11thAfrican Peter Leon

7/28/2019 11thAfrican Peter Leon

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Investing with certainty: stabilityunder South Africas new oil and

gas regulatory regimeAddress by Peter Leon

Partner, Webber Wentzel Bowens, Johannesburg,to

UNCTADs Africa Oil, Gas, Trade and FinanceConference

Nairobi, Kenya

23 May 2007

NOT AN OFFICIAL UNCTAD RECORD


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International Best Practice for Oil and GasExploration and Production

This year, the South African oil and gas regulator, the PetroleumAgency, SA (PASA) actively sought investment in its 2007 licensinground for a number of blocks offshore the South African coast. Thislicensing round closes in September 2007

Resource-rich countries must make themselves attractive to privateinvestment

For those countries which are geologically less prospective (such asSouth Africa), this is all the more so

A successful oil and gas regulatory regime requires certainty andpredictability in a high cost, high risk and capital intensive industry

The success of PASAs licensing round will rely in part on the extent towhich the South African regulatory regime affords investors certainty,security of tenure and stability


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Previous regulatory framework for oil and gas inSouth Africa: the Mining Rights Act, 1967 and theMinerals Act, 1991 (1)

The OP26 prospecting lease and OP26 prospecting sub-leases and miningleases (going back to 1967): PetroSA leased rights to explore and produce oil and gas to exploration and

production companies (lessees) Terms and conditions were guaranteed for the duration of the prospecting sub-

leases and the mining leases

Legislative stability

The lessee was protected as it was subject to the laws of South Africa and suchfurther laws passed,provided such further laws would not adversely affect therights of the lessee

Guarantees in favour of the lessee by the Minister of Minerals and Energy: the contractual obligations of the lessee would not be altered without the

lessees consent the form of the mining lease was attached to the prospecting sub-lease. A

lessee thus knew what rights it would have in the event of a discovery


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Previous regulatory framework (2)

Fiscal stability Tax, customs and exchange control Income tax payable frozen as at the 1977 amendments to the

Income Tax Act

Customs duties waived

Exemption from exchange control

Fiscal stability Royalties Royalties calculated as a share of profits on an ad valorem formula

Formula to calculate royalties remained the same for the durationof sublease

Limited socio-economic obligations placed on lessees

A multinational could employ non-South African citizens if requiredskills and qualifications not available in the local labour market

Limited Black Economic Empowerment (BEE) equity divestiturerequirements (9 percent under the Liquid Fuels Charter)


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Current regulation: Mineral and PetroleumResources Development Act, 2002 (the MPRDA)

State is now the custodian of all mineral and petroleumresources in South Africa, including oil and gas

Oil and gas exploration and production administered by PASA,overseen by the Department of Minerals and Energy (DME)

MPRDA attempts to secure tenure of rights holders through itstransitional arrangements

old order to new order: the old order OP26 sub-leasesand mining leases must be converted into exploration rightsand production rights by 30 June 2007

The terms of the new order rights are still being negotiated,despite the fact that there is less than six weeks to go!


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Current regulation: the MPRDA (cont)

Socio-economic objectives: The MPRDA seeks to promote equitable access to oil and gasresources, and expand opportunities for historicallydisadvantaged persons, to enter and benefit from the industry

The 2000 Charter for the South African Petroleum and LiquidFuels Industry (the Liquid Fuels Charter) is applicable toexploration and production of oil and gas

The requirements of the Liquid Fuels Charter may seemsomewhat benign in relation to the far more onerous MiningCharter: 9% BEE equity divestiture Vague employment equity and BEE procurement requirements

This is appropriate in a high risk, capital intensive industry in ageologically uncertain area

Social objects of the MPRDA are linked to the grant andconversion of rights under the MPRDA


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Issues arising from the MPRDAs regulatoryframework and the draft Exploration Rights (ER)and Production Rights (PR)

Legislative stability

Fiscal stability Royalties

Tax

Transitional Arrangements

Onerous empowerment requirements


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ER/PR: Legislative Stability

Holder will be subject to the applicable laws ofSouth Africa, as amended from time to time. Thiswill include all new legislation and legislation to bepassed in the future which may adversely affectthe holders rights

Holder is subject to alllaws

The ER/PR may now be affected by anylegislativeamendments which are enacted after theconclusion of the ER/PR, thus potentially affectingthe rights granted to the holder


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ER/PR: Fiscal stability - royalties

Draft Mineral and Petroleum Royalty Bill, 2006 (theDraft Bill):

if enacted in current form, a royalty rate of 1.5%(deeper than 500 metres) and 3% (shallower than500 metres) will be imposed on oil and gas production

The issue is not so much that of the royalty ratepayable under the draft Bill, but rather whether therate will remain at the rate it is at in the draft Bill

the industry has endeavored to include a walk-away

provision in the ER, under which the holder mayterminate the ER without liability or suspend the ERuntil the royalty legislation is enacted


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ER/PR: Fiscal stability - taxation

Holder will be liable for income tax in accordance with the applicablelaws, as defined

The Tenth Schedule to the Income Tax Act, 1962 came into force on 7February 2007. It empowers the Minister of Finance, after consultingthe Minister of Minerals and Energy, to guarantee that the provisionsof the Tenth Schedule will continue to apply for the duration of the

ER/PR tax rate applicable (29 percent for residents and 32 percent

for non-residents) over the duration of right Secondary tax on companies (STC) limited to 5 percent

and no STC payable if dividends arise from an OP26 right foreign entities can decide on the currency used in

calculating tax payable A windfall tax has been mooted, but not finalised


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ER/PR: Onerous empowermentrequirements

PR: Holder must comply with 26% BEE equity divestiturerequirements of the Mining Charter by 2014, or a new LiquidFuels Charter to be adopted in terms of the MPDRA

Narrower scope to employ non-South African citizens

Holder must implement a programme for the recruitment,training and employment of historically disadvantaged SouthAfricans

Holder is required to effect payments to the Upstream TrainingTrust


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Conclusion (1)

Need to create investment certainty and anattractive investment environment A lack of clarity and regulatory certainty may deter

investment

South Africa is not the Gulf of Guinea. It has to

compete with resource-rich oil and gas jurisdictions.This will only be successful if investors are givenadequate incentives

Look to other jurisdictions:

Kenyas regulation of oil exploration. Strong security of

tenure and active investment schemes aimed atpromoting foreign investment and terms of the licencesare negotiable.


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Conclusion (2)

Need to create security of tenure for holders ofexisting old order rights

The ER/PR could provide for financial guarantees by theSouth African government in the holders favour in theevent of legislative or fiscal changes which are

detrimental to the holder In a capital intensive, high risk industry, the ER/PRs

should provide for more reasonable empowermentrequirements to stimulate investment

Kenya has shown how to incentivise investment in a

geologically uncertain area


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Conclusion (3)

The National Treasury is alive to the need forcertainty and stability in the oil and gas industry inSouth Africa, as is evident from the fiscal stability

provisions contained in the Tenth Schedule to theIncome Tax Act

PASA and the DME need to reflect a similar

intention in finalising the draft ER and PR in the nextsix weeks

11thAfrican Peter Leon

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