Regulatory uncertainty continues to weigh down South Africa’s oil and gas sector

5th August 2015

By: Terence Creamer

Creamer Media Editor

  

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The uncertain regulatory framework for oil and gas exploration and development in South Africa was likely to result in delays to the development of offshore and unconventional “frontier” projects, particularly in light of the depressed pricing environment, PWC’s latest Africa Oil & Gas Review states.

However, Africa oil and gas advisory leader Chris Bredenhann expressed optimism that discussions between government and the industry on amendments to the Mineral and Petroleum Resources Development Act (MPRDA) could result in “significant updates” to the legislation.

“The new terms have been discussed with industry stakeholders through Project Phakisa, and we expect to see favourable legislation soon,” he said at the release of the report in Johannesburg.

Bredenhann cautioned, however, that it was unlikely that separate legislation would be drafted for the mining and oil and gas industries as had initially been proposed to cater for the vastly different stages of development of the two industries.

The oil and gas industry had expressed unhappiness with proposed MPRDA amendments, which not only stipulated a 20% free-carry for the State in projects developed in South Africa, but an indication that, in certain instances, government might take an even higher position. No pricing formula was outlined for the acquisition of additional stakes, which would also be over and above prescribed black economic-empowerment ownership.

The industry was also concerned that the Minister had discretion to declare minerals “strategic”, which could affect the ability of companies to export resources that had been designated for beneficiation within the borders of the country.

There were also concerns about the Department of Mineral Resources assuming control of the licensing of oil and gas acreages – a function currently performed by the Petroleum Agency of South Africa, which was viewed as relatively independent and efficient.

Bredenhann said companies were hoping for greater certainty on the ownership formula, in particular, so that they could model its effect on project returns.

However, PWC senior manager Derek Boulware suggested that the legislation might also need to take account of the relative underdevelopment of the sector so as to find a risk-reward balance that was supportive of investment.

“When we look at fiscal systems across the globe, we find that ‘frontier plays’, or territories that don’t have proven resource bases, need to be encouraging investment. So you generally won’t have a very large government take until the reserves base increases, which is when you would typically increase that government portion of the pie,” Boulware asserted.

But the review also showed that South Africa was not alone on the continent with regards to presenting regulatory uncertainty. In fact the issue again topped the list of challenges confronting the industry, followed by Africa’s poor physical infrastructure and concerns over corruption and ethics.

But the 53 respondent firms, which included oil majors, explorers and oilfield service companies, identified the decline in oil and gas prices as having the highest potential impact, with the vast majority expecting oil to trade well below $100/bl for the coming three years.

For 2015, 93% of respondents expected the Brent crude oil price to trade in a range between $50/bl and $80/bl, while gas prices were also expected to remain depressed.

GAS TO POWER?

On prospects for South Africa’s gas-to-power sector, Bredenhann said he was encouraged by the fact that over 200 project submissions had been made in response to the Independent Power Producer (IPP) Office’s request for information, which closed on July 20.

However, the Department of Energy (DoE) had not yet released the Gas Utilisation Masterplan, or Gump, which was expected to offer a roadmap for the facilitation of a gas-based IPP sector in South Africa.

The DoE confirmed in Parliament this week that the draft Gump, which was likely to outline liquefied natural gas import and domestic production options, had been completed. However, it was still making its way through internal departmental processes.

The development of the gas IPP sector beyond the 3 126 MW expected to be procured through a competitive-bidding process would also depend on the future of the Integrated Resource Plan for electricity, as the current 2010 version was relatively light on gas.

Edited by Creamer Media Reporter

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