• Time to act

    As industry players await the release of the long-delayed draft amendments to South Africa’s resources legislation, the country should take note of the opportunities offered by a gas economy.

    Time to act

    South Africa currently has possibly the biggest development opportunity since the discovery of gold and diamonds. That’s according to Niall Kramer, CEO of the South African Oil and Gas Alliance (SAOGA), who argues that the economic acceleration enabled by oil and gas could be a game changer. ‘If we get these projects right, we’re not only looking at the direct impact but also at the demonstration effect,’ he says. Kramer adds that creating a gas economy could boost investment confidence on a scale not seen since the 2010 FIFA World Cup and is something the South African economy desperately needs.

    Kramer is hopeful that the final draft of the amended Minerals and Petroleum Resources Development Act (MPRDA), due for release in mid-2017, will provide some of the clarity the industry is waiting for. They have been waiting a long time. The amended MPRDA was published for comment in December 2012 and passed immediately before the 2014 general election. But soon afterwards it was returned to Parliament, by President Jacob Zuma, ostensibly because it did not conform to either South Africa’s constitution or its trade obligations.

    The oil and gas majors were unhappy with the initial draft of the MPRDA amendments. There were at least two critical areas of uncertainty. First, the draft legislation proposed that the state be allowed a free 20% ‘carried’ interest in any new project.

    PwC’s Chris Bredenhann points out that this sort of provision is by no means unusual. ‘It’s rooted in the idea that resources belong to a country and should deliver some local benefit. How you achieve that – through taxes, royalties, partial state ownership, or a combination of these – varies from one jurisdiction to another. But the principle is not contested and oil and gas majors are accustomed to working with these ideas,’ he says.

    A ‘carried interest’, he explains, is a percentage of ownership that is effectively free for the government. ‘It is “carried” by the exploration company and costs the state nothing,’ he says. But the 2014 draft went further.

    Resources lawyer Peter Leon points out that it entitled the state ‘to a further partici­pation interest [through] acquisition at an agreed price or production-sharing agree­ments’. He adds that, in the original formulation, this state share was ‘apparently unlimited’. Furthermore, it was not clear what ‘an agreed price’ meant nor how a deadlock will be broken where the state and the exp­­­loration company could not agree on a price.

    Luke Havemann of legal firm ENSafrica said the original 2002 legislation allowed the state to take an extra 30% owner­­ship above its free 20% carried interest. But the 2014 amendment placed no upper limit, which resulted in opposition politicians pointing to the possibility of 100% state ownership or ‘nationalisation’. Havemann said, at the time, that ‘expropriation was a more accurate term’.

    The second, related, issue was a lack of clarity about the BEE requirements for oil and gas projects. The amended Mining Charter was released in June 2017 and, controversially, specifies a target of 30% BEE ownership for the sector. In terms of the MPRDA, the oil and gas industry has argued that it was not clear whether this was a requirement over and above the state’s free carried interest. Havemann says that, even assuming that the state’s additional interest was limited to the 2002 level of 30%, the amended act could require as much as 76% of a project’s ownership to be in the hands of the government and local black stakeholders.

    Kramer explains why the issues are of such concern. ‘We’re not talking about boutique finance. Drilling a single offshore exploration well may cost US$150 million and no one is going to undertake that sort of expenditure when they don’t know how much they will own of anything they find.’ Kramer adds that no one knows how much oil and gas South Africa may or not possess, either offshore or shale gas in the Karoo. ‘The first thing we need to do is find out what we’ve got,’ he says. For this reason, while Kramer hopes even­­tually to see separate oil and gas legislation, SAOGA’s current priority is seeing the amended MPRDA passed in an acceptable form. ‘It must be commercially acceptable – reputable explorers will not take licences if it’s not,’ he says.

    In a perfect world, South Africa would enact separate, focused oil and gas legislation. But this is not SAOGA’s current focus. ‘Of course we want oil and gas regulation separated from the mining statute. But that’s not the priority right now. We can deal with this in future. What we need right now is legal and regulatory clarity,’ says Kramer.

    Although the final form of the MPRDA is yet to be seen, Bredenhann – who agrees that ‘this is not a good time to split the legislation’ (between mining and oil and gas) – says a recent presentation to the industry by the Petroleum Agency of South Africa suggests that the industry’s arguments had been effective.

    According to the presentation, there would only be a single provision for carried state interest, which would be constrained to 20% while the BEE requirement for early projects would be just 10%. These figures have yet to be confirmed but, being less onerous than the draft, they do fit with another point made by Kramer. The South African oil and gas industry framework is in its infancy, while mining is mature. ‘Gas provides 3% of South Africa’s energy mix while the world average is between 10% and 20%,’ he says. By implication, as there is so much more uncertainty around infant industries, a more gentle inter­vention that recognises the high risk is needed.

    The MPRDA can be expected to provide clarity on other critical although perhaps more mundane aspects of upstream development. It will lay out the requirements, duration (most likely two years) and extension criteria for technical co-operation permits, the vital first stage of the development process, which allows initial field work, including seismic studies, but not actual drilling. It will also clarify the nature and duration of full exploration and production rights.

    Bredenhann notes that these technical requirements are already laid out in the draft that was sent back to Parliament and were acceptable to the industry. He doesn’t expect any surprises in the final draft.

    At the time the MPRDA was sent back for redrafting, there was considerable interest in especially the upstream element of the oil and gas industry in South Africa. The allocation of the last of the country’s offshore exploration blocks was only finalised in 2012 after the 2007 bid round. The majors were queueing to start exploration, led by Shell, ExxonMobil, Total and others. Bredenhann says the same range of companies are still interested. But they have been burned in past and may well be more cautious in future.

    In the meantime, however, another gas-related focus has emerged, the prospects of gas-to-power developments under the country’s much-heralded Independent Power Producer programme. In October 2016, the Department of Energy published a preliminary information memo regarding liquefied natural gas (LNG)-fuelled gas-to-power projects at Richards Bay and Coega (Phase 1) and Saldanha Bay (Phase 2). Kramer points out that now is the time to publish a request for qualification, make the deals concrete and ‘lock in’ international gas providers, given that international gas is currently at ‘happy hour prices’.

    At present, to import LNG into South Africa requires only a conventional import licence, issued by the Department of Energy in terms of the International Trade Administration (ITA) Act of 2002, and generally known as an ITA permit. Imported gas is an ‘anchor’ option, intended to tide the economy over until local resources have been explored and, hopefully, brought on-stream.

    With regard to creating a gas economy, Kramer argues, there are two documents on the table that are also as important as the MPRDA amendment, critical though that may be. These are the Integrated Resources Plan and the Integrated Energy Plan, both published by the Department of Energy, released last year with a closing date (for written public submissions) of 31 March 2017. These are the documents in terms of which South Africa’s future energy mix is to be decided. Most comment has revolved around the future scenario, which allocates a large role to nuclear power (20 GW by 2050) as well as 5.5 GW of wind and solar. But what should not be ignored is that the documents suggest a bright future for gas, with new generation capacity from that resource projected to be twice that anticipated from nuclear – 40 GW by 2050.

    The problem is that final decisions have to be made and regulations enacted. The imbroglio over the MPRDA amendments suggests it is certainly all too easy to get these wrong, and that it can take a long time to correct them.

    In 2014, the oil price was near an all-time peak. However, the withdrawal of the amended MPRDA made it impossible for the upstream industry to seize the moment and invest in South Africa. Currently, the low gas prices prevailing offer a new and different oppor­tunity related to LNG importing and gas-to-power projects. It is to be hoped this moment will be seized.

    By David Christianson
    Images: Gallo/Getty Images