I have done a transcript of the interview for anyone interested:
This is Michael Avery and you are listening to an interview I conducted for classic business on classic FM 102.7
The shale gas revolution is attracting global investors into the country as the government realises finally, that South Africa's energy needs are of paramount importance to address poverty and unemployment.
One of these companies is a relatively little known small cap resource company. Relatively little known in South Africa. It's on an investor road show in the country at the moment to educate potential investors about who it is, what it's doing, and what its investment story is.
Challenger Energy is a public company listed on the ASX and is presently focussed on that world class shale gas play in the Karoo basin and I'm joined now by CEO Robert Willes.
MA: Hi Robert, how are you doing?
RW: I'm very well thank you.
MA: Now the fracking exploration moratorium was lifted recently. Tell me about the investment case and what Challenger is doing in the Karoo?
RW: Ok Well thank you. Challenger actually has a subsidiary called Bundu. Bundu Gas & Oil exploration. Bundu was the first company to apply for an exploration right in the Karoo. So they applied in 2010 current application for 1 million acres. That’s about 400,000 ha. So a pretty large area. And that application area is around a well that was drilled in 1968 by SOEKOR, and
the reason that area was picked was because that well, what we tend to term the discovery well, when the drilled that well in 1968 it actually flowed gas to surface, took quite a gas kick and flowed gas to surface for almost 24hrs .
MA: So that didn’t even require any hydraulic fracking to stimulate the gas flow.
RW: That’s correct, that was a vertical unstimulated well. So this an extremely positive sign, most encouraging sign for the potential of gas in the Karoo.
MA: What do you still require from a permit and licensing perspective?
RW: At this point in time none of the companies that have applied have as yet received an exploration right. We are all in that place, we are all waiting for the exploration rights to be processed by the Government and awarded. Now that will give us the right to commence exploration, without that nobody can go and do any activity on site. There will undoubtedly be further permits required under the environmental legislation before we can go on and drill wells and particularly conduct any hydraulic fracture stimulation. What is occurring at the moment is that the Government is finalising a set of what they call the technical regulations. This is effectively going to regulate those activities. The regulations were put out in draft form in the final quarter of last year. I understand from what minister Ramatlhodi said last week that they will do consultation on that either this month or next month and hope to finalise the regulations after that. Once those are finalised we will have a much clearer idea what exactly permits are required in terms of moving forward.
MA: Well right now it’s on the starting blocks and everyone is looking forward to the exploration phase and to actually get going. Which other companies are we talking about the bigger players. I think you are probably one of the more obscure players in the Karoo certainly for a lot of South African listeners out there?
RW: Well you are right. As I mentioned we were the first company to apply for an exploration right. But very shortly thereafter Shell and a company called Falcon, which is probably not terribly well known but is a larger company, applied for exploration rights essentially all of the area around us. Falcon then subsequently announced a partnership with Chevron. So effectively we know have Shell and Chevron represented across the vast majority of that area that the industry considers prospective. So that puts Challenger in quite an interesting position as really the only junior company and effectively if one is interested in investing the only company that is a pure play on this investment.
MA: With some fantastic acreage having a look through your investor presentation document you really are right in the thick of things. Which is mouth-watering indeed! Tell me a little more about Challenger. Who are your major shareholders and there is a real wealth of experience in the management team there as well?
RW: Yes that is right. Our shareholders, we have a small number of high net worth shareholders who collectively own about 20% of the company. You will see them on the shareholder register under various nominee names. They have been extremely supportive throughout the process since I joined the firm about 18 months ago. You are absolutely right. The board and management team have some considerable experience. And I must admit I sat down and added up the collective years of experience the other day and I think I stopped at 177 years and thought maybe I was feeling a little old! But you will find the board have a quite wide ranging experience. I spent 24 years with BP for example. You will find others who spent long periods with companies like Exxon, BHP Billiton and also a lot of experience with junior companies as well. Also involved in shale gas exploration in the US for example.
MA: Bill Bloking I think some of our listeners might be familiar with. He is quite well known in that space.
RW: Bill Bloking for example is quite well known in that space. He and I have known each other for an awfully long time since he was with BHP Billiton. In fact we worked together fairly recently on a company called Eureka Energy which had a fascinating positing in the Eagleford shale in Texas which was in fact taken over before we could get too much further with that company. I recently joined the board of a company called Buru Energy in Australia which has a very significant and exciting positing in unconventional gas in WA.
