January 24, 2018

Global oil turmoil: Long term view needed

 Jenny Erskine

 Jenny Erskine, Deloitte’s Western Cape Senior Manager in oil and gas

Short term relief for industry following rejection of MPRDA Amendment Bill

The continued drop in the oil price in recent months has sparked fears about the economic domino effect that this could have on both local and international markets, especially on the infant South African oil and gas industry. This month alone the oil price dropped to a five-and-half year low. As government prepares to invest in South Africa’s oil and gas industry through Operation Phakisa, which aims to unlock the economic potential of SA’s oil and gas industry, investors now need to adopt a long term view to weather the storm.

This is the view of Jenny Erskine, Deloitte’s Western Cape Senior Manager in oil and gas, who says that international oil and gas companies are cutting back on investing in upstream and downstream operations due to the uncertainty around the oil price.

In addition, the lack of clarity on the application of the draft Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill in the country has resulted in a lack of spending on exploration activities by international oil and gas companies.  However, the President’s recent rejection of the Amendment Bill to the MPRDA has been welcomed by the oil and gas industry.

“South Africa needs to be ready to capitalise on a potential economic boom that may stem from oil and gas exploration. The only way for companies to survive the current oil price plunge is to adopt a long term view, so that when there is an uptick in prices, South Africa is ready to reap the investment returns.”

Erskine explains that government plans to invest in oil and gas exploration off South Africa’s coastline as well as onshore, as per the action plan set out in the recent Operation Phakisa.

“Although South Africa’s oil and gas sector is in the early development phase, it has the potential to create significant economic value for the country.”

The potential exists that the country has the equivalent of forty years of South Africa’s own oil consumption off its coast which could see the country producing roughly 370 000 barrels of oil and gas per day. This could in turn create more than 130 000 jobs and develop additional South African industries, such as chemicals and power.

“An economic boom will only happen once there is large-scale exploration interest from the local and international oil and gas industry. Currently there is a double-edged sword preventing this from taking place; the tough trading environment created by the plunge in the oil price, which sees fewer companies spending money, as well as the current regulatory environment.”

Erskine says that two areas in the MPRDA Amendment Bill that gained specific attention from industry participants were the principles of “free carry” and government’s ability to purchase the remaining interest in licences at a reasonable price. Regulations permitted government to a 20% free share in profits (“free carry”) in all new gas and oil projects, yet there was no clear indication as to how this will be implemented, creating uncertainty within the industry.  However, the recent rejection of the Amendment Bill has brought investor relief, given that it is hoped that these uncertainties would be addressed by the National Assembly through the revision of the proposed Amendment Bill.

“History has shown us that investors in the oil and gas industry prefer certainty and clarity in regulations to facilitate investment in the industry.  If the next draft does not adequately address these considerations, investors could move to some of our African counterparts, such as Mozambique, Kenya and Nigeria, who show great potential in oil and gas, and provide fewer barriers to entry.

“While the global oil market experiences turmoil, we must gear for growth by acting swiftly and decisively on completing the next version of the MPRDA Amendment Bill that addresses investor concerns and opens SA as a new frontier in Africa. Companies must also adopt a long-term view so that once the oil price stabilises, the country will be in a better position to reap the economic benefits of a growing oil and gas industry,” concludes Erskine.

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