The Oil and Gas Law Review: South Africa
Legal and regulatory framework
i Domestic oil and gas legislation
The main legislation governing the exploration and production of oil and natural gas is the Mineral and Petroleum Resources Development Act, 2002 (MPRDA) and the Mining Titles Registration Act, 1967. This legislation must be read with the Constitution of South Africa, 1996 (Constitution), the National Environmental Management Act 1998 (NEMA), the Income Tax Act 1962 (ITA), the Value Added Tax Act, 1991 and the Mineral and Petroleum Resources Royalty Act, 2008.
The object of the MPRDA is to (1) give effect to the principle that the state is the custodian of petroleum resources in South Africa; (2) promote equitable access to the national mineral and petroleum resources; (3) meaningfully expand the opportunities for historically disadvantaged persons (HDPs); (4) promote economic growth, development and employment; and (5) provide security of tenure.2
The MPRDA provides that licences, permits and the relevant environmental authorisation is required to conduct technical cooperation operations, reconnaissance operations, exploration and production operations.3
The key provisions of the MPRDA prescribes the application procedure to be followed to obtain the prescribed licences and permits. It also sets out the rights and obligations of the holders, the powers of the Minister of Mineral Resources and Energy (Minister) to suspend or cancel rights and permits, the transferability of rights and permits, the requirements to obtain a closure certificate, the powers of the Minister to expropriate land for purposes of exploration and production, acts that qualifies as an offence and the corresponding penalty.
Until recently, the MPRDA prescribed the environmental obligations of right and permit holders. However, the relevant provisions have been repealed and the holders' environmental obligations are now fully covered under NEMA.
The principal regulatory bodies overseeing upstream oil and gas operations are the national Department of Minerals and Energy (formerly known as the Department of Mineral Resources) (DMRE), the Petroleum Agency of South Africa (SOC) Limited (Petroleum Agency) and the Mineral and Petroleum Titles Registration Office.
The regulator's powers
The Department of Mineral Resources and Energy is responsible for the administration of the MPRDA. However, the MPRDA established the Petroleum Agency as the designated Agency and prescribed its functions.4 The Petroleum Agency has a dual role. On the one hand, it must perform the function of a regulator and on the other hand it must promote onshore and offshore exploration and production of oil and gas.5 The Petroleum Agency performs an advisory and administrative role that includes receiving applications for oil and gas permits and rights, evaluating and processing such application and making recommendations to the Minister whether to grant the right or permit applied for.6 They also monitor compliance with the terms and conditions of rights and permits and collect the prescribed licencing fees.7 In practice, the Petroleum Agency reports to the DMRE and the Minister.
The Mineral and Petroleum Titles Registration office is responsible for the registration of exploration and production rights and the recording of reconnaissance and technical cooperation permits.
South Africa is a party to the New York Convention, which has been enacted into domestic legislation by way of the Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977. South Africa is not a party to the International Centre for Settlement of Investment Disputes (ICSID).
In terms of the Institute of Legal Proceedings Against Certain Organs of State Act 40 of 2002, a notice of intention to institute legal proceedings must be served on an organ of state within six months from the date on which a cause of action arose. Any court process by which legal proceedings are instituted may not be served on the state before the expiry of 30 days after the notice of intention to institute legal proceedings was served on the organ of the state.
For parties to commercial disputes, arbitration is the preferred dispute resolution mechanism; however, disputes may be brought before local courts. Dispute resolution clauses in upstream-related rights, as well as dispute resolution clauses in downstream contractual arrangements, usually provide for disputes to be settled by way of arbitration in accordance with the rules of the Arbitration Foundation of Southern Africa.
To date, there have been no judgments or awards obtained by foreign corporations against government authorities or state organs in the oil and natural gas sector. Foreign corporations are, however, not precluded from doing so. Local subsidiaries of foreign corporations have obtained judgments against the state in mining and other sectors.
South Africa is a signatory to a number of bilateral investment treaties (BITs) protecting investments by nationals of countries such as the United Kingdom, the Netherlands, Switzerland and South Korea, to name but a few.
However, South Africa has begun terminating its BITs with the intention to replace them with South African domestic legislation in the form of the Promotion and Protection of Investment Act 22 of 2015 (the Act). This was as a result of the South African government reviewing the investment laws and regulations following the case of Piero Foresti, Laura de Carli & Others v. The Republic of South Africa, ICSID Case No. ARB(AF)/07/01.
