The South African government must expedite oil and gas legislation to boost investor confidence.
By NJ Ayuk, Executive Chairman, African Energy Chamber
Within the last few months, there’s been both good and bad news for South Africa’s oil and gas industry.
I’ll start with some good news: Shell, the UK-based giant, is optimistic that the vast hydrocarbon reserves discovered offshore Namibia extend into South Africa’s offshore zone. The company is so optimistic, in fact, that it asked the government earlier this summer for permission to bid on exploration rights for the Northern Cape Ultra Deep (NCUD) block in the Orange Basin.
Now for some bad news. As of midsummer, TotalEnergies was said to be considering an exit from Block 11B/12B, the offshore license area where it discovered large reserves of gas condensate and natural gas in 2019 and 2020. After floating several unsuccessful proposals for the development of its Brulpadda and Luiperd fields, the French major may now be ready to follow the lead of Canada’s Africa Energy Corp., which said on July 1 that it was dropping its 20% stake in the block.
The Good, the Bad and the Ugly
For another country, this combination of good and bad news might not be a big deal. Like other sectors of the economy, the oil and gas industry is typically subject to both setbacks and advances that leave some players thriving and others struggling.
But South Africa isn’t just facing good news and bad news. It’s facing a mix of the good, the bad, and the ugly.
So how’s this for ugly news? South Africa’s Ministry of Mineral and Petroleum Resources hinted in May that it might punish Shell for selling its local downstream subsidiary by blocking its bids for new exploration licenses. If it carries out this threat, then Shell — yes, Shell, the same company that is so keen to bid for the NCUD block — will have a hard time testing its belief in the potential of the South African section of the Orange Basin.
But the ugly news doesn’t end there.
In late April, the National Council of Provinces (NCOP), the upper house of South Africa’s Parliament, approved the Upstream Petroleum Resources Development Bill (UPDRB). This move cleared the final procedural hurdles to adoption of the law, and the NCOP followed the vote by sending the UPDRB to President Cyril Ramaphosa for signature.
This ought to be good news, considering that the legislation in question was first put forth more than four years ago, in late 2019. But it’s not, as the UPDRB is still awaiting signature.
That’s right: The bill has now been on President Ramaphosa’s desk for more than two months without any action being taken.
Of course, the president has been busy of late. He was campaigning for his party, the African National Congress (ANC), in the run-up to the general election in late May. Following that election, which saw the ANC lose its parliamentary majority for the first time since the end of apartheid, he had to formulate a new governing coalition. Subsequently, he had to clear the obstacles that the election results posed to his bid to secure another term as president at a parliamentary vote in mid-June. (That bid did succeed, but only after two weeks of intensive politicking.)
In other words, the elections are over now, and they have been for several weeks. Nevertheless, Ramaphosa has still not signed the UPDRB or given any indication as to when he might do so.
An Oversight or a Choice?
It’s not clear at this point whether the president’s failure to enact the law is merely an oversight or a deliberate choice. Whatever the case, my opinion is that further delay is inexcusable in the face of South Africa’s ongoing energy crisis. The country has been short on power for more than 15 years now, and supply issues have become markedly worse since 2019. Eskom, the national power provider, has tried to deal with the problem through load-shedding, but the resulting blackouts have greatly complicated South Africans’ lives while also doing real harm to the economy.
Indeed, the South African Reserve Bank (SARB) said last October that the country’s GDP was on track to shrink by 1.8% in 2023 as a result of load-shedding. This was enough to push overall growth rates into negative territory, as SARB also said that it expected the economy to contract by 0.2% in the same year.
Other observers appear to believe that the impact has been even more dramatic. PwC, one of the world’s largest accounting firms, has estimated that energy shortages shaved 5 percentage points off South Africa’s GDP in 2022.
And in a 2023 study commissioned by Eskom, Stellenbosch-based Nova Economics said that as of 2019, the country had already lost the equivalent of USD 2.42 billion at current exchange rates.
“To put this into perspective, the total cost of load-shedding at ZAR 43.5 billion for the [period] between 2007 and 2019 was roughly equivalent to the impact that the 2008/2009 financial crisis had on GDP growth,” the study explained.
These losses could have been prevented. The South African government first expressed concern about the prospect of electricity shortages in a white paper published all the way back in 1998, long before it had committed to a policy of phasing out coal-fired thermal power plants (TPPs).
In other words, it has known for more than 25 years that it would eventually have to find different ways — and different fuels such as natural gas, which is a far cleaner-burning fuel than coal — to generate electricity to meet future demand. It has had time to prepare — and it has not made full use of that time.
Granted, South Africa has not done nothing. It did enact a new legal regime for coal and petroleum in 2002, when former President Thabo Mbeki signed the Mineral and Petroleum Resources Development Act (MPRDA). However, that legislation proved to be inadequate. It failed to differentiate adequately between the needs of the coal industry, which was developing an established resource base, and the needs of the oil and gas industry base, which was hoping to develop new types of hydrocarbons such as unconventional shale gas in the Karoo Basin and deepwater gas and condensate fields such as Brulpadda and Luiperd in the Outeniqua Basin. Those shortcomings helped lead the government to start work on UPDRB in 2019. But progress on the new legal regime has been agonizingly slow.
Time to Take Action
It is likely that some of the delays have arisen from unforeseen developments such as the COVID-19 pandemic, which inflicted considerable damage on the South African economy. (Others stem from the rise of environmental activism portraying oil and gas exploration as dangerous.)
Even so, Ramaphosa has been in office since 2018. He has been president more than long enough to see and understand how much disruption and discontent the energy crisis has fomented. He should know by now how much South Africa has to lose if the energy crisis persists.
For that reason, he should take action. He should sign the UPDRB into law — and he should do it quickly, so that Shell, TotalEnergies, and other international oil companies (IOCs) can help the country make use of the gas they have already discovered. The faster he does this, the faster South Africa will be able to deliver gas to its TPPs and move forward with the transition away from coal — and the faster it will be able to benefit from the provisions of the new legal regime, which include the right to take 20% equity stakes in new development projects without the obligation to bear any of the costs.
There’s no excuse for further delays. It’s time for the president to act.