Well-written bill may finally unlock SA’s upstream petroleum potential

Sector earmarked as a potential game-changer years ago, but nothing has been done to cultivate it

The potential of SA’s upstream petroleum resources has been spotlighted since 2019 by global oil giant Total’s discovery of two vast deposits of gas concentrate in the Outeniqua Basin off the coast of Mossel Bay. A bill introduced in parliament in July might allow the country to take full advantage of these and other untapped reserves. The government earmarked this underdeveloped sector as a potential economic gamechanger many years ago, but did virtually nothing to cultivate it. In 2014 the cabinet’s Operation Phakisa (Sesotho for “hurry up”) estimated that SA’s territorial waters sat atop 9-billion barrels of oil (40 years’ worth of national consumption) and 11-billion barrels of natural gas (375 years’ worth of consumption).

Drilling 30 exploration wells in 10 years could see SA produce 370,000 barrels of oil and gas a day in the next 10 years, reducing reliance on oil imports up to 80%, as well as the energy grid’s dependence on coal; creating 130,000 jobs; and adding $2.2bn (R33bn) to GDP a year.

Operation Phakisa found that one of the big obstacles to “unlocking” this potential is a “lack of legislative clarity”, which is inhibiting investment in exploration projects. This was an understatement. In fact, petroleum exploration had been a hostage to regulatory paralysis for about a decade.

The first mistake was regulating upstream petroleum under the 2002 Mineral & Petroleum Resources Development Act in almost identical terms to mining despite the two industries operating in different ways and different global markets. Even for the mining sector the act was considered an unattractive regulatory framework, leaving too many matters open to interpretation and administrative discretion.

Things became worse in 2009 when former president Jacob Zuma appointed his first cabinet, splitting the department of minerals & energy in two, leaving upstream petroleum regulation in the hands of the department of mineral resources & energy while the Petroleum Agency of SA, residing in the department of energy, would continue to process applications for permits and rights.

Operation Phakisa concluded that resolving this incongruence was the “highest priority” —“to affirm investor confidence, clarity and stability must be provided on the full legislative, regulatory and contractual package”, requiring petroleumspecific legislation, separate from the Mineral & Petroleum Resources Development Act.

Despite the exhortation to “hurry up”, a draft Upstream Petroleum Resources Development Bill was unveiled five years later, at the end of 2019; the more investment-orientated Ramaphosa administration seemed to have been spurred into action by Total’s first offshore discovery.

However, the 2019 bill was extremely disappointing, for a variety of reasons.

TAILORED

Encouragingly, the new bill introduced in July has resolved many of those concerns. While the 2019 bill mostly re-enacted inappropriate provisions of the act, the 2021 bill is truly a bespoke statute tailored to the features and needs of the petroleum industry. It also removes the minister’s discretion to impose new conditions when an exploration right is succeeded by a production right, and to renegotiate the terms of a right upon renewal — this is vital to predictability and security of tenure, the bedrock of investor confidence.

The 2021 bill has jettisoned the old bill’s references to undefined fiscal imposts such as a “resource rent tax” and “production bonus”. While the 2019 bill required prior ministerial consent for the transfer of a controlling interest in a listed company or any interest in an unlisted company that holds an exploration or production right anathema to merger & acquisition activity

the new bill lightens this by requiring consent for the transfer of a controlling interest in an unlisted company.

Unfortunately, the bill does retain a number of problematic provisions when it comes to the production phase of operations.

First, for reasons that are not immediately clear, it proposes to extend minimum work commitments beyond the exploration phase to the production phase. The production phase ordinarily requires maintained oversight via annual work programmes. Second, the bill provides that a failure to comply with minimum work commitments may result in a fine or imprisonment. This is unusual since a breach of that nature would typically be sanctioned by payment of a penalty.

Last, it proposes to entitle the Petroleum Agency SA to postpone the development of a petroleum field after having regard to “national interests”. This is of particular concern in the absence of clear guidelines under which the agency would be allowed to exercise this power.

As the 2021 bill undergoes deliberation and public participation processes in parliament over the next few months investors will be closely watching the “resource nationalist” features of the proposed law. Like its predecessor, the new bill gives the government a 20% free carried interest in an exploration or production right, which is high by regional standards, but the proposed law allows the holder to recover the state’s share of expenses from its proportionate share of production or revenue.

The empowered 2019”bill’s if black requirement shareholders of 10% exit black the deal participating interest in a petroleum right has been retained, but this is now made more commercially viable by allowing dilution to 5% when capital has to be raised during the project, and by regarding a right holder as “once empowered, always after a certain time and for a certain value.

Finally, the 2021 bill introduces the requirement of a “local content” plan for procurement of goods and services from black suppliers, and recruitment and training of South Africans.

QUOTAS

The precise commitments required of right holders are left to be prescribed by regulations, which is sensible. But when those regulations are developed the government should take care to avoid the imposition of unrealistic and rigid quotas, which may fall foul of international trade law and harm the competitiveness of SA’s petroleum sector in comparison to other jurisdictions. The Mining Charter serves as a cautionary tale in this regard.

The department of mineral resources & energy will also need to clarify the role it envisages for the Petroleum & Liquid Fuels Sector Transformation Charter, which it is now reviewing. It is important for investors to be assured that the empowerment rules set out in the new bill, and the regulations, will not be subject to augmentation by the charter. The rule of law, as much as investor attractiveness, demands that this should not be allowed.

Overall, the 2021 bill is an encouraging sign for SA’s petroleum industry and the wider economy. Not only does it promise to unlock foreign and domestic investment into exploring and exploiting untapped oil and gas reserves, which will generate fiscal revenue and enhance the country’s energy self-sufficiency. It also provides a lesson in good legislative practice for economic regulation.

The drafters of the bill have been thorough, meticulous and clear, and importantly have been responsive to industry concerns about improvements that needed to be made to the 2019 bill.

It is hoped that the new bill both in content and process will serve as a model for muchneeded renovations of the Mineral & Petroleum Resources Development Act.