Government flip-flop threatens R1 trillion sector

Regulatory uncertainty surrounding South Africa’s business environment, particularly the minerals sector, seriously threatens the industry’s longevity.

This is according to Business Leadership South Africa (BLSA) CEO Busi Mavuso, who said that while there are some green shoots, much remains to get the country’s economy back on track.

Her comments come in light of French energy company TotalEnergies’ decision to quit its gas-condensate discoveries in South Africa.

On 29 July, TotalEnergies announced that it had exited the Brulpadda and Luiperd fields after its partner, Canadian Natural Resources International (CNRI), had made a similar decision.

Canadian Natural Resources International, which held a 20% stake in the block, announced its plans to exit in early July. It did not provide reasons for its decision.

TotalEnergies has also decided to exit from offshore exploration Block 5/6/7, where TotalEnergies EP South Africa currently holds a 40% interest.

TotalEnergies entered into Block 11B/12B in 2013 and made two gas discoveries, Brulpadda and Luiperd.

It spent at least $400 million using unprecedented engineering solutions to drill in one of the fastest ocean currents in the world.

In 2019, an estimated 1 billion barrels equivalent of light liquid hydrocarbons were found in the Brulpadda field. The following year, further success was achieved at the Luiperd well.

Potential production from the fields was also earmarked as feedstock for state-owned PetroSA’s 45,000-barrel-a-day gas-to-liquids plant.

However, it decided to exit these finds because “it appeared to be too challenging to economically develop and monetise these gas discoveries for the South African market”.

When Total first made these discoveries, there were major hopes that they would enable South Africa to develop gas independence and tap the energy source to transition from the relatively more polluting coal. 

“But now TotalEnergies has said it is too difficult to economically develop and monetise the resources for the South African market,” Mavuso said.

“While the company did not say it, I am sure that ongoing regulatory uncertainty is a major contributor to that difficulty.”

She explained that, since TotalEnergies’ discovery, there has been a series of dramatic flip-flops over regulating the gas sector. 

The government once announced it should get a free 20% ownership interest in all gas projects, only to abandon amendments to the Minerals and Petroleum Resources Development Act.

The department then introduced a new bill to govern gas exploration and development, which Parliament passed in April of this year.

However, experts have said that this legislation violates the constitution in several respects, as it reintroduces the state’s right to a 20% interest in new projects at exploration and production phases. 

It allows the minister to order companies to sell a percentage of petroleum to any state-owned company designated by the minister. 

“For any company looking to develop gas or petroleum resources, this is a new source of considerable uncertainty,” Mavuso said. 

“The Bill is sitting on the president’s desk for assent and would be better sent back to Parliament for reworking that would enable companies to take on the huge risks of developing major new gas resources.”

Mavuso said uncertainty remains the theme of the minerals sector more broadly, which has faced two decades of decline. 

She explained that the lack of exploration activity means the industry is in a sunset phase unless there is a considerable change in how the sector is regulated. 

A 2023 PwC report explained that the South African economy is still very dependent on the mining sector. 

The mining sector is a significant contributor to South Africa’s financial well-being through various taxes, foreign currency reserves from mineral sales and employment.

The Minerals Council of South Africa estimated last year that South Africa’s mineral production was valued at R1.1 trillion in 2023.

The mining sector employs an estimated 477,000 people, contributes over R400 billion to the GDP, and contributes R90 billion in taxes.

“We still have among the best mineral reserves in the world, yet we are steadily falling behind many other jurisdictions in the economic contribution such reserves can make,” Mavuso warned.

Energy expert Anton Eberhard has echoed her concerns, saying problems with South African authorities are behind TotalEnergies’ decision to abandon its gas condensate discoveries in the country.

Eberhard said the report is ‘polite speak’ for TotalEnergies not obtaining any traction with South African authorities to develop these offshore gas resources near Mossel Bay.

He said there are multiple options for these gas fields, including PetroSA’s gas-to-petrol refinery, which is currently idle after exhausting its gas reserves.

It can also be used to convert Eskom’s peak power plants from expensive diesel to cheaper gas or power a possible new gas-to-power plant.

“Gwede Mantashe scored another own goal. He’s encouraged PetroSA to engage Russia’s Gazprom to explore options,” Eberhard said.

Mantashe suggested Gazprom, even though landing Russian liquefied natural gas (LNG) for the refinery would be completely uneconomic.

“This is a huge lost opportunity. TotalEnergies spent around R8 billion drilling exploration wells,” he said.

“PetroSA simply doesn’t have that kind of money or expertise. And now TotalEnergies is moving to more friendly waters in Namibia.”