July 22, 2017

Positive Legislative Developments afoot for South Africa’s Oil and Gas Industry

By David Forfar, Head of Oil and Gas, Bowmans, South Africa

On Tuesday, 9 November 2016, representatives of the Department of Mineral Resources (DMR), including Minister Zwane, briefed the National Council of Provinces (NCOP) on significant developments relating to the Mineral and Petroleum Resources Development Amendment Bill 15 of 2013 (the MRPDA Bill). The briefing, which took place before the NCOP’s Select Committee on Land and Mineral Resources (the Committee), covered a variety of issues from amendments aimed at streamlining inter-departmental processes to amendments addressing the discretionary nature of certain ministerial powers.

Although aspects of the Bill that will impact upon the activities of the mining industry constituted a significant portion of the briefing, the DMR revealed that negotiations with representatives of the upstream sector of the petroleum industry had led to a decision to modify certain aspects of the Bill. Of these modifications, the most significant relates to the issue of State participation.

One of the strategic objectives of the Bill is to “[p]rovide for the State’s active participation in the development of petroleum resources” and, to that end, the MPRDA Bill proposed the insertion of s86A into the Mineral and Petroleum Resources Development Act of 2002 (the “Act”).

Section 86A proposed, amongst other things, the granting to the State of a right to a 20% free carried interest in all new exploration and production rights, as well as a further participation interest in the form of acquisitions at either an agreed price or through production sharing agreements.

Based on its negotiations with the upstream sector, as well as certain outcomes of Operation Phakisa (an initiative by the South African government aimed at fast tracking the implementation of solutions on critical development issues), the DMR decided “to relook at clause 86A and find a win-win solution for the [upstream] sector taking into account its frontier nature.”

As a consequence of this, the DMR advised the NCOP that s86A of the Bill had been reworked to delete the reference to free carried interest in favour of a 20% State carried interest linked to a cost recovery mechanism that can be employed during the production stage. We await revised drafting of the Bill for fine detail.

The DMR also revealed that the unpopular proposal under the Bill to abolish the well-respected Petroleum Agency of South Africa (“PASA”) will be omitted.

A further legislative development that was brought to light by the DMR and which will be of interest to the upstream sector relates to the uniquely South African issue of black economic empowerment (“BEE”). The Bill has proposed that the upstream oil and gas sector should be subject to the Mining Charter which, amongst other things, requires companies to be 26% black owned.

Currently it is understood that BEE-related divestment obligations were not more than 10% of the participating interest of an upstream endeavour, consequently the possible impact of a proposed 16% increase in participation was a taxing development.  The DMR conveyed to the NCOP that a Petroleum Charter will be developed for the oil and gas sector and that, due to the prohibitively costly nature of upstream ventures, participation by black South Africans beyond a threshold of 10% would not be feasible. Although the DMR did not delve into the exact nature of the proposed Petroleum Charter, it did convey that it plans to develop and promulgate the Petroleum Charter within 12 months of the Bill being assented to.

As part of the introduction to its briefing of the NCOP, the DMR pointed out that “the first decade since promulgation of the Act has provided the benefit of jurisprudence on the basis of which inherent weaknesses are being addressed.”

At first glance, the newly proposed amendments, especially those addressing State participation, the retention of PASA and the proposed Petroleum Charter, may well provide an improved regulatory environment for the petroleum industry that, jurisprudentially and practically, could go some way towards addressing the weaknesses of the Act and the Bill.

ends

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