MA: Now we have had quite a well-publicised legislative issue, if I can call it that, around the minerals and petroleum resources development ACT. It has been withdrawn by the new minister and the Government is re-looking at it. It allowed 20% free carry for the state in oil and gas ventures up to a further 80% over and above that and up to 100% with to-be-discussed terms. Does that make you nervous at all? Are you concerned? Clearly not because you are here trying to drum up support?
RW: Well yes. The concept of amending the MPRDA had been around for a while. I think the industry was a little surprised by some of those terms that you’ve mentioned that were suggested in the final quarter of last year. The legislation was passed through Government before the last election but as you say was not signed off by the President. My understanding is that the new Minister, Minister Ramatlhodi has asked the President not to sign off on that legislation because he wishes to review it to basically understand it’s appropriateness for the oil and gas industry. My understanding is that there now is growing understanding of the benefits that an oil and gas industry could bring to South Africa and they need to make sure that the terms are appropriate to encourage that. Now again my understanding at the moment is that a lot of work is going into this, there has been a lot of input from industry as well. The minister was talking about what he termed I think a “Laboratory” which is a think-tank in other words that I think has been about a 6 week process and is expected to finish up fairly soon. So we don’t know as yet exactly what is going to come out from that process in terms of revised terms but that there is general expectation that these terms are going to be rethought and represented in a manner that is more appropriate to encourage, and I’m not just talking about the shale gas here but this obviously impacts off shore exploration as well and that is a very expensive game drilling off shore wells.
MA: Yes and we are trying to position ourselves as a bit of a logistics hub in the new scramble for some of that new oil and gas that we’re finding both on the east and west coast. Unfortunately fracking has had controversy that has followed it through the states despite the huge benefits that the US economy is receiving as a result of becoming so energy independent. Do you see significant threats from the environmental lobby over and above what we have just discussed around the legislative environment?
RW: I think it would be fair to say that there is a robust debate should we say both pro and con as far as hydraulic fracturing is concerned. That is not a unique situation in South Africa. We do see that around the world pretty much where this is proposed. Perhaps to some less extent where some of the benefits of this have really been felt. I think it is a healthy thing that people should be able to express their views and try and understand what it is that has been proposed. We are very much looking forward to being part of that stakeholder consultation once the exploration rights are awarded.
MA: Robert, when we look at a project of this size and scale. What sort of employment benefits does it offer to South Africa? We are grappling with some major employment issues at the moment.
RW: Well I think this is a very important point. I think the first thing to say is the US energy information administration has ranked this basin number 8 in the world with a figure of something like 370 trillion cubic feet technically recoverable gas. That may not mean a lot if you are not ofay with oil and gas terms or metrics.
MA: Mossgas was started on 1 trillion.
RW: 1 trillion exactly. 1 trillion cubic feet would typically be enough to run a 1000 megawatt base load power station for 20 years. So if you take something like Kusile or Medupi I think they are around about 5 gigawatts each, 5tcf would run one of those for 20 years. So even if the ultimately recoverable gas, the economically recoverable gas turns out to be less than that, it can be very significant. If we look at the impact that could have on South Africa and the broader economy there is a study that was done a couple of years ago by an outfit called Econometrix which you may be familiar with. They did some modelling and they looked at the impact of 2 hypothetical development scenarios. One was a 20TCF development and the other was 50TCF development. Much less than the headline numbers than the IA are talking about here. To give you an example the 50TCF scenario for example they estimated would add something like 200 billion rand per annum to GDP in South Africa and create something like 700,000 sustainable jobs. This is not all in the upstream obviously, but in terms of the flow on benefits into the broader economy. These are the sorts of the things have experienced in the US. So the potential for SA is very substantial.
MA: When one looks at accessing such an interesting pure shale play as yourself you’ve got that listing over on the ASX are there plans for a secondary listing here in South Africa?
RW: I have actually been asked that a number of times. I think it would probably be fair to say that whilst at the current time we have no firm plans to have a JSE listing it is something that is on the agenda and something that we may consider at the right time.
MA: That was Australian listed Challenger CEO Robert Willes selling the compelling shale story on classic business.
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