FUEL INJECTION - JSE MAGAZINE

FUEL INJECTION

SA’s offshore acreage is brimming with potential. It remains to be seen, however, whether government regulations will aid the industry or cost the country billions in untapped revenue

FUEL INJECTION

It was odd that the Africa Oil Week Conference 2014, held in Cape Town in early November, should have come and gone with hardly a word uttered publicly about SA’s offshore oil and gas activity.

The subject has generated much excitement in recent times. Industry expert Duncan Clarke sums up the early 21st century outlook well in his book, Africa: Crude Continent. In it he writes: ‘The future outlook for South Africa’s upstream should be more positive than at any time for a number of reasons: the government is committed to developing petroleum resources and making investment in this industry more attractive; South Africa is under-explored with much virgin acreage; areas that have been explored show petroleum potential; a considerable market for oil exists; the potential for a gas market appears favourable; and political and commercial risks have diminished considerably.’

Just a few years back, very little of SA’s offshore acreage was leased. Today, catalysed by the discovery of massive gas fields off the coastline of Mozambique, almost all the acreage off the SA coast has been leased, and there have been some exploration and production manoeuvres.

It is worth recapping the facts to date. In the Orange basin, off the west coast, the Ibhubesi gas field, discovered in 1981, passed from SA exploration and production company Forest Oil to Australian company, Sunbird Energy, in partnership with PetroSA. The hope is that reserves will prove to be significantly in excess of an initial estimate of 210 billion cubic feet, which is considered to be below the threshold required to supply a plant. Sunbird has, nevertheless, signed a memorandum of understanding with Eskom to investigate the possible supply of gas to Ankerlig Power Station near Atlantis, a diesel-powered plant that costs the parastatal a fortune to operate.

In the Bredasdorp basin, south of Mossel Bay, the oil field that supplies oil-from-gas plant, Mossgas, is nearing its end of life, though national oil company PetroSA is heavily invested in appraising nearby blocks.

The big news of the last decade, however, originates from the adjacent Southern Outeniqua basin, which was 100% leased by Canadian Natural Resources (CNR) until French multinational Total farmed-in for a 50% share in late 2013. This was after CNR announced prospective resources of 3 billion barrels initially in place. In mid-2014, Total and CNR announced that they intended drilling the first deep-water well off SA’s coast, at an estimated cost of $170 million. The field, named Paddavissie and later renamed Brulpadda-1AX, is located at a depth of almost 1 500m, requiring the abilities of the Eirik Raude, a semi-submersible rig.

Drilling commenced in July 2014 but just two months later a note was circulated among members of the Oil and Petroleum Association of South Africa stating that drilling had been abandoned ‘after the semi-sub had difficulty in spudding the well due to the very strong Agulhas current’. The Eirik Raude was dispatched to the North Sea, while the partners work out how to tackle the area’s tricky sea state.

No announcement has been made regarding the commencement of drilling activities but according to industry expert Steve Hrabar, another attempt is feasible. ‘In studies, the field showed serious potential,’ he says. ‘SA’s deep waters are some of the last under-explored regions in Africa, and to date block 11b/12b has been the most promising part of this under-explored region. That’s not something you walk away from lightly.’

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‘It is hoped that the relevant authorities will provide legislative and regulatory clarity and stability’

LUKE HAVEMANN, OIL AND GAS SPECIALIST, ENSAFRICA

The organisation Hrabar helped found, the South African Oil & Gas Alliance (SAOGA), has for many years promoted the potentialities of a thriving domestic oil and gas industry. To foreign investors, SAOGA has punted SA – with its infrastructure and diverse range of service providers – as being well-positioned to play a hub role in the region. To the government, SAOGA has promoted the potential socio-economic benefits that an oil and gas sector could stimulate.

Oft-cited is a 2012 Marintek study into the probable impact of a supported oil and gas sector on the shipping repair and modification business. Based on global trends in exploration and production spending, Marintek projected a jump in annual revenue from $140 million to $240 million a year, excluding original equipment manufacture.

