Government to take half of fracking projects

Susan Shabangu
Susan Shabangu

The government will take a 20% “free carry” in all new oil and gas projects, and reserve the right to buy another 30% at market-related rates, which will allow it to take its interest in projects to an effective 50%, it emerged on Thursday.

Mineral Resources Minister Susan Shabangu broke the news when she announced that the technical regulations for shale gas hydraulic fracturing (fracking) in the Karoo and other petroleum sector technical regulations had been approved by the Cabinet.

The regulations will be published in the Government Gazette next week.

However, it was not yet clear yesterday whether the free carry and the reserve will be included in these regulations.

The size of the free carry stake has surprised the industry.

Ms Shabangu told a post-Cabinet media briefing that Cabinet had approved the free carry and reserve last November, but did not explain why they had not been made public until now.

Free carry in the oil and gas sector takes place when a government is able to take a percentage of production without having contributed to the capital and exploration costs of the project.

Ms Shabangu said previously the mining sector had contributed little to the country’s direct economic development.

“The petroleum industry is completely new and the state will have to also be a free carrier … the reason for the technical regulations, particularly for the hydraulic fracturing, is how is it going to happen,” she said.

“The policy agreed to by the Cabinet of November says the state will have 20% free carry, but it also says if the state has another interest it can be up to 50%, but the 30% can be market related.”

During last month’s public hearings on amendments to the Mineral and Petroleum Amendment Act, oil and gas companies, especially ExxonMobile and Royal Dutch Shell, criticised the draft law for not having stated up front what the free carry obligations would be.

Several other oil and gas representative bodies complained that leaving the free carry and other state interests to regulations and not including them in the act made their planning and risk assessment very difficult.

They also pointed out during their oral presentations that the world norm was for governments to take a 10% free carry.

ExxonMobile’s SA GM Russ Berkoben told Parliament last month that South Africa’s potential offshore oil and gas reserves were possibly located in some of the most dangerous seas in the world, entailing significant exploration risks.

Therefore, he said, the fiscal and regulatory terms had to be as attractive as possible to encourage investment in the sector, otherwise companies would rather go to other countries with more accessible resources and simpler laws.

The regulations to be published next week will allow for a 30-day public consultation.

The immediate reaction from Royal Dutch Shell, Sasol and the South African Oil and Gas Alliance to Ms Shabangu’s announcements was that they welcomed the clarity emerging from them. However, they would have to study the regulations extremely carefully before making further comment.

Shell is exploring prospects off the west coast, while Exxon plans to search for crude and natural gas after acquiring rights to blocks near Durban.

Webber Wentzel partner Jonathan Veeran said that “10% ( free carry) was what one would have expected”. While the clarity on the percentages is helpful, it does mean that companies would have to test whether it would still be economically viable to continue with their projects, he said.

Mr Veeran said South Africa had a very underdeveloped upstream oil and gas sector and this meant it would still have to be seen whether even local companies could absorb this state interest.

Democratic Alliance MP James Lorimer said: “If the Cabinet was deliberately trying to sabotage the prospects of South Africa developing an offshore oil industry, they could hardly be going about it any differently to how they are behaving.”

He added that after listening to what the industry said in the public hearings on the new mineral and petroleum bill, the minister should have been moving towards realism rather than descending into “kleptocratic fantasy land”.

Treasure the Karoo Action Group and civil rights organisation Afriforum said yesterday that they did not believe this to be a proper consultation and were preparing to stop fracturing in the Karoo in the courts if necessary. Treasure the Karoo Action Group CEO Jonathan Deal said: “Government is effectively embarking on a business plan without proper consultation with the public.”

He said that should the government go ahead with its plans to frack in the Karoo, it would effectively lead to another e-tolling saga where a lot of money is invested with no real return and no popular support.

“The fact of the matter is that government has not heard the total story about fracking and is only listening to one side. It is not just about the ecology, but also that fracking is not a sustainable option,” he said.

Ms Shabangu said one of the report’s main recommendations was to ensure that the regulatory framework was robust enough to mitigate any negative effect should fracking be approved.

Mr Deal referred to comments by outgoing Royal Dutch Shell group CEO Peter Voser in the Financial Times this week that he regrets entering his company in the US fracking sector where it had to take a $2.1bn impairment. – Business Day