[NGW Magazine] SA regulations deter investors

This article is featured in NGW Magazine Volume 2, Issue 15

Natural gas may fall victim to aggressive tightening of South African rules on black empowerment as political upheavals leave investors worried.

A major battle is underway in South Africa between the mining industry and the government over moves to extend ownership by black investors. Although there is no direct spill-over to the natural gas sector, there are concerns that the besieged ANC government may extend the same tightening of the rules beyond mining and into other extractive industries.

Resources lawyer Peter Leon of Herbert Smith Freehills LLP expressed concern about a new draft Mining Charter, which was tabled June 25, and which contains proposals to extend black ownership of mining companies from 26% to 30%. “My understanding is that the upstream oil and gas industry and government agreed in 2014 not to apply the Mining Charter to it,” Leon noted. 

“The government's approach to the oil and gas industry has traditionally been different from mining, as it is seen as a new industry with, presumably, none of the legacy issues of mining. Having said that, anything is possible in an era of radical economic transformation!”

As part of the spat between government and the mining industry, a moratorium has been placed on all new prospecting, and Leon suggested this might directly affect the development of hydraulic fracturing in the gas-rich Karoo region of the country. “Fracking could certainly be affected by the minister's proposed moratorium on prospecting and mining rights,” he confirmed.  

The chief economist at the think-tank South African Institute of Race Relations Ian Cruickshanks said what is happening in mining “is the thin end of the wedge in the process of grabbing control of all productive areas in the economy. 

“Current low-levels of consumer, business and investor confidence reflect the concern of the private sector about the socialistic tendency of the ruling elite to take whatever is available in the economy, regardless of ability to manage this to the benefit of the majority. The government’s track record in managing current state-owned enterprises points away from benefit to the majority.”

This fear was also confirmed by independent economist Mike Schussler, of economists.co.za. “They [the government] are taking what they can, a little at a time. Then they seek to get control of the cash flows,” he warned.

“The Mining Charter proposal does make investing more expensive for many investors who will have to find a 30% black economic empowerment partner – and they would also have to give 1% of total turnover to this partner to help pay for the shares/investment. In an industry with often paper-thin margins, and sometimes losses, the 1% of turnover will make it less likely for players to invest.

“Many countries require local involvement and local procurement, but we face the combination of mining royalties, a Black Economic Empowerment share, and now a sort of turnover tax.

“All of the above, combined with high cost structures and limited infrastructure for the natural gas industry, makes the further development of the industry much less likely.”

NGW approached the South Africa Oil and Gas Alliance (SAOGA) for comment. CEO Niall Kamer would not be drawn directly on the issue but he did say that any anchor investor in a natural gas project seeks “guarantees and clear, stable and attractive terms. The world is awash with LNG now, so the supply side is known.

“Investors in all other elements – from pipelines, tankage, floating storage and regasification units and other power infrastructure – will want certainty,” he said.

In another development, financial services firm Grant Thornton released July 27 the findings of a survey of South African business executives, which showed that two thirds of business executives’ operations and business decisions are impacted by a turbulent SA economy and uncertainty about the country’s future direction. (See box).

During a recent visit to the Industrial Development Zone at Coega, near Port Elizabeth, South Africa’s energy minister Mmamoloko Kubayi expressed her own support for the development of the country’s gas economy.

Coega is one of the chosen sites for LNG import into SA, with plans to feed the gas both to power generation and to industry. “Our plans still need to be finalised to see where coal, wind, nuclear and other energy sources will be utilised,” she was quoted by local media as saying. "But we can say with certainty that gas will be critical for power generation.”

Coega and Richards Bay, north of Durban, are the two ports selected for a new gas importation programme. 

The LNG will be received by FSRUs at both sites. A further extension of this programme to Saldanha Bay, north of Cape Town, is also envisaged. In a commentary on the development of South Africa’s gas economy, law firm Norton Rose Fulbright said: “demand for gas as a feedstock for power generation is projected to rise considerably with a number of new power stations being planned in Coega and Richards Bay, for example. There are also ageing diesel and coal-fired power stations that could be converted to gas.

However, the law firm warned of regulatory uncertainties which “may cause some delay and uncertainty amongst potential developers and lenders alike.”

BOX

Government scares off investors

Even before the release of the new Mining charter, South African business leaders have been concerned by the sacking of the respected finance minister Pravin Gordhan, and the subsequent downgrading of the country by the ratings agencies. 

Two out of three business executives who expressed pessimism in the survey for the second quarter, compared with 58% in the first quarter of 2017. 

“This is just another sign of how the changes which took place in March and April this year have affected South Africa’s businesses,” said Gillian Saunders, Head: Advisory Services at Grant Thornton South Africa.  “We are recording dramatic changes in sentiment when comparing the first and second quarters of this year. It’s very concerning.”

Grant Thornton said that when asked to outline the ways in which economic uncertainty affects their business decisions, roughly a third of total respondents stated they were delaying business expansion plans or putting off investment decisions; a quarter were considering investing offshore (possibly in a more stable business environment), and one in six were weighing up decisions to sell their business.

“Delaying business decisions, stalling company expansion and considerations to invest offshore will all negatively impact South Africa’s GDP growth,” said Saunders.  “It is truly concerning how political instability and economic turbulence have affected general business operations.  Even first quarter positivity was proved to be misplaced when quarterly GDP figures released in June showed a decline of -0.7% in GDP in the first quarter, and South Africa entered a technical recession. The events at the end of the first quarter and subsequently in the second quarter do not bode well for any improvement in economic growth.” 

John Fraser