South Africa may have its challenges, but it is a very rich country in terms of its natural resources. Locked up in South Africa, are potentially, some very rich oil and gas reserves. Will we ever see them? Will they ever be brought into account? The Mineral and Petroleum Resources Development Amendment Bill will make a difference. Dr Luke Havemann, Oil and Gas expert from ENSafrica, was on the Power Lunch today, unpacking the realities of the new bill and what having the right legislation in place could do for South Africa. The potential for a booming industry is massive, and it is imperative that the country leverage its position on the continent as multinationals compete in the second scramble for Africa. – LFÂ
ALEC HOGG: Welcome back to Power Lunch.  Dr Luke Havemann, Oil and Gas expert from ENSafrica, I guess there aren’t too many who specialise in your field in in the law, in South Africa.
DR LUKE HAVEMANN: No, there are very few of us. I’m in the fortunate position of holding down a PhD in field, so that is something that distinguishes me from the other lawyers in the field, which is nice to have.
ALEC HOGG: A ‘go to’ man when it comes to this, and you’re our ‘go to’ man on this, as well. Last time we spoke, there was a change. It was just ahead of the election. It appeared as though government had almost kyboshed the whole fracking opportunity before it even got off the ground, to say nothing of the east coast of South Africa – the exploration there, but there have been some developments.
DR LUKE HAVEMANN: There have recently been some interesting developments. As you know, the last time we spoke the situation was that the Bill was possibly going to stymie the advent of this oil and gas industry. There were certain provisions and there was a lot of push back from the industry – very unhappy with certain provisions. We spoke about them in some detail last time. For example, we were talking about a simple thing: making the DMR (Department of Mineral Resource) the final authority on environmental issues. That was a problematic provision, but perhaps most of the push back came along the percentage interest that was available to the government and what was at stake there. We had the 20 percent free carried interest, which we spoke about.
ALEC HOGG: That wasn’t a problem. Just to put that in perspective: the government would then get 20 percent of every project – free. They wouldn’t pay anything.
DR LUKE HAVEMANN: That’s the idea behind it. You would get 20 percent free carried interest, so you get a free ride for 20 percent of the net profits without any capital expenditure. The problem came with what was an addition to that. The Bill made provision for an additional participation interest at an agreed price. Originally, the first draft of the Bill said ‘well, we’re going to cap that additional interest at 30 percent and it’s going to be fair market value’.
ALEC HOGG: Just stop there. That meant the government could then go up to 50 percent of every project if it wanted to, so it gets 20 percent anyway, but there was a 30 percent that they could have gotten. That was the original legislation.
DR LUKE HAVEMANN: That was the draft. That was then taken away fairly swiftly, and replaced with as much as you can take at an agreed price. There was no set…there was no cap at 30 percent. The questions that were raised about that was ‘what happened to the cap, what’s an agreed price, and what happens if there isn’t agreement’.
ALEC HOGG: Just to go back with that, because it is very relevant there: they get 20 percent free. You then have an agreed price, – which the DMR or somebody in government could decide upon, – of any project, which would give the government or the State the ability to take the whole project – another 80 percent.
DR LUKE HAVEMANN:Â Theoretically, that was possible.
ALEC HOGG:Â Why would someone want to invest with those rules?
DR LUKE HAVEMANN: Exactly. If you look at an industry where it costs multimillions to invest – you’re looking at $200m to go and have an exploratory well to drill – why would you go and invest into a country where possibly/theoretically, it’s possible for the government to take away such a massive percentage. It just didn’t make sense and there was obviously a lot of push back in that regard, and that was just one example of the problems with the Bill but possibly, the most important problem.
ALEC HOGG: So what’s happened, subsequent to that?
DR LUKE HAVEMANN: Well, we’d actually gotten to the 11th hour, where the Bill was sitting in front of President Zuma for signature. It had gone the whole hog, save for that last signature. Fortunately, (and we’re all breathing a sigh of relief) it’s been pulled back by our new Minister of Mineral Resources. He says he’s going to have a look at this and with a committee; they’re going to look at these problematic provisions. I think the word used was ‘hostile provisions’ or ‘hostile clauses’. There’s acknowledgement that what we were going to change about our law, was not appropriate and we need to have a look at whether or not what we’re doing is sufficient to continue to attract foreign investment. We’re a very young industry – oil and gas wise – very young in South Africa, but in the last three years there’s been a massive increase in the number of international oil companies that have come into our waters, and big ones.
