The government’s new Mineral and Petroleum Resources and Development Bill is causing an uproar in business circles, and not without reason. The bill essentially paves the way for government to grab 20% of any new oil or gas project in South Africa, and then acquire the remaining 80% at “an agreed upon price” – an ambiguous phrase that will strike terror into the heart of any sensible potential investor in the sector. While business has reacted to the bill with thinly disguised horror, government seems a lot more flippant. Minister Rob Davies’ told CNBC investors are tripping over themselves to get a slice of the shale gas opportunity, so we asked for a reaction from the DA’s shadow Minister of Minerals and Resources James Lorimer. Suffice it to say that the two gents are coming from opposite ends of the debate – Davies thinks government’s position is fair and reasonable, Lorimer thinks the Bill is catastrophic.
At this point, it seems fair to say that the bill, whatever its merits as a redistribution tool, will pretty much guarantee that no private money is going to be invested in developing oil and gas in South Africa. If government wants to reap the profits from South Africa’s petroleum resources, it’s probably going to have to dig them out of the ground itself. – FD
To watch this CNBC Power Lunch video click here
ALEC HOGG: James Lorimer the DA’s shadow Minister of Mineral Resources. Rob Davies is fairly flippant about this new Amendment. Are you?
JAMES LORIMER: I think he’s completely wrong to be flippant. If you look at this Amendment Bill, you can divide it into two area, which it affects: one is the mining industry where it’s very bad and one is oil and gas industry, where it is catastrophic.
ALEC HOGG: There was a tweet yesterday on Twitter obviously – where else -, where it said ‘rest in peace to the oil and gas industry before it was even allowed to begin’. Is that exaggerating, given that you’ve now said it’s catastrophic?
JAMES LORIMER: Not at all. I just want to correct something that I think was said by your interviewee this morning. This does not allow government to take over just 80 percent of any oil or gas find. It allows government to take over 100 percent. The way it works is that this Bill says government gets free carried interest of 20 percent of any oil or gas find. If somebody finds an oilfield, the government can immediately take 20 percent – free. Then, the Bill says that the government can take over the rest of it effectively, in other words the other 80 percent, to a total of 100 percent at an agreed price. Now, in the original formulation of this Bill, that said ‘a fair market price’, but it was changed at the last moment to be ‘an agreed price’ – that the government is entitled to take it over at an agreed price. We would argue that the government could go and say ‘well, you may have spent one billion Rand finding this oilfield. We’ll offer you 100 million and if you don’t take it we’ll offer you 90 million next week, but you have to sell to us’. It amounts to nationalisation in advance. Under those circumstances, certainly, what the oil and gas companies are saying to us (and remember, these guys have indeed been lining up and looking at our resources), but in the face of this , they’re saying privately to us ‘no way are we going to spend money, because if we spend money we risk losing it all through government expropriation’.
GUGULETHU MFUPHI: James, have you spoken to the industry about this, and could you elaborate on your discussion with them?
JAMES LORIMER: We’ve been in very close contact with both mining, and oil and gas, but on oil and gas, they have been extremely concerned about it. If you just look at all the meetings of the Parliamentary Portfolio Committee and indeed in Parliament yesterday, there were numerous representatives of the oil and gas industry. Remember, this industry is very new in this country and we’re really just at the point where people are ready to spend money on exploration, and these can be very large amounts of money. What the guys are telling us privately…they’re saying ‘we had money set aside to come and explore in South Africa, but because of this we’re diverting it elsewhere’.
ALEC HOGG: We spoke yesterday with Dr Luke Havemann from ENS and he said that there was a change as recently as a week ago. Could you perhaps elaborate or enlighten us as to why this change would come about at such a late stage?
JAMES LORIMER: Well, to get the full answer to that you’d have to ask the ANC. Yes, this came last Thursday evening when we were discussing the Bill clause-by-clause and this is one of the clauses near the end, which was already contentious because it had the provision for the 20 percent free carried interest, and then it said government could take another 30 percent at an agreed market price. At that late stage, they suddenly changed it and they said ‘remove the 30 percent ceiling (in other words, it can go up to 100 percent) and we’ll change the ‘fair market price’ to ‘an agreed price’.
ALEC HOGG: Is there a precedent for this anywhere in the world, James?
JAMES LORIMER: Alec, I’m not an expert but I can tell you something: anybody who has an industry has an industry because they find a way of cooperating with oil companies. I think the government has overreached itself. It tends to do this. It says ‘we have such magnificent minerals. The world will be forced to come to us on our terms’ and that does not happen.
ALEC HOGG: But surely, they must have a Plan B because this is, as we were saying to Luke Havemann yesterday, this is really stupid. If you as an investor – anywhere in the world…doesn’t matter how attractive the resource might be – are going to put your money in, on the knowledge that the government can take it away at any point in time, you aren’t going to make long-term investments, which clearly, are needed in this industry. Is there a Plan B? You guys in Parliament talk to each other. Are the Chinese waiting in the shadows?
JAMES LORIMER: That’s certainly one area of speculation. People have said ‘well, this is so foolish that it can only be designed to drive away the people who hold those leases’. That’s possible, but there are problems with that. People in the oil industry tell me that if you’re going to drill off South Africa’s coast, it’s going to be hugely expensive and you risk throwing a lot of that money down drain – as you always do with deep-sea oil explorations – and the Chinese never risk on that kind of exploration. The Chinese tend to go in where there’s an established oil business, which there isn’t in South Africa. That may be the case with shale gas where the capital requirements are not as high but nevertheless, still quite high. As far as the potential offshore oil and gas industry is concerned, it’s just mad because it’s not going to happen.
ALEC HOGG: So we know that economically it makes as much sense as the EFF’s economic processes or policies, but politically…
JAMES LORIMER: Search me. In a wider context… I can’t explain oil and gas. It just seems too crazy. In the context of the mining side of the Bill, as I said in Parliament yesterday, this is clearly designed to put maximum power in the hands of them mining Minister, to hand out goodies to comrades, cronies, and cousins (which was the formulation I used). Before, we’ve had ‘not enough’, but at least a certain amount of certainty in the regulation – that is being reduced. If I can just explain that, mining investors in mining companies have complained for a long time that there’s not enough certainty in South Africa’s current mining law. Mines take a long time to build and develop and investors need to know several years down the line what rules will govern their investments, and those rules have not been clear enough. Instead of making them clearer in this Amendment Act, the Bill contains more than 30 instances where key rules will be decided by regulation. Now, regulation is decided on by the Minister and that regulation can change fairly rapidly, and in a way that is not very transparent. If potential investors cannot see what rules will govern their investment – say, five years down the line – they’re just not going to put their money here.
