AFRICA ENERGY FRONTIERS SOUTH AFRICA www.centurionlawfirm.com
Centurion Law Group is a pan-african corporate law conglomerate. Operating at the cutting edge of business practices today, Centurion stands ready to provide outsourced legal representation and a full suite of legal services to new, expanding and established corporations. At Centurion Law Group, we cannot understate the role that oil, gas and power have played in building our practice. Indeed it is through our work with energy and mining ministries and world-class oil companies that we have shaped Centurion into an elite pan-african conglomerate. We are excited to be officially opening an office in Johannesburg and to make a lasting contribution to the legal and business community. While the size of South Africa s oil and gas industry is limited, the country has a robust power sector and a distinct legacy in bringing cutting edge technologies to market. In South Africa, Centurion will extend our full range of services in all its practice areas, including arbitration and commercial litigation, corporate and finance law, and labor and employment. And we will continue to operate at the vanguard of legal practices to deliver a first-class service that is tailored to your operating environment, the nature and structure of your business, your level of risk tolerance, and your overall objectives. If you are planning to open or expand your enterprise in Africa, we welcome you to contact Centurion and place your trust in our knowledge and experience. South Africa in Profile One of Africa s most developed economies, South Africa has a hydrocarbons upstream sector that remains undeveloped, albeit well regulated. Production of gas is low and crude oil output is marginal, with most internal demand covered by imports. The country is highly dependent on its world-class coal reserves for power production, but shale gas and new exploration offshore could change the face of the industry rapidly. PETROLEUM LEGISLATION Mineral and Petroleum Resources Development Act 28 of 2002 (as amended 7 December 2014) DEPARTMENT OF MINERAL RESOURCES Minister Mosebenzi Joseph Zwane NJ AYUK Chief Executive Officer +1 647 308 6325 nj.ayuk@centurionlawfirm.com PETROLEUM OIL AND GAS CORPORATION OF SOUTH AFRICA (PETROSA) Group CEO Nosizwe Nokwe-Macamo ENERGY FRONTIERS CENTURION OFFICES Highly developed downstream industry, little oil and gas production with great potential in untapped shale gas resources A37 Katherine & West, 114 West St., 3rd Floor Sandton 2031 South Africa Malabo II, Carretera en Medio de Arab Contractor En Malabo il SOGECO, Casa Acsa Planta Baja Equatorial Guinea Centurion House 61 Rue de la Messe/Ave. du Général de Gaulle Bonapriso Douala Cameroon info@centurionlawfirm.com 1 2
OVERVIEW AND BACKGROUND Little to no oil and gas has been found in South African territory over the years but that doesn t prevent major companies from trying. With the country s first geological survey taking place in the 1940s, subsequent legislative moves have seen the birth of Soekor, the country s first national oil company, in 1965, and the licensing of exploration acreage to foreign private companies from 1967 onward. Exploration activity, first in the onshore Karoo, Algoa and Zululand Basins and later in the Pletmos offshore basin, revealed small but interesting findings of oil and gas. However, the economic sanctions set by the international community against the Apartheid regime during the 1970s and 1980s greatly reduced the role of international companies in the country, letting the responsibility of the industry fall to Soekor, with little capacity to bring forward a consistent exploration campaign. South Africa has focused on what it knew it had available to answer its energy needs and developed what is today one of the biggest coal industries in the world. Over 70 percent of primary energy consumption comes from coal. The fall of the Apartheid regime and the reopening of the country s offshore acreage to private exploration happened through the form of a licensing round in 1994. Change happened quickly after that, with the Petroleum Agency of South Africa being established in 1999, a new national oil company named PetroSA being created in 2001 to replace Soekor and accumulate further responsibilities, and a new piece of legislation being put forward to better regulate the industry, through the form of the 2002 Mineral and Petroleum Resources Development Act, that came into force in 2004. Today, the upstream industry remains small. Most of the natural gas produced comes from the F-A field, an offshore maturing asset managed by PetroSA. The company is planning to develop the F-O field in the near future to sustain gas production. The country s 41 billion cubic feet (bcf) of dry natural gas produced during 2013 sufficed to cover less than a quarter of total 173 bcf domestic consumption. The rest is imported from Mozambique via pipeline. Most of this gas goes to the Gas-to-Liquids refinery in Mossel Bay. Crude oil production is minimal. South Africa has a considerable structure for synthetic fuel production from both natural gas and coal. The Secunda Coal-to-Liquids plant, operated by private company Sasol, is one of the biggest of its kind in the world. Crude oil reserves estimates indicate the country s reserves to be located offshore and to not reach more than 15 million barrels. However, the advent of shale gas, of which South Africa is thought to have the world s eighth biggest reserves, has the potential to considerably change the country s upstream industry. 3 4
