On 16 January 2015 the President referred the Mineral and Petroleum Resources Development Bill 15 of 2013 (Bill) back to the National Assembly based on reservations that it would not pass the constitutional muster. One of unconstitutional grounds was the lack of public consultation at the level of the National Council of Provinces. The National Assembly adopted the report prepared by the portfolio committee for Mineral Resources (Portfolio Committee) on 1 November 2016 in terms of which the Portfolio Committee agreed with the majority of the President’s reservations. Within only a few weeks the Bill then proceeded to the Select Committee on Land and Mineral Resources (National Council of Provinces) and on 8 November the Department of Mineral Resources (DMR) provided a briefing on the Bill to this committee.
The Bill in its current form grants the State a 20% free carried interest in all new exploration and production rights. “Free carried interest” is defined in clause 1 of the Bill as “interest allocated to the State in exploration or production operations without any financial obligation on the State”. The State is also entitled to a further participation interest in any exploration or production right. This entitlement may be exercised either through a production sharing agreement or through the acquisition of the interest at an agreed price. If the Bill is passed in this form it is likely to deter foreign investment in the upstream oil and gas industry.
Operation Phakisa: Oceans Economy, commissioned by the Presidency, created a platform for the State and the upstream oil and gas industry to have robust discussions with the aim to create a uniquely South African win-win solution. These consultations resulted in recommended changes to section 86A of the Bill presented by the DMR at the select committee meeting.
The DMR proposed that the state’s 20% carried interest no longer be free and suggested a cost recovery mechanism for the carried interest during the production phase. The DMR did not elaborate on the details of the cost recovery mechanism. In addition, the DMR suggested that in the event of a discovery, the holder of the exploration right be entitled to apply for a downward adjustment of the State’s participating interest. It is our understanding that projects will be assessed on a case by case basis to ensure that projects remain economically viable in light of concerns that in certain instances a carried interest at a level of 20% could render the project uneconomical. We expect that the legislator will provide principles that would guide the Minister of Mineral Resources (Minister) in exercising its discretion in adjusting the State’s participation. Furthermore, project certainty will be created by settling the terms and conditions of the exploration right and the corresponding production right at the exploration stage. The terms and conditions of the 30 year production right would be subject to renegotiation between the parties at the renewal of the production right.
Currently the Mining Charter, which (together with the MPRDA) governs BEE in the mining sector, does not specifically make provision for the upstream oil and gas industry. The DMR proposed that the Minister be given the power to develop a Petroleum Charter for the upstream oil and gas industry and that a 10% shareholding be reserved for Black Economic Empowerment (BEE). It is understood that in light of the significant investment costs of upstream oil and gas operations and the relatively small chance of commercial success, a BEE participation level of 26% would prohibit oil and gas exploration and production. Consequently the DMR suggested that BEE participation be set at a 10% level. This level of BEE participation also takes into account the State’s 20% carried interest in projects. The enforcement of BEE requirements will be strengthened by giving the Minister the power to cancel or suspend exploration or production rights in the event of non-compliance with BEE requirements.
The DMR further proposed that the Bill be amended to omit the replacement of the South African Agency for Promotion of Petroleum Exploration and Exploitation (SOC) Limited with Regional Managers.
Parliament is currently in the process of updating the NCOP programme which will provide for public consultation in the various provinces. We remain hopeful that the Bill will be finalised in the first half of 2017.