The Draft Upstream Petroleum Resources Development Bill (“Draft Bill”) was published by the Minister of Mineral Resources and Energy (“Minister”) on 24 December 2019 in an attempt to promote policy certainty and to encourage investment in petroleum resources in South Africa.
Petroleum resources are currently regulated by the Mineral and Petroleum Resources Development Act (Act 28 of 2002) (“MPRDA”), which also governs mineral resources. The Draft Bill proposes to separate the regulatory framework so that petroleum and mineral resources are governed by two separate Acts.
Comments were due to the Department of Mineral Resources and Energy on 21 February 2020.
Below is an outlined of some of the most notable changes to the regulation of petroleum in terms of the Draft Bill:
Active participation of black persons
One of the objectives of the Draft Bill is to “substantially and meaningfully expand opportunities for black persons, to enter into and actively participate in the upstream petroleum sector and to benefit from the exploitation of the nation’s petroleum resources”.
In order to achieve this, the Draft Bill has introduced a requirement that all exploration and production rights must have a minimum of 10% participating interest held by black persons. This must include economic interest plus corresponding percentage of voting rights, per exploration right or production right. The Minister may also reserve certain exploration or production areas for 100% black-owned companies.
One of the more contentious provisions of the Draft Bill allows the State, through the Petroleum Oil and Gas Corporation of South Africa (SOC) (“PetroSA”), a right to 20% carried interest in exploration and production rights. This gives the State permission to select the petroleum operations in which it wishes to participate and to benefit from successful discoveries at the cost of exploration and production rights holders.
Although holders of production rights may recover the development and production costs of the State’s carried interest from the State’s portion of proceeds generated from production operations, the recovery procedure has not been included in the Draft Bill and will need to be provided in other legislation.
Provision for South Africa’s strategic stock
Another potential concern for investors is the provision that allows the Minister to require a production right-holder to avail certain volumes of petroleum in order to provide for the country’s strategic stock “when the need arises”. The Draft Bill has not included any criteria to determine “certain volumes of petroleum”, or what would be regarded as “strategic stock” and how to determine “when the need arises”.
Petroleum resource rent tax, royalties and production bonus
The Draft Bill has introduced a petroleum resource rent tax, a production bonus and royalties that holders of exploration and production rights will be required to pay. These fees still have to be drawn up by Treasury and determined by the Minister of Finance.
Transferability and encumbrance of exploration or production rights
The Draft Bill prohibits the cession, transfer, encumbrance, assignment or alienation of an exploration or production right, or any interest in such a right, in an unlisted company or a controlling interest in a listed company, without the written consent of the Minister. This means that, insofar as transfers of interests in companies are concerned, unlike the current position under the MPRDA which only applies to the transfer of controlling interests in unlisted companies and excludes listed companies from its application, the Draft Bill’s prohibition will extend to any interest in an unlisted company or any controlling interest in a listed company, which holds rights.
It is also interesting to note that, unlike section 11(1) of the MPRDA, section 36(1) of the Draft Bill, contains an express reference to encumbrance as one of the acts requiring ministerial consent under that section. This distinction may mean that both an encumbrance (other than one excused under section 36(3) of the Draft Bill) and the transfer pursuant to any foreclosure under the encumbrance would require the consent of the Minister under section 36(1). It is currently suggested that the absence of the express restriction of an “encumbrance” under section 11(1) of the MPRDA would exclude the requirement for ministerial consent for an encumbrance and that only a transfer pursuant to any foreclosure under the encumbrance would require the consent of the Minister under section 11(1) of the MPRDA.
The Draft Bill has combined the transitional arrangements in respect of the Petroleum Agency of South Africa (which is re-established under the Draft Bill) and the transitional provisions relating to rights-holders in one provision, which is confusing.
It is also strange that no period of transition has been provided in order to allow holders time to familiarise themselves with the new regulatory regime and get their affairs in order (as was the case when the MPRDA came into effect).
It is important that any rights or permits that were granted before the date on which the Draft Bill comes into effect, will continue in force and be subject to the terms and conditions under which the right or permit was granted. Any new applications for a right or permit (e.g. reconnaissance, retention or technical co-operation permits or exploration or production rights) and any new applications for renewal will be subject to the Draft Bill.
Should you have any queries about the Draft Bill, please do not hesitate to contact us.