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Systems Engineering in scenario based research: A shale gas field development study

Pieter W Stoker Faculty of Engineering, North-West University

piets@lantic.net; 083 4422112

Copyright©2013 by PW Stoker. Published and used by INCOSE SA with permission

Abstract

It is reported, (Department: Mineral Resources, 2012) that the Karoo basin in South Africa

may have considerable technically viable shale gas resources. Even if a small percentage of

this resource is commercially viable (30 trillion cubic feet Tcf), development of the resource

will have a marked positive impact on South Africa’s economy, including job creation. The

report indicates many uncertainties and further work to be done. It is noteworthy though,

that the main recommendation of the report was announced by the Minister (Engineering

News, 2012), namely lifting the moratorium on exploration, while not yet allowing hydraulic

fracking to commence.

Against this background the paper reports a scenario based research project whereby the

Systems Engineering approach was followed to compile a System Development Specification

for a Multi-Well Pad (MWP), it being the lowest level “economic building block” in the

development of a shale gas field.

A system design was completed of an imaginary shale gas field. The project was set in a real

world scenario, which was designed with reference to the science of Scenario Modelling. A

narrative normative scenario, in the form of a Stakeholder Requirement Statement (SRS),

served as input to the system design process. The output of the process was documented in

a System Development Specification (SDS) for the development of shale gas in the Karoo.

Three scenarios were identified, but only one was studied, namely generation of 9.6 GW

electrical capacity using shale gas. The rationale behind this scenario was the replacement

of nuclear power, as contemplated by IRP2010, with power from shale gas.

It was found that power from shale gas could be delivered to the grid at R1/KW-h, including

CO2 taxation and healthy Internal Rate of Returns (IRRs) at multiple business levels that

would attract strategic investments in such business opportunities.

It was further found that the capital investment for shale gas power is approximately 31% of

that required for the same capacity generated by nuclear.

The paper concludes that Scenario Modelling, combined with Systems Engineering, offer a

powerful methodology that Government could use to determine the future of shale gas

development in South Africa.

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Introduction

To arrive at a credible shale gas development scenario, the underlying theory of Scenario

Modelling is discussed. Elements of Systems Engineering methodology is then mapped onto

the Scenario Modelling process, resulting in a scenario description couched in system

engineering terms. The outcome of this process was captured in a “Stakeholder

Requirement Statement”, included as Appendix A.

Interesting examples and some findings of the study are presented next, more specifically

system delimitation, functional analysis, shale gas field concept design, definition of

concepts and economic feasibility modelling.

Finally the paper draws conclusions in respect of the power of combining scenario and

Systems Engineering processes, including the role that such could play in support of

Government planning, policy and legislative outcomes.

Scenario based research – an overview

Herman Kahn, a futurist and military strategist, introduced scenario methodology as a

strategic planning tool around 1950. (www.hudson.org, accessed 11 April 2013). The

methodology has since developed markedly. A thorough overview of recent developments

in the theory of scenario methodology is presented by Kosow and Gassner, 2008. Key

findings of their overview are reported here and serve as basis for the shale gas scenario

study developed in the next section.

As to what a scenario is, the authors state a description that is implicitly shared by many

proponents, namely “a description of a possible future situation (conceptual future),

including paths of development which may lead to that future situation”. Kosow et. al. 2008,

p11.

Scenarios are not claimed to represent reality. They are hypothetical constructs of possible

futures, based on present knowledge. Scenario studies are distinct from prognosis – the

latter being an extension of the present to yield an expected situation in the future.

A plausible view of the concept “future” is that it is malleable – suggesting that the course of

future events is neither predictable and controllable nor chaotic, uncontrollable and

random. It upholds that intervention strategies could contribute to shaping the future. They

should be devised by those who can take action in accordance with their goals and decision

making processes.

Scenario methodology pre-supposes that numerous different alternative futures are always

possible. Ideally a scenario study should span the space of all possible futures. They are not

scientific in the true sense, but should always conform to criteria of good scientific work,

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such as logical consistency, a clear description of scope, an explanation of premises, and

transparency.

The purpose of scenario studies is to “generate a body of orientational knowledge which

can serve as a compass for lines of action in the present” Kosow et. al. 2008, p13.

Scenarios serve several functions:

• Generation of knowledge about the present and likely future state of affairs and the

limits of such knowledge, specifically unpredictabilities, gaps, dilemmas and

uncertainties.

• Facilitation of communication, based on the exchange of ideas between persons

with different perspectives.

• Aiding decision making and goal formulation. Questions such as “where do we want to

go from here?” and “what do we hope to achieve?” can be informed by scenario

studies. Normative ideal images of the future are created by scenarios.

