The exorbitant cost of petroleum exploration is likely to exclude black participants unless the Upstream Petroleum Resources Development Bill is amended to allow them a “carried interest”, an industry body said on Friday.
A carried interest frees its holder from bearing the upfront costs of exploration and production that are borne by the holder of the petroleum right. The holder of the carried interest will only contribute to the costs once revenue from production begins to flow.
In terms of the bill the State Petroleum Company will have a 20% carried interest, and a minimum of 10% participation in a project must be assigned to historically disadvantaged South Africans. The holder of the right will carry the upfront costs of the project.
But the Oceans Economy task team — which consists of industry representatives from the Offshore Petroleum Association of SA (Opasa), the SA Oil and Gas Association (Saoga) and CTC Global — has proposed that the state’s carried interest be redefined as being up to 15% and that the historically disadvantaged be assigned a carried interest of up to 5% that will form part of their 10% participation.
With no carried interest, black participants would have to carry their proportionate costs of exploration and the development of the petroleum that the team said would be onerous.
The proposal was made by the task team’s chair, Alison Futter, in a presentation to parliament’s mineral resources & energy committee during public hearings on the bill, which has been in the pipeline since December 2019.
There is no prospect of the bill being finalised in the near future as committee chair Sahlulele Luzipo indicated that public hearings will be held in all provinces next year.
Commercial borrowing
Futter said the bill “does not make provision for carried participation in terms of black people. It is onerous for black people to fund their participation in the exploration and development of a petroleum right particularly as such activities are costly and carry significant risk.
“Commercial borrowing is not available to black people in the absence of an assurance of a cash flow from production or a mechanism for repayment. Funding of the participation by black people is likely to take the form of equity in the ownership of the [historically disadvantaged South African] participant.”
The bill provides that a black people’s interest in the petroleum right may be diluted to no less than 5% to any funder or company for purposes of raising capital. The task team has proposed an amendment to the effect that this dilution cannot be in respect of the 5% carried interest.
The team also proposed that the holder of the petroleum right will be entitled to recover 100% of the black person’s proportionate share of the exploration and production costs.
In terms of the bill the holder of the petroleum right will be entitled to recover 50% of the state’s proportionate share of exploration costs and 100% of production costs.
Opasa and Saoga raised concerns about the transitional arrangements and the conversion of existing rights. Opasa representative and mining lawyer Michael Dale argued that instead of converting exploration and production rights into petroleum rights under the bill, existing rights should continue to preserve security of tenure.
Sagoa argued for the state’s carried interest to be “up to 20%” rather than 20% and for the minimum black participation to be “up to 10%” rather than 10%.
Green Connection presenter Adrian Pole criticised the bill for not addressing how future greenhouse gas emissions will affect SA’s ability to reach its emission targets. “The bill should be clearly aligned with SA’s international climate change commitments,” he said.
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