LEGAL FRAMEWORK Like the mining industry, the hydrocarbons sector is well regulated in South Africa, but is relatively underdeveloped in the upstream segment. The legal framework has adapted quickly to new exploration opportunities. SOUTH AFRICA S LEGAL FRAMEWORK FOR ITS EXTRACTIVE SECTOR IS THE MINERAL AND PETROLEUM RESOURCES ACT OF 2002, WHICH OVERSEES OIL, GAS AND MINING. SOUTH AFRICA HAS RECENTLY ENACTED LEGISLATION TO OVERSEE SHALE GAS EXPLORATION. The oil and gas industry in South Africa is regulated by the Mineral and Petroleum Resources Development Act of 2002 (MPRDA) which came into operation on May 1, 2004 and is enacted by the Department of Mineral Resources, the government authority that administers, controls and manages petroleum resources and regulates petroleum exploration and production. The MPRDA is under review for further amendments that may include a clause to give the government a stake of 20 percent in new exploration and production projects, as well as giving the authorities discriminating powers for further participation through acquisition at an agreed price or through production-sharing agreements. The review was passed in parliament in 2014 but is still to be enacted pending potential alterations. Former Minister Ngoako Ramatlhodi spoke against these changes that he saw as too restrictive for the industry. In June 2015 a new review of the MPRDA enacted regulation referring to shale gas exploration in South African acreage, answering a much-needed clarification on the sector. The new regulation was met with considerable resistance from public and environmental organisations even as it established clear and strong environmental assessment requests before licenses can be awarded. The bill particularly focuses on protecting water reservoirs in dry areas and aims to assure the water resources in the regions with operations are not affected by fracking operations. Between February 2011 and August 2012, South Africa upheld a moratorium on shale gas while awaiting an environmental impact assessment. The Liquid Fuels Charter of 2004 oversees ownership of the oil and gas industry across the value chain. The charter aimed to place 25 percent of the industry in the hands of Historically Disadvantaged South Africans (HDSA). The industry has, however not been able to comply with the requests of the charter so far. The liquid Fuels Charter establishes that all licenses for exploration and production are subject to a minimum 9 percent participating interest of HDSAs since 2004. Extractive activities in South Africa are regulated by the Mineral and Petroleum Resources Royalty Act of 2008. This sets royalties to be paid based on gross sales. Since the act also regulates the mining industry, it sets different conditions according to whether the products are considered unrefined or refined at the time of extraction, establishing royalty percentages at 5 and 7 percent respectively. 5 6
ENERGY SECTOR ORGANIZATION State regulation and actors South Africa s oil and gas sector is overseen by the Petroleum Agency of South Africa (PASA), in charge of regulating exploration and production activities and of providing data and information related to the country s onshore and offshore oil and gas assets. PetroSA, the national oil company, is the main actor in exploration and production of hydrocarbons in the country and responsible for operating the GTL plant in Mossel Bay. The power sector is managed by the National Energy Regulator of South Africa (NERSA), regulating power production and transmission, as well as the oil and gas pipeline sector. It is in charge of managing the price of electricity and takes responsibilities in organising and promoting private investment in the sector through Independent Power Producers (IPP) and through offgrid power production. Eskom is the national electricity company and is responsible for producing 95% of the country s power production. At a governmental level, the Department of Mineral Resources, headed by Minister Mosebenzi Zwane, oversees the mining and the oil and gas industry, while the Department of Energy, led by Minister Tina Joemat-Pettersson, is in charge of defining power policy. Upstream activity South Africa s most relevant upstream projects are shallow offshore gas fields F-A (1980) and E-M (1983), located in Block 9, both operated by PetroSA and responsible for supplying the Mossel GTL refinery. PetroSA has received permission to start operating the F-O block in order to replace the reserves of these two aging fields. Shale gas has been a major debate focus in the country in recent years and it was announced in September 2015 that applications for exploration and production using fracking techniques will start to be processed but it is so far uncertain when activity in this sector will take off. Midstream One natural gas import pipeline connects South Africa to Mozambique. The infrastructure runs for 865 kilometres and has a peak transportation capacity of 524 million cubic feet per day. The country is considering building a second pipeline to increase its importing capacity. The pipeline is owned by the South African government, the government of Mozambique and Sasol Petroleum International in a