• Examination of the potential effectiveness of alternative strategies. Scenarios serve

to test the reliability, robustness, and effectiveness of policies.

A key objective of the Kosow study was to find the “lowest common denominator” between

the multiplicity of scenario methods. The authors found this in the form of 4 phases through

which any scenario study should progress:

• Phase 1: Identification of the scenario field. For what purpose is the scenario to be

developed? What are the issues? What must be integrated? What is outside scope?

• Phase 2: Identification of key factors. Define the key factors or descriptors of the

scenario. They should describe the scenario field and should provide the means for

the scenario field to impact the world around it.

• Phase 3: Analysis of key factors. Key factors are subjected to analysis to find what

possible future characteristics are conceivable. Analyses contain intuitive and

creative elements, aimed at envisioning the future development of key factors.

• Phase 4: Scenario generation. Experience suggests that it is good practice to

generate 3 to 5 different scenarios for any one study. For example, “Status quo

scenario”; “Go for it scenario”; “Doom and gloom scenario”; “Pie-in-the-sky

scenario”.

A further objective of the Kosow study was to identify a framework for characterising the

wide spectrum of scenarios found today: At the highest conceptual level scenarios could be

characterised as either explorative or normative and either qualitative or quantitative.

Explorative scenarios investigate “what will happen if” questions. They start with the

present and contemplate the future should the “if” materialise.

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Normative scenarios investigate “what do we want the future to look like” questions. They

start with the future and contemplate what we should do in the present to realise the ideal

future.

Quantitative approaches use mathematical constructs and models. Qualitative approaches

rely on narrative techniques and logical argumentation. Obviously hybrid approaches are

also commonplace.

It is appropriate in this summary of scenario methodology to include a few words on scope.

Scenario complexity should be limited to allow meaningful synthesis. (Kosow et.al. 2008

p35) reminds that “Their aim, after all, is to keep numerous different factors simultaneously

in view in order: 1) to observe their interactions and 2) to be able to develop overall images

of future situations”.

As with any other research instrument, criteria are needed against which the quality of

implementation of scenario methods could be determined. These are summarised by Kosow

et.al. as:

• Plausibility. Developments presented must be regarded as possible. The path to the

future must be conceptually feasible.

• Consistency. Development of factors within a scenario must be consistent with one

another. They should be mutually supportive and not contradict one another.

• Comprehensibility and traceability. Enough detail to be comprehensible. Avoid

excessive detail which could cloud comprehensibility due to complexity.

• Distinctness. Alternative scenarios in a given study are clearly distinguishable.

• Transparency. In defining scenarios, it should be clear who decided or carried out,

what, why and how.

• Degree of integration. The extent to which a scenario integrates the interactions of

factor development on different levels should be provided. Are causal relationships

accounted for?

• Quality of reception. Scenario should be readable and understandable, also to the

layman.

• Participants. Participants/stakeholders should be complete and credible.

Three categories of scenario techniques are identified by the authors as follows:

• Trend extrapolation. “The scenario is supported primarily and even exclusively by

trends which already exist or have already existed and by their projection into the

future”. (Kosow 2008 p44)

• Systematic-formalized scenario techniques. The departure point of these scenario

types is a clear definition of key factors. These are then varied and combined with

one another to provide a bounded spectrum of possible future scenarios.

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• Creative-narrative scenario techniques. These techniques are characterised by the

explicit implementation of creative techniques, intuition, and implicit knowledge.

The scenario process itself becomes a communication process and/or a participatory

approach. Three sub-techniques are identified: Intuitive Logics, Morphologic Analysis

and Normative Narrative. The latter is ideal when a desirable normative future is

contemplated. As such it can be viewed as an explorative technique.

Hybrids of these techniques are often found. They further do not stand in isolation and use

many established and proven techniques and methods, for example trend analysis, cost-

benefit analysis, models and simulation, and many more. In this paper, scenario

methodology is supported by the principles and approach advocated by Systems

Engineering. This will be done with reference to a shale gas field case study.

Shale gas scenario description

The broader context

The policy adjusted Integrated Resource Plan of 2010, (IRP2010, May 2011) envisages by

2030: new generation capacity from coal (6.3 GW or 15%); nuclear (9.6 GW or 23%); Import

Hydro (2.6 GW or 6%); Gas Combined Cycle Gas Turbines (2.4 GW or 5%); Peak Open Cycle

Gas Turbines (3.9GW or 9%) and Renewables (17.8GW or 42%, made up by wind 8.4GW,

Photo Voltaic 8.4GW and Concentrated Solar 1GW).

IRP2010 is vague on where gas feedstock would come from. It states that a decision on gas

infrastructure should be made soon, citing that a Liquefied Natural Gas (LNG) terminal

needs to be developed, “unless a suitable domestic supply is developed.” (IRP2010, p16).

