My awareness of shale gas’s revolutionary potential started a couple years back at the World Economic Forum meetings in Davos. During a private dinner for technology pioneers, each table was asked to share what they believe will be the most transforming process for America over the next decade (the audience was mostly from Silicon Valley). The most popular vote went to 3D printing, but my ears pricked up when the chairman of a major oil multinational suggested it would be shale gas – which, he claimed, would re-industrialise the USA. As South Africa’s reserves are supposedly close to those that America possesses (and our economy one seventy fifth the size) I have been paying close attention ever since. Including reading the detailed research into SA’s shale gas potential by the late Tony Twine. When the way was cleared for Royal Dutch Shell to go ahead with a $200m exploration project in the Karoo, like many others I started to get really excited about the country’s potential game-changer. But in their eagerness to cash in – or perhaps ignorance of investment processes – South Africa’s politicians appear to have badly over-reached with a last minute amendment to proposed legislation governing oil and gas. On top of a free 20% slice of all new shale gas businesses, the Government is now demanding the legalise an option to buy the balance of any project at “an agreed price”. The only local lawyer with a PhD in the subject, ENSafrica’s Luke Havemann, is appalled. He warned us yesterday ahead of the Parliamentary vote which approved the amended Bill. This afternoon’s interview began with my reference to DA shadow minister James Lorimer’s assertion that the amendment was catastrophic. – AH
DR LUKE HAVEMANN: ‘Catastrophic’ is a strong word, but in this situation, strong words are appropriate. We’re sitting with a situation where the legislation is threatening the very existence of the South African oil and gas industry. It is something you can use the word catastrophic for.
ALEC HOGG: Just unpack it for us.
DR LUKE HAVEMANN: Well, as you more than likely know, we have for some time been debating the Mineral and Petroleum Resources and Development Bill. There have been many problems with that bill over the course of the last few months. Many commentators have picked up on them, but the one that’s really sticking out at the moment is this one about the free trade interest and the additional further percentage that the government will be able to acquire down the line. What you’re really looking at there is the taking over essentially, of the endeavours of the oil and gas industry by the government. It has been described, as you know, as nationalisation by stealth but perhaps expropriation is a better term. I don’t know if you’d perhaps like me to get into those percentages.
ALEC HOGG: Sure, but just before we get there we had Rob Davies on CNBC Africa this morning actually, being rather flippant about the resistance to this, saying that there are companies lining up to get involved in shale gas. So government doesn’t think it’s going to have any problems in finding new investors in this sector.
DR LUKE HAVEMANN: Well, were those investors aware of the amendments made a week ago? This current possible percentage of 80 plus 20 – 100 percent of your operation being taken away from you – that only came into being a week ago. Yes, people have been lining up. We were an exceptionally attractive frontier province for some time now. The last few years have seen an explosion of interest in offshore and onshore acreage, but that was under a very different set of circumstances. The new set of circumstances, which was brought before the Mineral Resources Committee without input from the industry and even without input from the DA members of that committee, is something that’s very new so Mr Davies’ opinion should perhaps be tempered by knowledge of the fact that the current situation only recently came into being. We have yet to receive the industry’s comment on it.
ALEC HOGG: It seems as though the media so far has been missing the point, certainly from the way you described it to us yesterday. There’s a free carry of 20 percent and I don’t know if too many people can argue with that. The country owns the shale gas, but the problem has been over and above the 20 percent. If I understand it correctly: up until last Wednesday, Shell would do their exploration and whatever business it decided to create in shale gas, it knew that it would have to give 20 percent to the government?
DR LUKE HAVEMANN: Yes, that is the free carried interest. That was in the pipeline and that was understood. There was some resistance to it, but it wasn’t unacceptable and it could be lived with, so yes, that was the situation.
ALEC HOGG: In addition to that, there was a further amount that government would be allowed – or the state of South Africa would be allowed – to buy in the growing concern, and that amount was 30 percent – correct?
DR LUKE HAVEMANN: That’s correct. There was an option to acquire a further…in the amount of 30 percent and that has since changed.
ALEC HOGG: All right. So at least the investors were falling over themselves apparently – according to Rob Davies – when they knew they had to give 20 percent of their business to the government and government would have the ability, if it so chose at some stage in future, to go up to 50 percent to a joint partnership. The problem is that 30 percent has changed.
DR LUKE HAVEMANN: That’s correct. You hit the nail on the head.
ALEC HOGG: And the 30 percent is now…
DR LUKE HAVEMANN: Eighty percent. 20 plus 80 and it gets you to 100 percent.
ALEC HOGG: So it’s nationalisation, in other words.
DR LUKE HAVEMANN: Well, that’s the word that’s been bandied about. When it first came to light in that Mineral Resources Committee meeting, the relevant members from the DA said ‘but this is nationalisation’. I think they were the ones who first used the word. It certainly smacks of it. It’s something that needs to be looked at very closely.
ALEC HOGG: Let’s just understand this in terms that anyone can understand. Shell is going to spend two-and-a-half billion Rand/250 million US Dollars exploring. If it all comes out rosy, as we all hope as a nation, and then they might possibly spend another $10bn for argument’s sake, in creating a business here. If that business becomes profitable, the way the law is now written the government of South Africa can buy back that business. At what price?
DR LUKE HAVEMANN: Well, the original position was that they’d have to pay Fair Market Value. That has apparently since changed, under the latest Amendments to the Bill and is now going to be ‘acquisition at an agreed price’. What is an agreed price? What is it going to be? That’s the next question, now. That’s the latest Amendment.
ALEC HOGG: So an agreed price between two parties in fact, could be quite a long way from market value.
DR LUKE HAVEMANN: It could very well be a long way from market value. The interesting thing is the new legislation says the state is entitled…has a right to exercise that option, so there’s a strength on the side of the law – on the state’s side.
ALEC HOGG: So government has approved these Amendments. What happens next?
DR LUKE HAVEMANN: The Bill will now go to the National Council of Provinces to be voted on there. After that, it needs to go to the President for his signature to become law, so there are still two steps left.
ALEC HOGG: And if it does become law, what is your sense from the industry about how they will react?
DR LUKE HAVEMANN: Well, the industry may well challenge it. I know if many of them will be willing to do so, because you don’t ever want to bite the hand that feeds you. At the end of the day, the state is the one that grants you the rights you need in order to exploit our resources, so to challenge them would not necessarily be in your best interest. There may be a backlash. What they may well do is simply relinquish their acreage, start looking elsewhere, and look for a favourable legal environment – further north perhaps.
ALEC HOGG: So elsewhere on the continent – elsewhere in the world…
DR LUKE HAVEMANN: Yes, elsewhere on the continent…I suspect East Africa.
ALEC HOGG: But surely, there’s a Plan B in all of this from the government’s perspective. If you are putting these draconian measures into law, that will get rid of most Western Investors. Would it be someone in the east perhaps, who is ready to come in?
DR LUKE HAVEMANN: Okay, this is all speculation. I’d like to know what government’s Plan A is at the moment; let alone what Plan B is. This sudden change of tack at the moment is leaving everyone with their jaws open, saying ‘what are we doing? What’s the motivation?’ I’d love to understand it and many of us would.
ALEC HOGG: Not quite everyone…Rob Davies says that they’re lining up to come in, but as you say, perhaps he’s working on outdated material.
DR LUKE HAVEMANN: Look, I think what he needs to do is consult with the industry. The industry – when the news broke – said ‘we weren’t consulted on this’, so let’s consult with the industry, unless he did so in the course of the last week. Let’s hear what they have to say about it.