South Africa historically has been a mining jurisdiction with petroleum activity in the South African economy generally confined to exploration and downstream refining and liquid fuels distribution. Indeed, South Africa has limited oil reserves of just 20 million barrels and proven gas reserves of approximately 0.53 trillion cubic feet.2 This has the potential to change drastically. With the discovery of potentially large-scale onshore unconventional gas reserves and the expectations of substantial near term offshore crude oil and gas discoveries off the back of historic finds in neighbouring waters, South Africa is poised to transform into a petroleum jurisdiction.
Estimated technically recoverable resources in the Karoo shale gas fields alone are estimated to be as great as 390 trillion cubic feet.3 South Africa’s Minister of Mineral Resources (the Minister) has given the go-ahead for shale gas exploration in the Karoo that may enable these initial assessments to be more fully developed.4 In addition, substantial potential coal bed methane resources are in the process of being brought towards commercial development. Offshore potential, particularly in deep water, can clearly be seen by the substantial increase in farm-in and exploration activity. Some of the largest petroleum companies in the world have recently farmed into South African exploration blocks and are leading these exploration initiatives, including ExxonMobil, Shell, Total and Anadarko, among others. Underpinning these moves is the expectation of significant offshore resources based on the contiguousness of the geology with the game-changing recent finds in East Africa for South Africa’s east coast and Angola, Namibia and the Falkland Islands for South Africa’s west coast. This is coupled with the fact that there has historically been limited deepwater exploration offshore of South Africa.
Oil and gas is set to play a substantially expanding role in South Africa’s energy mix. This change presents substantial investment opportunities across the value chain, including in the upstream, for oil and gas investors in South Africa.
To foster and enable this investment and the development of the oil and gas industry, South Africa’s government has embarked on a series of legislative and regulatory amendments and changes in recent years, including:
a the passing of the Mineral and Petroleum Resources Amendment Bill No. B15B-2013 (the Bill), which seeks to amend the Mineral and Petroleum Resources Development Act 2002 (MPRDA), as amended by the Mineral and Petroleum Resources Development Amendment Act 2008 (the Amendment Act);
b the deliberations of an inter-ministerial committee tasked with addressing the concerns regarding certain provisions of the Bill;
c lifting the moratorium on hydraulic fracturing and drilling in the Karoo shale gas area;
d promulgating proposed hydraulic fracturing detailed regulations to govern drilling and exploitation of unconventional gas resources in South Africa;5
e publishing the proposed declaration of the exploration for and or production of onshore unconventional oil or gas resources and any activities incidental thereto including but not limited to hydraulic fracturing as a controlled activity under the National Water Act 1998 (NWA).6 Undertaking a controlled activity requires authorisation under the NWA; and
f announcing the go-ahead for shale gas exploration in the Karoo.
This chapter presents an overview of the current upstream oil and gas legislative and regulatory regime in South Africa, as well as these proposed changes.
II LEGAL AND REGULATORY FRAMEWORK
i Domestic upstream oil and gas legislation
The South African petroleum industry is primarily regulated under the MPRDA.7 Chapter 6 of the MPRDA governs the granting of exploration and production rights, and the issuing of technical cooperation and reconnaissance permits.8
The Department of Mineral Resources (DMR) is responsible for the administration of the MPRDA, and is the national department of the government of South Africa accountable for overseeing the mining and petroleum industries of South Africa. The Minister is the political head of the DMR.9
The designated agency: PASA
Under the MPRDA, the Minister may designate authority to an organ of the state or a wholly owned and controlled agency or company to perform any of his or her functions under Chapter 6 of the MPRDA (Petroleum Exploration and Production).10 The then-Minister of Minerals and Energy designated the Petroleum Agency of South Africa (PASA) to perform the functions set out in Chapter 6 of the MPRDA and such other functions as the Minister may determine from time to time.
Applications for rights and permits under Chapter 6 must be lodged at the office of the PASA; in the prescribed manner; and with the prescribed fee.11 The PASA must accept an application within 14 days of receipt, if the above requirements are met; no other person holds a technical cooperation permit, exploration right or production right for petroleum over any part of the area applied for; and no prior application for the aforementioned has been accepted.
