Jury out on oil and gas law

2014-03-30 14:00

It’s a brave new world for mining, oil and gas companies in South Africa after long-awaited amendments to the country’s minerals regime were given the green light by the National Council of Provinces (NCOP) on Thursday.

The most contentious parts of amendments to the Minerals and Petroleum Resources Development Act relate to “strategic minerals” as well as the state’s ability to take shares in oil or gas rights, including offshore exploration and the potential rights to seek shale gas in the Karoo.

The state now gets a 20% “free carried interest” in any oil or gas exploration, or production right. An earlier version of the bill capped the state’s additional participation at 30% while paying “fair market value”.

Now the state is entitled to buy out the whole right, but has to pay an “agreed price”. The problem is no one agrees on the meaning of “agreed price”.

The explanatory memorandum attached to the bill skips over the part about the state buying oil and gas stakes beyond the free 20% and there are no provisions for disputes around prices.

The DA asserts that “agreed price” really means “the power to nationalise any drilling operation that finds oil or gas at fire sale prices”. Only the DA-controlled Western Cape voted against the amendments in the NCOP and the opposition party was on the warpath as soon as the ink had dried.

Its shadow minister for mineral resources James Lorimer announced the DA will petition President Jacob Zuma to send the bill back to the National Assembly.

But not everyone sees it that way.

“No one is in a position to say what ‘agreed price’ means,” says Luke Havemann from law firm ENSafrica.

According to him, the mineral resources minister will have to issue regulations explaining it. It’s not just the determination of price that is unclear. “What happens if you refuse [to sell]?” he asks.

According to Havemann, the 20% free carry “could be lived with”, but the eventual rules on the state buying up to 80% more are “make or break” for the nascent oil and gas sector. But, he adds, “the baby is not yet thrown out with the bath water”.

From a mining or oil company’s perspective, “agreed price” could be seen as added protection and not an attempt to expropriate the best finds.

Manus Booysen, a partner at law firm Webber Wentzel, says it seems to mean exactly what it says – the seller has to agree to the price. “This is progress,” he told City Press.

The thinking is that “agreed price” might imply a variant of “willing buyer, willing seller”, which might serve the interests of oil and gas companies much like it served the interests of landowners.

According to Booysen, the free carry and the additional stakes the state may take should be seen in the context of the BEE requirement. That makes the local situation very different from other jurisdictions, where governments also part-own oil and gas resources.

The new version of the act also changes the BEE rules for especially offshore oil and gas prospects. The ownership target of 10% can now move to the 26% that applies to mines. That would mean a foreign or white-owned oil company exploring for gas or oil would have to give government 20% and sell another 26% to a local partner, in effect capping its interest at 54%.

This significantly changes the situation for offshore explorers, who in recent years have snapped up exploration rights to practically the entire South African coast, but have yet to report any significant new finds.

Jonathan Veeran, another Webber Wentzel partner specialising in oil, says Mineral Resources Minister Susan Shabangu will now need to issue a raft of regulations to bring the amended law into effect.

The mineral resources department will, among other things, have to unveil which minerals are “strategic” with coal for Eskom and iron ore for steel making being the most likely candidates.

After that, the department can regulate their export and have mines offer part of their production to local users at either the “mine gate price” or, as with oil and gas shares, an “agreed price”.

Karoo gas could be an industry ‘game-changer’

It has been speculated that the Karoo potentially hosts massive reserves of shale gas that could be unlocked using hydraulic fracturing (fracking).

These potential shale gas reserves have been deemed a “game-changer” by everyone from the president and the mineral resources minister to

Eskom and Shell.

Shell and two other applicants for exploration rights in the Karoo are now waiting on the mineral resources department, which is yet to publish the final technical regulations for fracking – rules around water conservation and well design.

“It could be tomorrow, it could be five months,” says Shell’s upstream general manager in South Africa, Jan-Willem Eggink.

On Thursday, he delivered a lecture at Wits University’s School of Geosciences about fracking in the Karoo. “It is very possible we find nothing, but we need to drill holes.”

If gas is found in a high enough concentration, a pipeline infrastructure will have to be established connecting remote Karoo locations with industrial centres and a port.

Given the probable costs of building pipelines and possibly importing water to the semi-arid region, a relatively large and concentrated reserve will have to be found to justify the expense.

According to Eggink, Shell or its competitors would probably have to find at least 20?Tcf (trillion cubic feet) of recoverable gas within an area of up to 40 square kilometres by 40 square kilometres.

That would be 20 times the size of the natural gas reserve that has served Mossgas in Mossel Bay since 1992. This would qualify as a so-called “sweet spot” worth the large investments required.

1?Tcf is required to fuel 1?000 megawatts of a gas-fired base load power plant for about 25 years.

The economics change significantly depending on where in the Karoo the potential gas find is, Eggink adds. If it is near the edge of the vast semidesert, that’s better.

If it is right in the middle, the smarter use for it might be building a power station right there and hooking it up to Eskom’s grid.

The answer to most questions is “we don’t know”. “We need to drill holes,” says Eggink.

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