Transcript Document

NOT AN OFFICIAL UNCTAD RECORD
Investing with certainty: stability
under South Africa’s new oil and
gas regulatory regime
Address by Peter Leon
Partner, Webber Wentzel Bowens, Johannesburg,
to
UNCTAD´s Africa Oil, Gas, Trade and Finance
Conference
Nairobi, Kenya
23 May 2007
International Best Practice for Oil and Gas
Exploration and Production
• This year, the South African oil and gas regulator, the Petroleum
Agency, SA (“PASA”) actively sought investment in its 2007 licensing
round for a number of blocks offshore the South African coast. This
licensing round closes in September 2007
• Resource-rich countries must make themselves attractive to private
investment
• For those countries which are geologically less prospective (such as
South Africa), this is all the more so
• A successful oil and gas regulatory regime requires certainty and
predictability in a high cost, high risk and capital intensive industry
• The success of PASA’s licensing round will rely in part on the extent to
which the South African regulatory regime affords investors certainty,
security of tenure and stability
Previous regulatory framework for oil and gas in
South Africa: the Mining Rights Act, 1967 and the
Minerals Act, 1991 (1)
•
The OP26 prospecting lease and OP26 prospecting sub-leases and mining
leases (going back to 1967):
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Legislative stability
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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 subleases and the mining leases
The lessee was protected as it was subject to the laws of South Africa and such
further laws passed, provided such further laws would not adversely affect the
rights of the lessee
Guarantees in favour of the lessee by the Minister of Minerals and Energy:
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the contractual obligations of the lessee would not be altered without the
lessee’s 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
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 duration
of sublease
• Limited socio-economic obligations placed on lessees
 A multinational could employ non-South African citizens if required
skills and qualifications not available in the local labour market
 Limited Black Economic Empowerment (“BEE”) equity divestiture
requirements (9 percent under the Liquid Fuels Charter)
Current regulation: Mineral and Petroleum
Resources Development Act, 2002 (“the MPRDA”)
• State is now the “custodian” of all mineral and petroleum
resources 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 its
transitional arrangements
• “old order” to “new order”: the “old order” OP26 sub-leases
and mining leases must be converted into exploration rights
and 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!
Current regulation: the MPRDA (cont)
Socio-economic objectives:
● The MPRDA seeks to promote “equitable access” to oil and gas
resources, and expand opportunities for historically
disadvantaged persons, to enter and benefit from the industry
● The 2000 Charter for the South African Petroleum and Liquid
Fuels Industry (“the Liquid Fuels Charter”) is applicable to
exploration and production of oil and gas
● The requirements of the Liquid Fuels Charter may seem
somewhat benign in relation to the far more onerous Mining
Charter:
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9% BEE equity divestiture
Vague employment equity and BEE procurement requirements
● This is appropriate in a high risk, capital intensive industry in a
geologically uncertain area
● Social objects of the MPRDA are linked to the grant and
conversion of rights under the MPRDA
Issues arising from the MPRDA’s regulatory
framework and the draft Exploration Rights (“ER”)
and Production Rights (“PR”)
• Legislative stability
• Fiscal stability
● Royalties
● Tax
• Transitional Arrangements
• Onerous empowerment requirements
ER/PR: Legislative Stability
• Holder will be subject to the “applicable laws” of
South Africa, as amended from time to time. This
will include all new legislation and legislation to be
passed in the future which may adversely affect
the holder’s rights
• Holder is subject to all laws
• The ER/PR may now be affected by any legislative
amendments which are enacted after the
conclusion of the ER/PR, thus potentially affecting
the rights granted to the holder
ER/PR: Fiscal stability - royalties
• Draft Mineral and Petroleum Royalty Bill, 2006 (“the
Draft Bill”):
if enacted in current form, a royalty rate of 1.5%
(deeper than 500 metres) and 3% (shallower than
500 metres) will be imposed on oil and gas production
 The issue is not so much that of the royalty rate
payable under the draft Bill, but rather whether the
rate 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 may
terminate the ER without liability or suspend the ER
until 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 “applicable
laws”, as defined
• The Tenth Schedule to the Income Tax Act, 1962 came into force on 7
February 2007. It empowers the Minister of Finance, after consulting
the Minister of Minerals and Energy, to guarantee that the provisions
of the Tenth Schedule will continue to apply for the duration of the
ER/PR
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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
ER/PR: Onerous empowerment
requirements
• PR: Holder must comply with 26% BEE equity divestiture
requirements of the Mining Charter by 2014, or a new Liquid
Fuels 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 South
Africans
• Holder is required to effect payments to the Upstream Training
Trust
Conclusion (1)
• Need to create investment certainty and an
attractive 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 given
adequate incentives
 Look to other jurisdictions:
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● Kenya’s regulation of oil exploration. Strong security of
tenure and active investment schemes aimed at
promoting foreign investment and terms of the licences
are negotiable.
Conclusion (2)
• Need to create security of tenure for holders of
existing old order rights
● The ER/PR could provide for financial guarantees by the
South African government in the holders’ favour in the
event 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 empowerment
requirements to stimulate investment
● Kenya has shown how to incentivise investment in a
geologically uncertain area
Conclusion (3)
• The National Treasury is alive to the need for
certainty and stability in the oil and gas industry in
South Africa, as is evident from the fiscal stability
provisions contained in the Tenth Schedule to the
Income Tax Act
• PASA and the DME need to reflect a similar
intention in finalising the draft ER and PR in the next
six weeks