If the application does not comply with the above requirements, PASA must, within 14 days notify the applicant, in writing with reasons. The acceptance of an application prompts the commencement of the environmental impact assessment process pursuant to an application for an environmental authorisation, and related public consultation process required for the environmental authorisation application. Historically this process was regulated under the MPRDA. However, the South African government recently implemented the ‘One Environmental System’, which has shifted this regulation to the National Environmental Management Act 1998 (NEMA) which governs the process of applying for an obtaining an environmental authorisation for the operation. The DMR remains the competent authority, having now been given authority to enforce these environmental laws in respect of activities conducted on or related to exploration and production areas. The ‘One Environmental System’, which was practically implemented on 8 December 2014, seeks to reduce the regulatory complexity of the petroleum industry (see further discussion below).
iii General issues
The Minister may, by notice in the government gazette, invite applications for exploration and production rights in respect of any block(s), and may specify a deadline or terms and conditions under which the application must be lodged and the terms and conditions subject to which such rights may be granted. Other applications may be directly received by PASA.12
Holders of rights granted under the MPRDA and registered with the Mineral and Petroleum Titles Registration Office (MPTRO) enjoy certain rights, including the right to enter the land to which such right relates; to bring onto that land any plant, machinery or equipment and build, construct or lay down infrastructure required for exploration or production; to explore for, or produce, the petroleum for which such right has been granted; to remove and dispose of petroleum found during the course of exploration or production; subject to the NWA, to use water for exploration or production; and to carry out other incidental activities that do not contravene the MPRDA.13
The Minister may cancel or suspend any reconnaissance permit, technical cooperation permit, exploration right or production right, after written notice, in accordance with the procedure outlined in Section 47 of the MPRDA, if the holder, among other things, contravenes the MPRDA; or breaches material terms or conditions of the right, which includes a contravention of any condition in the environmental authorisation granted for the operation.
The holder of any permit or right must submit such information, data, reports and interpretations to the designated agency as may be prescribed.14 PASA must submit progress reports and information within 30 days to the Council for Geoscience.15 Subject to the Promotion of Access of Information Act 2000, all information and interpretations thereof submitted to the PASA must be kept confidential for a period not exceeding four years, or until the permit or rights to which such information and interpretations relate terminate.16
Neither the state nor any of its employees is liable for the bona fide or inadvertent release of information submitted; or guarantees the accuracy or completeness of such information.17
As of 1 June 2013, South Africa has concluded 47 bilateral investment treaties (BITs), of which 23 are in force.18 While the scope and specificity of such clauses will vary, generally most BITs contain provisions regulating general standards of treatment, which apply to investments in general and, specific standards required in relation to any particular issue; and protection against expropriation, nationalisation and, increasingly, indirect expropriation.
According to the South African Department of Trade and Industry, (DTI), BITs allowed the legal and business community to challenge regulatory changes, which the government considered to be in the public interest.19 The DTI accordingly recommended the restructuring of South Africa’s BITs to ensure that the treaties align with South Africa’s broader social and economic priorities. In light of this, the Promotion and Protection of Investment Act (the Investment Act), was passed by Parliament in 2015 and assented to by the President on 15 December 2015. It has yet to come into effect.
There are various arbitration institutions and rules available to parties involved in BIT-related disputes, including the International Centre for Settlement of Investment Disputes (ICSID),20 the International Chamber of Commerce (ICC), and the rules of United Nations Commission on International Trade Law (UNCITRAL). South Africa is also a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to as the New York Convention),21 which applies to the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration.22
v Black economic empowerment in the upstream petroleum industry
The transformation of the upstream petroleum industry is regulated by the Charter for the South African Petroleum and Liquid Fuels Industry on Empowering historically disadvantaged South Africans (HDSAs) in the Petroleum and Liquid Fuels Industry (the Liquid Fuels Charter).
Under the Liquid Fuels Charter, all licences for exploration and production in the country’s offshore area reserve are subject to a minimum 9 per cent buy-in by HDSAs. In addition, the Liquid Fuels Charter envisages that by the end of 2010, HDSAs will own not less than 25 per cent of the aggregate value of the equity of the various entities that hold the operating assets of the South African oil industry.
Under the MPRDA, a person may apply for a:
i Reconnaissance permit23
The holder of a reconnaissance permit may conduct any operation carried out for or in connection with the search for petroleum by geological, geophysical and photo geological surveys and includes any remote sensing techniques, but does not include any exploration operation other than acquisition and processing of new seismic data.24 The Minister must issue a reconnaissance permit if the following requirements are satisfied: financial resources; technical ability; compatibility of the estimated expenditure with the intended reconnaissance operation and duration of the reconnaissance programme; the reconnaissance will not result in unacceptable pollution, ecological degradation or damage to the environment and a NEMA environmental authorisation has been issued; the ability to comply with the relevant provisions of the Mine Health and Safety Act 1996 (MHSA); and non-contravention of any other provision of the MPRDA. A reconnaissance permit issued under section 75(1) of the MPRDA is: subject to prescribed terms and conditions; valid for a period not exceeding one year; not an exclusive right; not transferable; and not renewable.25
ii Technical cooperation permit
The holder of a technical cooperation permit may carry out desktop studies including geological, geochemical, geophysical studies, as well as technical research and analysis.