joint venture. Downstream The South African downstream sector is much more diverse than the upstream in terms of private sector participation. The country has the second largest oil refining capability on the African continent, only surpassed by Egypt, although it remains a net importer of petroleum products. Sapref, operated by Shell and BP with a capacity of 170,000 barrels per day (bpd); Enref, owned by Engen with a capacity of 135,000 bpd; Chevref, operated by Caltex with a capacity of 110,000 bpd; and Natref, operated by Sasol with a capacity of 88,000 bpd, represent the four pillars of South Africa s 503,000 bpd crude oil refining capacity. PetroSA has been evaluating a project to build a new 300,000 bpd refinery in the country to answer rising demand. Currently, all the production is directed at national consumption. PetroSA s Gas-to-Liquids (GTL) refinery in Mossel Bay has been operating since 1992 and was at the time the biggest refinery in the world by capacity of its type. It remains today the third biggest out of the five gas-to-liquids facilities in existence. It processes 45,000 barrels of oil equivalent per day (boepd) in liquid fuels with gas coming from PetroSA-operated fields in shallow-water Block 9. Sasol operates the only Coal-to-Liquids (CTL) plant in the country. The Secunda plant has a total capacity to produce 160,000 boepd in synthetic liquid fuels and chemical feedstock from low-grade coal. A project to expand the plant is under study. Imports In 2014 South Africa imported 425,000 bpd of crude oil, mostly from Saudi Arabia, Angola and Nigeria. The country has refrained from importing from Iran, South Africa s former biggest oil supplier, due to international sanctions imposed on the Iranian government. In the same year South African imports for distilled petroleum products reached 120,000 bpd, originating mostly in Asia. Local content South Africa's empowerment laws (Broad-Based Black Economic Empowerment, BBBEE), a national plan that aims to redress present or Apartheid-era discrimination through affirmative action, are applied to the hydrocarbons sector. 7 8
TAX AND FISCAL REGIME The tax and fiscal regime applied to the oil and gas industry in South Africa is established by the Mineral and Petroleum Resources Act of 2002 and the Mineral and Petroleum Resources Royalty Act of 2008. Oil and gas companies financial obligations are based on two main axes: Corporate Income Tax (CIT) and Royalties. Royalties are calculated taking into account gross product sales and earnings before interest. Taxes are determined by the Income Tax Act of 1962. Payment is on provisional terms every six months, based on an estimate similar to the one applied for income tax purposes, which is then rebalanced at the end of the fiscal year. For income tax purposes, royalties can also be deducted. Oil and gas companies earnings fall under the normal corporate tax structure, structured by several rate caps with added specific incentives and allowances. The legislation establishes that this tax may never exceed 28 percent. Any activities an oil and gas company engages in other than exploration and production will be taxed separately under the general provisions of the Income Tax Act. All cost oil and losses are deductible from CIT. An exception may be made for costs or losses associated with the acquisition of new oil and gas licenses. Deduction of costs related to farm-in and farm-out transactions is allowed in some cases. There are specific conditions for oil and gas equipment when it comes to import and export duties. The regulator gives special rebates for drilling rigs and other operational equipment pending the request of a special permit before the transaction. Both VAT rules and securities transfer tax do not contain special conditions for the oil and gas industry. However, crude oil sales are not subject to VAT, while the same is not true for natural gas sales. With the world s ninth biggest coal reserves and 95 percent of all Africa s coal, South Africa boasts a power matrix centred around coal-fired power plants. 85 percent of the country s electricity comes from this fuel, most of it produced by Eskom, the national electricity company, which is responsible for 95 percent of the country s power and its distribution grid. Independent power producers (IPP) are responsible for the remainder of production. At a nominal capacity of 45,645 MW, South Africa s electricity grid is under strain. The country is a member of the Southern Africa Power Pool and so is capable of importing power from some of its members like Namibia, Lesotho and Mozambique. However, Eskom has been forced to request some of its bigger industrial clients to reduce power consumption during peak hours due to lack of capacity and mining activity has been halted at times due to insufficient power. Blackouts are still fairly common and highlight the fragility of the country s power grid. Other sources of power include hydroelectric plants that provide 10 percent of power, the Koeberg nuclear power plant, currently the only example of commercial nuclear power in the country and responsible for 4 percent of production, and a residual 1 percent is provided by non-hydro renewable energy, including one operating wind farm. Some gas-fired plants operate off-grid at industrial sites. Eskom has tried to address the power grid shortfalls through new additions to the