Why Shell’s Econometrix report is flawed (Scepticism over Shell’s Karoo gas report, March 7). The report has three major flaws:
— It doesn’t indicate how it came to a well-head price of $8 per million cubic feet (MCF), which is not the same as end-user price. The methodology for arriving at this number is rather mysterious because we don’t know whether it includes the cost of environmental mitigation, and other costs. This needs unpacking and the report is not transparent as to how the well-head cost is arrived at. The entire edifice of the Shell report sits on the basic assumptions made about well-head and other costs.
— Even if we assume a well-head price of $8/MCF as being reasonable, it’s only half of the story. This is really the nub of the problem and at the heart of the report’s exaggerated figures. The study does not take into account infrastructure development costs and surcharges for distribution. These costs would be an add-on to the $8 and we would arrive at a true end-user cost. These costs are missing. These costs will have to be defrayed either by consumers or the government. This is why the report is disingenuous and deceptive. It describes well Shell’s handsome turnover but says little about what the end user will pay or suffer. These end-user figures will tell us, at certain price ranges for different uses of gas, the level of market absorption and the rate at which people will switch to gas. If it is cheaper we will possibly get greater market penetration and local beneficiation. If it is more, the market will be undeveloped compared with other energy sources.
— This leads us to the third problem with the report. It is likely that if the price is not right we will need very long lead times for a domestic shale market to develop, because somebody has to outlay huge amounts of capital for infrastructure and storage for gas, Shell and other gas producers will feel all the incentive to export the gas. Guess what will happen next if we have a very large reserve: lots of dollars will flow, the rand will strengthen and you can be sure our other exports and jobs will be destroyed. We will catch the Royal Dutch disease, to use the pun.
The report tells us more about Shell’s and other producers’ windfalls, but for local beneficiation the report is an analytical mess, if not a scandal.
Saliem Fakir
Head of Living Planet Unit, WWF-SA
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Article source: http://www.businessday.co.za/articles/Content.aspx?id=167064