A technical cooperation permit, issued under Section 77(1) of the MPRDA is: subject to prescribed terms and conditions, valid for a period not exceeding one year, not transferable, and not renewable.26 The holder of a technical cooperation permit has the exclusive right to apply for and be granted an exploration right in respect of the area to which the permit relates.
iii Exploration right
The holder of an exploration right is entitled to reprocess the existing seismic data, acquisition and processing of new seismic data or any other related activity to define a trap to be tested by drilling, logging and testing, including extended well testing, of a well with the intention of locating a discovery. If an application for an exploration right was lodged in respect of a technical cooperation permit, the latter shall, notwithstanding its expiry date, remain in force until such application has been granted or refused.
The Minister must grant an exploration right if the requirements relating to financial resources; technical ability; the compatibility of estimated expenditure with the intended exploration operation and duration of the exploration work programme; the Minister has issued a NEMA environmental authorisation for the operation; the ability to comply with the relevant provisions of the MHSA; non-contravention of any other provisions of the MPRDA and compliance with the terms and conditions of the technical cooperation permit (if applicable) are satisfied. An exploration right granted takes effect on the ‘effective date’,27 is subject to prescribed terms and conditions and is valid for the period specified in the right, which may not exceed three years.28 Subject to certain requirements being met, an exploration right may be renewed for a maximum of three periods not exceeding two years each. If a renewal application has been lodged, the exploration right shall, notwithstanding its expiry date, remain in force until such time as such application has been granted or refused.29
The holder of an exploration right has the following exclusive rights: to apply for and be granted a production right in respect of the petroleum and the exploration area in question;30 to apply for and be granted a renewal of the exploration right;31 and to remove and dispose of petroleum samples found during exploration.32 The holder of an exploration right must: lodge such right within 60 days for registration at the MPTRO; continuously and actively conduct exploration operations in accordance with the approved exploration programme; comply with the terms and conditions of the exploration right and any relevant law; comply with the terms and conditions of the approved environmental management programme (certain sections of the MPRDA need to be ‘cleaned-up’ in light of the shift of environmental regulation to the NEMA under the ‘One Environmental System’. Accordingly, this provision should be read as the conditions of the environmental authorisation granted under the NEMA); pay the prescribed exploration fee to the PASA; and commence with exploration activities within 90 days from the effective date of the exploration right or such extended period as the Minister may authorise.33
iv Production right
The holder of a production right may reprocess the existing seismic data, acquire and process new seismic data or any other related activity to define a trap to be tested by drilling, logging and testing, including extended well testing, of a well with the intention of locating a discovery.
The Minister must grant a production right if: the requirements relating to: financial resources and technical ability; compatibility of the estimated expenditure with the intended production operation and duration of the production work programme; the production will not result in unacceptable pollution, ecological degradation or damage to the environment (and a NEMA environmental authorisation has been issued – this is another provision that will be added to the MPRDA in the clean-up process pursuant to the full implementation of the ‘One Environmental System’); the ability to comply with the relevant provisions of the MHSA; compliance with the MPRDA; financial and other provisions for the prescribed social and labour plan; optimal production in accordance with the production work programme and the prescribed social and labour plan;34 and compliance with the terms and conditions of the exploration right (if applicable) are satisfied.
The Minister must, within 60 days, refuse to grant a production right if the application does not meet all of the requirements referred to in Section 84(1) of the MPRDA35, in which case, he or she must notify the applicant, in writing and with reasons, within 30 days.36
A production right is subject to prescribed terms and conditions, and is valid for the period specified in the right, which may not exceed 30 years.37
The Minister must grant the renewal of a production right if the application complies with the above-mentioned requirements and the holder complied with the: terms and conditions of the right and is not in contravention of the MPRDA, relevant law; production work programme; the prescribed social and labour plan; and the approved environmental management programme (again this, in due course, need to be amended to refer to the NEMA environmental authorisation).
Subject to certain requirements being met, a production right may be renewed for further periods, each of which shall not exceed 30 years at a time. If an application for renewal has been lodged, the production right remains in force, despite its expiry date, until such application has been granted or refused.38
The holder of a production right has exclusive rights: to apply for and be granted a renewal of the production right in respect of the petroleum area in question39 and to remove and dispose of petroleum found during the course of production. The holder must: lodge such right for registration at the MPTRO within 60 days; continuously and actively conduct production operations in accordance with the approved production programme; comply with the terms and conditions of the right, the MPRDA and other relevant laws; comply with the requirements of the NEMA environmental authorisation for the operation and the prescribed social and labour plan; pay the state royalties; and commence with production operations within one year from the date on which a production right becomes effective or such extended period as the Minister may authorise.40
IV PRODUCTION RESTRICTIONS
Currently no production restrictions are applicable in South Africa.
V ASSIGNMENTS OF INTERESTS
Reconnaissance permits and technical cooperation permits are not transferable.
Exploration rights and production rights or an interest in such rights or a controlling interest in a company (other than a listed company) may, under Section 11 of the MPRDA, only be ceded, transferred, let, sublet, assigned, alienated or otherwise disposed of with the prior written consent of the Minister. The Minister must grant such consent if the transferee satisfies the requirements for the grant of the relevant right.
