The revised oil and gas bill is at last on its way to parliament and, with it, legislative certainty that is expected to thrust the nascent sector out of limbo and into action.
The Upstream Petroleum Resources Development Bill is stand-alone legislation for the industry that has been in the works for years and will replace sections of the Mineral and Petroleum Resources Development Act which regulate oil and exploration and production in SA.
Industry players have grown especially impatient for the finalisation of the legislation since French oil and gas giant Total made not one but two big discoveries off the coast of Mossel Bay.
Though Total will not be affected by any regulatory changes — the terms relating to these finds have been agreed — legislative certainty may be the final puzzle piece required for investors to take a punt on oil and gas exploration in SA.
The previous draft of the bill, released on Christmas eve in 2019, has been overhauled and was this month approved by the cabinet for submission to parliament.
The redrafted bill, a copy of which Business Day has seen, has not been officially published but in it current form appears to be largely good news for SA’s fledgling oil and gas industry. Promising though it may be, certain aspects are unlikely to escape scrutiny.
Independent consultant Niall Kramer says the new version appears to be an attempt to balance making SA’s exploration prospects commercially attractive and sticking to the state’s centrist controlling default position.
For one, it provides reasonably long exploration and production periods. Exploration rights extend to nine years in shallow waters and 14 years in deep waters. Production rights are valid for 30 years and thereafter are extendable for 10 years at a time.
However — as was the case in the previous draft — the revised bill notably requires a state carried interest of 20% in all projects, and requires 10% black participation.
A carried interest refers to the government’s participation in a petroleum right that vests exclusively for the benefit of the state while the costs are borne by the holder of a petroleum right.
The latest iteration does now allow for black participation to be diluted to as low as 5% in aid of capital raising.
Megan Rodgers, a Cliffe Dekker Hofmeyr director and head of the firm’s oil and gas sector practice says it is important to note that the black-owned companies participate essentially on a rand-for-rand basis and paying the costs of the project. “Oil and gas exploration, in particular, requires significant high-risk capital. So the ability of black-owned oil companies to dilute their interest down to 5% is quite critical to be able to allow them to be able to fund the projects, and contribute as a meaningful partner towards the joint venture,” she says.
The redrafted bill further allows for empowerment credentials to remain recognised even after black people exit, though subject to certain conditions.
The redrafted oil and gas bill, such as the one before it, proposes a 20% state carried interest but now provides much-needed clarity that the costs of the carried interest can be recovered. That is 50% of the exploration costs spent on behalf of the state can be recovered, while 100% of the production expenditure can be recovered.
That comes into play in the scenario that exploration leads to discovery, and to production and revenues.
While a state carried interest in oil and gas is by no means unusual, a 20% state carry in SA could deter exploration. After all, there is a one in seven chance of success per well drilled. And just across the border in Namibia, where the risk profile is similar to SA, the state carried interest is 10%.
“It remains to be seen if other explorers will warm to these terms and prefer SA over their other global prospects,” says Kramer. “Consider the scale of risk at say 10 deep-sea drills at $150m each. That’s about $1.5bn [R22.5bn]. This would be pure risk on the part of the explorer, not SA government or the national petroleum company.”
Missing from this draft, and the one before it, is a downward adjustment mechanism which has previously been outlined by the department in the Minerals and Petroleum Resources Development Act Amendment Bill, which has since been scrapped in favour of this stand-alone oil and gas bill.
Such a mechanism — which had been described by an industry insiders as the critical ingredient to make the legislation work — would allow for the state carried interest of 20% to be reduced to a minimum of 10% (using legally guided discretion) in certain cases where projects would be uneconomical otherwise.
Beyond the economic package put forward by the revised bill are the fiscal considerations, and investors will want to know what taxes will apply.
The previous draft ominously made reference to a production bonus and petroleum rent tax, without providing further detail. These terms have since been removed from the revised bill. Sensibly so, as taxes are the domain of the National Treasury.
Rodgers notes there are oil and gas taxation provisions in the Income Tax Act, and there is no indication of an intention to amend them as yet. The Minerals and Petroleum Resources Royalty Act is another relevant piece of legislation which falls under National Treasury and provides certainty of the state’s take.
Mineral resources & energy minister Gwede Mantashe last week said the introduction of the bills to parliament is in the parliamentary process where the bill has previously experienced significant delays, says Rodgers.
An important part of the debate, not addressed in this bill, will be local content, says Kramer, who warns SA must not allow itself to be sidetracked and must recognise early that it cannot realistically produce much of the high-end components for drill ships and rigs or offshore.
“The most important local content we can have in SA will be local gas at scale. SA needs to minimise the hurdles and make it easy for super majors with huge capital and expertise to justify allocating their exploration dollars to SA. Development will flow from inward investment, good policy and importantly a ready value chain. But first we need to prove we have the hydrocarbons at scale.”
Even with oil and gas legislation many years in the making, time remains of the essence. “We’ve been getting by without the bill for a while,” says Rodgers. “But, other than Total, we haven’t had wells drilled in the jurisdiction because the market is very much aware that we are in a transition phase when it comes to our legislation. So it’s about ensuring that we have investor certainty when it comes to our legislative regime so that we attract foreign investment as quickly as possible.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.