Law firm concerned about Petroleum Resources Bill

As the global upstream sector continues to grow, law firm Webber Wentzel says there has been “negative sentiment” about the Upstream Petroleum Resources Development Bill (UPRDB), recently approved by parliament.

Webber Wentzel partner Jonathan Veeran contextualises the introduction of the UPRDB – which has received bicameral approval – noting that, for years, the regulations for oil and gas development were “entangled” with the Mineral and Petroleum Resources Development Act (MPRDA).

“We regulate oil and gas in the same way that we regulate mining, unlike most countries,” which means that the regulations are not fit for purpose, particularly because the development of oil and gas reserves can be especially technical and challenging, he explains.

Relative to mining, the costs for oil and gas development are much higher, which was one of the key drivers for the first series of amendments to the MPRDA, but “this went nowhere”, he adds.

Consequently, government concluded that there should be separate legislation for the oil and gas sector, which would, nonetheless, still be administrated by the same department as mining.

Veeran points out that the UPRDB has yet to be signed into law, despite there having been “two or three administrations” since the regulator first decided to split the legislation.

Further, the key concerns with the UPRDB are the 20% carried interest for government, and the minimum requirement of 10% participation of historically disadvantaged South Africans (HDSA).

The State will have a carried interest during the exploration phase but will need to “pay its way” if an asset goes into production.

Further, the 10% HDSA requirement has been retained, which Veeran notes is problematic, because generally, based on experiences in the mining industry, HDSAs do not provide significant contributions towards project development, especially in terms of financial contributions.

This, combined with the high costs associated with the oil and gas sector, could result in a company’s struggling to stay afloat.

“In oil and gas, we are talking costs that are exponentially higher than those of mining, and it is going to be difficult to find an HDSA partner that can contribute to those cash calls and other funding requests,” he adds.

Alternatively, an oil and gas company could carry 100% of the costs, which is ordinarily the case, but derive only 70% of the project’s benefit. Whether companies can “tolerate” such a scenario is up for debate.

He comments that, ultimately, the 20% carried interest for the State could deter potential investors and suggests that it might be better for the State to seek benefits through mandated social and labour plans, as well as corporate social investment initiatives, rather than its seeking a stake in a project.

Veeran states that, when companies realise that the South African fiscal regime for oil and gas, and the broader regulatory regime, is “not good”, they will seek other jurisdictions where it is easier to do business.

He believes that, even though the Bill has not been signed into law, the prevailing sentiment is negative, which is evident from “the number of players in lucrative blocks or good acreage that have decided to divest” from their projects in South Africa.