Saoga’s Adrian Strydom on the state hitting the gas after nine wasted years
Oil and gas bill a last chance to woo fed-up global energy players
● Adrian Strydom, acting CEO of the South African Oil & Gas Alliance (Saoga), says the government’s failure over many years to publish enabling legislation has held back the industry from unleashing its huge potential to grow the economy.
“The lack of legislation has been a game stopper,” says Strydom
Instead of making oil and gas finds that would have created thousands of jobs, added significantly to the country’s GDP and prevented the current energy crisis, the industry has been left in limbo.
The department of mineral resources & energy published its long-awaited draft Upstream Petroleum Resources Development Bill on Christmas Eve to kick-start the process. But persuading fed-up multinationals to participate may not be as easy as the government might think, says Strydom.
A number of global companies that opened offices in Cape Town in expectation of the necessary legislation have gone to more welcoming countries.
“They had their offices here, waiting to get things going in terms of exploration. They couldn’t hang on any longer, and left SA for pastures elsewhere in the world.
“They had to make investment decisions and they couldn’t do that on the basis of an uncertain environment. So the delay has severely damaged the progress we could have made.”
The estimated $35bn (R500bn) to $50bn in foreign direct investment that Mozambique has attracted from oil and gas exploration to date gives some idea of what SA has missed out on.
Strydom says he has little doubt that exploration in South African waters will yield similar results.
“We can’t be different to countries around us in terms of having oil and gas.”
The Brulpadda find off Mossel Bay by French multinational Total SA “proves we certainly do have those resources, but we can’t be sure of the amounts until we start drilling exploration wells and get sufficient data”.
But it’s been nine years since permit holders, among them Shell, made their initial applications. Minister Gwede Mantashe lifted the government moratorium on applications a week before publishing the draft bill, meaning they can apply for exploration permits when the draft becomes law.
If they still want to. Because in nine years portfolio strategies and global options will have changed substantially.
“A lot of work will have to be done to get them interested again, and the legislation certainly needs to seek to be friendly to investment.”
That could mean removing some of the discretionary rights in the draft bill, which are “not always palatable to multinationals that have many other options”.
These include a 10% black ownership requirement on top of a 20% carry for the state, which is considered high given the unexplored, high-risk terrain involved.
“If you compare the 20% of carry to some of the other countries, like Ghana with 16% and Senegal at about 10% carried interest, we’re quite above that,” says Strydom.
“If you consider the 10% black shareholding then it’s significantly higher in terms of the sacrifice companies will have to make.
“It may be a bit of a challenge under these conditions to encourage multinationals to come to SA.”
The oil and gas industry has the potential to be the biggest catalyst for economic growth in SA since mining, he says.
“But we can’t afford to take it for granted. “There are competing forces, there are competing markets that these companies can play in. So we need to make it as simple and attractive for investors as possible, without selling SA Inc short.”
The costs of exploration are eye-wateringly high, and the risks considerable.
The drilling of a single well can cost up to $250m, with probably only one out of every seven wells sunk likely to be successful.
This makes it “almost impossible” for
South African companies to do it on their own. “So we do need foreign investment to move ahead.”
According to the draft bill, all the risks and costs are borne upfront by the holders of exploration licences. How they’re to recover these costs is unclear, but this need not be unduly problematic, says Strydom.
“It’s a given that the risks are high and the investments are high. But companies play hard, so the risk will certainly be offset by the profits they will make eventually.
“These oil companies have been doing this for many years, and they will not commit if they don’t see an opportunity to succeed.”
The industry has until February 21 to comment on the draft bill.
Strydom, a civil engineer by training who has been with Saoga for 10 years, says it will be making recommendations to the minister after consulting its members.
“Obviously some tweaking will be required and requested from the government.
“I’m hopeful that they see the need for this legislation to be finalised and approved as soon as possible.
“We have lost out on a number of very good opportunities, great opportunities, as history will show, that we could have had if government was more proactive.”
Meanwhile, “we haven’t been sitting on our hands in terms of readiness”.
A lot of work has been done to develop human resources including more than 2,000 artisans, 95% of whom are now employed.
“We will continue to lobby and network with industry and government to develop resources and improve the readiness for oil and gas exploration and production.”
When industry finally gets the green light, there will still be “quite a bit of upskilling to do”. In the “very short term”, additional skills will have to be sourced from overseas.
“We have a number of South African professionals working overseas who want to work in SA. We’re more ready than most countries starting off in the oil and gas space.”
The length of the exploration phase will depend on “how eager” companies are to start production “given they’ve got lots of different projects running across the globe with different timetables”.
Thanks to government delays, SA has lost the priority status it once had. So even once the legislation is finalised there’s likely to be a time lag of at least four years before production, job creation and contribution to GDP start to come through.
Strydom says the bill should have been published “at least” six years ago for SA to be benefiting from it “at this point”.
They had their offices here but [global companies] couldn’t hang on any longer, and left SA for pastures elsewhere