autralian article - cel to go boom!

Challenger set to go boom
• by: Barry Fitzgerald
• From: The Australian
• March 11, 2014 12:00AM

Challenger Energy. Source: TheAustralian
Challenger Energy (CEL)
RARELY does an Australian junior resources company get a shot at making a major economic and social contribution to a country that it is struggling to deliver the basics of jobs, electricity, water and decent housing.
But that is exactly the position ASX-listed Challenger Energy has worked its way into thanks to its first-mover status in the potential of the shale gas revolution, which first got going in the US, to become a game-changer for South Africa.
The US has shown the rest of the world that it is possible to extract gas and liquids that are tightly held in shale formations by employing hydraulic fracturing and horizontal drilling techniques.
Monster-sized gas and oil resources previously considered locked up in shales for all time are now an economic proposition, radically altering the energy outlook for the US, with all of its global geopolitical implications to boot.
Attempts to replicate the US success here, in Britain, and in parts of Europe and Latin America are now well under away. Success is not guaranteed given the US has the advantage of a well-developed pipeline gathering system and the unique ability to smooth over land access issues through its royalty payments system for landowners.
The geological shale potential was first highlighted in a ground-breaking assessment by the US Energy Information Administration. South Africa’s Karoo Basin, it turns out, ranked eighth globally with an estimated 370 trillion cubic feet of gas estimated to be technically recoverable.
It is a potential gas resource number that is hard to get the mind around. Better then to think that it represents enough gas for near on 20 North West Shelf gas projects.
South Africa could do with one NWS project, let alone 19 others. The country is in continual energy crisis, with little peak demand capacity in its ageing fleet of coal-fired power stations.
What little gas is currently consumed by Africa’s biggest economy comes down the line from Mozambique, a country set to become a big LNG player but which can’t be expected to do South Africa any favours by selling it gas for less than what it could get on world markets.
What’s more, in a country where one quarter of the population lives on less than $US1.25 a day and youth unemployment runs at more than 50 per cent, a potential new industry like shale gas has got some real appeal.
Modelling by South Africa’s economic consultancy Econometrix in March 2012 pointed to an $US18 billion annual boost to GDP and 700,000 associated jobs that would come from the exploitation of a 50 trillion cubic feet gas resource over 25 years. But, as mentioned earlier, there is a long way to go before South Africa can count on that sort of fillip.
The point here today is that Challenger is in the thick of things, not that its current market price of 9.8c a share for a market capitalisation of $32 million reflects that.
Challenger was on to the potential of the Karoo Basin early and is currently waiting on the award of an exploration licence covering 323,700ha. It is in good company, too, with other early movers Shell and the Dublin and Toronto-listed Falcon (in a joint venture with Chevron) also waiting on licence applications in the basin.
Although the Karoo is mainly semi-arid sheep country, with some game parks and some game hunting lodges here and there, South Africa has taken the controversy around hydraulic fracturing as seriously as anywhere else. As a result, a moratorium was put on the practice in 2011. It was lifted in September 2012 but the regulatory framework under which fracking and its use in the Karoo will occur has yet to be put in place.
Much of last year was taken up by the regulatory authorities seeking out best practice elsewhere in the world.
That consultation process closed in October and the industry is hoping that the technical regulations will be published soon, clearing the way for Challenger and its big oil and gas neighbours to get their licences, or exploration rights, as they are called in South Africa.
Whether that happens before the South African election in May remains to be seen. What is known is that President Jacob Zuma has come out strongly in support of the potential leg-up that could come from success in the Karoo, as has his ruling African National Congress. The ANC is said to be facing its toughest test in 20 years at the polls because of disenchantment over slow economic and social progress, but it remains widely tipped to win.
In his state of the nation address last month, Mr Zuma said that the development of petroleum, especially shale gas, would be a game-changer for the Karoo region and the South African economy.
“Having evaluated the risks and opportunities, the final regulations will be released soon and will be followed by the processing and granting of licences,” Mr Zuma said.
The 2014 election manifesto of the ANC echoed that comment: “The pace of oil and gas exploration, including shale gas exploration, by the state and other players in the industry will be intensified as part of the country’s effort to ensure national self-sufficiency and energy security while promoting environmental sustainability.”
None of that is to suggest that the shale gas hunt, and the use of fracking techniques, has not been the subject of opposition in the rainbow nation. And it is reasonably well organised. But given the macro-impact success in the Karoo would have on South Africa, it is hard to see the government doing anything but encouraging the industry, including Challenger, from seeing just what might be locked up in the Karoo’s shales. Challenger’s area of interest in the Karoo surrounds a gas exploration well drilled in the 1960s by the national energy company. It was targeting conventional reservoirs in a standard vertical hole and flowed gas to the surface from what was interpreted to be fractured shales. Not interesting at the time, but real interesting nowadays.
More than that is that the gas zone was from one of the upper shale zones in the Karoo, not the lower zone on which the IEA’s 370 trillion cubic feet estimate was based because it was considered to have had a higher amount of the organic material needed to cook up a big gas resource. So, if anything, the Challenger ground comes with upside to the IEA estimates.
That should make it all the easier for Challenger to find a partner with deep pockets, and the right technical qualifications, to join forces in the Karoo hunt. That is a potential near-term news event that would force a re-rating of Challenger. The more immediate news event which will get things jumping is the granting of the exploration rights.