Related Articles
Forward article link
Share PDF with colleagues

Key petroleum legislation delayed in South Africa

Until the Mineral Petroleum Resource Development Act (MPRDA) is passed investments are uncertain

Investors are still waiting for key legislation governing South Africa’s petroleum sector, which has been delayed in parliament since early in the year. Until the Mineral Petroleum Resource Development Act (MPRDA) is passed it is inevitable that the uncertainty will inhibit investment.

The biggest difficulty for oil companies in terms of the proposed legislation for upstream oil and gas activities is the stake that the South African government wants to take in oil and gas ventures. It not only includes a substantial upfront 20% free-carried interest but it also allows it to take a further undetermined stake at what is being described as being at an “agreed price.”

Oil companies opposed the provisions, saying they were too vague and would discourage potential investment. President Jacob Zuma declined to sign the Bill into law on the grounds that it might violate the constitution and he referred it back to parliament in January.

South Africa has limited oil reserves and imports about 70% of its crude oil needs from Saudi Arabia and Nigeria. Last year, the government initiated a project known as Operation Phakisa that aims to bolster local exploration and production by encouraging companies to drill 30 offshore wells within a decade as the country strives to reduce its heavy reliance on imports.

“There has been a sincere and sustained engagement between the South African government and the upstream industry in the two years since the bill was published, and the government has put its money where its mouth is through initiatives such as Operation Phakisa,” says an energy specialist at law firm Norton Rose Fulbright, Lizel Oberholzer.

“It has been two and half years since the bill was published but I think we are very close to a solution,” she says.

“In my view the state’s free-carried interest is the most contentious issue but it is recognized that it is capable of multiple interpretations for the way that it is defined and that creates the uncertainty,” she said, but the government, as part of the Operation Phasika, is working on “finding a solution” to the issue.

Oil company executives say they are not against the government having a stake in projects but they do want the regulations to be clear and stable.

Meanwhile, South Africa’s ruling African National Congress has backed a plan by the minister of mineral resources to split legislation governing oil and gas from mining laws. While mining has a more than 100-year history in South Africa, oil and gas is still in its nascent stages.

Oberholzer agrees that there should be a separate law to regulate South Africa’s embryonic oil and gas sector. “In the long term, I do support it. However, in the short term to get the industry going we need to sort the Bill out in the current form and then we can start working in the longer term on oil and gas specific legislation,” she says.

The search for oil and gas resources including shale gas exploration is emerging as another “potential game-changer” and an “appropriate political response” is necessary to shape the industry’s development, the ANC said in a document 17 August. The document is due to be discussed at the National General Council Meeting in October.

No drilling has taken place in South African waters since November 2014, when Total suspended a drilling program off the southern coast owing to technical issues with the rig. Industry experts said the French major was unlikely to resume drilling in the Orange basin until 2016, which is a setback for the nation’s plans to have 30 exploration wells drilled in the next 10 years. The company said it was continuing its exploration but gave no further details. “Total Exploration & Production South Africa is progressing its studies to resume drilling in the block 11/B and 12/B as soon as possible,” a company spokeswoman says.

Lower oil prices have weighed heavily on energy companies who are struggling to keep exploration and development costs under control. Some producers have been forced to re-think spending plans especially for capital-intensive projects like shale gas. The regulatory uncertainty poses a significant further challenge to South Africa’s oil and gas ambitions. Oil companies when considering whether or not to invest substantial sums of money into conducting upstream activities are likely to baulk at the possibility of having to wade through a quagmire of incoherent legislation. It would appear already to be acting as a disincentive to would-be investors. By way of example, US’ Anadarko said last year it had halted spending on exploration in South Africa until it could get more clarity on changes to the country’s oil and gas legislation.

Around 2012, the pursuit of South Africa’s potential shale gas resources by means of hydraulic fracturing (fracking) hit the South African media by force. From a regulatory perspective, the government was not prepared for the heated debate over rumours of the vast “cheap” energy wealth stacked beneath the semi-arid Karoo region.