grid. The company s plan foresees the inclusion of 12,000 MW in the near future to answer current and growing demand but delays and financial shortfalls have delayed plans. A Renewable IPP Procurement Program launched by the government aims at promoting the participation of the private sector in addressing this issue. POWER SECTOR A 150-percent incentive on expenditures is in place for qualifying research and development activities in the oil and gas sector. No special terms apply to unconventional oil or gas exploration and exploitation. A growing focus on renewable energy aims at curbing international pressure over South Africa s carbon dioxide emissions. An overwhelming dependency on coal has turned the country into Africa s biggest emitter, responsible for 40 percent of the emissions of the whole continent, and number 13 worldwide. 9 10
Gas-to-Liquids PetroSA s GTL refinery is a symbol of how the country has adapted to its lack of crude oil reserves to respond to growing demand for fuel. When it was commissioned in 1992, the refinery in Mossel Bay was the first of its kind in the world. Today it still represents a central point of the national oil company s assets. PetroSA s exploration and production activities in South African waters have been primarily directed at guaranteeing the constant supply of natural gas for this 45,000 boepd processing plant. The plant makes use of Fischer-Tropsch technology to convert natural gas into synthetic fuels. PetroSA sources the gas from the E-M and F-A fields and a smaller amount from the Oribi and Oryx fields. PetroSA is now working on exploring the contiguous F-O field in order to assure continued supply. The company announced in 2012 its intention to build an LNG import terminal to supply gas to the GTL refinery and an Eskom-operated gas power plant. The project aims to take advantage of the growing gas industry in Tanzania and Mozambique, both on their way to build LNG plants, and use the gas influx to reduce the country s coal dependence. While no official decision has been made, in September 2015 an announcement was made that Saldanha Bay was being considered for the $1.4 billion import terminal. Shell, Sasol and Mitsubishi showed interest in the venture. KEY PROJECTS COD Plant A unique project to South Africa is PetroSA s Conversion of Olefins to Distillate (COD) plant. Built in 1992, it still stands as the only facility of its kind in the world. The technology is capable of synthesizing petrol and diesel through the combination of short-chain unsaturated carbons to form longer chain hydrocarbons, reaching the petrol and diesel boiling range. PetroSA states that COD produces better quality fuels from cheaper raw materials and with lower CO2 emissions than common fuels. Coal-to-Liquids Sasol s Secunda Coal-to-Liquids plant is a historical part of South Africa s energy matrix. As a fundamental component of the economy, it suffered several attacks by the African National Congress (ANC) during the Apartheid era. At 160,000-boepd production capacity, the facility uses a coal liquefaction process based on the Fischer-Tropsch process to produce synthetic crude oil from coal. It was first commissioned in 1980 and is still today the largest coal liquefaction plant in the world. 11 12
CONCLUSION As the most developed economy in sub-saharan Africa, South Africa presents a very favourable business environment for international investors but has so far failed to present interesting opportunities to foreign oil and gas companies. That seems to be about to change as opportunities open in the deep offshore, shale gas developments move forward and the country is incentivising investment in energy sources other than coal to curb carbon emissions and strengthen its power production capacity. GAS-TO-LIQUIDS REFINERY EXPANSION Expansion through a planned LNG import terminal at Saldanha Bay will cost $1.4 billion GAS FIELDS Gas feedstock is piped from the E-M, F-A, Oribi and Oryx fields. The F-O field is being explored PARTNERS PetroSA is the owner of the GTL facility, using technology partly under licence from SASOL DELIVERY The GTL plant was a world first when it opened in 1992 Pretoria OIL RESERVES SHALE GAS COAL RESERVES ENERGY CONSUMPTION TECHNOLOGY Proven crude oil reserves of 15 million barrels Estimated 390 tcf of technically recoverable shale gas reserves South Africa has 95% of Africa's total coal reserves More than 70% of primary energy consumption comes from coal Fischer-Tropsch technology is key to the gas-to-liquids process Bloemfontein NEW GAS FIELDS Ibhudesi Gas Field F-O Gas Field (Project Ikhwezi) South Africa's largest undeveloped gas field Estimated to hold 1 trillion cubic feet of gas Mossel Bay Located 105 km off the coast of Northern Cape Province in Block 2A in the Orange Basin Will supply feedstock for the Mossel Bay GTL refinery to replace the F-A and E-M fields Cape Town Production is expected to start in late 2017 Operated by Sunbird Energy (76%) in partnership with PetroSA (24%) Located 40 km south-east of the offshore F-A production platform Operated by PetroSA GAS IMPORT PIPELINE An 865-km pipeline connects the Pande gas field in Mozambique with Johannesburg,South Africa. The $1.2-billion project was completed in 2004 and has a capacity of 524 million cubic feet per day. Sasol and the governments of South Africa and Mozambique are the owners of the pipeline. 13 14