Free — but not for all
SOUTH Africa hardly has an oil and gas industry yet, but the government is already moving to extract rents from it. And signs are that those rents could benefit PetroSA, a stateowned entity in need of a reason to continue to exist, rather than to benefit SA more broadly.
Last week’s revelation by Mineral Resources Minister Susan Shabangu that the government plans to take a 20% “free carry” in new oil and gas projects was disturbing for several reasons.
One concern is the way the department is looking to do this. Signs are that this provision will be in the regulations, rather than in the legislation itself. That would mean Ms Shabangu could wake up any time and decide to change the 20% to something higher, or lower. Either way, it would be subordinate legislation, subject to ministerial discretion. So the certainty investors need if they are to invest billions of rand of capital to develop new projects would be absent. They might choose not to invest at all.
A more profound concern is the stage at which the free carry would apply. Internationally, it is not unusual for the state to appropriate a share of production free of charge at the exploration stage of new oil and gas ventures. After all, there is no point in burdening the fiscus with the costs if the project may not prove viable. But in many jurisdictions, once the project is in production and generating profits, the state would be expected to contribute its share of the costs. If the carry were to remain free at this stage, the other investors would have to cough up that extra 20%.
This is similar to a tax. But SA already has royalty taxes in the mining law. Might these apply to those new oil and gas ventures too? It is not clear whether the tax and mining authorities will take a holistic view of the state’s take. In addition to the free carry, Ms Shabangu said the state would be able to take another 30% at “market-related” prices. This is not necessarily the same as “market” prices, which is a potential worry.
But add the requirement for projects to include a significant black empowerment share, which investors also usually have to finance, and you wonder why anyone would invest to develop new offshore gas or fracking projects.
Meanwhile, PetroSA has put its hand up to house the “free” stakes. Why are we not surprised?