Anthea Jeffery: SA wants offshore oil, but government’s own rules will scare investors to Namibia - Biznews

Anthea Jeffery

The South African state’s crude oil reserves have dropped to some 8 million barrels (enough to meet the country’s fuel needs for just 13 days), the country’s refining capacity has halved and conflict in the Middle East is badly disrupting global oil supplies.

The minister of mineral and petroleum resources, Gwede Mantashe, has now announced two major interventions to avert a gathering crisis.

The minister’s first plan is to build up South Africa’s fuel reserves to more adequate levels. To this end, the minister has invited public comment (by 7 August) on the Draft Petroleum Stock Policy of 2026. This will require both the state and the private sector to maintain specified reserves of crude oil and refined fuels.

Here, Mantashe overlooks the state’s role in selling off the nation’s oil reserves in 2015 via corrupt contracts that, fortunately, were later set aside by the courts. He also ignores how this malfeasance undermined private sector trust in the government. The result is that the Saldanha oil tanks set aside for commercial use – and capable of storing 30 million barrels – are reportedly standing empty. However, this is a longish tale to tell and will be further explored in these pages next week.

Mantashe’s second proposal is for South Africa to start producing its own oil and gas, so that it can “reduce its vulnerability to external shocks.” Speaking to the Fuels Industry Association of South Africa Annual Imbizo in Sandton last month, the minister said: “If we are serious about improving our energy security…and strengthening our economic sovereignty, then we must accelerate exploration and development of our own oil and gas resources.”

According to Mantashe, the Upstream Petroleum Resources Development Act (UPRDA) of 2024 – together with its 2026 draft regulations – are ready for implementation. The 2024 Act will separate the upstream petroleum sector from the mining industry, both of which are currently governed by the Mineral and Petroleum Resources Development Act (MPRDA) of 2002. The new rules, he says, will “create a more appropriate and investment-friendly environment for oil and gas development.”

South Africa’s oil and gas potential

The country potentially has considerable oil and gas resources offshore: nine billion barrels of oil and some 60 trillion cubic feet of gas, according to a 2014 government assessment. That represents roughly 40 and 375 years, respectively, of the country’s consumption at 2014 rates.

Part of these resources are located in the Orange Basin off the West Coast, which extends north into the seabed off Namibia, where exploratory wells have yielded positive results and the country is being hailed as one of the most attractive offshore oil drilling destinations in the world.

One “gobsmacking” prediction, writes James Lorimer, spokesman on mineral and petroleum resources for the Democratic Alliance (DA), is that the Namibian government’s receipts from oil and gas could be “about the same” as Norway’s in ten years’ time. If Namibia can look forward to oil revenues of this magnitude, what then of South Africa?

A key difference is that Namibia wants a 10% carried interest in offshore oil and gas projects for its government, whereas South Africa demands 20% for the state, plus a 10% participation interest for black South Africans. Other provisions of the UPRDA are also onerous and lack the certainty that investors need, especially for costly off-shore ventures.

Benefits for the state and (a narrow group of) black South Africans

Here, the UPRDA provides for:

A 20 per cent carried interest for the state

Under the UPRDA, the recently established South African National Petroleum Company (SANPC) is entitled to a 20% carried interest in petroleum rights in both the exploration and production phases. Once a project generates revenue, half the exploration costs carried by the oil company for the state will become recoverable, while all production costs can in time be clawed back.

The 2026 draft Regulations propose a cost recovery framework, under which cost recovery ceilings (or “gross revenue caps”) are to be set at 60% for oil production and 75% for deepwater drilling. Although an oil company will have paid 100% of all initial costs, it will not be able to use 100% of gross revenue each year to help recover those costs – as the state would then get nothing for some time. Instead, the company will be able to use 60% (or 75%, where appropriate) of gross revenue in a given year to recover its costs, including the state’s 20% portion of these. The remaining 40% (or 25%) then becomes the profit for the year. This must be used to pay royalties, taxes and what remains (after the state’s contribution to costs has been taken into account) of the state’s 20% share in the profit.  

A 10 per cent participation interest for black people

Black South Africans are entitled to “a minimum of 10 per cent undivided participating interest.” This is a direct 10% co-ownership stake in the upstream venture, under which black South Africans will be entitled, among other things, to 10% of the oil extracted in a given year and will have to pay 10% of all capital and operating costs (unless alternative vendor financing is agreed).

