Business

Gas boom gains ground, but state needs to revise the rules

2019-11-10 12:09

The discovery of large South African offshore gas deposits has buoyed the oil and gas sector, but legislation needs to be finalised to attract investors and ensure that citizens benefit from the exploitation of the country’s resources.

The discovery was made in February by oil and gas company Total at its Brulpadda prospect, located 175km off the southern Cape, in the Outeniqua basin. Estimated to contain 1 billion barrels of oil equivalent, the find has been lauded as “a game changer” for South Africa by Adewale Fayemi, managing director for exploration and production at Total. He was addressing delegates at this week’s Africa Oil Week conference, held in Cape Town.

The discovery of gas in the Rovuma basin, off Mozambique’s northern coast, which holds an estimated 32 billion barrels of oil equivalent, has also spurred interest in drilling off KwaZulu-Natal – where Sasol and Italian multinational oil and gas company Eni have exploration rights.

However, the drilling of six exploration wells off KwaZulu-Natal has been stalled by 47 appeals, lodged in terms of the National Environmental Management Act.

As reported by City Press on October 27, the appellants include a dive centre, academics, environmental nongovernmental organisations, a documentary production company, an architectural firm, marine biologists and an eThekwini ward committee. The appellants are challenging the authorisation granted by the department of mineral resources and energy.

The Brulpadda find – undertaken by Total, despite a lack of legislative and regulatory clarity on issues such as future cost recovery – has also renewed interest in exploration. This interest has been spurred by the recent publication of government’s long-awaited Integrated Resource Plan, which provides for an additional 3 000 megawatts of gas-fired power by 2030.

However, said Fayemi this week, in order to unlock the potential billions of rands worth of investment in exploration and infrastructure, government needs to provide an enabling environment for investors.

The splitting of minerals and energy into separate departments in 2009 created a host of practical problems regarding governance of the petroleum sector. This was exacerbated by minerals and petroleum having been combined in the Mineral and Petroleum Resources Development Act of 2002. The act regulated exploration and production of oil and natural gas (known as the upstream sector), but it fell solely under the authority of the mineral resources minister.

The Mineral and Petroleum Resources Development Amendment Bill of 2008 further stultified the development of the upstream petroleum sector by about five years, said Peter Leon, a partner at global law firm Herbert Smith Freehills and co-chair of its Africa practice.

Leon said government had now “clearly recognised” that petroleum needed its own legislation. Hence, the Brulpadda discovery had led to the withdrawal of the amendment bill and the development of the new Petroleum Resources Development Bill, focusing on the oil and gas sector.

Kishan Pillay, director of upstream and midstream oil and gas in the department of trade and industry (the dti), said the bill’s finalisation would lead to much-needed investment in South Africa.

“We need to get the ball over the line,” said Pillay. “Operators want to know that the rules of the game are set. They want to understand how they play within those rules, and to understand that if there are going to be changes down the line, how these changes will be effected. But the main thing they want to know is the price risk.”

Pillay said that Mozambique had set an example by modelling its legislative framework on Norway’s best practice. As a result, Mozambique was now the recipient of $80 billion (R1.2 trillion) in foreign direct investment linked to the Rovuma basin discovery. The amount is more than five times the country’s GDP.

Pillay emphasised that as long as there was policy certainty and the rules of the game were clear, investors could run their financial models and make decisions.

He added that it was an encouraging sign that the department of minerals and energy was in constant consultation with the dti, other government departments and industry. “It is important that we have been called in at the very beginning of this process, and we are moving with speed to get a piece of legislation that seeks to create a win-win for industry and the interests of the country.”

Tebogo Motloung, acting general manager of Petroleum Agency SA, a state-owned entity responsible for regulating the upstream oil and gas, said the agency was “excited and emboldened” by the Brulpadda discovery, and was working to finalise legislation as soon as possible.

Motloung said government needed to ensure that the interests of exploration companies, the state and citizens were balanced in the exploitation of gas resources.

READ: State plan to allow drilling off KZN coast to be further delayed as activists fight back

He said state interest in exploration agreements was being pegged at 20% and that issues of cost recovery had to be settled, given that “generous” contributions from government were provided within the Income Tax Act.

“It is about framing a balanced discourse, taking into account the generous fiscal dispensation that we have. The key issue lies in ensuring the acceleration of exploration. We are moving with speed to create legislative certainty; we simply want to see exploration wells being drilled.”

But, he added, the upstream sector was “not as inclusive as we want it to be”. This was something that the regulator was paying attention to.

Pointing to exemplary case studies such as Ghana, which had also replicated the Norwegian model, Motloung said: “We are going to Norway to engage with authorities there and determine how we can maximise opportunities to improve the lives of our people.”

Delivering the keynote address at Africa Oil Week, Mineral Resources and Energy Minister Gwede Mantashe said the Petroleum Resources Amendment Bill would “be before Cabinet soon”.

He also announced that South Africa’s first liquefied natural gas hub would be established at the Coega Industrial Development Zone in the Eastern Cape. This would lay the foundation for a new gas-to-power plant and see the conversion of existing power plants from expensive diesel to gas.

“We also intend to use that location as a base for importing feedstock for the gas-to-liquids refinery in Mossel Bay,” said Mantashe, adding that the framework to support this “major programme” would be announced “in the near term”.

Despite a protest by global climate activist group Extinction Rebellion at the start of the conference, no mention was made of environmental concerns related to exploration and drilling during Africa Oil Week.

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December 15 2019