Inept mineral exploitation laws deter investment
How different the story of fracking in SA could have been had the act not dictated the rules of the game, writes Luke Haveman
THE South African legislature was caught napping on the exploitation of the country’s unconventional hydrocarbon resources.
Roughly two years ago, the pursuit of South Africa’s potential shale gas resources by means of hydraulic fracturing (“fracking”), a technology that is currently unregulated and prohibited, hit the South African media with tsunamilike force.
From a regulatory perspective, the legislative authorities seemingly did not foresee the need to prepare for dramatically heightened interest and investment in our potential hydrocarbon resources.
Until 2011, when the US Energy Information Administration put forward a particularly high estimate of the size of South African shale gas reserves — 485 trillion cubic feet, which has subsequently been reduced to 390 trillion cubic feet — the country was not considered a hydrocarbon-endowed state.
Nevertheless, unconventional hydrocarbons were on the horizon and comparatively minuscule conventional resources should never have been reason enough for the development of a regulatory environment that has, over the years, proven to be particularly fertile soil for academic criticism.
Any industry would like to op- erate under conditions in which legislative clarity and regulatory certainty are a given, and the oil and gas industry is no different.
The current situation is, however, one of uncertainty, and the primary statute dealing with the exploitation of hydrocarbon resources, the Mineral and Petroleum Resources Development Act, is perhaps one of the most inept pieces of legislation on the statute books.
The question that has not yet been raised is: What will follow fracking?
The drafters of the act failed to see to the creation of a coherent, self-contained and industry-specific regulatory framework that would be well suited to attracting foreign investment and ensuring that the exploitation of our hydrocarbons could be achieved in a comparatively appropriate manner.
From the perspective of attracting foreign investment, various academic papers have confirmed that when an international oil company is in the process of considering whether or not to invest substantial sums of money in conducting up- stream activities in a particular jurisdiction, having to wade through a quagmire of laws will be a strong disincentive.
The act is in many instances an incoherent statute that is not industry-specific — it governs the exploitation of both minerals and hydrocarbons — and fails to address important issues, particularly in relation to the exploitation of offshore hydrocarbon resources.
The lack of a well-drafted and forward-thinking hydrocarbon-specific regulatory framework (combined with few botched public relations exercises by prospective operators) and the next thing you know, it was official: the development of potentially huge hydrocarbon resources was faced with a cavalcade of opposition, from back yard fracking-specific nonprofit organisations and farmers to citybased businessmen, all of whom had very little understanding of the industry, let alone the law governing it.
Fast-forward to August 2013 and, in the face of the litigation that will inevitably follow a decision to authorise fracking, Deputy President Kgalema Motlanthe and Trade and Industry Minister Rob Davies have described hydraulic fracturing as “game-changing” and something that may be given the go-ahead before next year’s elections.
Albeit a potentially unforgettable game-changer, how different the story of fracking in South Africa could have been had the act not been responsible for dictating the rules of game. Among other things, the moratorium, the questionable task team on fracking, the fracking-related litigation instituted against the minister of mineral resources and the furore that followed the recent statement about the “game-changing” nature of fracking may all have been avoided had a superior industry-specific legislative framework been in place.
Unfortunately, the current set of proposed amendments, set out in the infamous Mineral and Petroleum Resources Development Bill will do little to remedy the issue.
The bill’s failure to solve more problems than it appears to create is such that commentary by the legal fraternity on the issue can be characterised as scornful. Of the few legal practitioners who are well placed to comment on the bill, most are not enamoured of what is inadequate and inappropriate legislative repair work or of the fact that the state has seemingly ignored reams of constructive criticism that were levelled against the bill. It will be interesting to see whether the upcoming fracking-related regulations will be able to sidestep similar criticism.
The important question that has not yet been raised is: What will follow fracking? How many more sets of regulations will need to be introduced in future to accommodate further, inevitable technological advancements as the pursuit of conventional and unconventional hydrocarbons heats up?
The authorities need to think fur- ther ahead than simply cutting, pasting, tweaking and ultimately presenting South Africa with regulations for fracking.
In an ideal world, the act should be binned and a new industry-specific statute that is both coherent and cutting-edge should replace it. Practically speaking, addressing all the legislative and regulatory implications and knock-on effects of wiping the statutory slate clean would be a gargantuan task that would further frustrate the potential influx of necessary foreign investment.
The role that hydrocarbons, in particular unconventional hydrocarbons, could play in the South African energy mix is significant enough for the legislature to look further into the future than fracking. Shale gas is now. What is next?
Haveman is senior associate in oil and gas at Edward Nathan Sonnenbergs