting groundwater and maintaining “well integrity” (containing produced hydrocarbon into a well). Casing must be able to withstand the various compressive, tensional, and bending forces that are exerted while running in the hole i.e. must withstand at least 1.2 times the maximum pressure to which it may be subjected during operations (Regulation 2). All casing must be in accordance with the API “5CT Specification for Casing and Tubing” which specifies the length, thickness, tensile strength and composition of casing.

14. Different types of casings Conductor Casing Stabilizes unconsolidated sediments Isolates shallow aquifer

15. Protects surface fresh water formations • Provides support for pressure control Different types of casings cont… Surface Casing

16. Different types of casings cont… Intermediate Casing Isolates unexpected fresh water found below surface casing shoe

17. Different types of casings cont… Production Casing Isolates the production zone from other formations and the fluid in them. Provides protective housing for production equipment Covers worn or damaged intermediate casing.

18. Salient provisions of the regulations cont... Horizontal and Vertical Well

19. Salient provisions of the regulations cont... Cement Requirements & Compressive Tests – Regulation 18 After casing is run into a hole it must be cemented in place which is important in maintaining well integrity. Cement plays a role in isolating hydraulic fracturing operations from fresh water and other permeable horizon. A well not cemented properly leads to gas leaks into the other units, particularly drinking water aquifers, as it comes back up the well. Macondo Well Blowout – One of the reasons was bad cement job. All cement placed into the well bore must meet the standards of API “ 10 A specification for cements and material for well cementing”. Blowout Prevention – Regulation 21 Blowout Preventers are used to seal, control and monitor oil and gas wells to prevent blowout which is critical to the safety of the crew.

20. Salient provisions of the regulations cont... Water Resource Assessment & Monitoring – Regulation 5 & 38 Provides for baseline water quality assessment by an independent specialist for a period of a year prior to operations and continuous sampling of water during operations to determine any changes if any. Protection of Water Resources Setbacks – Regulation 38 Regulate the distance between hydraulic fracturing well and streams, wetlands as well as existing municipal water wells.

21. Salient provisions of the regulations cont... Hydraulic Fracturing Fluid Disclosure – Regulation 29 Provides for the disclosure of hydraulic fracturing fluids to be used i.e. fluids and their status as hazardous/non hazardous. Induced Seismicity Assessment– Regulation 6 Creates an obligation to develop and implement mitigation measures for hydraulic fracturing induced seismicity i.e. conducting site-specific surveys and other techniques to identify faults. Fluids Disposal- Regulation 41 Approved waste disposal facility and disposal to underground and re-injection disposal prohibited

22. Salient provisions of the regulations cont... Water Source and Use – Regulation 40 Providesforthedisclosureofwatersupplysource, locationandwaterusagevolume. Protection of Astronomy Activities – Regulation 9 & 10 Provides for the rules of interface between shale gas exploration in the Karoo Area and the Square Kilometre Array Project to address the second key recommendation as discussed above. DST,DMR and PASA are continuing to engage to determine the extent of SKA on shale gas application areas and to develop mechanisms to minimise such impacts.

23. Salient provisions of the regulations cont... Monitoring of Operations – Regulations 12,18,20 All phases of operations to be monitored i.e. casing, cementing, formation pressure integrity and BOP tests. Fracture and Fracturing Fluid Containment – Regulation 30 HF Fluid must be monitored to ensure it is confined to the target zone and any indication of migration will result in suspension of operations. Assessment of Related Seismicity – Regulation 6 Provides for testing of fracture behaviour of targeted formation by pre-fracturing injection tests and micro-seismic monitoring.

24. Potential economic benefits of shale gas Shale gas has the potential to contribute significantly to the envisaged accelerated, inclusive and sustainable economic growth as indicated below: Electricity Generation: It is calculated that 30Tcf of shale gas is enough to meet half of the country’s current electricity generation requirement for over 20 years. Gas to Liquid (GTL):The resource can be used in the conversion of GTL to meet the country’s demand for domestic consumption. Cost Competitive Advantage: It provides a potential source of cost competitive energy advantage analogous to the United States (USA), where energy costs have dropped considerably since the development of shale gas, with the country projected to become a net energy exporter by 2020. Employment: The development of the resource has the potential to create employment opportunities directly and through leveraging linkages as described below: The Mossgas gas to liquid project created approximately 1600 jobs from development of 1Tcf gas reserve. Side-stream, input and down-stream linkages have the potential to develop associated jobs in respect of localization of capital goods, consumables and infrastructure development. Revenue: Development of this resource will also contribute considerably to the nation’s fiscus, as it is estimated that a resource of 30 Tcf will yield gross sales of about R1 trillion.

25. Concluding remarks C A B Areas A and B: Sites earmarked for exploration application Area C: Site earmarked for desk-top study (technical cooperation)

26. Indicative timelines for shale gas development

27. Concluding remarks The draft regulations, once finalised will result in a regulatory framework that ensures safe exploration subsequent potential extraction of gas Finalisation of the Technical Regulations for the development of shale gas to mitigate inherent risks – December 2014 Processing of the applications currently held in abeyance until such time that Technical Regulations are concluded – April 2015 Exploration activities to affirm extent of economic recoverability of shale gas – a minimum of 3 – 7 years to sufficiently acquire information Comprehensive monitoring and evaluation of progress and compliance – throughout the associated activities

28. THANK YOU