We’ve had what we call super majors. We have the likes of Exxon, Total, Shell, and now very recently, ENI (the Italian company that’s just come into our waters). They wouldn’t be coming unless there was an interest, and unless there was a possibility of there being decent reserves, but we have to provide the right regulatory environment. We actually have to entice them; otherwise, the alternative is that they simply go to jurisdictions where the terms are more favourable.
ALEC HOGG:Â And in Africa, there are many of those.
DR LUKE HAVEMANN: There are many. Africa is the hotspot at the moment for oil and gas. It’s referred to as the second scramble for Africa. If you look at what’s happening in Mozambique, Kenya, and Tanzania it’s undoubtedly the ‘go to’ destination for oil and gas on the globe at the moment. However, we are behind the rest of our fellow countries/our neighbours, because our law is hampering us.
ALEC HOGG: So with the new/proposed amendments – again, to the law before it finally goes to President Zuma -, what are you expecting will come out of this that will be sufficiently attractive for the international companies, to participate?
DR LUKE HAVEMANN: It depends on which side of the fence you’re sitting – if you’re sitting on the side of government or if you’re sitting on the side of industry. There’s always going to be a natural tension between what the industry would like to get back for their efforts, and what government would like to retain as custodian of the resources for the populace. What we’d like to see is the right balance struck. At this stage, we can’t be certain which clauses will be looked at and possibly amended, but we’d like to see something dealt with – predominantly that issue about the additional interest needs to be addressed. Certain other things about the DMR being the final authority on environmental issues…things like that should be looked at, but we’re not yet certain so we wait with baited breath. We’re very happy that this has been pulled back, but we’re not yet popping the champagne.
ALEC HOGG: Luke, you work around the world. This proposed legislation in South Africa – because that’s what it remains – how does it compare with other African countries?
DR LUKE HAVEMANN: The problem we have in South Africa, relative to the other jurisdictions that I work in is that South Africa has a statute that governs both terrestrial mining and for example, offshore oil and gas. We have gold mining, and oil and gas, governed by the same statute, which are two entirely different industries. There’s been a lot of talk about this for some time as to whether or not oil and gas should be taken out of the MPRDA and given its own statue, which is industry-specific, or not. The dominant approach around the world – what’s considered best industry practice – is to have an independent statute that deals just with industry. If you look at Mozambique, they’ve gone that route. Uganda’s recently gone that route. There are one or two jurisdictions that are not yet going that route. For example, Burundi’s not there but we’re not there and we should be there.
ALEC HOGG: We’re quite a bit bigger than Burundi. The miners were very happy with the way the MPRDA came out. They had a lot of negotiation, a lot of engagement with government, and I suppose ‘very happy’ would be excessive, but they were comfortable with the final Act as it came through, or as it was proposed. The problem lay on the oil and gas side, which hopefully now, will be adjusted.
DR LUKE HAVEMANN: Yes, the oil and gas industry, and the mining industry, which needs to be borne in mind, are very different industries. You can be happy for different reasons. Gold mining in South Africa has been done for a very long time. We know what we’re doing and the conditions are x, y, and z. In oil and gas, the conditions are a, b, and c. It requires different forms of investments and different amounts in different… If you think of it, just simply where you’re looking. Geographically, we’re offshore in a very harsh environment, drilling at extreme depths that’s costing a hell of a lot.
ALEC HOGG: Yes, and exploration is multiple when you’re doing oil and gas. Just to go, finally, on this point: why would the multinationals come here and want to explore here if they don’t have certainty yet in the legislation?
DR LUKE HAVEMANN: There are many reasons for that. If you think about the low-hanging fruit in terms of oil and gas reserves around the world, have essentially been picked. If you’re looking at the North Sea, it’s coming to the end of its life. If you’re looking around for resources…to find that resource, you have to go and explore for it. You’re constantly having to go and look for it. The discoveries off our east coast of Mozambique, and the discoveries off the Falkland Islands for example, are indicative of the possibility of their being decent resources or commercial resources rather, off the South African coastline or on-shore in terms of for example, shale gas. It’s enticing to come and look, and see what we have as nation, and what could possibly be exploited.
ALEC HOGG:Â Very quickly, the whole fracking story: are we getting closer to seeing it come to fruition?
DR LUKE HAVEMANN: We’re slowly but surely getting there in terms of the legislation, in terms of the regulations that are being put out and the commentary on them, so we’re getting there but we still haven’t yet gotten out of the gates. We still have some way to go.
ALEC HOGG: Luke, thank you for that update. Luke Havemann is with ENS South Africa. He’s the country’s oil and gas expert on the legal side. It is a huge potential industry. We have to get this one right.