The income tax treatment of oil and gas companies in South Africa is regulated under Section 26B of the Income Tax Act 58 of 1962 (the Act), read with the Tenth Schedule (the Schedule) to the Act. A company that holds any oil and gas right, or engages in exploration or production under any oil and gas right is regarded as an oil and gas company.
The Minister of Finance may enter into a binding fiscal stabilisation agreement with an oil and gas company. The contract will ensure that the Schedule, as at a date the particular oil and gas right is acquired, will not be amended, for the duration of the period that the oil and gas company holds its rights. The oil and gas company is entitled to rescind the agreement of its own accord.
Oil and gas operators are taxed directly in the form of corporate income tax. This is levied at a rate not exceeding 28 per cent for oil and gas companies.
In cases of oil and gas companies, dividends tax is levied at a rate not exceeding zero per cent. To the extent that an oil and gas company seeks to pay out a divided from income that is not its oil and gas income, such dividend is subject to the default dividend withholding tax of 15 per cent. This may be reduced under double tax treaty provisions.
Foreign currency gains and losses of an oil and gas company for income tax purposes, are determined using the functional currency and the translation method used by that specific company for purposes of financial reporting. After calculating taxable income using the functional currency, the amount of tax is converted into South African rand at the average exchange rate for that year of assessment.
Subject to certain specified exclusions, an oil and gas company is allowed to deduct all expenditure and losses actually incurred in that year in respect of exploration or post-exploration.41 An additional deduction of 100 per cent of all expenditure of a capital nature actually incurred in that year in respect of exploration under an oil and gas right is allowed, and 50 per cent of expenditure of a capital nature actually incurred in that year in respect of production under an oil and gas right is also allowed.42
Any assessed losses in respect of exploration and production may only be set off against the oil and gas income of that company. This includes income from refining of gas derived in respect of any oil and gas right held by that company. The set-off is allowed to the extent that those assessed losses do not exceed that income.
Ten per cent of the remaining assessed losses can be set off against other forms of income derived by the company and the residue rolled over into future years of assessment.
If an oil and gas company disposes of an oil and gas right to another oil and gas company, it can elect either a rollover or participation treatment of tax to apply to it.
If rollover treatment is selected the disposing company is deemed to have disposed of the right for an amount equal to the tax cost, whether it is held as a capital asset or trading stock. In essence this means that there is no capital or revenue gain derived. Participation treatment for disposals is also available. If an oil and gas company disposes of any right to another company, the disposing company will treat any gains arising, whether the right was held as a capital asset or as trading stock, as revenue. Reciprocally, the acquiring entity will be deemed to receive an immediate deduction equal to the gain.
South Africa currently imposes withholding taxes on dividends, interest, royalties and payments in respect of immoveable property sold by non-residents.
The tax treatment set out above, in particular the generous tax allowances are intended to operate as tax incentives. In addition, general allowances, such as those for research and development may also be applicable.
Other forms of state support, such as subsidies, may also apply, but these do not strictly fall within the tax regime.
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
i Summary of environmental laws and regulations applicable to oil and gas operations
Environmental regulation of the petroleum industry shifted from the MPRDA to NEMA with the practical implementation of the ‘One Environmental System’ on 8 December 2014. For any new applications for rights and or permits, renewal thereof, applicants will need to demonstrate compliance with the NEMA and the requirement to obtain an environmental authorisation or prove compliance with the conditions thereof, as opposed to the historical MPRDA environmental provisions.
Although the ‘One Environmental System’ is in force, the full suite of regulations to complement this shift in environmental regulation has yet to all be brought into force. As of September 2016, the following complimentary regulations have been brought into force: the 2014 National Environmental Impact Assessment Regulations (and associated Listing Notices 1–3), the 2014 National Appeal Regulations, the 2014 National Exemption Regulations the 2015 Regulations Regarding the Planning and Management of Residue Stockpiles and Residue Deposits and the 2015 Regulations Pertaining to the Financial Provision for the Rehabilitation, Closure and Post-closure of Prospecting, Exploration, Mining and Production Operations.
In order for the transition to be holistically implemented, the following additional complimentary regulations must also be brought into force: the 2015 Draft Regulations Regarding the Procedure Requirements for Licence Applications under the NWA and the amendment of the MPRDA Regulations to remove regulations relating to the environment.
Section 38B of the Amendment Act (the enactment of this section was delayed in the proclamation of the Amendment Act i.e., Proclamation 17 in Government Gazette 36541) should ideally be brought into force, to provide that environmental management programmes and plans previously approved under the MPRDA will be deemed to be an environmental authorisation issued under the NEMA. However, Section 12(4) of 2008 NEM Amendment Act currently provides that environmental management programmes and plans approved in terms of the MPRDA immediately before the 2008 NEM Amendment Act came into operation (effectively 8 December 2014) must be regarded as having been approved in terms of NEMA, under the guise of the DMR.