Gas generation is planned to be on-line in 2019.

With reference to the improvement of South Africa’s infrastructure, the National

Development Plan (NDP Executive Summary - not dated) calls for “Constructing

infrastructure to import liquefied natural gas and increasing exploration to find domestic gas

feedstock (including investigating shale and coal bed methane reserves) to diversify the

energy mix and reduce carbon emissions.”

On the development of economic infrastructure the plan suggests that exploration should

commence to determine economically recoverable coal seam and shale gas reserves. If

shale gas reserves are proven to be exploitable in an environmentally sustainable way, gas-

to-power projects should be fast tracked.

On the subject of nuclear power the executive summary is silent. However the full plan

(NDP 2011) calls for the re-assessment of the desirability of nuclear power investments,

stating that financing of nuclear projects will pose major challenges. The plan requires that

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all possible alternatives to nuclear be explored “including the use of shale gas”. (NDP 2011

p147). Replacing nuclear by gas would require 9.6GW CCGT (Combined Cycle Gas Turbines).

Chapter 4 of the NDP elaborates on South Africa’s carbon intensity. It states that shale gas

could make a meaningful contribution to reduce the country’s emissions, suggesting that

gas could contribute about 20GW to the grid. (It is interesting to observe that this number

equals the allocation to nuclear plus the amount of coal generation that will be phased out

in the foreseeable future, namely 10GW). The plan suggests that shale gas be used only if its

environmental costs and benefits outweigh the current costs and benefits associated with

the county’s dependence on coal (or with the alternative, nuclear power).

Designing shale gas scenarios the SE-way

Kosow’s phased approach to scenario development is subsequently interpreted and applied

in the context of Systems Engineering science. The study reported in this paper was done as

an integral part of a post graduate course in Systems Engineering.

Phase 1: Identification of the scenario field. The purpose of developing shale gas

exploitation scenarios is to assess the feasibility of this resource as a means to supplement

South Africa’s energy needs. As evidenced by the background information stated above,

high level Government policy documents make far reaching proposals on the future

possibilities of shale gas (albeit subject to further study). The question is whether the

authorities really understand what the implications are of pursuing such a solution?

Scenario methods, specifically the Normative Narrative technique, will contribute much to a

better understanding of the implications of such proposals. They could provide visibility in

respect of business drivers, support infrastructure needs (including their integration and

management), environmental issues, and many more.

Note that a scenario of NOT exploiting shale gas was considered outside scope. In

identifying the scenario field, the overarching issue was – what are the requirements of key

stakeholders in respect of a future shale gas project, and how can these requirements be

met?

Phase 2: Identification of key factors. According to the systems approach, key factors which

will influence the development of shale gas should be ascertained from stakeholders. The

latter was identified as National, Provincial and Local Government; shale gas project

sponsor(s), licensee, licensor, local communities, suppliers, clients, workforce, anti-groups

and the media. These stakeholders each have their own requirements and needs. For

example, Government wants affordable electricity, a sustainable environment and job

creation; sponsors require return on investment; local community wants employment and

so forth.

The Systems Engineering approach is widely recognised to be particularly strong in the area

of stakeholder requirement definition and analysis. The methodology also excels in

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“translating” stakeholder requirements into a system solution that would best satisfy and

balance the needs of stakeholders. Implementing the systems approach in the scenario

process was thus accomplished in the form of:

• A Stakeholder Requirement Statement (SRS), providing a narrative normative

description of the scenario field as well as key factors as viewed by stakeholders.

Taking the clue from the NDP, namely that the exploitation of shale gas requires

further study, the SRS also requires specific work to be done to provide visibility and

substance to identified factors.

• A System Development Specification (SDS), essentially a technical baseline and road

map to realise stakeholder requirements and needs, using a program-unique format.

The SDS served as a vehicle to document the output of phase 3.

Phase 3: Analysis of key factors. Three Systems Engineering processes are applicable in this

phase: Stakeholder Requirement Definition, Requirement Analysis and Architectural Design.

In the shale gas case study intuitive and creative elements found their way into concept

definitions, for example concept of business operations, concept of social responsibility,

concept of deployment, concept of environmental responsibility, concept of investor return

and concept of localization. Quantitative analysis focussed on the characterization of the

business case. Of course the latter depends on the utilization concept of the gas resource

and the architectural design underpinning such utilization. This is best done in the context of

a number of defined scenarios, as suggested by the next phase of scenario methodology.

Phase 4: Scenario generation. Scenario generation is not a linear process. It follows from the

above mapping of the systems approach onto the scenario methodology process that it is

iterative. Scenarios drive alternative business cases. Architectural design considers

alternative solutions, aimed at optimising the business case associated with a particular

scenario.

