Tuesday, July 16, 2013

Due to only a few discoveries in South Africa, exploration is considered to be a high risk venture with low prospects of finding commercial quantities of oil or gas. Consequent- ly, investors must take reasonable steps to reduce the risk to their operations by managing their exposure to commercial and regulatory risks. Such risk mitigating exercises can only be effectively undertaken within a clearly defined fiscal and regulatory framework, which South Africa is known to have. This contributed to the influx of oil majors such as ExxonMobil, Total SA, Cairn Indian and Anadarko within the past year. However there are many substantive amendments in the Bill which may discourage further investment in South Africa’s oil and gas resources.
One of these amendments provides for the disbandment of PASA (The Petroleum Agency of South Africa), the government authority regulating the country’s oil and gas resources and which has specialised industry experience. The Bill delegates all functions presently exercised by the PASA to regional managers of the Department who are responsible for handling mining applications and who have little or no expertise in the oil and gas industry. Consequently, it is expected that the processing of applications is likely to be significantly delayed. Further, international best practice suggests that it is more beneficial to have a dedicated oil and gas regulatory authority. The reason for the disbandment of PASA at a time when South Africa is quickly developing and attracting major international oil companies is unclear.
The Bill also stipulates that the State has a right to a free carried interest in all new exploration and production rights, with an option to acquire a further interest on specified terms through an organ of State or State-owned company. At present the State’s interest in rights are not legislated but is provided for in the standard form exploration and production rights. In terms of these rights the State may exercise an option to acquire a 10% participating interest in a production right through an organ of State. The State is not liable for past expenses but contributes in proportion to its participating interest towards production costs. Thus it is likely that the free carried interest will not be less than 10%. The full implications of this provision remain obscure as it is not clear what the extent of the State’s free carried interest will be, what extent of the further interest is intended, and the terms on which such interest may be acquired.
Currently the oil and gas industry complies with the Charter for the South African Petroleum And Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry which provides that a 9% participating interest (which in practice became 10%) must be reserved for HDP’S (Historically Disadvantaged Person(s)). The Bill suggests compliance with the Amended Broad Based Socio Economic Empowerment Charter for the South African Mining and Minerals Industry. This means that the 10% participating interest presently reserved for HDP’s will be increased to 26 %.
The State’s interest (at a minimum of 10%), together with the increased HDP interest of 26% reduces the percentage interest available to local and international oil companies and may prejudice investment in the South African oil and gas industry.
In terms of the Bill, a listed company, holding an oil and gas right or an interest therein, or that holds an interest in a company that holds an oil and gas right or an interest therein, may not alienate any interest in the company without the prior written consent of the Minister. In practice most listed companies hold their South African oil and gas assets through a subsidiary. This amendment will place undue trading restrictions on listed companies.
The Bill also links fines to the right holder’s annual turnover in South Africa and its exports from South Africa. This could result in no fines being payable during exploration (as there would be no turnover) and excessive fines being levied at the production stage.
It is clear from the above that the Bill fails to provide a stable and clearly defined fiscal and legal framework. This will no doubt discourage future investment in South Africa’s oil and gas resources.