The Act came into effect on 13 July 2018 and the aim of the act is to protect foreign investors in South Africa. Since 1994, the government has bound the Republic of South Africa in a large number of bilateral investment treaties for the protection of foreign investments.
Essentially, South Africa substituted the treaty protections with that of domestic legislation in the form of the Act. However, the protections offered in the Act are substantially diminished when compared to the substantive standards contained in international treaties.
The Act will have no direct effect on any protections that foreign investors enjoy under international treaties; those protections are still governed by the international instruments from which they arise.
South Africa operates a licensing regime under which access to petroleum resources is obtained through an application to the Minister of Mineral Resources (Minister) for an upstream oil and gas right in the form of a reconnaissance permit, technical cooperation permit, exploration right or production right. These applications are processed on a first come, first served basis and in the case of contemporaneous applications, an application by a historically disadvantaged South African (as defined in the MPRDA) will be given preference.8
A reconnaissance permit entitles the holder to carry out geological, geophysical and photo geological surveys. The reconnaissance permit is valid for a period not exceeding one year, and it is not renewable or transferable as well as the fact that it does not provide any exclusivity.
A technical cooperation permit entitles the holder to conduct a technical cooperation study, based on an analysis of data held by the Petroleum Agency. 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 covered by the permit. The technical cooperation permit is valid for a period not exceeding one year and is not renewable or transferable.
Exploration rights entitle the holder to conduct exploration operations and all incidental activities on the exploration area and are transferable. Exploration rights endure for a period not exceeding three years and can be renewed for three periods of two years each. The holder of an exploration right has the exclusive right to apply for renewal and be granted a production right over the exploration area.
Production rights are granted for an initial period not exceeding 30 years and are transferable. In addition, the holder of a production right has an exclusive right to apply for, and be granted, a renewal of the right. The maximum number of renewals permitted in relation to a production right is not prescribed by the MPRDA; thus, the period may be renewed for further periods not exceeding 30 years.
The MPRDA envisage that the terms and conditions of rights and permits must be prescribed, which is normally done under the regulations.9 However, the regulations have some form of negotiation in mind as they provide that the terms and conditions agreed upon for upstream oil and gas rights and permits will be approved by the Minister.10 In practice, the Petroleum Agency has a standard form for all rights and permits. The terms and conditions of the standard form rights and permits have not been published under regulations and the terms and conditions are negotiated on a case-by-case basis. The terms and conditions of these rights and permits must be informed by the MPRDA and any provisions that go beyond this act will be ultra vires. However, ultra vires terms and condition remains valid until they are set aside collaterally or on judicial review.11
The key terms and conditions that are not specifically legislated is the state's participation, the participation by HDPs, relinquishment and mandatory contributions to the Upstream Training Trust.
The current standard terms and conditions provide the state has an option to acquire a 20 per cent participating interest for the state in production rights. The state will not be liable for past cost but must contribute in accordance with their participating interest towards cost incurred after the acquisition of the state's participating interest.
The holder of a right must reserve a 10 per cent participating share for HDPs in the production right, which must be acquired on commercial terms.
Generally, relinquishment of a portion of the exploration area is required on renewal. The standard form exploration right normally requires a 20 per cent relinquishment of the exploration area on completion of the initial exploration period, 15 per cent relinquishment of the exploration area on completion of the first renewal period and a further 15 per cent relinquishment of the exploration area on completion of the second renewal period. However, this may vary from right to right.
The standard form exploration and production rights also require an annual contribution to the Upstream Training Trust, which is further discussed in Section VIII.
All rights and permit must be submitted within 60 days after the execution of the right to the Minerals and Petroleum Titles Registration Office (MPTRO) to be recorded or registered. Once the right is registered at the MPTRO, it becomes a limited real right in respect of the acreage over which they are granted.12
Upstream oil and gas licences will lapse if the right is not renewed before the end of the relevant period or the efflux of time at the end of the last renewal period. The Minister may also cancel or suspend an upstream oil and gas right or permit if the holder is conducting operations in contravention of the MPRDA, breaches a material term or condition of the right and permit, is in contravention of an environmental authorisation or has submitted false, fraudulent, incorrect or misleading information in connection with its right or the MPRDA.13 However, the Minister must, before cancelling or suspending the right, give the holder written notice of its intention and provide the holder with reasonable time to make representations or to comply with a directive.14
Currently, there are no restrictions on the export of oil and gas and there are no local beneficiation provisions. However, this is expected to change in the future.