The shale gas case study relied on the Normative Narrative technique. An imaginary shale

gas field was created in a real world setting. Alternative utilizations of the gas resource were

subsequently considered, again with reference to real world possibilities.

Figure 1 summarises the above iterative interaction between Systems Engineering and

Scenario Modelling in the context of the four phases advocated by the proponents of

Scenario Modelling.

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Figure 1. Iterative interaction between Scenario Modelling and Systems Engineering

Shale gas scenarios defined

The processes depicted in Figure 1 lead to the definition of the following overarching

scenarios:

• Scenario 1: “Shale Gas Field as Independent Power Producer” (SGF-IPP). In this

scenario the output of the entire gas field is converted to electrical power and fed

into the grid.

• Scenario 2: “Shale Gas Field output to Petro-SA” (SGF-PetroSA). Output of the entire

gas field is fed to Petro-SA’s Gas-to-Liquid (GTL) facility in Mossel Bay.

• Scenario 3: “Combination of S1 & S2” (Combo). This scenario provided for a flexible

combination of scenarios 1 and 2.

As noted earlier, the study was done as an integral part of a post graduate course in Systems

Engineering, using an inductive teaching method. Approximately 20 students enrolled in the

course. As departure point of the course the class was confronted with a “Stakeholder

Requirement Statement for the development of a shale gas field in the Karoo”. (Refer

Annexure A). Please note that the information contained in this document serves the

academic objective of Systems Engineering teaching. Nothing contained in it bears any

resemblance to reality or should be construed to represent a proposed project.

Students were required to follow the systems approach and compile a System Development

Specification (SDS) of a shale gas field, using Multi-Well Pads (MWPs). The latter was

identified as the “lowest level economic building block” in the development of a shale gas

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field system. Due to time constraints, the SDS was developed for scenario 1 only, namely

SGF-IPP.

Some examples and findings of the study are presented next. Names of students who

completed the course are listed in Appendix B and are hereby acknowledged for their

contributions to the contents of this paper.

A Systems Engineering approach to shale gas development

System delimitation

The System of Interest (SOI) for scenario SGF-IPP is shown in Figure 2.

Figure 2. Identification of the System of Interest: Scenario SGF-IPP

The Multi Well Pad was identified as the lowest level economic building block of the System

of Interest. Operations support systems include well drilling systems, fracking systems and

maintenance support for these systems. Community systems include towns affected by the

project, land owners and communities residing in close proximity to MWP operations.

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The systems approach calls for thorough consideration of all elements comprising the SOI.

Furthermore, proper interfaces between the SOI and related systems need to be identified,

described and considered in the analysis of the SOI. The case study considered these issues

and documented their outcome in the SDS.

Functional analysis (Kleynhans, 2013)

As always, functional analysis was an effective tool to describe shale gas operations from a

life cycle perspective. Top level functional flow of shale gas life cycle operations is shown in

Figure 3.

Figure 3. Level-1 FA. Shale Gas Field Operations. Life cycle view

Multi Well Pad operations, mapped onto SGF operations, is shown in Figure 4.

Figure 4. Level 1 FA. Multi Well Pad Operations. Life cycle view

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Deeper level analysis then followed. For example, “conduct drilling operations”, shown in

Figure 5.

Figure 5. FA Drilling operations

Functional Analysis was finally “made tangible” by including pictures of real equipment, for

example Figure 6.

Figure 6. FA was supported by pictures of real equipment

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Shale gas field concept design

Kleynhans 2013, generated hypothetical locations of MWPs in the target shale gas field

identified in the SRS. Please refer to Figure 7. Shale gas field area is approximately 2,000

square kilo metre. The blocks show a 1km x 2.5km sub-surface footprint of a typical MWP.

The surface footprint of a MWP site is typically 1 hectare, or 0.4% of the sub-surface

footprint of the pad - a mere dot on the scale of Figure 7.

Figure 7. Hypothetical locations of MWPs. (Source: Kleynhans 2013)

Block clusters are arranged in configurations that are typical for a gas field. Obviously, in real

life the location of MWPs will be determined after thorough exploration of the field. Red

blocks indicate pads which are economically viable. Yellow blocks have the potential to

deliver economically viable gas, but are eliminated from further consideration due to one or

more of the following reasons:

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• They are located in in-accessible mountainous terrain;

• They are located in ecologically sensitive areas;

• The cluster is too small. Its Estimated Ultimate Recovery (EUR) does not warrant the

cost associated with its logistics. (Roads, water supply, power and gas lines).

The “physical presentation” of the shale gas field gives the scenario a “real life” feel.

