South Africa’s ‘Vague’ Oil-Law Changes Seen Deterring Investment

South Africa risks deterring investors in its oil resources by proposing “vague” amendments to mineral and energy legislation, according to New York-based consultants Horizon.

“Over the last two years, South Africa has witnessed unprecedented interest from international oil majors,” Anne Fruhauf, director of Africa energy at Horizon, said by e-mail. “But the Mineral Resources Development Act amendments could nip this nascent boom in the bud.”

Lawmakers will hold four days of public hearings starting today on the proposed amendments, which are aimed at removing ambiguities in the 2002 law. While Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) have stakes in offshore blocks, extraction is yet to take off. The country imports 70 percent of its oil needs, processing the remainder of its fuels from coal and gas.

The amendment bill is “fraught with vague and uncertain language,” Jonathan Veeran, a partner at Johannesburg-based law firm Webber Wentzel, said in an e-mail. “Rather than address the problems” in the act “the bill in fact exacerbates them.”

No one at the Department of Mineral Resources was available for comment. Minister of Mineral Resources Susan Shabangu said Aug. 28 that the bill “is not intended to strangulate investment opportunities” but rather to attract investors.

Bolster Economy

South Africa, isolated from foreign investment until apartheid ended in 1994, is seeking to develop its oil resources to diversify and buoy an economy that expanded an annualized 3 percent in the second quarter compared with 0.9 percent in the first, which was the slowest rate since a 2009 recession.

Planned changes to the 2002 act would allow the country to force mine operators to process some output locally and give the state stakes in new oil and gas projects. South Africa would be able to appoint two directors to companies with new energy projects and declare some minerals strategic to secure supplies.

“The biggest problem with the bill isn’t a particular clause, it is the combination of potentially onerous, vaguely defined clauses,” Fruhauf said. “The percentage of state participation in upstream ventures is not specified and neither are ‘designated minerals,’ yet the bill would grant the minister vast amounts of discretion in defining everything.”

South Africa is also looking to exploit its shale reserves, which could be the world’s eighth-biggest, the U.S. Energy Information Administration said in June.

Responsible Development

The “shale-gas industry needs a regulatory environment, as with all hydrocarbon extraction, which allows for the responsible development of South Africa’s resources in line with the wishes of the government,” Dineo Pooe, a spokeswoman for Shell, said by e-mail. The company, waiting for a shale-gas exploration license, has already been permitted to look for oil and gas offshore in the Orange Basin near the Namibian border.

South Africa’s offshore industry is particularly dependent on a positive response to the bill because it’s a “frontier market” where exploration costs are high, Johannesburg-based Standard Bank Group Ltd. (SBK) said in a public comment this month.

The current-account deficit widened to 6.5 percent of gross domestic product last quarter as a weaker rand failed to damp imports and boost exports, according to the Reserve Bank. The gap on the current account, a measure of trade in goods and services, could be reduced to -0.9 percent, the bank calculated using a model of offshore production at 450,000 barrels a day.

“It becomes very difficult to draw up business plans when so many terms are fundamentally vague and subject to future ministerial revision,” Fruhauf said. “The preferred outcome of many upstream operators, onshore or offshore, would be for the Department of Mineral Resources to drop all upstream elements from the bill and to draft separate petroleum legislation.”

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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