A host of other environmental legislation that regulates, inter alia, biodiversity, air quality, waste management, protected areas, heritage resources and land use is also applicable to oil and gas operations in South Africa. Further, the environmental impact of constructing and operating petroleum pipelines and other facilities is regulated by the Petroleum Pipelines Act 2003.
ii Details of regulatory agencies with responsibility for environmental regulation
As described above, the PASA as the designated authority advises the Minister (as the final authority) in granting exploration and production rights and their related environmental approvals, now an environmental authorisation under the NEMA, under the One Environmental System.
Other regulators of note are the Department of Water and Sanitation, the DEA, the National Energy Regulator of South Africa, the South African Heritage Resources Agency and the Department of Agriculture, Forestry and Fisheries.
iii Description of any key environmental approvals necessary for oil and gas activities
As of 8 December 2014, an application for a production or exploration right will also require an application for an environmental authorisation, which is to be approved by the Minister under the NEMA, with the PASA acting as the advising authority.
The draft technical regulations provide for further environmental impact studies and related obligations.
As explained, it is proposed that the exploration for and or production of onshore unconventional oil or gas resources and any activities incidental thereto be declared a controlled activity for which a water use licence is specifically required under the NWA (the process to be followed to apply for a water use licence will be governed by the Draft Regulations Regarding the Procedure Requirements for Licence Applications under the NWA, once enacted). Other approvals that may be required include a waste management licence, biodiversity permits and municipal approvals or registration certificates.
Rehabilitation (including concurrent rehabilitation) must be undertaken by the holder of an exploration or production right and financial provision must be made to fund the costs thereof. The 2015 Regulations Pertaining to the Financial Provision for the Rehabilitation, Closure and Post-closure of Prospecting, Exploration, Mining and Production Operations govern the putting-up of this financial provision, the quantum of which is to be informed by the preparation of an annual rehabilitation plan, a final rehabilitation plan and a latent and patent environmental risk assessment report. Under the changes introduced by the NEM 2014 Laws Amendment Act, the definition of ‘financial provision’ has been extended to include the pumping and treatment of polluted or extraneous water, as well as the remediation of latent or residual environmental impacts which become known in the future. The holder must then apply to the Minister for a closure certificate (the PASA remains the advising authority) within 180 days of the occurrence of the lapsing, abandonment, cancellation, cessation or relinquishment of the right. The holder remains responsible for the environmental liability of the operation until the certificate is issued. Under the 2014 National Environmental Impact Assessment Regulations and specifically Listing Notice 1, a NEMA environmental authorisation will need to be obtained in order to obtain a MPRDA closure certificate. Further, Listing Notice 1 provides that a NEMA environmental authorisation must also be obtained if the throughput of the activity (pursuant to an exploration or production right) has reduced by 90 per cent or more over a period of five years excluding where the DMR has agreed in writing that such reduction in throughput does not constitute closure.
The draft technical regulations provide that a holder may only suspend a well43 after obtaining the approval of PASA. Inactive, suspended or non-producing wells must be plugged and abandoned in accordance with an abandonment plan approved by PASA. Abandoned wells must be clear of all obstructions and equipment and cemented for the full length and diameter of the well bore to surface.
VIII FOREIGN INVESTMENT CONSIDERATIONS
The present control measures were introduced by way of the Regulations as promulgated by Government Notice R1111 of 1 December 1961 and amended up to Government Notice No. R.885 in Government Gazette No. 20299 of 23 July 1999 and Orders and Rules 1961, as published in Government Notice R1112 of 1 December 1961 and amended up to Government Notice R.7445 in Government Gazette No. 35430 of 8 June 2012, issued under the Currency and Exchanges Act No. 9 of 1933 (the Currency and Exchanges Act).
The legal framework of South African exchange control is based on the premise of a total prohibition to deal in foreign exchange, except with permission of, and on the conditions set out by, the Treasury Department. Because of its obvious impact on the conduct of normal international trade and payments, the underlying economic policy is not totally prohibitive. The purpose of exchange control in this context is thus:
a to ensure the timeous repatriation into the South African banking system of certain foreign currency acquired by South African residents; and
b to prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa.
Thus, in essence, the broad ambit of South African exchange control regulation is to prohibit the export of capital from South Africa by South African residents.
The administration of exchange control in South Africa has been delegated to the South African Reserve Bank (SARB) and administratively performed by the Financial Surveillance Department of the SARB. Certain powers, set out in the Currencies and Exchanges Manual for Authorised Dealers (Authorised Dealer Manual), have been delegated to authorised dealers (banks licensed to deal in foreign exchange).
