Shell announced in March it was putting its South Africa shale gas exploration program on hold and pulling its shale gas head, Jan-Willem Eggink, out of the country – with more “highly skilled staff” to follow him – as it continues to seek an exploration licence.

Shell cited falling oil and gas prices and the need for greater clarity on legislation and technical regulations before deciding on its next steps.

This prompted fears from one South African Member of Parliament who said the government risked losing billions of dollars’ worth of investment due to inaction.

“Shell will resist saying it publicly, but they have given up on the government getting it together any time soon to fix the position of oil and gas companies in the Mineral and Petroleum Resources Development Act (MPRDA) or to release fraccing regulations,” the MP told South Africa’s Business Times.

While Shell’s announcement was seen by some commentators as a setback for South Africa’s shale gas prospects, Edison said: “We would be wary of drawing overly negative conclusions”, because “beyond the headlines, we suspect Shell’s announcement may have been motivated by other factors”

“Firstly, Shell may have chosen not to update its environmental management program dating back to April 2011 given the sheer size of its license application, preferring to wait for full technical regulations on hydraulic fracturing to be in place,” Edison said in a research note this week.

Shell’s licence application of 95,000sq.km is roughly 23 times bigger than ASX junior Challenger Energy’s 4200sq.km license application and over three times bigger than that jointly held by Falcon Oil & Gas and Chevron, the JV which is the only other applicant besides Challenger to submit an updated Environmental Management Program (EMP).

“Secondly, it may have been a tactical move by Shell to try and put pressure on the South African government, which would be helpful to its smaller competitors,” Edison added.

“Lastly Shell is reducing global exploration spend notably on shale opportunities outside of North America, so South Africa is unlikely to be the sole casualty of spend-reduction efforts.”

Shell has made clear it would regard South Africa shale as competitive compared to other shale assets, if the right regulatory and legislative framework was put in place.

Business Day quoted Shell: “Should attractive commercial terms be put in place, the Karoo project could compete favourably within Shell's global shale gas and oil portfolio. We will continue our ongoing consultation with government and industry about the long-term opportunities of shale gas exploration and the regulations that will govern this industry.”

Edison is of the belief that the implications of Shell’s move on the broader timeline of South African shale exploration are limited, and its withdrawal may not delay the actual timing of drilling in the Karoo.

“We understand that because it applied for a Technical Cooperation Permit, Shell has already had access to the existing 2D seismic data and undertaken preliminary geological modelling,” Edison said.

“As such, it has a head-start over Challenger. Once it receives a permit award, Shell may be in a position to drill its exploration wells broadly around the same time as Challenger."

No panic stations

Challenger managing director Robert Willies was also philosophical on Shell's move, echoing Edison's sentiments.

"Whilst we cannot speak for Shell, it appears that Shell may have elected not to update its EMP at this time (likely a complex and expensive exercise given the large size of its application areas), but to await the finalisation of the technical regulations that will govern hydraulic fracturing," Willies said.

"If so, it seems likely that Shell’s application will not be processed until these are in place and it may therefore have taken the opportunity to give a clear message to government.

"This may be helpful to the other applicants."

Edison believes the country is making real progress on the legislative front, while Challenger made its own progress towards the award of exploration permits by submitting the updated environmental management program in late February.

“If the legislative framework is in place by this northern hemisphere summer, Challenger could potentially be awarded a licence and commence its work program in Q3 2015, with corehole drilling starting 12-18 months later,” Edison said in a research note this week.

“A licence award and farm-out could lead to a near-term re-rating, with longer-term upside based on drilling success.”

South Africa’s regulator has until the end of June to approve the EMP, and if the MPRDA bill is approved by then, exploration licences could potentially be granted soon after.

Challenger has a 95% interest in an application for an exploration permit in the Karoo Basin. In 2011, the US Energy Information Administration estimated that the Lower Permian Ecca Group shales in the Karoo Basin contain 1559 trillion cubic feet of risked shale gas in-place, with 390Tcf as the risked, technically recoverable shale gas resource.

Meanwhile, South Africa’s power crisis is deepening, highlighting the need for new energy sources.

“Regular load shedding by Eskom is hurting South Africa’s economy to the tune of 0.5-1.8% of GDP per month, depending on the blackouts’ severity,” Edison said.

“The country does not have easy or cheap options to solve its near-term power crisis, as gas imports from neighbouring Mozambique would require an expensive new pipeline and LNG imports would be technically difficult.

“If shale exploration is successful, indigenous gas supply could help meet the country’s dire need for more power.

“Current commodity price fluctuations have little impact on new-build power economics, which continue to favour gas over coal or diesel in the long-term.”