Posted by: Requier Wait | May 5, 2014

Upstream Legislation: a restraint to investment

South Africa’s legislative uncertainties have led Anadarko to halt exploration spending in South Africa.

I have already made a few posts on South Africa’s Mineral and Petroleum Resources development Act (MPRDA) Amendment Bill. The amendments have been passed by parliament. The uncertainty created by the MPRDA seems likely to dampen upstream investment (Anadarko is a case in point) and restrain the growth of South Africa’s oil & gas industry. Considering that  SA’s upstream is still in its infancy, government policy should aim to promote investment rather than impose legislation that would be regarded as harsh, even in mature oil regions.

images

I co-authored a paper on the topic which will soon be submitted for publication. I will post a link to the full paper as soon as it becomes available. In the meantime, here is the abstract:

The effects of licencing and tax policy on the development of the upstream oil and gas sector: the case of South Africa

Requier Wait*, Elsabé Loots**, Henri Bezuidenhout* & Riaan Rossouw*
* School of Economics, North-West University, Potchefstroom campus
** Faculty of Economic and Management Sciences, University of Pretoria
________________________________________
Abstract
Developing countries, such as South Africa, need FDI to exploit their hydrocarbon resources. Recent years have seen significant developments in offshore exploration activities along the South African coastline. In terms of onshore development, there is also the possibility of significant shale gas reserves from the Karoo basin. The South African economy could greatly benefit from further developing the upstream sector to a stage where significant production can be achieved. The licencing of exploration acreage, and the specific petroleum fiscal system, are two crucial policy elements that impact on the development and sustainability of a country’s upstream sector. Licencing controls the allocation of exploration and development rights for a specific area to the investing oil company. The effective management of licencing and marketing upstream acreage is an important aspect of attracting upstream investment. Furthermore, the petroleum fiscal system is an aspect that host governments can directly control, as opposed to the level and type of oil reserves that the country holds. The design of a country’s petroleum fiscal system can play a significant role in shaping how investors perceive the competitiveness of a potential hydrocarbon region, thus either attracting or deterring upstream investment. In this context, the proposed Mineral and Petroleum Resources development Act (MPRDA) Amendment Bill in South Africa may create significant distortions and divert exploration investment to regions with more attractive fiscal and licencing regimes. This study reviews the literature on licencing and fiscal regimes and makes policy recommendations for the development of a country like South Africa’s upstream oil and gas sector. An economy-wide impact modelling methodology (computable general equilibrium or CGE) is used to estimate and compare the economic impact of using the current South African fiscal system as opposed to the systems used by “competitor countries” such as Namibia, Mozambique, Uganda and Tanzania. The results indicate that South Africa’s “current” (pre-MPRDA) fiscal system is more favourable than the systems of the modelled “competitor” countries. The MPRDA amendment’s provision for carried interest can be seen as an additional tax which would have a negative impact on the economy, specifically the development of the upstream sector.

 

 

Posted by: Requier Wait | May 2, 2014

Study on how to make Natural Resource Funds work

The Revenue Watch Institute & the Vale Columbia Center recently released a  study on making Natural Resource Funds (NRFs) work for citizens.

Some of the figures that the report highlights:

  • NRFs (at the end of 2013) hold approximately $3.5 trillion worth of assets.
  • There are more than 50 NRFs in over 40 countries.
  • Roughly 30 new funds have been established since 2000. For example: Kenya, Mozambique, Niger, Uganda, Tanzania and Zambia.

You can access the interactive map of NRFs and the full report here

 

Posted by: Requier Wait | May 2, 2014

Fracking or scary bananas?

Have a look at these interesting books on fracking:

1) Extreme Environment: How Environmental Exaggeration Harms Emerging Economies by Ivo vegter. The Author questions the claims of the anti-fracking movement and argues for public opinion and government policy to be based on reliable data and sound reasoning. Here is Ivo talking at a TED event:

 

2) The Frackers chronicles the emergence of fracking & shale gas in the USA.

Posted by: Requier Wait | February 21, 2014

MPRDA Amendment Bill: Still in Limbo

My earlier post alluded to the negative impact the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill could have on the future of South Africa’s upstream sector.  South Africa still does not have any noteworthy proven oil reserves and should be aligning policy towards stimulating and sustaining investment. It is not so much current investment than future investment that will dry-up if the amendments are passed by parliament.

The bill currently governs both the mining and oil/gas industry. However these two industries are in completely different stages of development: South Africa has a long history of mining whereas the oil/gas industry is still to be established. Accordingly, there is merit in arguing for separates industry specific legislation for both the mining and oil/gas industry.

Requirements for free carried interest by government tied with further BEE stipulations significantly reduce the share available for oil companies.  Furthermore, oil companies can only invest in projects that are profitable and which can justify the high levels of risk and capital expenditure required for upstream exploration and development.

More recently, parliament’s MPRDA portfolio committee delayed debates on the proposed changes and it is till to go before parliament before being passed into law. Hopefully, the potential negative impacts will be considered and the amendments adjusted accordingly. In the meantime investors face increasing policy uncertainty until the process has been finalised.

Posted by: Requier Wait | February 3, 2014

Natural Gas: energy supply and carbon emissions

It seems the importance of natural gas is on the rise: meeting the worlds’ increasing energy demand whilst contributing to lower carbon emissions.

