In January 2015, President Jacob Zuma referred the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill to the National Assembly, based on concerns that it would not pass constitutional muster.

Law firm Norton Rose Fulbright South Africa director Lizel Oberholzer says that one of the reasons the Bill may be deemed unconstitutional is the lack of public consultation at the level of the National Council of Provinces (NCOP). She notes that the National Assembly adopted the report prepared by the Portfolio Committee on Mineral Resources last month, in terms of which the committee agreed with most of the President’s reservations.

“Within a few weeks, the Bill proceeded to the NCOP’s Select Committee on Land and Mineral Resources, and, on November 8, the Department of Mineral Resources (DMR) provided a briefing on the Bill to this committee.”

The Bill, in its current form, grants the State a 20% free carried interest in all new exploration and production rights. A free carried interest is defined in Clause 1 of the Bill as an “interest allocated to the State in exploration or production operations without any financial obligation on the State”.

Further, Oberholzer points out that the State is also entitled to a further participation interest in any exploration or production right. This entitlement may be exercised either through a production sharing agreement or through the acquisition of the interest at an agreed price.

“If the Bill is passed in this form, it is likely to deter foreign investment in the upstream oil and gas industry,” she warns.

Meanwhile, Oberholzer recounts that, through the oceans economy initiative, which falls within government’s Operation Phakisa, the State and the upstream oil and gas industry have held “robust discussions” with the aim to create a uniquely South African “win-win” solution.

It was these consultations that resulted in the recommended changes to Section 86A of the Bill presented by the DMR at the select committee meeting. Specifically, the DMR proposed that, the State’s 20% carried interest no longer be free and suggested a cost recovery mechanism for the carried interest during the production phase. The DMR did not elaborate on the details of the cost recovery mechanism.

Oberholzer adds that the DMR also suggested that, in the event of a discovery, the holder of the exploration right would be entitled to apply for a downward adjustment of the State’s participating interest.

“It is our understanding that projects will be assessed on a case-by-case basis to ensure that projects remain economically viable in light of concerns that, in certain instances, a carried interest at a level of 20% could render the project uneconomical,” she states.

Oberholzer expects the legislator to provide principles that will guide the Mineral Resources Minister in exercising discretion in adjusting the State’s participation when he makes each determination. Further, project certainty will be created by settling the terms and conditions of the exploration right and the corresponding production right at the exploration stage.

Moreover, she points out that the terms and conditions of 30-year production rights would be subject to renegotiation between the parties at the renewal of the production right.

Oberholzer notes that, currently, the Mining Charter, which, together with the MPRDA, governs black economic empowerment (BEE) in the mining sector, does not specifically make provision for the upstream oil and gas industry.

She remarks that the DMR has proposed that the Mineral Resources Minister be given the power to develop a Petroleum Charter for the upstream oil and gas industry and that a 10% shareholding be reserved for BEE participants.

The level at which BEE participation is set in the mining sector as contained in the Mining Charter is 26%.

“It is understood that, in light of the significant investment costs of upstream oil and gas operations and the relatively small chance of commercial success, a BEE participation level of 26% would prohibit oil and gas exploration and production.”

Oberholzer says that the DMR consequently suggested that BEE participation be set at 10%.