The Disappearing Dream of Oil

helenzille2011bThere is light at the end of the tunnel for South Africa’s economic and unemployment crisis.  But will the ANC extinguish it?  When I read this excellent speech by James Lorimer MP, the DA Shadow Minister of Mineral Resources during the recent Parliamentary budget debate, I thought many more people should do so too.  I asked him to edit it, so that I could circulate it as “SA Today”.
Despite all of South Africa’s mineral resources we sometimes don’t think we’re really resource blessed, because we don’t have oil.
But maybe we do.  Some very clever people are prepared to put very big bets on us having it. Or were prepared to, before government started getting greedy.
The belief that South Africa is probably surrounded by rich oil fields has arisen because of a new theory about our offshore geology.
Most people already know that we’ve got offshore gas in the relatively shallow waters off Mossel Bay. The Mosgas project has been running for nearly 25 years. But the new theory is that the gas off the West coast is not an “outlier”, but rather an indication there could be much, much more down there. It all relates to developments many millennia ago, when the continents were closer together.  Part of South America was snuggled up against the Cape, more or less where the Falkland Islands are now.  And oil has been found in the seabed off the Falklands.
This is obviously not the full story  but it is the basis of a theory that serious oil drillers are taking seriously. So seriously that for the first time ever, all the oil exploration blocks off South Africa’s coastline have been applied for and allocated.
The allocations have gone to big oil drilling players, like Shell, Total, ExxonMobil and Anadarko. All of them reckon there’s a strong chance there might be oil or at least significant amounts of gas in the deep and hitherto unexplored seabed off our coast. One industry expert says they’re hoping for oil and expecting lots of gas.
One Texas-based large oil and gas exploration and production company,  that found significant oil off the coast of Ghana resulting in  Ghana becoming one of the fastest growing economies in Africa, has also recently discovered a vast gasfield off the Mozambique coast, containing the equivalent of the known gas reserves of Qatar.  The company has interests in a block off the coast of Cape Town and will possibly need to risk around $250 million in order to ascertain whether there is a significant oil field lurking somewhere in the deep water, below the seabed.
A leading banker says large amounts of offshore gas or even oil could be the silver bullet that puts South Africa’s economy on a new upward path. It could slash electricity prices and provide clean, energy and feedstock that could open the way for mineral beneficiation and industrial processes.
But this dream of oil may not come true. Since the end of last year, oil explorers may need to reconsider their approach to their plans to spend the money and actually drill wells. The reason for the new caution is that the cost/benefit calculations may change dramatically for the worse. The culprit is the ANC’s proposed new mining law, the Mining and Petroleum Resources Amendment Bill. The bill provides for a massive expansion of BEE demands (undoubtedly to benefit a politically connected elite) as well us undefined and potentially large increases in share giveaways directly to government. Major oil companies are used to paying large amounts to their “host governments”, but this may be too much, even for them.
The first version of the MPRDA Amendment bill was released for comment in the last days of last year. There was a storm of concern from mining industry players and analysts who predicted huge problems in the mining sector. Their cries of pain, drowned out the worries of the oil and gas drillers, particularly the offshore ones.
The bill is a child of the ANC’s internal convulsions over minerals policy which pitted exponents of nationalisation against realists who thought we should try to retain a viable mining sector that would produce tax revenues for the state and create jobs. The eventual result has been lots of resource nationalism, which means a higher take for the state, combined with a state mining company that, the ANC hopes, will gain huge profits, shower the fiscus with money and allow them to do lots of empowerment ( for comrades and families, of course). This is all contained in the new bill, the new version of which is expected before cabinet possibly in the next few weeks.
Nobody knows how much the new version will have changed from the old version, but as it stands the prospects are not good. Whereas previously drillers were faced with having to transfer 9% of their operations to “BEE partners”, as they fell under the liquid fuels charter, the new proposal would move them under the mining charter where the BEE requirement is 26%.
But that’s not all. There’s also a clause in the law that gives the state a “free carried interest” of unknown percentage in any oil or gas operation. The department has indicated this may be in the region of 10% of the operation going into state hands.
And even that’s not all. There’s also a provision for the state to acquire ‘a further interest’ through an organ of state or state-owned company. The size of this is not specified.
All of this comes on top of regular taxes. An energy company would still be paying 28% tax on whatever profit it makes from the operation and another 5% in resource royalties.
This ownership grab is accompanied by vague but potentially devastating powers given to the minister to regulate what products are sold, where and at what price, effectively nationalising all critical decision making.
So at a stroke, there’s a prospect that as much as 70 or 80 percent of any operations profit may have to be given away by an oil company which has taken all the risk and paid hundreds of millions to actually find out if there is oil and gas down there at all. It’s easy to see why the appetite for taking that risk may evaporate completely.
Its more or less standard practice in the world of offshore drilling that where there are proven reserves, governments take a far higher percentage of any commercial drilling operation, but if governments want to attract prospectors to areas where the presence of significant reserves remains a matter of guess work, then they need to be far less involved in order to attract those companies prepared to risk large amounts of money to see if oil is there.
The ANC government though, smashes through the resources sector like the proverbial bull in the china shop. Its finesse in dealing with mining investors made South Africa, which is, after all, the mining jurisdiction with more minerals under its soil than any other, actually succeed in shrinking its mining industry during the recent resources boom.
Another hugely contentious section of the new bill would do away with the state agency which has been overseeing our onshore and offshore oil and gas resources. The Petroleum Agency of South Africa, or PASA, was largely responsible for the efficient marketing of our oil and gas potential. It is known in the industry as being knowledgeable and efficient. One industry insider told me that’s probably why the government wants to do away with it.
That points to something in mineral resources that is becoming increasingly clear: much of the regulation is either designed or operated in such a way that the priorities are a) shovelling cash into the pockets of ruling party members and cronies;  and b) only afterwards, if there is anything left, “empowering”  those disadvantaged by apartheid. This skewed priority is not the worst problem. So rapacious is the intended “cash grab” by government, that it threatens the generation of any cash in the first place. This is one of the main reasons why the oil drillers are pulling back, and why investment in new mining has collapsed.
We are now at a very clear decision point: unless the national government starts approaching resource extraction in a more responsible way, South Africa’s dreams of being an energy producer of consequence, and all the multiple benefits that flow from it, will quietly slip away. Amidst all the gloom dominating the mining industry, the strangling of a new industry of great promise, should be cause, not only for sorrow at opportunities missed but anger at the greed and incompetence that killed it.

Sincerely yours,
Helen Zille

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