BP recently launched their latest Energy Outlook 2035. According to the Outlook, natural gas is expected to be the fastest growing fossil fuel  with demand rising, on average, by 1.9% per annum. Per capita gas consumption (2012) is shown below:

Gas consumption

If you are interested in LNG projects, have a look at this useful article: Overview of issues common to structuring, negotiating and documenting LNG projects.

Posted by: Requier Wait | January 27, 2014

Fracking: Regulation is the key issue

From my earlier posts, regulation has been highlighted as the key issue when developing shale gas resources.

South Africa needs to consider the experience of other countries and incorporate this with local objectives for safely developing a shale gas industry. A number of countries are involved in fracking:

Fracking map

Source: Franco et al., 2013.

The EU has recently released a set of recommendations to guide member states in regulating fracking and guard against potential health and environmental costs.  The recommendations suggest that member states:

  • Plan for/consider the possible cumulative effects before granting licences;
  • Carefully evaluate environmental impacts and risks;
  • Ensure that the integrity of wells are in line with best practice standards;
  • Measure the initial quality of water, air and soil before operations start and monitor any changes to mitigate potential risks;
  • Control emissions, in particular greenhouse gas emissions, by capturing the gases;
  • Inform the public of the chemicals used in individual wells, and
  • Ensure that operators apply best practices throughout the project.
Posted by: Requier Wait | November 30, 2013

Advancing Technical Capacity for the Future

I was recently invited to make a presentation on advancing technical capacity for the future at the 2013 Africa Oil Week.  My presentation was part of Global Pacific & Partners’ Young Professionals initiative. The initiative aims to promote the development of young talent in the oil, gas and energy industry.

There is an aging demographic in the oil industry and a need to firstly, attract young talent and secondly, to fast track their development and progress to fill the gaps left by senior staff preparing for retirement. Amongst the major constraints on developing technical skills in the oil sector, is the lack of a young generation to step in where the aging demographic steps out.

The current problem can be linked to past fluctuations in hiring plans associated with fluctuations in the oil price and the industry’s E&P activity. The entry of new students also tends to fluctuate with the expansion and contraction of the industry. My presentation looked at the skills issues fir oil companies, some advice for young professionals and some of the trends in technical training in South Africa (with permission from Amrop Landelahni: 2013 Oil & Gas Sector Research Report).

In conclusion, corporations (IOCs) need a long term view on HR strategy, specifically a structured mentoring program to fast track the development of young professionals.  Furthermore, Young Professionals need to be proactive in developing their own skilss and careers. (Download my presentation here)

Posted by: Requier Wait | October 21, 2013

Fracking debate: a Panel Discussion

The Potchefstroom branch of the SA Academy of Science and Arts recently hosted a discussion on fracking in South Africa. The aim was to increase awareness and stimulate open discussion on a topic that should be part of a wider culture of community engagement.

Some of the main points from this discussion are summarised below:

Positive aspects:

  • Fracking can create positive impacts which could stimulate the development of South Africa’s economy – increasing economic growth, employment, household income and government revenue.
  • An adequate supply of energy is needed to allow for economic growth and future prosperity.
  • Shale gas can be used as a “cleaner” bridge fuel (although this aspect is debated in the literature).
  • The required energy supply will need to come from somewhere, using shale gas for energy does not “add” to the spectrum but is in fact an energy source used in place of something else, for example coal.

Negative aspects:

  • The biggest environmental issue is the use of water in the fracking process, especially since South Africa is a water scarce region.
  • The mixture of water and chemicals used in fracking could contaminate ground water aquifers in cases where the fluid leaks due to structural weaknesses in a well.
  • Further issues include air pollution from gas flaring, the use of land for drilling pads and equipment as well as the heavy traffic of trucks moving into the area.

Main conclusions from the discussions

  • Further exploration is needed to determine the actual level shale gas reserves present in the Karoo basin.
  • Regulation of fracking activities was highlighted as the most crucial aspect to consider if  the Karoo’s shale gas is to be developed.
  • Any discussion of the economic benefits from shale gas must be accompanied by an equal consideration of environmental externalities.

Resources for further reading:

Two new laws on the environmental regulation of fracking have recently been proposed and published, have a look here

Also look at the following papers published on the regulation of fracking in Texas  and Argentina

The African Development Bank recently launched a report on shale gas and its implications for Africa, the report is available here

Posted by: Requier Wait | August 23, 2013

The greenhouse gas footprint of shale gas

Developing shale gas has both benefits and costs. A recent discussion with a fellow researcher highlighted the debate surrounding carbon emissions from shale gas.

Proponents argue that shale gas can be used as a cleaner ‘bridge fuel’ to replace coal or oil.  Specifically in South Africa, shale gas could be used to substitute coal for producing electricity.  However, the opponents argue, that in fact, shale gas is not such a clean alternative. The issue is highly contested. The model assumptions, for example the time-frames used to analyse carbon emissions, are a particular point of difference and leads to divergent conclusions.  Follow the links below to read more on these opposing views:

Higher emissions:

Methane and the greenhouse-gas footprint of natural gas from shale formations

Counter arguments:

A commentary on “The greenhouse-gas footprint of natural gas in shale formations”

A Credibility Gap

The Response:

Response to Cathles et al.

Reducing the footprint:

Reducing the greenhouse gas footprint of shale gas

 

 

 

 

 

Posted by: Requier Wait | August 6, 2013

Regulatory Woes

An efficient regulatory framework is crucial if South Africa is to develop its upstream sector, especially for the Karoo’s shale gas.  It seems there are lessons to be learned from the Polish experience with shale gas, have a look at this article from the Economist.

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