Seemingly in response to the first discovery, on Christmas eve, 2019, the minister of mineral resources and energy published the Draft Upstream Petroleum Resources Development Bill seeking to ensure that the upstream petroleum sector is no longer regulated under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA), but under discrete petroleum legislation.
The 2019 Bill has since been overhauled. On 1 July 2021, the revised Upstream Petroleum Resources Development Bill was introduced to Parliament.
This Bill is a significant improvement on its predecessor.
The regulatory framework created under the new Bill is promising and brings an additional degree of regulatory certainty – and, hopefully, investor confidence – to a sector which has been in a holding pattern for many years.
Despite these improvements, certain aspects of the 2021 Bill remain problematic. Fortunately, the Bill must still undergo an extensive Parliamentary process (including a national public participation process) which will afford the public (and the industry) an opportunity to voice their concerns and Parliament the opportunity to make further improvements.
Moreover, all fiscal provisions have now been removed from the 2019 Bill. This is an important change since, constitutionally, fiscal matters fall under the responsibility and domain of South Africa's National Treasury and outside the jurisdiction of the Department of Mineral Resources and Energy.
Different from the mechanism provided under the 2019 Bill, the new Bill confirms that the holder may recover the State's share of expenses from the State's proportionate share of production or revenue. These expenses include 50 per cent of the exploration costs and 100% of the production costs. More detailed cost recovery rules may be set out in subsequent regulations, as well as in the terms and conditions of the petroleum right itself.
Furthermore, the ambiguity surrounding the structure of the state's participation – resulting from the 2019 Bill interchangeably referring to PetroSA (the then state petroleum company) being a party to a shareholders agreement and to a joint operating agreement (JOA) – is now removed. The 2021 Bill provides that the SPC must conclude a JOA with the petroleum right holder, or become a party to an existing JOA, and appoint a minimum of two representatives to the joint operating committee to represent the state. The SPC's participation will therefore be held directly at the level of the petroleum right through a JOA.
The 2021 Bill provides that this participation by black persons may be diluted to no less than 5% for the purposes of raising capital. Such dilution will not trigger a requirement for the petroleum right holder to augment black persons' participation to 10%.
The 2021 Bill retains the minister's ability to reserve block(s) for black persons, but now allows such persons' participating interest in respect of such blocks to be diluted to no less than 3% in aid of capital raising. Under the old Bill, a dilution of black persons' participation below 51% triggered state-carried participation.
Black persons may exit from a petroleum right and the empowerment credentials of that specific petroleum right will be recognised for the duration of such right, provided that:
(a) black persons have held an undivided participating interest for a minimum period equivalent to one third of the duration of the initial term of the production phase of that petroleum right;
(b) at least 50% net value has vested in black persons;
(c) an agreement detailing exit mechanisms and black persons' financial obligations is submitted to the Petroleum Agency; and
(d) the recognition of empowerment credentials may not be claimed or recognised for other petroleum rights or future petroleum right applications.
Unusually, the notion of 'minimum work commitments' is extended beyond the exploration phase to the production phase as well. Ordinarily, such minimum work obligations are linked to the right to continue holding the exploration rights to the area, while oversight during production would normally be maintained through the submission of annual work programmes.
Failure to comply with minimum work commitments constitutes a breach of the terms and conditions of the petroleum right which may result in a fine or imprisonment. This is also unusual, as, ordinarily, a failure to comply with minimum work obligations would be sanctioned by payment of a penalty (for example, equivalent to the minimum expenditure obligation).
The reference to controlling interest has given rise to much controversy under section 11 of the MPRDA (the provision on which the wording of the clause under the 2021 Bill is largely based). Fortunately, the 2021 Bill includes a definition of controlling interest providing that it is "the majority of the voting rights attaching to all the classes of shares in a company or, where the holder is not a company, any interest that enables the holder to exercise directly or indirectly any control over the activities of the assets of the business or the petroleum right.
Such a right to postpone development is somewhat unusual; it is not clear what factors or issues would be considered under "national interests". However, the impact of this provision is mitigated by the consultation obligation and the fact that the term of the petroleum right is extended for the period of such postponement.
The Petroleum Agency is required to first consult with the affected petroleum right holder before making such a decision.
The grandfathering provisions allow for any reconnaissance permits, exploration rights (for the exploration and production phases), production rights, social and labour plans, permissions to remove and dispose, and technical co-operation permits in force immediately prior to the promulgation of the 2021 Bill to remain in force until their expiry.
Under the 2021 Bill, pending applications lodged in terms of the MPRDA, but not finalised before the 2021 Bill takes effect, must be finalised in accordance with the mechanism set out under the MPRDA. This clarifies the uncertainty ensuing from the 2019 Bill as to whether an applicant is required to supplement a previously lodged application in order to comply with obligations set out in the 2021 Bill that were otherwise inapplicable under the MPRDA.
Once production commences, the Brulpadda and Luiperd deposits have the potential to generate substantial benefits for South Africa.
The Luiperd drilling campaign alone employed 195 South African professionals during its first four months from August 2020 to November 2020, and is expected to generate R1.5bn for the domestic economy through expenditure on training, housing, as well as logistics services to and from the oil rig.
The Brulpadda and Luiperd discoveries together would replenish gas supply at Mossel Bay's gas-to-liquid refinery, Mossgas – on the brink of running out of gas – which could supply 8% of the crude oil which South Africa currently imports; imports which cost the economy approximately R200bn per year.
To accelerate Total's route to commercialisation, the natural gas infrastructure supplying Mossgas would be required to be converted into a large, natural gas-fired power station, rather than a peaking plant using diesel at four times the cost, which would result in R20bn worth of imports per year being substituted by domestic supply.
This increase in economic activity will, in turn, generate increased fiscal revenue for the country as a result of corporate tax and royalties imposed on profits from production.
From a socioeconomic perspective, the benefits include: a progressive development in South Africa's green energy transition as gas-to-power plants emit 60% less carbon dioxide than fossil fuels, as well as greater employment opportunities relating to oil refining, downstream activities and ancillary business.
The 2021 Bill clarifies a number of the unclear or ambiguous provisions from the 2019 Bill and sets a generally sound and bespoke legislative framework for the upstream oil and gas sector in South Africa. Industry participants can hope that regulation of the upstream petroleum sector will become a key regulatory focus, given the country's historical focus on mining in the extractives sector.