The National Energy Regulator of South Africa (NERSA) is mandated to in terms of the Gas Act 2001 (Gas Act) and can determine the maximum prices to be charged by individual gas distributors, reticulators and traders. To exercise this power, NERSA must determine that there is inadequate competition in the gas industry. Oil prices are not regulated by legislation in South Africa.
Assignments of interests
The MPRDA provides that an exploration or production right or any interest in such right, or controlling interest in a company that holds such right, may not be ceded, transferred, let, sublet, assigned alienated or otherwise exposed of without the written consent of the Ministerial of Mineral Resources and Energy.15 No fees are prescribed for the transfer of exploration rights and permit and the state does not have a right of first refusal.
Ministerial permission is not required for a change in operatorship. However, if the operator is not a holder of the right, Ministerial approval will be required.
i Applicable tax regime
The South African Revenue Service (SARS) is responsible for collecting revenue and ensuring compliance with tax laws.
The taxes that are applicable to the oil and gas industry include:
- income tax and capital gains tax (CGT) in terms of the ITA;
- value added tax (VAT), levied under the Value Added Tax Act 1991 (VAT Act); and
- royalties, which are imposed by the Mineral and Petroleum Resources Royalty Act, 2008 read with the Mineral and Petroleum Resources Royalty, 2008 (Administration) Act.
ii Income tax and CGT
In addition, oil and gas companies may be liable for transfer duties on the transfer of immovable property and securities transfer taxes on the transfer of securities. South Africa further imposes withholding taxes on dividends, royalties and interest.
South Africa applies a residence-based income tax system, meaning that South African residents are subject to income tax on their worldwide income while non-residents are taxed on their income from South African sources. Residents are further subject to CGT on their worldwide capital gains, while non-residents are subject to CGT only in respect of capital gains arising from the disposal of immovable property situated in South Africa, or movable property attributable to a permanent establishment in South Africa, unless a double taxation agreement (DTA) provides otherwise.
A resident, in relation to juristic or legal entities, means any person that is incorporated, established or formed in South Africa or that has a place of effective management in South Africa. Branches of offshore companies will not fall within the definition of resident, but they may still be subject to South African income tax and CGT on the basis that they derive income or capital gains from a South African source, unless they can rely on a DTA for protection.
Until 31 March 2012, a resident company was subject to secondary tax on companies, a second tier of corporate tax on distributions of profits, at a rate of 10 per cent (STC). The STC was replaced with a dividends tax with effect from 1 April 2012. A dividends tax is a tax on the shareholder receiving the dividend, which is collected by the company declaring the dividend. Dividends tax is imposed at a rate of 15 per cent but may be reduced to 0 per cent under the Tenth Schedule to the ITA or under a DTA.
Resident and non-resident companies are subject to income tax at a rate of 28 per cent and to CGT at an effective rate of 22.4 per cent.
The Tenth Schedule to the ITA contains a number of favourable provisions for oil and gas companies, including a special dispensation in respect of deductions from oil and gas income. The Tenth Schedule also currently authorises the Minister of Finance to conclude binding fiscal stability agreements with an oil and gas company.
Persons who make taxable supplies in the course of an enterprise conducted wholly or partly in South Africa, irrespective of whether they are a resident or non-resident, must register as VAT vendors, provided that the minimum threshold is reached. VAT vendors collect output VAT from their customers and claim credits for input VAT paid by them. The difference is paid to SARS.
VAT is generally levied at a rate of 15 per cent at each stage of the distribution chain, although certain supplies are subject to VAT at a rate of 0 per cent (referred to as zero-rated supplies), while other supplies, such as financial services, are treated as exempt.
A person must register as a VAT vendor if it carries on an enterprise and the total value of taxable supplies during the previous 12 months exceeds 1 million South African rands, or will exceed 1 million South African rands within the next 12 months.
iv Carbon Tax Act
In May 2019, the South African National Treasury announced the implementation of the new Carbon Tax Act 2019, with effect from 1 June 2019. The Carbon Tax Act imposes a levy on any person who conducts any number of listed carbon dioxide-producing activities, including several attributable to the extraction and processing of petroleum products.
Environmental impact and decommissioning
i Authorisations and competent authorities
Applicants for exploration and production rights under the MPRDA must obtain an environmental authorisation (EA) issued in terms of Section 24 of the NEMA and the NEMA Environmental Impact Assessment Regulation (EIA Regulations) which require that an environmental assessment is undertaken for certain activities that are listed in the regulations.
