EDITORIAL: SA must step on the gas
The country needs an attractive oil and gas legislative framework — fast
After years in the making, SA’s oil and gas legislation is heading to parliament.
The redrafted bill builds on the legislative proposal released on Christmas Eve in 2019. But it is worth noting that legislation to regulate upstream oil and gas in SA has in fact been in the works for many years. At first, it was to be catered for in the Mineral and Petroleum Resources Development Amendment Act, but after years of back and forth it was ultimately abandoned in favour of more suitable stand-alone legislation.
The bill now heading to parliament looks like it will do the trick. Like the draft bill before it, it has thankfully forsaken any concept of “free” carried interest for the state that made the previous legislative proposals particularly unworkable.
In the revised draft, though the holder of a petroleum right will still have to give the state a 20% interest in any right, if a project generates revenues, half the prospecting costs carried for the state can be recovered and all the relevant production can also be clawed back.
The introduction of a petroleum right too is significant for investor certainty and project bankability because it ensures a project can move from exploration to production seamlessly and without interference. Legislative certainty is something the industry has long called for, arguing that time is of the essence. Now that it has virtually arrived, it is just in the nick of time, if not a little too late.
If SA is found to have economic oil and gas resources below ground, it could completely transform the economy. And the two recent discoveries by Total are certainly a promising sign. At the French oil giant’s Brulpadda well, where a significant find was announced in early 2019, there is estimated to be about 1-billion barrels of gas condensate, which industry observers claim could bring a minimum R1-trillion to the SA economy over the next 20 years. At Total’s Luiperd well, a second and similarly significant find was announced in October 2020.
If similar resources are to be found by other prospecting efforts in SA, the economic benefits could be truly enormous.
The Total discoveries are, however, said to be at least eight years away from production. Meanwhile, SA is marching towards a sovereign debt crisis, though afforded some reprieve by the exuberance of cash-flush external markets seeking emerging market yields.
But time is running out in another respect. Big-four SA bank Nedbank recently indicated it will have no exposure to fossil fuels, not even gas, by 2045. The commitment is ambitious and pioneering among SA banks, but looks passe compared with a special report published last week by the International Energy Agency (IEA). Entitled, “Net Zero by 2050: A Roadmap for the Global Energy Sector”, the report outlines plans for the global energy sector to reach “net-zero” greenhouse gas emissions by 2050. Net zero refers to a balance between the amount of greenhouse gas produced and the amount removed from the atmosphere.
SA is an associate country of the IEA, and indeed the report has already been referred to as “bold” by public enterprises minister Pravin Gordhan in his budget vote on Tuesday this week. Even as climate change rhetoric continues to outweigh climate action, the IEA report finds it is still possible to meet the global warming goals of the Paris Agreement on climate change and to meet net zero by 2050.
Notably, the IEA’s scenario of net-zero emission by 2050 dictates that, globally, there be no new upstream oil and gas investment from 2021 onwards. Rather, investment in new fields between 2021 and 2030 would only be for projects that are already under construction and have already been approved. This, the report finds, would average at $350bn a year — about 30% lower than average annual spend in recent years — and would drop to $170bn a year from 2030.
Given that only one in seven exploratory holes drilled has a chance of even finding oil or gas, and with production following many years after that, the walls certainly feel like they are closing in.
SA needs to ensure it has an attractive oil and gas legislative framework in place, and fast — as in yesterday.
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