Exxon Says S. African Oil-Law Changes to Deter Investment

Exxon Mobil Corp. (XOM), Royal Dutch Shell Plc (RDSA) and other energy companies operating in South Africa said planned changes to mineral and energy laws lack clarity and will deter investment in the continent’s largest economy.

Changes to the 2002 Mineral and Petroleum Resources Development Act, being processed by parliament, would give the state an unspecified free stake in all new oil and gas ventures and the right to name two directors to their boards. The state would be able to force mine operators to process some output locally and declare some minerals strategic to secure supplies.

The changes “may significantly impact on the ability of investors to continue exploration in South Africa,” Russ Berkoben, president of Exxon’s local unit, told lawmakers in Cape Town today. The government “is sending a message to investors that their high-risk investment will have a much lower reward. A lot of work has to be done.”

South Africa, closed to foreign investment until apartheid ended in 1994, is seeking to develop its oil resources to boost and diversify an economy with a 25.6 percent unemployment rate. While Irving, Texas-based Exxon and Shell 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.

Excessive Discretion

Parliament’s mineral resources committee began four days of public hearings on the draft bill today. On July 30, officials from the Department of Mineral Resources told lawmakers they were winning over business to the new laws and they didn’t expect the regulations to hurt investment.

Shell said the proposed bill gives the mineral resources minister excessive regulatory discretion and doesn’t clarify the size of stake the state intends to take in new energy ventures.

“For a country to attract investment in the exploration of oil and gas, the financial risks need to be balanced with stable and transparent legislation that provides benefits to investors and meets the country’s aspirations,” The Hague-based Shell said in its submission. The bill’s deficiencies “could lead to significant delays in planned investment.”

Marek Ranoszek, managing director of Anadarko Petroleum Corp. (APC)’s South African unit, told lawmakers the draft law failed to protect the rights and expectations of mineral permit holders and may lead investors to reconsider plans for oil and gas exploration.

Wider Deficit

“The potential costs to the country in terms of job creation, energy security, energy diversification and revenue to the fiscus will be in the order of billions of rands,” Ranoszek said. Johannesburg-based Sasol Ltd. (SOL), the world’s largest producer of motor fuel from coal, several other energy companies and business lobby groups also rejected the bill on the grounds that it’s unclear and would hamper investment.

South Africa relies on foreign capital to fund its current-account deficit, which widened to 6.5 percent of gross domestic product last quarter as a weaker rand failed to damp imports and boost exports.

The draft law has also drawn objections from mining companies.

Anglo American Plc, the largest investor in South African mining, and Impala Platinum Holdings Ltd. (IMP), the world’s second-largest platinum producer, said in written submissions that the bill introduced legislative uncertainty and would fail to achieve its aims of encouraging local processing.

Legal Obligations

The measures may also flout South Africa’s international legal obligations, said London-based Anglo American, which is due to address the committee on Sept. 18.

Fund-management companies Allan Gray Ltd. and Sanlam Investment Management, both based in Cape Town, said many of the law’s provisions would discourage investment in mining and energy at a time when resources companies are struggling worldwide.

Stagnating economies have eroded demand for commodities from metals to fuels, sending the Standard & Poor’s GSCI Spot Index (SPGSCI) of 24 raw materials down 4.8 percent in the past 12 months.

Provisions in the bill aimed at encouraging local mineral processing may lead to the construction of unviable plants, while restraints on exports would undermine businesses’ ability to reap maximum revenue, Allan Gray said in its submission.

Eskom Holdings SOC Ltd., the state power company, said coal should be declared a strategic mineral and exports of some grades should only be permitted after being offered to domestic energy producers at a cost that provided for “fair returns.”

Eskom also urged lawmakers to ensure it and other domestic utilities were consulted prior to the awarding, granting and renewal of coal exploration and mining licenses, and they had first right of refusal on forfeited exploration rights.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net John Viljoen at jviljoen@bloomberg.net

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