Logistics design of the field as a whole was now possible. This in turn supported the

development of the business case for the gas field. Population demographics and statistics

of nearby towns Graaff-Reinet, Aberdeen and Willowmore were called on to analyse human

resource availability. The impact of operations on job creation, local infrastructure, wealth

creation and the environment were cast in a real setting, making analysis tangible, credible

and most important – pre-active. The latter stands in contrast to environmental impact

assessment, which is usually done much later in the system life cycle, as part of licensing.

Definition of Concepts

Definition of concepts as indicated by Systems Engineering practice relates to scenario

analysis in the sense that it provides for a high level description, a type of vision, of what the

future should look like. Concepts in Systems Engineering serve as frameworks within which

architectural design should be conducted to define a road map (System Development

Specification) to arrive at the conceptual targets.

Two concepts that were defined by the team are of particular interest: concept of business

operations and concept of social responsibility.

Concept of Business Operations

The SDS defined the following concept of business operations, underlying rationale being

the creation of many independent smaller businesses, each with an entrepreneurial

character. This in turn was designed to enhance job creation and spread the opportunities

and wealth that will emanate from the development of shale gas as widely as possible. The

approach advocated here stands in sharp contrast to a multi-national licensee following a

“winner takes all” strategy. The challenge of course is how to realise this “broad based

economic development” vision.

The SDS specifies:

a. “The Concept of Operations specified herewith reflects the requirements of the Shale Gas

Field (SGF) licensee. It focusses on operations relating to business management of the SGF

operation as a whole. b. The SGF business model requires the establishment of business units for the following

operations:

• Multi Well Pad • Drilling and Casing • Completion

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• SGF waste management services • SGF water utility • SGF gas utility • SGF electricity utility • SGF power station • SGF maintenance services • SGF road infrastructure • Environmental management and rehabilitation services • SGF materials, production and business management services • SGF personnel services

c. Business units identified in b) could be legal entities in own right. d. More than one service provider may be contracted for any one of the business units

identified in b), thereby encouraging competitive practices. e. Service, material, and such other exchanges between business units shall be at arms-

length, expecting each business unit to be profitable in own right. f. The licensee shall conduct shale gas field exploration and act as system integrator

responsible for overall operations, including Government liaison, liaison with

landowners, social responsibility, training, quality and such other expert services. For

these services it shall collect royalties, franchising fees or service fees as the case may

be.”

Concept of Social Responsibility

The challenge here was to break the paradigm that social responsibility is a “handout to the

poor”; a “deed of good” to the surrounding community. Based on the common knowledge

that education is the only means to break the poverty cycle, the SDS specifies the following

concept of social responsibility:

a. “As a statement of principle, social responsibility shall be earned by the community so

served. b. The licensee’s social responsibility shall be directed to education and training and the

creation of education and training opportunities for the communities in and adjacent to

the shale gas field. c. In lieu of b) social responsibility projects could include building of schools, upgrading of

the infrastructure of existing schools, hiring of additional teachers, teacher training

programmes, bursaries for tertiary education, building of adult training facilities,

building of artisan training facilities and providing financial support towards the

operation of such facilities. d. Success or otherwise of investments contemplated in c) is deemed to be a contract

between the licensee and its communities and shall be measured by monitoring pupil

grades, number of pupils trained, absence of teacher strikes, and other such indicators

of a stable and productive learning environment. e. Social responsibility investments shall not be made outside the domain of training and

education. f. In lieu of a), social responsibility investment shall be withdrawn if receiving communities

fail to deliver on the metrics specified in d).”

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Clearly the two concepts elaborated above support one another: The latter concept builds

human capacity and capability through broad base training and education. The former

concept assumes availability of educated and trained persons to embark on and follow

through on entrepreneurial business opportunities.

Economic feasibility modelling

MWP gas flow prediction is an important component of economic viability modelling.

Duman, 2012 analysed the economic viability of shale gas production in the Marcellus Shale

in the USA. He based his study on the widely used hyperbolic decline equation:

q(t) = qi*(1+b*Di*t)^(-1/b), where

q(t) = production rate at time t (m3/h)

qi = production rate at time = 0 (m3/h)

Di = initial nominal decline rate at time=0 (1/month); Typical value = .06

b = hyperbolic exponent; Typical value = .9

t = time (months)

Applying the above formula yielded a typical annual well production as shown in Figure 8.

Expected Ultimate Recovery (EUR) of the well over a 15 year period amounts to 133 million

cubic meters. It is possible to re-stimulate the well, say after 10 years. Duman reports that

this is an expensive undertaking, quoting re-stimulation cost to be in the order of 60% of the

original fracking cost. Re-stimulation would typically result in a renewed initial flow no more

than 40% of the original initial flow. This option was not considered in the economic

feasibility analysis.