The timelines, processes and costs associated with applying for the EA would depend on whether a Basic Assessment or an Environmental Impact Assessment (EIA) is appropriate for the project. This would be determined by a qualified environmental consultant referred to as an Environmental Assessment Practitioner (EAP) in terms of the NEMA EIA Regulations. Although the EAP undertakes the assessment on behalf of the applicant, they are required to be independent. The applicant is responsible for the cost of the environmental assessment.
The Minister of Mineral Resources and Energy is the competent authority for the granting of EAs for activities related to exploration and production, while the Minister of Environmental Affairs would act as the appeal authority.
In June 2015, the Minister of Mineral Resources (now the Minister of Mineral Resources and Energy) published Technical Regulations for Petroleum Exploration and Exploitation (the Technical Regulations) under the MPRDA, which apply to onshore exploration and production operations. These attempted to establish technical and environmental standards for the conduct of hydraulic fracturing in South Africa. However, in July 2019, the Supreme Court of Appeal of South Africa ruled that the Technical Regulations had been improperly promulgated and were therefore invalid. The court ordered that the Technical Regulations be set aside, and it is expected that they will be redrafted.
Depending on the nature of the petroleum operations, other environmental licences and permits may be required. Such licences may include a waste management licence issued in terms of the National Environmental Management: Waste Act 2008, or an atmospheric emissions licence issued in terms of the National Environmental Management: Air Quality Act, 2004.
ii Environmental enforcement
NEMA provides for the appointment of environmental management inspectors (EMIs) within the DMRE to control compliance with environmental obligations. The appointment process, functions, powers and standards which apply to EMIs are governed by Section 31 of NEMA.
These EMIs have the power to investigate, issue compliance notices and admission of guilt fines, and in more extreme cases hand over cases involving criminal liability to the National Prosecuting Authority (NPA) for prosecution. Failure to comply with a compliance notice may also result in the revocation of the EA or licence in respect of which contravention occurred.
iii Decommissioning and financial provisioning
Holders of an exploration or production right must obtain a closure certificate in the event that:
- the right lapses, is abandoned or cancelled;
- the relevant operations are ceased; or
- any portion of the right is relinquished.
Closure certificate applications must be submitted to the Petroleum Agency within 180 days of the lapse, expiry or cancellation of the right in question.
In addition, an EA must be obtained to decommission the operations. The EIA process in support of the EA application must be initiated before the submission of an application for a closure certificate. Finally, on closure, an exploration or production right holder will be required to execute approved rehabilitation and closure plans.
The Financial Provisioning Regulations published under NEMA require an exploration or production right holder to make financial provision for the rehabilitation, closure and ongoing post decommissioning management of negative environmental impacts.
Foreign investment considerations
Non-South African entities may apply for and hold upstream oil and gas licences and permits in South Africa. However, companies that are incorporated in other jurisdictions and that conduct business in South Africa are required in terms of the Companies Act, 2008 to register as and external company with Companies and Intellectual Property Commission.16
ii Capital, labour and content restrictions
There are no specific legislative requirements that relate to the employment of local personnel in the upstream oil and gas industry. However, the standard form exploration and production rights used by the Petroleum Agency state that the holder of the right shall employ South Africans with appropriate qualifications and experience, giving preference to historically disadvantaged persons, taking into account the operational requirements of the licence holder.
The standard form exploration and production right specifically states that the holder shall not be precluded from employing non-South African personnel if the required skills are not available in the local labour market. It also requires that licence holders report on the number of local persons (classifying by race and gender) and expatriate persons employed.
There is a shortage of workers trained in the upstream oil and gas industry; therefore, companies often employ foreign workers in these skilled positions.
The standard form Exploration and Production Rights require the holder to make an annual contribution to the Upstream Training Trust. The Trust administer the funds and provide bursaries to South Africans to study at universities in South Africa to gain the skills required for the oil and gas industry.
The Prevention and Combating of Corrupt Activities Act, 2004 is the key legislation aimed at combating corruption in South Africa. The act creates a general offence of 'corruption,' which is broadly defined as directly and indirectly receiving or giving gratification from or to another person to act or influence the other person to act in a manner that:
- is illegal, dishonest, unauthorised or biased, among other things;
- amounts to breach of a positon of authority, breach of trust or violation of a legal duty or set of rules;
- is designed to achieve an unjustified result; or
- amounts to any other unauthorised or improper inducement to do or not do anything.
The act applies in both the private and public sector and persons convicted of offences under the act are liable to a fine or imprisonment, including life imprisonment.
