A new and updated Upstream Petroleum Resources Development Bill, which was introduced to Parliament on July 1, is a significant improvement on its predecessor, report law firm Herbert Smith Freehills’ (HSF’s) Peter Leon, Paul Morton, Ernst Muller and Lauren Paxton.

In a note, the authors state that it is encouraging that many of the concerns they raised in their previous brief, which considered the 2019 Bill, have now been addressed.

Petroleum products company Total South Africa’s initial discovery just over two years ago of gas concentrate in the Outeniqua basin – the Brulpadda prospect, Block 11B/12B – offshore of South Africa, has placed a spotlight on the potential of South Africa's upstream oil and gas industry.

The Brulpadda prospect represents a deposit reportedly containing about one-billion barrels of oil equivalent.

Further highlighting the country’s oil and gas potential is a second significant gas concentrate discovery made in the Outeniqua basin – the Luiperd prospect, Block 11B/12B – off the south coast of Mossel Bay in October 2020.

The authors suggest that, in response to the first discovery, on December 24, 2019, the Mineral Resources and Energy Minister published the Draft Upstream Petroleum Resources Development Bill.

This Bill, they say, sought to ensure that the upstream petroleum sector was no longer regulated under the Mineral and Petroleum Resources Development Act (MPRDA), but rather under discrete petroleum legislation.

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, state the authors. 

However, despite these improvements, the HSF authors state that certain aspects of the 2021 Bill, remain problematic.

In this regard, they say that, 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. This will also provide Parliament the opportunity to make further improvements.

KEY DIFFERENCES

The key differences between the 2019 Bill and the 2021 Bill are its principal rights, permits and approvals; the State’s carried interest; its strategic outlook; its exit and dilution of black persons’ participation in petroleum rights; its minimum work commitments and annual plans; transfer restrictions; the postponement of the development of a petroleum field; third party access to upstream petroleum infrastructure; exploration and production periods; and transitional provisions.

The structure of the 2021 Bill follows a more organised and systematic approach under which the application, grant and duration of reconnaissance permits, retention permits and petroleum rights, as well as the rights and obligations accruing to the holders of such rights, are set out in separate provisions, the authors point out.

This is an improvement on the 2019 Bill, which included such processes in a single provision, making it difficult to follow, they say.

Moreover, all fiscal provisions have now been removed from the 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 (DMRE),” the authors state.

In terms of carried interest, the authors say the State's carried interest in a petroleum right, through the State Petroleum Company (SPC), remains at 20%, as provided for in the 2019 Bill. However, they say this will come as a disappointment to many in the industry who were expecting a reduced level of State participation, which is high by regional standards.

As for the new Bill’s outlook, the HSF authors highlight that the 2021 Bill mandates petroleum right holders to sell a percentage of petroleum at the prevailing market price to the SPC to meet the State's strategic stock requirements.

As was the case with the 2019 Bill, the 2021 Bill provides that every petroleum right must have a minimum of 10% undivided participating interest by black persons, thereby meaning 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%, states HSF.

Regarding minimum work, the authors highlight that the 2021 Bill requires that petroleum rights must include a clause outlining a minimum work commitment, together with a corresponding minimum expenditure amount to be met by the petroleum right holder during the exploration phase or production phase. This must be accompanied by an annual work plan and corresponding budget.

However, the authors state, the notion of “minimum work commitments” is extended beyond the exploration phase to the production phase, which is unusual. 

As for transfer restrictions, the authors point out that the 2021 Bill “lightens the burden” which the 2019 Bill placed on companies wishing to transfer and/or encumber a petroleum right.

As such, listed companies are no longer subject to this provision, and the Mineral Resources and Energy Minister’s written consent is only required for the transfer or encumbrance of a controlling interest in an unlisted company.

Also, the new Bill permits the Petroleum Agency, having regard to national interests, after consultation with the Minister of the DMRE and the holder of the rights, to postpone the development of a petroleum field.

Also, the authors note that the newly inserted Clause 68 of the 2021 Bill governs third-party access to upstream petroleum infrastructure; while also pointing out that petroleum rights during the exploration phase are valid for nine years in shallow waters and 14 years in deep waters.

Lastly, the authors note that the 2021 Bill provides clear transitional provisions for existing right holders in comparison with the 2019 Bill.