Figure 8. Annual well production as per hyperbolic decline equation

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Gas price obviously drives the profitability of a MWP. (Kosow 2008) reports that gas prices

in the USA dropped from about USD10/1000ft3 (R3.20/m

3 at R9/USD) to around USD4-

5/1000ft3 (R1.30 - R1-60/m

3 at 9R/USD).

NERSA recently set a maximum price for piped gas at R117.7/GJ. Assuming a heat value of

36MJ/m3 for shale gas, this calculates to R4.21/m

3. The set maximum price caused an

outrage amongst gas clients, claiming that South Africa has one of the highest gas prices in

the world (http://www.fm.co.za/economy/2013/04/04/sasol-gets-its-way. Accessed 8 May 2013).

NERSA’s defence was that R118 is a ceiling price, and that consumers should negotiate a lower price

when contracting with Sasol.

Referring to the concept of business operations, the economic viability of two business units

are reported henceforth, namely the MWP and shale gas power station. (All values in 2012

Rand, and where converted to dollars, at R9/USD.)

Multi Well Pad

According to the business model, MWP operations are franchised by the system integrator

(entity licenced by Government to explore for and extract gas in a particular area). The

systems integrator provides training and technical support, including exploration results,

and receives an agreed royalty payment for these services. Payment amount is determined

as a percentage of gas produced.

The following assumptions were made:

• Well life time was 15 years with EUR per horizontal line=133 million m3.

• Well yield over time as per hyperbolic decline equation.

• 12 horizontal lines per MWP.

• Site preparation, drilling, casing and completion cost are capitalised and expended

up-front: Rm 801 in total.

• Carbon tax at R120/ton CO2 equivalent, increasing at 5% per year for 6 years.

• MWP royalties payable to franchisor: 25%.

A discount percentage on NERSA set maximum price was then calculated which yielded a

real Internal Rate of Return (IRR) of 40%. (Hurdle IRR for a MWP specified in the SRS). The

selling price of gas to the power station was thus determined at R2.86/m3.

Gas Power Station

Gas field output was piped to a central Combined Cycle Gas Turbine (CCGT) facility, located

near Aberdeen. The facility was sized to produce 9.6 GWe power. The idea was to

determine if the shale gas scenario reported herein could eliminate (or postpone for several

decades) the need for nuclear power.

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The following assumptions were made:

• 12-line MWPs were commissioned at a fixed rate of one per month.

• Unit size of CCGT set: 250MWe at USD1,200/KWe, or Rm 2,700 per unit.

• 40 units (total capacity 10GWe) were installed over a 15 year period.

• Facilities infrastructure for 40 units was constructed up-front at an overnight cost of

Rm 32,400.

• CO2 taxation as for the MWP.

Selling price of electricity to the grid was subsequently determined such that the total

investment in the project (Rb140.4) met a 10% real IRR. The selling price calculated to

1R/Kw-h. This price can be construed as the levelised cost of electricity for the shale gas

generation option. It includes CO2 taxation and a healthy real internal rate of return (10%)

that would typically be a pre-requisite for a private entity to enter the market.

Interesting to note the sensitivity of investor IRR hurdle rate on cost of electricity to the

grid: For a real IRR of 6%, it calculated to R0.915/KW-h

With the above ramp-up, the scenario gas field has a life time in excess of 20 years. Total

investment cost per KWe amounts to R14,000 (or USD1,555/KWe). Approximately 35% of

total investment cost (for the power station) will be made up-front, with the balance spread

over 14 years.

Compare the above with nuclear overnight cost estimates, ranging from USD4,000/KWe-

USD7,000/KWe. (IRP2010) estimates nuclear at USD5,000/KWe, more than 3.2 times the

amount estimated for shale gas by this study.

It all comes together in the System Development Specification

The Systems Engineering post graduate class of 2013 delivered many novel and innovative

solutions towards achieving the normative narrative scenario described in Appendix A. Time

and space does not allow reporting on all of them. System delimitation, functional analysis,

shale gas field concept design, definition of concepts and economic feasibility modelling

reported above serve as examples of work underlying concomitant requirements

documented in the SDS.

Referring to Figure 1, the Scenario Modelling process produced a Normative Narrative

description of the ideal future where shale gas is monitised in a responsible way. Systems

Engineering baseline documents, more specifically the SRS and SDS, where generated

iteratively with the Scenario Modelling process, thereby giving qualitative and quantitative

substance to both the ideal future scenario and the road map to achieve this ideal future.

The latter took the form of a SDS.

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In conclusion some of the “things that should be done now” to achieve the envisaged future

of shale gas development in South Africa are presented.