‘South Africa has the potential of 9 billion barrels of oil, and 11 billion barrels oil equivalent of gas,’ states a 2014 sector presentation to the government. ‘Assuming South Africa could achieve production levels of 370 000 barrels of oil and gas a day … this would mean up to 130 000 jobs are created with annual uplift to GDP of $2.2 billion, while reducing the dependence of expensive oil and gas imports.’

DA shadow minister of mineral resources James Lorimer describes it as ‘a silver bullet’.

He says: ‘The South African government has this silver bullet for the economy in the breach. We know the investor interest is there. We also know this is the last chance the government has to enter the oil and gas upstream market.

‘If they do not act, countries like Nigeria, Angola and Namibia will expand their port facilities, and the business will be lost.’

The government has been criticised in the past for doing too little to enable upstream activity, though some proactive steps in recent months have left the industry hopeful the government might finally pull the trigger.

In July 2014, President Jacob Zuma launched Operation Phakisa, an initiative aimed at ‘fast-tracking the implementation of solutions on critical developmental issues’. It brought industrial and governmental leaders together, and first up for talks were the stakeholders in SA’s marine industries, including the oil and gas sector.

Many issues were discussed, ranging from infrastructure constraints to the sector’s potential environmental impact. Industry leaders, however, were most vested in discussions regarding the regulatory environment. It is no secret that the oil and gas industry reviewed the contents of the amendment bill of the Mineral and Petroleum Resources Development Act (MPRDA) – drafted in early 2014 and shortly thereafter passed by Parliament (though left unsigned by the president before the May general election) – with deepening horror.

‘The infamous MPRDA, as well as the proposed Technical Regulations for Petroleum Exploration and Exploitation regulations, stand out as prime examples of regulatory developments that have been the target of substantial criticism from industry players and legal commentators,’ says Luke Havemann, oil and gas specialist at legal firm ENSafrica. ‘Although it was hoped that these developments would improve the legal framework by, for example, removing well-known ambiguities within the MPRDA, their track record has thus far fostered a noteworthy degree of regulatory uncertainty.

Fuel Infographic

‘International oil companies have openly labelled the MPRDA to be a major commercial risk and, perhaps unsurprisingly, Anadarko, which has remarkably successful operations in Mozambique, went so far as to announce that it would stop exploration-related spending in South Africa until such time as it received more clarity on the proposed changes to the law.’

According to Global Pacific & Partners chairman Duncan Clarke: ‘The MPRDA Amendment Bill sought to unilaterally impose harsh terms for free carried positions to be applied in the exploration and production phases of oil and gas projects, with potential further significant equity acquisitions on uncertain grounds by the state on in-place and new entrant operators’ blocks.

‘The question of the extent to which these put at risk much existing and future upstream investment in South Africa, still hangs in the wind.’

Marek Ranoszek, MD of Anadarko South Africa, says that ‘things are definitely on a better footing’, now that Operation Phakisa has been initiated. But exactly what, if anything, was agreed between industry and government leaders under the auspices of the operation is unknown at this stage.

According to industry appeals to the government, it costs an average of $150 million to sink a well, with a success rate of 15% to 20%. These investment figures have been the immovable object in all industry/government discussions to date, which Clarke says have led to ‘putative suggestions that the oil industry would possibly be separated in laws from the radically different mining world’.

According to Lorimer, Operation Phakisa appears to have had the effect of ‘pulling the industry back from the brink of packing their bags and leaving’.

Havemann says: ‘Despite the growing pains that the SA oil and gas industry has been enduring, recent indications are that Minister Ramatlhodi is applying his mind to the rectification of the most troublesome institutional and regulatory hurdles. The prime example is, of course, the fact that the minister played a significant role in the president’s decision not to sign the MPRDA into law.

‘Albeit that the oil and gas resource potential of SA has the potential to contribute significantly to the South African economy, it will take years before these potential resources may be produced.

‘Bearing in mind the fact that it took the Nigerian oil and gas industry roughly 20 years to move from licensing to production, it is hoped that the relevant South African authorities will be able to provide legislative and regulatory clarity and stability soon so as to heighten investor confidence and thus help reduce the relevant time frame.’

By Sean Christie
Image: Mr.Xerty © www.nomastaprod.com