Opportunity Issue 98

ENERGY
or revenue generated from the project. Where the project does not
move to the production phase and generate revenue, there will be
no cost recovery. Even where the project generates revenue, it is
debatable whether the entire portion of the state's returns will be
capable of being allocated to cost recovery, which will extend the
repayment period.
National Treasury has not yet commented on the bill and we
expect that the exact cost-recovery mechanisms will be detailed
in subsequent regulations. Still, it will be interesting to see how
these cost-recovery mechanisms will interact with the capital
uplift and other tax deduction provisions in the Income Tax
Act's Tenth Schedule for oil and gas. The interplay between the
Income Tax Act and the cost-recovery mechanisms presents a
further opportunity to introduce a more attractive fiscal package
to potential investors.
A further change proposed by the UPRDB includes giving the
state an active role through joint operating agreements (JOAs)
that must be entered into with the state. The state is entitled
to voting rights corresponding to their 20% participation.
Depending on how the voting processes of the JOA are
structured, this may encumber the exploration company's
interests. While creating more transparency and reducing the
asymmetry of geological and commercial information available
to the state, this active participation may be perceived as being
more cumbersome to the companies' commercial decisionmaking
processes.
For current rightsholders whose rights do not provide for state
participation, these state participation provisions will only kick
in when the company applies for approval to progress to the
production phase in terms of the new bill.
BEE participation
In terms of the UPRDB, every petroleum right (which includes the
exploration and production phase) must have a minimum of 10%
undivided participating interest by black persons. The BEE participation
is on full commercial terms, and BEE partners will be expected to fully
fund their involvement at both the exploration and production phase.
Whilst this is welcome news for investors, there is a limited pool of BEE
companies and partners that would be able to field the costs associated
with exploration and production. As mentioned, exploration activities
are often estimated to be upwards of $100-million, and a BEE company
participating on full commercial terms will be expected to fund 10% of
those costs (approximately $10-million).
There may be instances where investor companies will have to
provide nominal funding to structure their ventures to comply
with the BEE provisions. In recognition of some of the funding
challenges, the bill permits the dilution of the BEE interest to
no less than 5% to raise capital. This dilution will not trigger any
requirements to “top up” the BEE participation to 10% leading
us to conclude that the “once empowered, always empowered”
principle will likely apply to BEE participation.
The Upstream Petroleum Resources Development Bill is a
welcome intervention in the sector and moves towards creating
certainty and clarity in the upstream regulatory environment. The
bill also introduces greatly expanded and tightened regulatory
processes for the industry. Still, it remains to be seen if investment
communities will find this attractive and whether it achieves its
objective to create an enabling environment that also meaningfully
expands opportunities for black participation in the sector.
ABOUT BOWMANS
Bowmans helps clients overcome legal complexity and unlock
opportunity in Africa. Our track record of providing specialist legal
services in the fields of corporate law, banking and finance law and
dispute resolution, spans over a century. With eight offices in six
African countries and over 400 specialist lawyers, we draw on our
unique knowledge of the business and socio-political environment
to advise clients on a wide range of legal issues. Our clients include
corporates, multinationals and state-owned enterprises across
a range of industry sectors as well as financial institutions and
governments.
Nonkululeko Zondo is an associate in the Corporate M&A
practice at Bowmans, and is completing a PhD on oil and gas law
at UCT. Callie-Jo Bouman is a candidate attorney in the Corporate
M&A practice.
Credit: PASA
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