Conclusions

The paper makes a case for combining the sciences of Scenario Modelling and Systems

Engineering in an endeavour to influence Government planning outcomes, policy decisions

and legislative implementation of such policies. To this end, it is concluded that:

• Broad Based Economic Empowerment (BBEE, not BBBEE) could be achieved by

implementing the concept of business operations proposed in this paper.

• Follow-through on concept formulation using Systems Engineering tools such as

functional analysis, concept design and economic feasibility modelling, create a

credible baseline for pivotal economic drivers, such as the price of electricity as

informed by a particular technology.

• Narrative normative scenarios contemplate “things that should be done now” to

arrive at the ideal future. This is illustrated by the statement of fact in paragraph 2.3

of the SRS: “The Licensor has been mandated by the “Shale Gas Development Act”,

Act 23 of 2015.” Government could pursue such an instrument to achieve at least

some of the positive outcomes of shale gas development in South Africa, as

documented in the SDS.

References

Kosow H, Gassner R. Methods of Future and Scenario Analysis: Overview, Assessment, and

Selection Criteria. German Development Institute. Bonn, 2008. http://www.die-gdi.de

Electricity Regulations on the Integrated Resource Plan 2010 – 2030. Government Gazette

no. 34263, Vol. 551. Pretoria. 6 May 2011.

National Development Plan 2030. Executive Summary. National Planning Commission.

Department: The Presidency, Republic of South Africa.

National Development Plan. Vision for 2030. National Planning Commission. Department:

The Presidency, Republic of South Africa. November 2011.

Kleynhans E. Internal report. Faculty of Engineering, North West University. Vanderbijlpark.

May 2013.

Integrated Resource Plan for Electricity. 2012-2030. Department of Energy. Government

Gazette. Volume 511, Number 34263. Pretoria. May 2011.

Duman RJ. Economic viability of shale gas production in the Marcellus shale; indicated by

production rates, costs and current natural gas prices. Masters Thesis. Michigan Technology

University. School of Business and Economics. 2012

APPENDIX A

Stakeholder Requirement Statement (SRS) for the

development of the SGL shale gas field in the Karoo

1. Background

Shale Gas Limited (SGL) holds the shale gas prospecting and development

rights for area 013ER shown in Figure 1.

Figure 1. Source: Government Report - Investigation of Hydraulic

Fracturing: Report of the Working Group.

Area 013ER is approximately limited by (32.24.00.S;19.54.00.E, top left

corner) and (33.00.00.S;20.44.00.E, bottom right corner). Promising

exploration results have been obtained in the area around the N9

connecting Graaff-Reinet and Willowmore. The technical recoverable

resource of this area is estimated at 55 Trillion cubic foot (Tcf).

Commercially recoverable resource for the same area is estimated at

17.5%, or 9.6 Tcf. Consequently SGL will launch its first operations here.

SGL plans to establish a total of 400 multi-well drill pads in the area, with 6-

10 wells per pad. Assuming an Estimated Ultimate Recovery (EUR) per well

of 3 billion cubic feet, yields 9.6X10^12/3*10^9=3200 wells.

The purpose of this document is to record the requirements of all major

stakeholders in the above project. This will serve as a baseline for the

development of the identified gas field. The document will be presented to

a Systems Engineering Task Team (SETT) who will be requested to compile a

System Development Specification (SDS) for a Multi-Well Pad (MWP), the

latter being the fundamental “economic building block” of the venture.

2. Stakeholder requirements

Eleven classes of stakeholders have been identified. Their requirements are

documented herein under:

2.1 Sponsors

a) Sponsors in the context of this document are meant to be investors

and or institutions providing the initial capital for the project.

b) The sponsors require an Internal Rate of Return (IRR) greater than

20%.

c) The confidence level for attaining requirement 2.1.b should be

better than 90%.

2.2 Licensee

a) The licensee is SGL, an investment holding company which holds the

rights to explore and develop the 013ER gas field.

b) SGL has entered into a license agreement with the Department of

Minerals of the South African Government.

c) The license agreement imposes a multitude of obligations on SGL,

which the task SETT should consider in performing their work.

d) The sponsors hold SGL accountable for achieving the investment

performance specified in 2.1

The SETT shall:

e) Do a concept design of a MWP, using the approach and principles

advocated by Systems Engineering methodology.

f) Conduct an in depth analysis of the economic performance of a

typical MWP. It is proposed that the MWP is the lowest level

economic entity in the integrated development of the gas field.

Consequently it is envisaged that a MWP should have an IRR of at

least 40%.

g) Identify and specify the interfaces of the MWP to all related systems.

Related systems include (amongst others) the road access system,

electricity supply system, telecommunications system, water supply

system and community system.