In addition, the act makes it a criminal offence for a person in a position of authority who has knowledge or suspicion of an offence of corruption, theft, fraud, extortion, forgery or uttering a forged document (in excess of 100,000 South African rands) to fail to report this to the South African police services. A person in a position of authority who fails to report knowledge of suspicion of corruption can be imprisoned for up to 10 years.
i Policy developments
The 2019 Integrated Resources Plan (IRP) was published in October 2019. The IRP is an electricity capacity plan, which sets out South Africa's electricity demands, how this demand is to be addressed and the costs thereof up to 2030.
An expanded role for gas in the energy mix is provided for in the IRP, which envisages the creation of an additional 8,100MW of gas-fired and diesel-fired generation capacity by 2030 to support energy security. This capacity is expected to make up the shortfall caused by the delays to the completion of the mega coal-fired power stations Kusile and Medupi, and the future decommissioning of other existing power generation facilities.
To this end, two ministerial determinations have recently been made for the procurement of new electricity generation capacity. The first determination provides for the procurement of 2,000MW of capacity via the Risk Mitigation Power Procurement Programme and the request for proposal was published in August 2020.
The second determination, which is still in draft form, concerns the procurement of 11,813MW of new generation capacity, of which 3,000MW must come from gas-fired and diesel-fired power plants.
In addition, the Minister of Mineral Resources and Energy published the draft Upstream Petroleum Resources Development (UPRD) Bill on 24 December 2019. The UPRD Bill, once enacted, will have the effect of separating regulation of the upstream oil and gas industry from the mining and minerals industry. It is expected that this Bill will be tabled in the Cabinet in 2020 and will be promulgated in 2021.
ii Domestic exploration and production
PetroSA is the primary producer of indigenous natural gas offshore South Africa. Its offshore producing gas field is located in the Bredasdorp basin and is used as feedstock for its gas-to-liquids refinery in Mossel Bay. This field is depleting, and the government has announced that an LNG hub is planned at the Coega Economic Zone, which could act as a base for the import of additional feedstock.
Renergen, a local South African company, is the only other local producer of natural gas. Renergen utilises onshore wells at its Virginia Gas Project in the Free State, which is also reportedly the site of the world's richest helium deposits.
Offshore exploration by Total over block 11b/12b resulted in the Brulpadda gas condensate discovery in early 2019. This discovery, the first of its kind made in extreme deepwater conditions offshore of South Africa, has the potential to be a game changer for the country. Despite ongoing regulatory uncertainty and logistical challenges posed by the covid-19 pandemic, Total is proceeding with drilling the leopard prospect in this block.
It is expected that more licence holders will commence drilling activities once the long-outstanding UPRD Bill is enacted and regulatory certainty is achieved.
South Africa relies on imports of crude oil and refined fuels to meet its liquid fuels needs, importing almost 90 per cent of the crude oil consumed domestically, primarily from sources in Saudi Arabia, Nigeria, Angola and Ghana.
South Africa imports the majority of its natural gas from Mozambique via a transmission pipeline owned by the Republic of Mozambique Pipeline Investing Company (ROMPCO), which has been set up as a joint venture comprised of iGas, Mozambique's Companhia Mocambicana de Gasoduto and Sasol.
iv Current market trends
The year 2020 will be remembered for a dramatic drop in global oil prices. This resulted from, among other things, oversupply of fuel and was compounded by declining demand for fuel amidst the covid-19 pandemic-related travel restrictions and economic lockdowns. These lockdowns, and consequently reduced transport requirements, have caused global oil demand to plummet by 10.8 million barrels per day, year-on-year. Consequently, international oil and gas companies have been financially negatively impacted and embarked on cost cutting initiatives. It is expected that they will abandon exploration rights that are less prospective and capital intensive.
1 Lizel Oberholzer is a director at Norton Rose Fulbright South Africa Inc.
2 Mineral and Petroleum Resources Development Act 28 of 2002, Section 2.
3 id., Section 5A.
4 id., Sections 70 and 71.
5 id., Section 71(a).
6 ibid., Section 71.
8 id., Section 9.
9 id., Sections 75(4)(a), 80(5), 80(4).
10 Regulation 19, 24, 29 and 35.
11 Oudekraal Estates (Pty) Ltd v. City of Cape Town and Others 2004 (6) SA 222 (SCA).
12 Mineral and Petroleum Resources Development Act 28 of 2002, Section 5.
13 id., Section 47(1).
14 id., Section 47(2)–(4).
15 id., Section 11.
16 Section 23 of the Companies Act, 2008.