South Africa has long been viewed as a country poor in oil resources. During the dark days of apartheid, when economic sanctions restricted oil imports, the country was reduced to gaming sanctions monitors and depending on its vast coal reserves to fuel the economy through a large, state-directed program to convert coal to liquid fuel oil.
Today, with domestic power demand outstripping supply and with labor unrest in South Africa’s mining sector hobbling investment and growth, two technologies widely used in the U.S. may be set to transform South Africa’s energy economy. What are these technologies? Hydraulic fracturing – also known as “fracking” – and deep-water, offshore oil drilling.
Both technologies come with costs and risks. How South Africa can trim those costs and hedge those risks will greatly determine whether Africa’s largest, albeit struggling, economy will manage to participate in the continent’s emergent energy-led economic boom. To South Africa’s north, for instance, in countries like Mozambique, Kenya, and Tanzania, prospectors from many international oil firms have been making historic discoveries, including the world’s largest offshore gas field off the coast of Mozambique.
Currently, South Africa ranks 80th in the world in terms of crude oil production, producing only 1.43 million barrels of oil a year out of a total consumption of just under 225 million barrels per year. This vast discrepancy in production and consumption is made up with imports, which amount to nearly 428,000 barrels of oil a day, and the conversion of domestic coal reserves to liquid fuels – which accounts for some 35 percent of all liquid fuels consumed in the country.
Clearly, increasing domestic oil production would do wonders for a country so dependent on imports. It would improve South Africa’s balance of payments and free up coal now currently being rendered into liquid fuel for domestic use for export to China and India – both of which are adding many new coal-fired power plants. The coal could also be used to fire power plants in South Africa itself, which desperately needs investment in the utilities sector in order for its manufacturing sector to remain competitive.
Most important still, the additional revenues that an oil boom might bring for South Africa’s government – which since the end of apartheid has come under increasing pressure to lessen the economic gap between the wealthy white minority and the mostly poor black majority. Oil revenues could go some way in doing that by providing Pretoria with the funds it needs to shore up faltering social services and provide expanded educational, health, and housing opportunities for poor blacks tired of waiting interminably for progress to occur.
Oil revenues might also go some way in patching up emerging fissures in the ruling African National Congress party, which has shown increasing strain in recent years. Such monies, if spread around liberally, would paper over growing differences between the ANC’s establishment, business-friendly faction and more radical elements, primarily based in its youth wing, that have grown increasingly critical of the economic status quo.
So, South Africa clearly has a need for the revenues oil and gas would bring, but is there the potential for such oil riches? For the moment, activity in the oil and gas sector would suggest that is the case as several major international oil companies are vying for exploration and drilling rights all across the country.
Offshore, hopes of finding similar-sized oil and gas discoveries as found in Mozambique have drawn in Exxon-Mobil, — which has snapped up prospecting rights for a block of ocean off of Durban, on the country’s eastern coast. On South Africa’s western coast, meanwhile, Royal Dutch Shell is leading an investor consortium interested in obtaining significant offshore exploration rights. Additionally, Shell is exploring the potential for deep water oil along the South African-Namibian border.
Onshore, while prospects for conventional oil development remain poor, the introduction of hydraulic fracturing technology — which has recently revolutionized U.S. oil and gas production — could open up significant amounts of shale gas and oil. U.S. oil giant Chevron, for instance, has aimed to move in on developing this opportunity through partnerships with local oil companies.
Though the economic windfall from onshore natural gas alone could amount to nearly $115 billion, and offshore vastly more, skeptics cite many potential problems. First, oil and gas development, especially onshore fracking, would take place in environmentally sensitive areas threatening already tight fresh-water supplies.
In the United States, concern over groundwater contamination has sparked widespread protests against hydraulic fracturing and in Texas and New Mexico – both severely affected by drought – local farmers and whole towns have lost access to water as a result of the process. Whether fracking in South Africa will face similar opposition remains to be seen; though as one of Africa’s most vibrant democracies it can no doubt be expected.
Second, offshore oil production – as seen in the recent Deepwater Horizon disaster in the Gulf of Mexico – is also extremely risky. Regulating such an industry to ensure safety and sound environmental stewardship is a difficult task even for advanced, developed countries like the United States — and the record of such management in Africa is scanty. Still, South Africa is no Nigeria or Angola, suggesting that if initial opposition to drilling can be overcome then a reasonably sound regulatory framework will likely be established.
Longer term, a growing oil and gas industry – while great for domestic energy security – could threaten the soundness of South Africa’s manufacturing and mining sectors by putting upward pressure on the rand. Already South African manufacturers face immense pressure from cheap imports from Asia and a stronger currency will only worsen the country’s manufacturing competitiveness. As for mining – long South Africa’s prime source of income – a stronger currency will make capital-intensive mining equipment easier to finance and thus easier to import, thereby reducing costs. A stronger rand will also diminish the attractiveness of South African-sourced minerals on global markets.
Since mining and manufacturing traditionally employ far more people than oil and gas, unemployment could thus also become even more of a problem than it currently is today. This in turn could only be ameliorated by expanding social services – which would increase the power and size of government and raise the stakes of winning or losing elections. Corruption, a common side-effect of energy investment in developing countries, could become a significant problem in a political system all but controlled by the ANC.
As in the rest of Africa, oil and gas development will provide no quick-and-easy solutions to the country’s problems. Indeed, it could make them worse. However, given the potential riches that lie underground and offshore, it seems a safe bet that they are just too tempting to leave lying fallow for too much longer.