2.3 Licensor

a) The Licensor is the Department of Minerals of the South African

Government.

b) The Licensor has been mandated by the “Shale Gas Development

Act”, Act 23 of 2015.

c) Apart from the requirements imposed by the act in b), the Licensee

shall be compliant with all other relevant legislation as outlined in

reference 5.a

The SETT shall:

d) Take the current and expected future legislative environment into

account when executing the work requested herein.

2.4 Adjacent communities

The SETT shall:

a) Propose means to enable communities in close proximity to MWPs

to share in the economic benefits of projects.

b) Investigate and recommend a business model which will effect 2.4a.

The business model may be based on a franchising concept.

c) Quantify the required investment to implement the business model

in 2.4b and community’s expected economic gains.

d) Propose a master plan to implement the business model in 2.4b.

2.5 Regional Government

a) Regional governments in the project area are concerned about the

impact which the development will have on the region’s

infrastructure, specifically roads, traffic, water and electricity supply.

The SETT shall:

b) Investigate the collective impact of the integrated project (estimated

at 400 multi-well pads) on the region’s infrastructure.

c) Propose a Concept of Operations (CoP) and a Concept of Support

(CoP) for the integrated project, covering its full life cycle including

phase-out and return to green field condition.

d) Make recommendations for future work to refine and implement

the two concepts designed in 2.5c.

2.6 National Government

a) National Government has set specific priorities for the project -

amongst others job creation, localization and broad based

empowerment.

The SETT shall:

b) Propose a Concept of Poverty Alleviation (CoPA) for the integrated

project, covering its full life cycle.

c) Estimate the expected direct and indirect financial gain that the

Fiscus would receive from the project.

d) Provide a Rough Order of Magnitude (ROM) of the investment that

will be required to upgrade the region’s infrastructure and

implement the various concepts.

2.7 Suppliers

a) Suppliers refer to all entities which are likely to supply equipment

and services to the project.

b) SGL have not yet had the opportunity to engage with this group of

stakeholders. The SETT is requested to note and document any

requirements that this group may have.

2.8 Clients

a) Clients refer to entities which are likely to buy the natural gas

produced by a MWP.

The SETT shall:

b) Develop a gas price prediction model, which will serve as input to

the quantification of a MWP’s IRR as required in 2.2f.

c) Perform ROM calculations to validate the realism of the output of

the pricing model for an electricity generation scenario using Open

Cycle Gas Turbine (OCGT) technology.

2.9 Workforce and labor unions

The SETT shall:

a) Identify, describe and propose resolutions to those project attributes

which have an important bearing on the wellness of the MWP

workforce.

b) Obvious “issues” falling in this domain include housing, sanitation,

training and education, health and health care, salaries and wages

and post-project livelihood.

c) Propose an interface management mechanism between SGL and

relevant labor unions.

2.10 Institutions opposing shale development

The SETT shall:

a) Conduct a structured interview with at least one anti-shale gas

organization and document their concerns and views.

2.11 Media

The SETT shall:

a) Prepare a press release on the project and its salient findings.

b) Depending on the success of the project, invite the press to sit in on

the final project presentation.

3. Verification

The SETT shall:

a) After analyzing and synthesizing the requirements set in SRS, either

recommend a change to or otherwise incorporate such requirements

into the SDS.

b) Define a means to verify each of the key requirements so included.

4. Notes

It was outline in the Module assignment that the work conducted by the

SETT will be presented at the INCOSE SA-conference in August 2013.

Herewith a provisional abstract of the conference paper:

“It is reported by (Department: Mineral Resources, 2012) that the Karoo

basin in South Africa may have considerable technically viable shale gas

resources. Even if a small percentage of this resource is commercially viable

(30 trillion cubic feet Tcf), development of the resource will have a marked

positive impact on South Africa’s economy, including job creation. The

report indicates many uncertainties and further work to be done. It is

noteworthy though that the main recommendation of the report was

announced by the Minister (Engineering News, 2012), namely lifting the

moratorium on exploration, while not yet allowing hydraulic fracking to

commence.

Against this background the paper reports a scenario based research

project whereby the Systems Engineering approach was followed to

compile a System Development Specification for a Multi-Well Pad (MWP), it

being the lowest level “economic building block” in the development of a

shale gas field.

The outcome of the research is not yet available, but will be included here

at a later stage.

The value of the paper to the INCOSE conference resides in the

methodology that was followed. Notions such as Stakeholder

Requirements, Concept of Operations and Concept of Support take on a

unique character in the set scenario. The paper further introduces a new

notion, namely Concept of Poverty Alleviation (CoPA), arguing that this

theme is of critical importance for South Africa”.

5. References

a) Investigation of hydraulic fracturing in the Karoo basin of South Africa.

Department of Minerals, RSA Government. (Available on efundi)

APPENDIX B

LIST OF SYSTEM ENGINEERING MASTER STUDENTS 2013