The distinction between residents of the Common Monetary Area (CMA) and non-residents thereof is crucial for exchange control purposes. Non-residents are not directly subject to exchange control as more fully described below. The CMA comprises South Africa, Lesotho, Namibia and Swaziland.
A South African resident is regarded for exchange control purposes as a person (that is a natural person or incorporated foundation, trust or partnership), whether of South African or any other nationality, who has taken up residence, or is domiciled or registered in South Africa. A non-resident is a person (natural or legal) whose normal place of residence, domicile or registration is outside of the CMA. Although this appears inconsistent, it reflects how the relevant exchange control regulations are drafted.
In the practical application of exchange control, the role of authorised dealers and the nature of their authority must be fully understood. In accordance with the exchange control regulations, no person other than an authorised dealer may trade in foreign currency in South Africa. Authorised dealers are appointed by the SARB and a list of the current authorised dealers can be found on the SARB’s website. The Authorised Dealer Manual issued by SARB details the general and specific authority granted to, and the rules and procedures to be followed by, authorised dealers.
The Authorised Dealer Manual is compiled as a technical handbook for use by authorised dealers containing authorities, instructions and conditions that apply to the wide range of transactions that they may undertake on behalf of their clients. The Authorised Dealer Manual is not intended for use by the public. Instead, Currencies and Exchanges Guidelines for Business Entities and Currencies and Exchanges Guidelines for Individuals are published.
IX CURRENT DEVELOPMENTS
The National Assembly and the National Council of Provinces passed the Bill on 12 and 27 March respectively. The Bill amends a number of key provisions of the MPRDA but has yet to come into effect.
The Bill seeks to:
a eliminate the role of PASA under the MPRDA and to transfer PASA’s functions to the DMR’s regional managers. The government has indicated that to the extent possible the intention will be to maintain PASA in its current form but reconstitute it under a new regional manager within the DMR;
b entitle the state to a 20 per cent free carried interest in all new exploration and production rights with an option to acquire a further participating interest in the form of either: an acquisition of a further potentially unlimited participating interest, at ‘an agreed price’;44 or a production-sharing agreement.45 Despite this wide-ranging discretion the Minister and the DMR have indicated that only a limited percentage beyond the 20 per cent free carry will be taken up by the state for any given block. In addition, the government has indicated that the 20 per cent free carry likely will be on a cost reimbursement basis and that the state will fund its participation once production commences. The DMR has indicated that such clarifying detail will be set forth in regulations to be promulgated once the Bill takes effect and potentially also set forth in granting instruments or production sharing agreements applicable to any given exploration block. Such additional information has been welcomed by industry though the detail is eagerly awaited;
c introduce a system of ministerial invitation for applications for reconnaissance permits, exploration rights and production rights.46 The Explanatory Memorandum to the Bill suggests that the ‘first-come-first-assessed’ principle in the processing of applications will be substituted by the ministerial invitation system;47
d ensure that the provisions relating to strategic minerals will also relate to ‘petroleum and petroleum products’. This means that petroleum and petroleum products may be declared ‘strategic minerals’. Under Section 49 of the MPRDA, the Minister may prohibit or restrict the granting of exploration and production rights for strategic minerals at any time;
e grant the Minister discretion to apply the revised Mining Charter in substitution of the Liquid Fuels Charter.48 Should the revised Mining Charter apply, the participating interest of HDSAs would increase from 9 per cent (the threshold required under the Liquid Fuels Charter) to 26 per cent;
f introduce further changes to the MPRDA to align with the One Environmental System for the petroleum industry and which are critical to the effective implementation of this system. Instances of misalignment with the One Environmental System have been identified in this chapter. These, and other instances need to be ‘cleaned-up’ in changes to the MPRDA; and
g introduce obligations for applicants for exploration and production rights to apply for a licence to use water under the NWA. The NWA has been amended to provide that the Minister of Water and Sanitation must align and integrate the process for consideration of a water use licence with the timeframes and processes applicable to applications for exploration or production rights in terms of the MPRDA and environmental authorisations in terms of the NEMA.
The President has elected to not assent to the Bill and has referred the Bill to the National Assembly raising the following constitutional reservations:
a the definition of the term, ‘this Act’, purports to elevate policy documents and industry charters including: (1) the Codes of Good Practice for the South African Minerals Industry, 2009; (2) the Housing and Living Conditions Standard for the South African Minerals Industry, 2009; and (3) the Amendment of Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry, 2010, (collectively referred to as the ‘Instruments’) to the status of national legislation. The Instruments, according to the President, are subject to amendment without the advent of the rigorous legislative process prescribed by the Constitution49 for the amendment of legislation (the Instruments Reservation);
b the Bill’s beneficiation provisions are inconsistent with South Africa’s obligations under the General Agreement on Tariffs and Trade, 1947 and 1994 (GATT)50 and South Africa’s Trade, Development and Cooperation Agreement (TDCA) with the European Union (EU);51
c the National Council of Provinces (NCOP) and the provincial legislatures did not facilitate sufficient public participation during the parliamentary processes as required by Sections 72 and 118 of the Constitution; and
c the Bill should have been referred to the National House of Traditional Leaders under Section 18 of the Traditional Leadership and Governance Framework Act 2003, owing to the Bill’s impact on customary law or the custom of traditional communities, presumably read with Section 212 of the Constitution;
In summary, the following processes have been initiated:
a the Speaker has referred the Bill together with the President’s reservations to the Portfolio Committee. The Portfolio Committee is reconsidering the MPRDA Bill in light of the President’s reservations, being of both a substantive and procedural nature, and will shorty confer with the NCOP’s Select Committee;
b on the procedural defects raised, primarily the lack of public participation in the NCOP, it is likely that additional public hearings will be convened by the Select Committee to cure such procedural defects. This may result in the provisions relating to oil and gas being reopened for debate.
