Tailor made oil and gas legislation

The DMR’s proposed wording

On 8 November 2016, the DMR presented to the NCOP Select Committee on Land and Mineral Resources and provided an overview of the changes to the MPRDA contained in the MPRD Amendment Bill. The DMR also informed the committee members that additional changes had been made to the Bill as a result of Operation Phakisa and the extensive discussions with the Offshore Petroleum Association of South Africa (OPASA), which represented the major offshore oil and gas industry players during and after Operation Phakisa, with the assistance of Norton Rose Fulbright.

On 29 November 2016 at the Western Cape NCOP provincial briefing, the DMR released its proposed wording relating to the amendments to the Bill.

A “one-size-fits-all” legal framework will not work

It was clear from the briefing that because South Africa has a diverse portfolio of petroleum rights, a “one size fits all” legal framework will not work. South Africa is a high risk jurisdiction as it has very little proven petroleum resources and exploration and production is both complex and costly. While the average cost of drilling a single deepwater well in the ocean off the country’s coastline is expected to be approximately USD 150 million, it is generally accepted that approximately one out of every ten wells is successful. The regulatory framework must be adjusted to be investor friendly and must have clear and certain terms.

To make provision for this, the DMR’s proposal created three classes of right holders, namely frontier holders, existing holders and new holders.

Frontier holders are holders that have converted old order OP26 rights into new order rights. These exploration rights have the corresponding production right terms attached to the exploration right. The wording released provides that the terms and conditions of these rights will be preserved as far as it relates to state participation and HDSA participation. This means that the required state and BEE participation for frontier holders will be capped at 10% each.

Existing exploration right holders are holders that have been granted exploration rights before the Bill is enacted. The state will have, through an organ of state, the right to a 20% state-carried interest in these projects. The state will also have a right of pre-emption in the event of a sale of a participating interest in the exploration right or corresponding production right. The state must match the commercial terms of the selected purchaser and has 90 days to exercise this right.

New exploration right holders are holders that are granted exploration rights after the enactment of the Bill. The state is entitled to a 20% carried interest in these rights together with an additional 30% interest which may take the form of (1) a carried interest, (2) acquisition at an agreed price or (3) production sharing agreements. This could result in a 50% state interest.

The state equity must at all times be maintained. This will prevent the right holder’s interests from being diluted during the course of the project.

It was acknowledged that the Mining Charter is not appropriate for the Petroleum Industry and the Minister is therefore empowered to develop a Petroleum Charter within six months from the date the Bill becomes law. The DMR indicated a 10% BEE stake will be the minimum.

The South African landscape

South Africa currently has a diverse portfolio of projects ranging from deepwater drilling to onshore coalbed methane and shale gas drilling. In order to address this situation the new wording released provides that all new and existing exploration right holders can apply to the Minister of Mineral Resources for a downward adjustment of the state interest before the grant of the production right provided that the state’s interest does not fall below 10%. The Minister of Mineral Resources will have a guided discretion and must consult the Minister of Finance and take into consideration the nature and scope of the project, the financial and economic profile of the project and the degree of risk assumed by the holder throughout the project.

New and existing right holders will have a three year period to apply to the Minister for the determination of the corresponding production right terms and conditions. The “state carried interest” is no longer “free”, but is recoverable at production stage from the proceeds generated from the production right. This is in line with international best practice.

Relinquishment

The new wording provides for a 40% relinquishment at the end of the first five year period of the exploration right. Thereafter the exploration right holders are required to relinquish a further 10% at each subsequent renewal. The scales are balanced by the implementation of the underlying “use it or lose it” principle which requires active exploration and/or production. The wording proposed by the DMR provides that the Minister must exempt the holder from the relinquishment requirements in circumstances where the holder can demonstrate that it is in a position to explore a larger area or that it has made a discovery or that such relinquishment will render the project uneconomic.

South Africa: open to investors

Despite the low oil price and legislative uncertainty in the sector, investors in South Africa’s embryonic oil and gas industry remain committed to growing their business interests in our emerging oil and gas sector and very few have decided to abandon their rights.

It is important to acknowledge the sincerity of both government and investors in finding workable solutions as evidenced by government’s engagement with OPASA. South Africa is in need of both energy resources and investment, while investors are in need of certainty, predictability and the prospect of reasonable returns. Based on the engagement we have had with government to date, we trust that a win-win solution will be attained.

Next steps

While certain of the provinces such as the Western Cape, Mpumalanga, KwaZulu-Natal and the North West Province have held their briefings, it appears that other provinces will hold their briefings early next year. After these briefings, public hearings will be held and we are hopeful that the Bill will pass into law in the first half of next year. Although the Bill’s deliberation process has not yet come to an end, it is encouraging to see that there has been significant progress in recent weeks.