There's been a lot of action in the South African oil and gas sector over the last couple of years – excitement around fracking in the Karoo, and now the news that Exxon plans to search for deep-water oil and gas deposits off the east coast. What's fascinating about all this, I think, is the role technology is playing. The oil and gas that we have has always been there. However, until very recently, those resources were inaccessible. It's only with the development of the controversial fracking technology and more-sophisticated deep sea mining technologies that is has become feasible to map South Africa's oil and gas deposits with a view to tapping them. And the other interesting thing is how proposed legislation is acting as a brake to these developments – even as technology is making it possible to extract these resources, new legislation is undermining the investment case for doing so. – FD.GUGULETHU MFUPHI: Petroleum giant, Exxon, is on a hunt for oil and gas just off the coast of South Africa, on the East coast that is. Cornelis van der Waal, Head of Energy and for Frost and Sullivan Africa joins us now for more. Cornelis, perhaps you can provide some perspective as to how huge this opportunity is for a company like Exxon..CORNELIS VAN DER WAAL: Well the hunt for carbon resources, let's say, South of Namibia and Mozambique has been ongoing for many years, but I think the level of sophistication of what has been announced, is obviously a next step. In the past, what we've seen is that most of the exploration has been to the south of the country, and not so much to the east. However, with the massive finds of oil and gas resources, very recently in Mozambique and also in Tanzania there is the hope that on the eastern side of South Africa, further and deeper in the waters, there are opportunities for South Africa. Obviously, this is a significant opportunity. South Africa is very much dependant on the importation of pretty much all of our oil and gas resources, except for about 30 percent that Sasol produces but it's a big foreign currency expenditure for us on a monthly basis, and it would be a significant benefit to us if we could use our own resources..ALEC HOGG: This is so interesting – the area that is now being investigated, Cornelis – because historically there's been a lot of exploration there, as you say, in the south and of course on the west coast, and even through the Karoo, but not too much in that east coast, KwaZulu-Natal area, why was that?.CORNELIS VAN DER WAAL: Well I think the geologists previously thought that our reserves are further south and it is fairly deep on the east side, where we're going to be looking now. The technology to really make use of such deep-water opportunities is relatively recent, so I think, from a South African perspective, we've been looking at the, let's call it, easier opportunities first. We're now getting to a space where we need to start looking further and deeper, if we are really serious about finding something. Of course, this is not South Africa looking. This is a company from the U.S.A. that's looking for this resource and even when they do find it, there's no guarantee that it will be extracted anytime soon..ALEC HOGG: So it's a bit like fracking. The technology is there…now, to exploit this. However, more important is the legislation; 20 percent free carry. Okay, you can kind of live with that, but an 80 percent option… Would Exxon mobile be happy to explore if it has an option to be nationalised?.CORNELIS VAN DER WAAL: Well, the exploration doesn't mean anything because I don't think Government is that interested in being part of the exploration phase. Once a resource has been found then, of course, the contentious issue will start. Right now, where we are, in terms of the exploration,…it's just an opportunity for Exxon to identify an opportunity and then the discussions will start with regard to the extraction and the equity. I don't think there is any company in the world that would want to put all their effort into locating an opportunity, only to be bought out at very uncertain market conditions once a good opportunity has been found. I therefore don't think the oil industry is particularly excited about this but, realistically speaking, this is not strange in the oil world. If we take Saudi as an example, they have a 90 percent investment in all oil and gas related activities. Similarly, we see it in Mexico, Brazil, and Angola…in all of these cases Government has a stake, an equity stake in the extraction of the resources. What South Africa is doing is therefore not foreign and these oil companies are used to that, so I don't think they're excited about it but it is part of reality..ALEC HOGG: No, but Cornelis, you don't have 100 percent that goes to the Government, as is being proposed in this country. I'm sure even in Saudi they would have said, "Well, if you're going to have 100 percent, thank you very much. Count me out.".CORNELIS VAN DER WAAL: Yes, that is of course why this Bill is so contentious. Just a correction: the 20 percent is free for Government, but Government has to pay for the remaining 80 percent. However, how that value of the 80 percent is determined and how it will be paid for…there is no clarity around that. There is therefore a lot of uncertainty with regard to this industry going forward and I think before the Bill is implemented, we need more discussions on this..ALEC HOGG: Yes, of course, Government will pay, but Government will pay the price Government wants to pay. I think that brings us to the real essence of this discussion and that is why would Exxonmobil spend money exploring when there is a chance that it is going to be unwilling to go ahead, under the conditions of the proposed legislation?.CORNELIS VAN DER WAAL: Well, in the oil world, very often the individuals who find the resource are not necessarily those who would ultimately be extracting the resource, who will be ultimately refining the resource, who would be ultimately, selling the refined product. Thus, there are various opportunities throughout the various stages and what Exxon is busy with at the moment is just identifying whether there is a reserve. If there is a reserve, what is the size of this? Then, that specific area, becomes valuable. At this stage, although they pay a lot of money to do the exploration, the size of the geology there is relatively worthless, but as soon as you find a resource, then it becomes particularly valuable and that resource can be sold. Whether it is sold to Government, whether it is sold to a different oil company, or whether they extract it themselves is why they are willing to look at that area. They are using very sophisticated technologies, so they are relatively sure that they are going to find something..GUGULETHU MFUPHI: Cornelis, before you go…the worst-case scenario…if they find all of this oil but unfortunately, it doesn't get used because of the legislative issues in South Africa..CORNELIS VAN DER WAAL: Well, legislation can be changed. It is created so it can be changed again in the future. However, from the way I see it, the opportunity is still of such a size that the oil companies would be willing to take a risk that they would obviously negotiate with the Government upfront, that the 100 percent scenario doesn't materialise. However, there are no guarantees and within the oil and gas industry companies are looking for guarantees. I think that similarly, with the Shell opportunity in the Karoo, we will see a bit of a slowdown in terms of the excitement around that, until such time as there's more certainty around how this legislation will impact the industry.