It is unclear, at this stage, whether the Portfolio Committee will deem the MPRDA Bill to be so defective either procedurally or substantively that it cannot be amended, in which case the NA must consider rejection of the MPRDA Bill in its entirety.
Further, in the likely event that the Select Committee convenes additional public hearings, it is important that affected parties participate in such hearings.
In the interim, the status quo, being the regime applicable under the MPRDA, is preserved.
The published technical regulations for petroleum exploration and production has sought to augment gaps that were identified in the current oil and gas regulatory framework under the MPRDA, particularly in relation to hydraulic fracturing.
While the Minister has given the go-ahead for shale gas exploration in the Karoo, exploratory drilling in the Karoo shale gas fields is likely to commence only after the completion of the inter-ministerial committee’s consideration of the Bill.
These recent developments should be seen as an attempt by the South African state to foster the rapidly growing oil and gas industry in South Africa. However, many of the Bill’s amendments to the MPRDA have posed challenges that need to be resolved. In attempting to resolve the issues, it is important for the South African state not to lose sight of the socio-economic benefits that can be unlocked from the development of a well-regulated oil and gas industry. In the present economic environment, it is vital for the state to provide investors with the wherewithal to assess opportunities and factor in risks with regulatory certainty. Recent communication by the government appears to indicate that the government appreciates the concerns of investors and is working to provide additional clarity and strike an appropriate balance. The next 12 months should prove determinative for the long-term trajectory of South Africa’s upstream oil and gas industry given the commencement of exploration activity offshore, the anticipated commencement of exploration activity onshore and the ongoing regulatory development taking place.
1 Manus Booysen, Jonathan Veeran and Garyn Rapson are partners, John Smelcer and Keith Veitch are directors, and Benjamin Cronin is a senior associate at Webber Wentzel in alliance with Linklaters.
2 United States Energy Information Administration (EIA) (www.eia.gov/countries/country-data.cfm?fips=SF) Accessed 8 September 2014.
3 Ibid 1EIA.
4 See ‘Govt gives go-ahead for Karoo Fracking’ 23 March 2014 (www.news24.com/Green/News/Govt-gives-go-ahead-for-Karoo-fracking-20140323) accessed 9 September 2014) and ‘Shabangu gives Karoo fracking green light’ 4 February 2014 (www.enca.com/south-africa/shabangu-gives-karoo-fracking-green-light) accessed 9 September 2014).
5 Regulations for Petroleum Exploration and Production published under Government Notice 38855 in Government Gazette 10444 of 3 June 2015.
6 Government Notice R863 Government Gazette 6760 of 23 August 2013.
7 The following amendments to the MPRDA by the Amendment Act did not come in force on 7 June 2013: Sections (i) 11(1); (ii) 11(5); (iii) 38B; (iv) 47(1)(e); (v) 102(2); (vi) Section 106(2), and all the Sections listed in Section 94(2) of the Amendment Act, which were said to come into force simultaneously with Section 14(2) of the National Environmental Management Amendment Act, 62 of 2008 (the 2008 NEM Amendment Act).
8 Section 69 of the MPRDA.
9 Minister of Mineral Resources (www.dmr.gov.za/about-us/the-ministry/minister.html, accessed 15 October 2013).
10 Section 70 of the MPRDA.
11 For example, see application for a production right in section 83(1) of the MPRDA which is used to describe this section.
12 Section 73 of the MPRDA.
13 Section 5(3) of the MPRDA.
14 Section 88(1) of the MPRDA.
15 Section 88(1A) of the MPRDA.
16 Section 88(2) of the MPRDA.
17 Section 88(3) of the MPRDA.
18 See UNCTAD, Full list of Bilateral Investment Agreement concluded by South Africa, 1 June 2013 (www.unctad.org/sections/dite_pcbb/docs/bits_south_africa.pdf, Accessed 15 October 2013).
