Within the next two decades, with provisos in regard to the regulatory environment as well as the extent of exploration and discoveries, South Africa’s energy space could be saturated with oil and gas production, and the resources may just become one of the top contenders to replace minerals such as gold as one of the country’s main contributors to GDP. This is according to acting CEO of Petroleum Agency South Africa (PASA), Lindiwe Mekwe.
‘Oil and gas development is, however, still in the exploration phase if you compare it with the established state of the minerals industry. But the results to date suggest that South Africa has large pockets of both these resources, both on- and offshore,’ she says.
Proven offshore reserves include Block 9 FO and FA-EM, both of which are south-coast gas and condensate fields operated by PetroSA, which is the government’s national oil company that undertakes exploration and production. PetroSA is also involved with Block 2A, off the west coast, in partnership with Sunbird Energy. Onshore, there are proven reserves in gas fields operated by Tetra4 in Virginia in the Free State; in the Waterberg region of Limpopo by Anglo; and a discovery by Badimo Gas/Kinetiko Energy in Amersfoort, Mpumalanga.
The role of PASA is to regulate these and other such operations, given that it is tasked to perform four major functions, namely the processing of exploration rights applications; (and) production rights applications; collecting and analysing geological or geophysical petroleum technical data; and the issue of technical co-operation and reconnaissance permits. ‘It is only through this data that we are able to determine and process how much on- and offshore reserves exist, advise on investment and help mitigate risks,’ says Mekwe.
The sector presents an excellent casefor investment, especially in the case of shale gas. According to the US Energy Information Administration (EIA), South Africa has some of the largest potential shale resources in the world, beneath the Karoo. The EIA estimates the potential resource to be some 380 Tcf, although estimations by PASA puts the figure around 205 Tcf, according to Mekwe.
‘The recent discoveries of major gas deposits in Mozambique also sends a very positive message for our east coast, while the Namibian discovery of gas suggeststhat our west coast will be just as fruitful along the Orange river basin – believed to be an extension of the Namibian fields,’ she adds.
There are challenges, however, with delays in the enactment of the new Mineral and Petroleum Resources Development Act (MPRDA). ‘We expect an announcement by the Minister in April that will see movement on enactment of the bill. It currently sits with the National Council of Provinces, which will then pass it onto the National Assembly before being presented to the President. The enactment of the bill will hopefully encourage optimum exploration activities by many operators as soon as the act is implemented,’ says Mekwe.
Such regulatory uncertainty has resulted in investors being hesitant to move from the exploration phase to production until they have clarity on the impacts of the bill on their respective jurisdictions.
A further challenge is the lack of infrastructure, which hampers oil and gas development projects. ‘The government is, however, committed to developing oil and gas infrastructure over the forthcoming 10 to 15 years,’ says Mekwe.
The geological risk associated with exploring for oil and gas in South Africais considered high, which is why equity funding is yet another challenge, especially for local operators. Currently, the fiscal regime applicable in upstream oil and gas comprises fees related to exploration; corporate income tax; royalties; fiscal stability agreements; and an upstream training trust.
The latter, which is related to training, was introduced by PASA as a term and condition of compliance to the MPRDA.
‘We see this as an imperative especially as it naturally relates to transforming the industry. But again, as most operations are in the exploration phase, the majority do not actually have local participants,’ according to Mekwe.
‘We are in constant engagement with the industry to look at transformation elements as a legislative requirement and as a compliance matter to achieve the targets set for ownership, procurement and enterprise development.’
Section 2D of the MPRDA emphasises that there should be substantial and meaningful employment opportunities for people from historical and disadvantaged communities.
Investors are aided by a set of guidelines developed by the agency. There is assurance that companies have a two-year adjustment phase to ensure the inclusion of transformation and BEE participants.
In October 2017, PASA also hosted a transformation colloquium, the purpose of which was to call on the industry – including international oil companies,local stakeholders, legal firms, traditional leaders and the Minister – to share ideas on how to ensure the mandate of transformation is fulfilled. The colloquium is set to become an annual event.
‘It has always been a requirement during the production phase to ensure that historically disadvantaged companies and employees are on board. This means ensuring at least a 10% quota, as well as a 10% participation by the state, usually exercised by PetroSA,’ says Mekwe.
She adds though that there is a decent voluntary effort by the oil and gas sector to engage with BEE companies. In cases where these companies are unknown to the agency, introductions are made through applications and submission of the parties’ agreements.
‘Companies are given the latitude to look for their own partners, and we are not prescribing how historically disadvantaged business are funded,’ says Mekwe. ‘We’re more concerned with the validation of those businesses, although we do look at financing terms more from the perspective of whether it makes sense for the companies to work together.’
The empowerment of women is also strongly factored into this scenario. PASA supports initiatives by Women in Oil and Energy South Africa, and wants to see more female stakeholder participation in particular.
‘Although we have representatives in every department of the sector, it isn’t enough yet to be impactful. But it is early days. It remains a work in progress but efforts would be advanced quicker if our male counterparts showed support and understanding that women are worthyt o hold executive portfolios.’
The number of downstream opportunities that can be created is also bountiful territory for female participation. Investors will be largely looking at refining, processing, supply, distribution, retail and logistics. Opportunities will be not just from South African-sourced production but also as a result of oil and gas from neighbouring countries, which Mekwe anticipates will be mostly refined in South Africa.
With regard to operating in the sector,the regulations that must be adhered to are the MPRDA; terms and conditions of exploration/production rights that incorporate good petroleum industry practices; and also those in respect of matters that find their origins in the Liquid Fuels Charter; the National Environmental Management Act; the National Water Act; the Mining Titles Registration Act and the Mine Health and Safety Act.
The licensing regime currently is on a first-come, first-served application basis, but when the new bill is passed, applications by invitation will replace this process.
‘Everyone knows that oil and gas are critical energy resources,’ says Mekwe. ‘The Petroleum Agency is in full support of those entering the market and we will go to all extents to ensure that our government and policy-makers sustain the sector for the benefit of all involved.’