The Upstream Petroleum Resources Development Bill is taking too long to develop and appears to ignore many of the lessons that should have been learnt from South Africa’s mining sector legislation

“Insanity is doing the same thing over and over and expecting different results,” is a quote generally attributed to Einstein, who might have been referring to South Africa’s efforts to draft an Upstream Petroleum Resources Development Bill.

With more than 20 years of experience in attempting, often unsuccessfully, to craft investor-friendly mining legislation, South Africa should have the ability to produce a more credible draft Bill for the upstream oil and gas sector. Some of the impracticality and policy uncertainty which plague the Mineral and Petroleum Resources Development Act (MPRDA) seem to have found a home in the Upstream Petroleum Bill.

The failings of the MPRDA have become increasingly obvious. In 2003, South Africa accounted for over 5% of global exploration spending. By 2022, this share had declined below 1%.  The DMRE has, however, been seeking to remedy these issues for the better part of two decades.

The Upstream Petroleum Bill, which is currently before the National Assembly after having been circulated for public comment, was recently amended to take comments into account. The latest version was published in late September.

Delays

This Bill was introduced on 1 July 2021, but it follows a previous attempt to amend the MPRDA in 2016 to accommodate oil and gas exploration. The length of time this process is taking is very concerning. Mozambique has become a gas province due to its massive dry natural gas reserves and it is likely that production will commence soon. Namibia likewise has become the “go-to” destination for oil and gas exploration.  

There is global competition to attract the International Oil Companies (IOCs). While South Africa fiddles with its legislation, the IOCs are moving into neighbouring countries and taking advantage of more navigable legislative frameworks and fiscal terms.

The sooner this Bill is finalised, the better, because the longer the delay, the more insecure the holders of existing exploration permits become.

Good and bad areas

Some of the positive aspects of the Bill are that it recognizes the principle of “once empowered, always empowered” in clearer language, although this aspect will not be welcomed by all commentators.

However, several problems remain. These include whether certain provisions will stand up to Constitutional scrutiny, vague wording in some sections and uncertainty over tenure. Although the Bill contains important provisions on black empowerment and state participation, it is uncertain whether the requirements are appropriate for this industry. The requirements should be less onerous in the exploration phase but can become stricter once IOCs move into the production phase. Experience in South Africa’s mining sector should have demonstrated that draconian ownership obligations make very few people wealthy.

The Upstream Petroleum Bill also has a misplaced emphasis on state participation: the state-owned entity will pay 50% of exploration costs and 100% of production costs. Given South Africa’s limited financial resources and other social spending priorities, it would be better to let the IOCs shoulder all the costs of exploration and production and focus rather on the economic benefits, which will translate into tax revenues. There should be a move away from creating or shoring up SOEs that over the past 30 years have clearly become more of a strain on, than an asset to the fiscus.

Any form of extractive industry will affect the environment, communities and socio-economic welfare and these issues will need to be managed carefully and stringently. South Africa’s mining experience should show how to manage these issues better. Without clear and conducive legislation to guide oil and gas exploration, South Africa will continue to attract various NGOs, both local and international, who see the country as fertile ground to tackle the IOCs on climate change. These organisations are canvassing the support of local communities by highlighting only one issue, without regard to the broader benefits that offshore exploration can bring for communities in these areas, in a country which is desperate for foreign direct investment.

Opportunities

A study by the Department of Trade, Industry and Competition and oil companies several years ago examined the multiplier effects of bringing more natural gas to South Africa. The experience of other countries such as the US and Australia have been that natural gas can stimulate local industries as well as gas-to-power projects. The South African economy is urgently in need of reindustrialization, and if it can develop a gas economy it will create more jobs and subsidiary industries, help to address the current power crisis and make the economy more attractive to local and foreign investors.

The South African economy is heavily dependent on mining. Oil and gas exploration offers the potential to help diversify the economy and find a more sustainable solution for our current economic and social troubles.

Written by Jonathan Veeran, Partner from Webber Wentzel