When it comes to hydrocarbon resources, inadequate legislation has placed South Africa at a disadvantage and needs to be readdressed.

The South African legislature was caught napping in relation to the exploitation of South Africa’s unconventional hydrocarbon resources, writes Dr Luke Havemann, Senior Associate in ENS’s (Edward Nathan Sonnenbergs) Projects department. Roughly two years ago, the pursuit of South Africa’s potential shale gas resources by means of hydraulic fracturing (“fracking”), a technology that is currently unregulated and prohibited, hit the South African media with tsunami-like force.  From a regulatory perspective, the relevant legislative authorities did not seemingly foresee the need to prepare for dramatically heightened interest and investment in South Africa’s potential hydrocarbon resources.  Up until 2011, when the United States Energy Information Administration put forward a particularly high estimate as regards the size of South African shale gas reserves (485 trillion cubic feet, which figure has subsequently been reduced to 390 trillion cubic feet), South Africa was certainly not considered to be a hydrocarbon-endowed State.  Nevertheless, unconventional hydrocarbons were on the horizon and comparatively miniscule conventional resources should never have been reason enough for the development of a regulatory environment that has, over the years, proven to be particularly fertile soil for academic criticism thereof.

Any industry is desirous of operating under conditions where legislative clarity and regulatory certainty are a given, and the oil and gas industry (“the industry”) is no different.  The current South African situation is, however, one of uncertainty and the primary statute dealing with the exploitation of hydrocarbon resources, the Mineral and Petroleum Resources Development Act (“the MPRDA”), is perhaps one of the most inept pieces of legislation on the statute books.  The drafters of the MPRDA failed to see to the creation of a coherent, self-contained and industry-specific regulatory framework that would be well-suited to attracting foreign investment and ensuring that the exploitation of South Africa’s hydrocarbons could be achieved in a comparatively appropriate manner.  From the perspective of attracting foreign investment, various academic papers have confirmed that when an international oil company is in the process of considering whether or not to invest substantial sums of money into conducting upstream activities in a particular jurisdiction, having to wade through a quagmire of laws that have not been tailored into a coherent and industry-specific framework, will be a strong disincentive for it to do so.  The MPRDA is, in many instances an incoherent statute that is not industry-specific (it governs both the exploitation of minerals and hydrocarbons) and it fails to address important issues (particularly in relation to the exploitation of offshore hydrocarbon resources).  The MPRDA is certainly not the magnet that it could be for the purposes of attracting investment into the country’s fledgling hydrocarbon sector.

It is against this backdrop, that it can be argued that, in relation to fracking, the legislature was caught napping and the South African public was able to appear as if they were wide awake.  In other words, the lack of a well drafted and forward-thinking hydrocarbon-specific regulatory framework (combined with few botched public relations exercises by prospective operators) and the next thing you know, it was official, the development of potentially huge hydrocarbon resources was faced with a cavalcade of opposition, from backyard fracking-specific NPOs and farmers to city-based businessmen, all of whom had very little understanding of the industry, let alone the law governing it.  Fast-forward to August 2013 and, in the face of the litigation that will inevitably follow a decision to authorise the advent of fracking, South African Deputy President Kgalema Motlanthe and Trade and Industry Minister Rob Davies have described hydraulic fracturing as “game changing” and something that may be given the go-ahead before the national election in 2014.  Also in August this year, at a seminar held in Johannesburg titled “Women Leaders in Oil and Gas”, Mrs Nosizwe Nokwe, CEO of PetroSA, stated that South Africa’s potential shale gas reserves are such that “we will not be forgiven if we miss the gas boom” as the size of the potential reserves is “mindboggling” and a “game-changer”.

Albeit a potentially unforgettable game-changer, how different the story of fracking in South Africa could have been had the MPRDA not been responsible for dictating the rules of game.  Amongst other things, the moratorium, the questionable task team on fracking, the fracking-related litigation instituted against the Minister of Mineral Resources, and the furore that followed the recent statement about the “game-changing” nature of fracking, may all have been avoided had a superior industry-specific legislative framework been in place.  The lack of an appropriate legislative framework has, since the advent of South African fracktivism, been an arrow in the quiver of the anti-fracking movement.  In many ways, the advent of fracking must be credited with drawing the attention of the populace to the dismal state of South Africa’s hydrocarbon-related laws.  Nevertheless, long before the moratorium on fracking was ever called for, there were calls for a change to the relevant legislative and regulatory frameworks but appropriate amendments have never seen the light of day.

Unfortunately, the current set of proposed amendments, as set out in the infamous MPRDA Bill (“the Bill”), will do little to remedy the issue.  The Bill’s failure to solve more problems than it appears to create is such that commentary from the legal fraternity on the issue can be characterised as scornful.  Of the few legal practitioners who are well placed to comment on the Bill, most are not enamoured by what is inadequate and inappropriate legislative repair work, or, for that matter, by the fact that the State has seemingly ignored reams of constructive criticism that were levelled against the Bill.  It will be particularly interesting to see whether the upcoming fracking-related regulations will be able to sidestep similar criticism.  It is common cause that it would not be in anyone’s best interests for fracking to proceed in a regulatory lacuna and perhaps the upcoming regulations will be an entirely commendable affair.  The possible pros and cons of those regulations aside, the important question that has not yet been raised is: what will follow fracking?  Bearing in mind that the overarching statute, the MPRDA, is significantly out of step with that which is considered best practice from a legal perspective, how many more sets of regulations will need to be introduced in future to accommodate further, inevitable, technological advancements as the pursuit of conventional and unconventional hydrocarbons heats up?  In many ways, the authorities need to think further ahead than simply cutting, pasting, tweaking and, ultimately, presenting South Africa with regulations for fracking.

South Africa needs more than just fracking-specific regulations.  While the amendment and updating of legislative and regulatory frameworks is considered to be a positive exercise, one that is best left to experts who possess the technical expertise and who can operate with the requisite independence and objectivity, the nature of the legislative and regulatory frameworks that have thus far been produced in South Africa are such that the entire exercise ought perhaps to be reconsidered.  In an ideal world, the MRPDA should be binned and a new industry-specific statute that is both coherent and cutting edge should replace it.  Cutting away what some may describe as the gangrenous laws governing oil and gas exploitation, is, in many ways, only an academic pipe-dream. Practically speaking, addressing all of the legislative and regulatory implications and knock-on effects of wiping the statutory slate clean, so to speak, would be gargantuan task that would further frustrate the potential influx of necessary foreign investment.  That said, unconventional hydrocarbon resources will, in the not too distant future, become “conventional” and regulators would be well advised to prepare for this eventuality.  Nevertheless, South African oil and gas law will, in all likelihood, continue to limp along, only to be patched-up once the legislature is yet again hit by a new of wave of concerns.  South Africa deserves better.  Regulators ought to be tasked with applying their minds to the adoption of a far more forward-thinking and holistic solution to the shoddy state of South Africa’s hydrocarbon laws. The role that hydrocarbons, in particular unconventional hydrocarbons, could play in the South African energy mix is significant enough for the legislature to look further into the future than fracking.

Shale gas is now, what is next?