In 2010, Shell, Bundu Oil & Gas and Falcon Gas & Oil each applied for shale gas exploration permits in the Karoo. In April 2011, the government slapped a moratorium on it largely as a result of action by environmentalists who believe that fracking risks polluting the water supplies in the sensitive Karoo. Fracking involves pressurised water, sand and chemical being pumped underground to release gas trapped in rock formations. The moratorium was however lifted by the government in July 2012 based on recommendations of a task team led by the Petroleum Agency of South Africa (PASA).

In 2014, PASA estimated technically recoverable reserves in the Karoo region at about 40 trillion ft3, much less than the US Energy Information Administration’s earlier estimates for the region of 485 trillion ft3. PASA at the time said that while it seemed much lower than the initial estimate, it was a nevertheless a significant resource which could be commercially exploited. In February 2014, Zuma said exploitation of the Karoo shale would transform the South African economy. About 85% of South Africa’s electricity is generated by coal and the government is hoping that shale gas would help it solve its power crisis.

Eskom, the state utility, has been forced over recent years to implement power cuts as it struggles to meet demand with ageing power plants and inadequate capacity and resources. Analysts said electricity cuts, offset by lower oil prices and the weaker rand, are expected to shave about 1.5 percentage points from South African growth this year.

On 3 June 2015 the South African minister of mineral resources gazetted the regulations for fracking in accordance with section 107 of the MPRDA. The purpose of the new regulations is stated as being “to augment the Mineral and Petroleum Resources Development Regulations, so as to prescribe standards and practices that must ensure the safe exploration and production of petroleum.”

The publication of the regulations means the government can go ahead and process applications that intend exploration shale gas by fracking. But environmentalist criticised the ministry’s gazetting the regulations instead of waiting for the findings of the government’s two-year strategic environmental assessment into the potential damaging consequences of fracking.

Oberholzer said the government had “acted responsibly” by putting the moratorium in place, and getting the regulations in place to make sure there was a “proper regulatory framework to proceed on.”

Meanwhile, in March this year, Shell said it was pulling back from its shale projects in South Africa largely owing to lower energy prices but also to delays in obtaining its exploration licence. Shell had applied for a license covering more than 95,000 km², almost a quarter of the Karoo. But a more than 50% fall in crude oil prices since June 2014 has put pressure on capital intensive projects such as shale gas exploration around the globe. Shell had been waiting seven years for a licence.

Shell said the Karoo project could compete favourably within Shell’s global shale gas and oil portfolio but only if commercial terms were put in place. It also said “clarity” on the MPRDA was necessary in making further decisions. “We are currently continuing our consultation with government, industry and the people of South Africa about the long term opportunities of shale gas exploration and the regulations that will govern this,” it said.

Whether the regulations are rejected or accepted, their publication shows that the South African government believes that natural gas is a means of cutting coal-burn. The shale boom in the US has driven down coal demand, resulting in a reduction of CO2 emissions.

The MPRDA introduces a new definition of “strategic minerals”, stating that these are “such minerals as the minister may declare to be strategic from time to time.” But it is silent as to the criteria on which minerals will be declared strategic. There are concerns among environmentalists that landowners in the Karoo would not be able to profit from the volume of shale gas under their land, effectively removing any incentive they might otherwise have to sell to energy developers.

Shale gas production will require heavy investment in infrastructure. Midstream infrastructure such as gas pipelines, roads and possibly water pipelines will be required as well as downstream refineries and distribution networks.

Even if exploration investment is made in the Karoo, production is not guaranteed. Since only a few core wells have been drilled there, a long time ago, geological uncertainties still exist.

South Africa will only succeed if it fosters an environment that is conducive to business and attractive to international investors. The biggest obstacle to the development of the country’s upstream petroleum industry is regulatory uncertainty. Curing the ambiguities in the MPRDA could go a long way towards restoring confidence. 

Also in this section
Unions flag North Sea safety fears
16 October 2018
Changed working terms have triggered strikes in both the the UK and Norwegian North Sea oil industries
Ecuador: In a hurry to mend the past
15 October 2018
After a decade marred by corruption and legal disputes, Ecuador’s reformist government wants a more investment-friendly exploration regime
Big guns boost UK North Sea commitments
12 October 2018
Shell and Equinor have bolstered their offshore presence in the UK, while Total has made a sizeable discovery