On 7 September 2012, South Africa gave notice to terminate its BIT with the Kingdom of Belgium and the Grand Duchy of Luxembourg BIT. Termination notices have also recently been served on the Kingdom of Spain on 23 June 2013 and the Kingdom of the Netherlands on or about 21 October 2013. Most recently, on 28 October 2013, it was announced that South Africa had also served a cancellation notice one of its single biggest investor, the Federal Republic of Germany. It should be noted that existing investments will enjoy, in most instances, a ten-year sunset period of protection, but any investments made after the date of termination will not receive any of the investor protections afforded by the BITs.
19 Leandi Kolver SA proceeds with termination of bilateral investment treaties Engineering News 21 October 2013 (www.engineeringnews.co.za/article/sa-proceeds-with-termination-of-
bilateral-investment-treaties-2013-10-21, Accessed 25 October 2013).
20 South Africa is a not a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) (See International Centre for Settlement of Investment Disputes List of Contracting States and other Signatories of the Convention (as of May 20, 2013) (https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&language=English, Accessed 15 October 2013).). The Administrative Council of ICSID has adopted the Additional Facility Rules authorising the Secretariat of ICSID to administer certain categories of proceedings between States and nationals of other States that fall outside the scope of the ICSID Convention (See the introduction to the ICSID Additional Facility Rules (https://icsid.worldbank.org/ICSID/ICSID/AdditionalFacilityRules.jsp, Accessed 15 October 2013)).
21 South Africa acceded to the New York Convention on 3 May 1976 and took effect on 1 August 1976. See New York Convention Countries (www.newyorkconvention.org/contracting-states/list-of-contracting-states, Accessed 15 October 2013).
22 Article 1 of the New York Convention (www.newyorkconvention.org/texts, Accessed 15 October 2013).
23 Sections 74–75 of the MPRDA.
24 Definition of ‘reconnaissance operation’ in the MPRDA.
25 Section 75 of the MPRDA.
26 Section and 77 of the MPRDA.
27 Sections 79–80 of the MPRDA. The MPRDA defines ‘effective date’ as ‘the date on which the relevant permit is issued or the relevant right is executed’.
28 Section 80(5) of the MPRDA.
29 Section 81(5) of the MPRDA.
30 Subject to Section 82(2) of the MPRDA.
31 Subject to Section 81 of the MPRDA.
32 Subject to Section 20 of the MPRDA.
33 Section 82(2) of the MPRDA.
34 Section 84(1) of the MPRDA.
35 Section 84(2) of the MPRDA.
36 Section 84(3) of the MPRDA.
37 Section 84(4) of the MPRDA.
38 Sections 84 and 85 of the MPRDA.
39 Subject to Section 86(2) of the MPRDA.
40 Section 86(2) of the MPRDA.
41 Exploration means the acquisition, processing and analysis of geological and geophysical data or the undertaking of activities in verifying the pressure or absence of hydrocarbons conducted for the purpose of determining whether a reservoir is economically feasible to develop.
42 Paragraph 5 of the Schedule.
43 Means any drilled hole used for the purpose of exploration and production of petroleum resources.
44 It is not clear what ‘an agreed price’ means or how a deadlock will be broken where the state is ‘entitled’ to an interest, but cannot agree with the exploration company in question on a price for such interest.
45 Section 86A(1) and (2) of the MPRDA as amended by clause 65 of the Bill.
46 Section 9 of the MPRDA as amended by clause 5 of the Bill.
47 Paragraph 2.2 of the Explanatory Memorandum to the Bill.
48 Section 80(2) of the MPRDA as contained in clause 57(b) of the Bill. Section 100(2) of the MPRDA required and empowered the Minister to develop a broad based socio-economic empowerment charter for the South African mining industry which would, among other things, set out how the objects referred to in Section 2 (c), (d), (e), (f) and (i) of the MPRDA may be achieved. On 13 August 2004, the Minister published the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry of 2002. The Minister subsequently published the revised Mining Charter on 13 September 2010. The revised Mining Charter stipulates the requirements for black economic empowerment in the South African mining industry.
49 Sections 73–89 of the Constitution.
50 The GATT is a multilateral international agreement, which regulates trade and is administered by the World Trade Organisation (WTO). South Africa was one of the founding parties to the GATT. The GATT was amended by the General Agreement on Tariffs and Trade, 1994. The GATT 1994 provided for the creation of the WTO. South Africa ratified the GATT 1994 on 2 December 1994. GATT is thus binding on South Africa under Section 231(5) of the Constitution, which provides that South Africa is bound by international agreements that were in force when the Constitution took effect on 4 February 1997.
51 The TDCA was signed in October 1999, and provisionally applied – but only partially – from 1 January 2000. The TDCA fully entered into force on 1 May 2004. It forms the legal basis for overall relations between South Africa and the European Union, and covers five areas of cooperation: political dialogue; development cooperation; cooperation in trade and trade-related areas; economic cooperation; and cooperation in other areas.