Blue Chip Issue 81

OIL & GAS EXPLORING THE

OIL & GAS EXPLORING THE UPSTREAM The latest draft of the Upstream Petroleum Resources Development Bill has been under scrutiny since its publication in June 2021. The bill comes as South Africa’s upstream oil and gas industry shows some promise. The Brulpadda and Luiperd discoveries of gas and condensate, the largest hydrocarbon discoveries made locally to date, have opened a world-class exploration play. These two discoveries are for only two drilled prospects in the Paddavissie feature where three further prospects remain to be drilled. There could be sufficient gas to feed the Mossel Bay plant at full capacity for more than 40 years. The Paddavissie feature is only a fraction of the Block 11B/12B, therefore these two gas finds do not even begin to represent the full potential of the licence block. Further seismic data to the east has confirmed the existence of another geological feature, named Kloofpadda, which consists of several large and encouraging leads. There are also prospects identified in the north of the block. REVISED REGULATION Oil and gas exploration and production is currently regulated under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA). The Upstream Petroleum Resources Development Bill (UPRDB) will repeal and replace the relevant sections pertaining to upstream petroleum activities in the MPRDA. The Draft Bill provides greater policy certainty and a stable environment for investment in the South African oil and gas sector. The Bill offers security of tenure by combining the rights for the exploration, development and production phase under one permit. The aims of the UPRDB are to expand meaningful black participation; promote local employment and skills development as well as to create an enabling environment for the acceleration of exploration and production of the nation’s petroleum resources. The Bill’s key features include mandated state participation of 20%, 10% participation by black persons, and the empowerment of the Petroleum Agency of SA (PASA) to administer the development of the upstream petroleum industry. “The upstream oil and gas exploration industry requires technological capacity and is extremely high risk in terms of capital investment and needs long-term investment before a return is shown. Because of this, many countries choose to share with private companies, and South Africa follows this model,” says Dr Phindile Masangane, CEO of PASA. “Government has designated PASA as the custodian of South Africa’s oil and gas resources. Its role is to attract these companies to our investment opportunities and facilitate their entry into and operations in the upstream industry. “All investors want to see a return on their investment and a reward for taking on risk. PASA’s approach is to facilitate their activities and guide them through compliance and regulatory requirements to achieve the best outcome for both government and the investing companies. Advocacy plays an important role and PASA is concentrating on communicating the role that the upstream industry can play in reconstruction and development of our economy to government,” adds Dr Masangane. EXPEDITING EXPLORATION South Africa has a history of political stability, the new administration is widely regarded as business friendly, and the new Upstream Petroleum Resources Development Bill will 74 www.bluechipdigital.co.za

OIL & GAS assist the Agency in expediting exploration through close management of acreage allocation and work programmes. The Bill also empowers the Agency to commission multi-client or speculative surveys enabling the acquisition of data to attract investment. South Africa currently offers an attractive fiscal framework. These positive factors create a conducive environment for the Agency to pursue its mandate of attracting investment into the upstream petroleum industry. In terms of the UPRDB, every petroleum right must have a minimum of 10% undivided participating interest by black persons. The BEE participation is on full commercial terms, and BEE partners will be expected to fully fund their involvement at both the exploration and production phase, which is welcome news for investors. In recognition of funding challenges, the bill permits the dilution of the BEE interest to no less than 5% to raise capital. This dilution will not trigger any requirements to top up the BEE participation to 10%. Applicants must demonstrate that they have the technical capability and financial resources to carry out the work programmes agreed, as well as any future development that may ensue. A track record of experience, a good health and safety record, environmental compliance record and adherence to oilfield practice is essential. Having said that, PASA is determined to increase involvement of local companies in our upstream industry and develop local capacity. One way of achieving this is through partnerships between international and local companies. A further change proposed by the UPRDB includes giving the state an active role through joint operating agreements (JOAs) that must be entered into with the state. The state is entitled to voting rights corresponding to their 20% participation. For current rightsholders whose rights do not provide for state participation, these state participation provisions will only kick in when the company applies for approval to progress to the production phase in terms of the new bill. RESOURCEFUL REASONING Simultaneously, the role of fossil fuels in the future of energy is under question considering the global aspiration of net-zero carbon emissions by 2050. Notwithstanding the mounting pressure to reduce reliance on fossil fuels, the upstream oil and gas sector still plays a vital role in South Africa’s energy policy. The transition to cleaner fuels and renewables is inevitable if the world is to reduce the negative impact of climate change. South Africa is a signatory of the Paris Agreement and has committed to a “Peak-Plateau-Decline” carbon emission trajectory. The government policy is to diversify the country’s energy mix, which is currently coal-dominated, to a lower carbon future by introducing proportionately higher renewable energy resources such as wind and solar, into the energy mix as well as gas-to-power. “Gas burns with less than half the CO2 emissions from coal and additionally has no sulphur oxide emissions. It is thus a suitable transition fuel towards a lower carbon economy for South Africa especially since gas-to-power technologies are flexible and would complement the intermittent renewable energy being added to the national grid,” explains Dr Masangane. The National Environmental Management Laws Amendment Bill, which was revived in June 2020, proposes various amendments to the National Environmental Management Act, 1998. Proposals that may positively impact upstream petroleum operations include the provisions empowering the Minister responsible for mineral resources to delegate a function entrusted to him in terms of the Act to any organ of state and designate, as an environmental petroleum inspector, any staff member of any other organ of state that executes a regulatory function. The Minister in this regard may delegate certain competent authority functions to the Petroleum Agency SA, which may improve the turn-around timelines for making decisions on the Environmental Authorisation (EA) applications. Furthermore, designating staff members of the Agency as environmental petroleum inspectors means that all compliance monitoring and enforcement functions prescribed in the Act, as far as upstream petroleum operations, would be efficiently executed. Currently, natural gas supplies just 3% of South Africa’s primary energy. A significant challenge facing the development of a major gas market is the dominance of coal. Opportunities for gas lie in the realisation of South Africa’s National Development Plan (NDP) and the Integrated Resource Plan (IRP). Held in high regard by the local and international oil and gas industry that it serves, PASA plays an important role in developing South Africa’s gas market by attracting qualified and competent companies to explore for gas. The Agency has successfully attracted major explorers to South Africa and facilitated the acquisition of many new large seismic surveys and some exploratory drilling, through a period affected by legislative issues and a major oil price crash. Government has designated PASA as the custodian of South Africa’s oil and gas resources. Its role is to attract these companies to our investment opportunities.