Political pressure to increase this 10% participating interest may grow over time, as the Economic Freedom Fighters (EFF) – an off-shoot from the ANC that often reflects its views – wants this interest raised to 51%. Yet, even at the 10% level, black participants may battle to pay their share of costs.

The reservation of blocks for black people

Under the UPRDA, the minister may at any time “reserve” one or more blocks for black people, who alone will be allowed to apply for the petroleum rights within them. (A block is one of the standardised grid units into which the sea bed off the coast has been divided.) This power is open to abuse – especially as applicants for petroleum rights must disclose considerable geological and other information to the state. The minister could use this data to identify promising blocks and then reserve them for black people.

The reservation of blocks for the State Petroleum Company:

The minister may also at any time reserve a block in order to “advance national developmental imperatives”. He or she may then direct SANPC to carry out exploration and production activities there. SANPC will be deemed to have the necessary petroleum right and will be exempted from “a black persons’ participation requirement”. It may also be excused from having to devise and implement a “local content plan” containing various BEE obligations. These provisions will give the state-owned company considerable unfair advantage.

“Local content plans” with onerous skills transfer, empowerment and developmental obligations:

A petroleum rights holder cannot move from exploration to production (and then to further production terms) without drawing up and implementing an approved “local content plan”. The minister may change the required content of such plans by regulation at any time and is likely to keep ratcheting up the state’s demands. This has already happened in the mining sector, where it has helped to choke off almost all exploration spending.

The 2026 regulations do not specify what racial targets will apply in employment and procurement, but such quotas could in time be introduced. In the interim, oil companies are prima facie subject to relevant racial targets under the amended Employment Equity Act of 1998 and the procurement rules gazetted under the Broad-Based Black Economic Empowerment Act of 2003

Other worrying provisions in the UPRDA

Such provisions include:

A risk of rights’ cancellation, rather than a seamless shift to production

Petroleum rights under the UPRDA cover both the exploration and production phases, which should allow a seamless shift from one phase to the next. However, the rights holder must still obtain permission from the Petroleum Agency of South Africa, the regulatory authority, for any such progression.

Moving to the initial production phase, for example, requires a new environmental authorisation, proof of compliance with the existing one, and approval of the “local content plan.” If the Petroleum Agency refuses to allow progression to the production phase and this decision is confirmed by the minister, the latter “may” or “must” (both words are used in different sub-clauses) cancel the petroleum right. The implication is that an oil company risks being left carrying the full costs of exploration without being able to recover those costs from production.

Ministerial discretion to impose new obligations

Once the initial (30-year) period of the production phase has ended, a petroleum right continues for further ten-year periods without limit. However, at the end of the initial period, the minister may, “having regard to the need for the State to derive a fair share of benefits from the production of its petroleum resources,” either “amend an existing term or condition” of a petroleum right or “insert a new term or condition”. Resulting disputes may be referred to arbitration, which must take place in South Africa under South African laws. What the minister might identify as “fair” remains uncertain.

Expropriation to achieve the objects of the Act

The minister may “expropriate any land or any right therein”, where this is “necessary” to achieve the objects of the Act. This wording is broad enough to allow the expropriation of petroleum rights. The compensation payable and procedures to be followed will be governed by the Expropriation Act of 2024, which was gazetted in January 2025 but has yet to become operative.

This statute authorises the expropriation of land and other property “in the public interest,” which “includes” increasing “equitable access to all South Africa’s natural resources”. The 2024 Act weakens current safeguards against the abuse of expropriation powers. It also reduces the compensation payable, which is likely to be set at well below market value and exclude damages for consequential financial losses.

How “investment-friendly” then is the UPRDA?

Lorimer sums up the key question that prospective investors are likely to ask as they assess the content of the UPRDA and the current regulations. “Do you go to Namibia where they know the oil and gas exists and where you have to give away 10% to a state oil company? Or do you put your money into South Africa where we have not yet found the oil and gas and where they have to give away 30%. Which place would you choose to invest?”

Dr Anthea Jeffery holds law degrees from Wits, Cambridge and London universities, and is the Head of Policy Research at the IRR. She has authored 12 books, including Countdown to Socialism - The National Democratic Revolution in South Africa since 1994, People’s War: New Light on the Struggle for South Africa and BEE: Helping or Hurting? She has also written extensively on property rights, land reform, the mining sector, the proposed National Health Insurance (NHI) system, and a growth-focused alternative to BEE.

https://www.biznews.com/thought-leaders/anthea-jeffery-sa-offshore-oil

This article was first published on the Daily Friend.