SA’s Draft Upstream Petroleum Resources Development Bill 2021

The first draft of the 2021 Upstream Petroleum Resources Development Bill was published in December 2019. The 2021 Bill was introduced to Parliament in July 2021 and has removed some of the uncertainties which arose following the publication of the first draft. Although it is still not finalised – the Bill still has to go through the Parliamentary process, which should include an opportunity for public comment so more changes may still be in the pipeline.

Critically, the granting and regulation of petroleum rights will in future be governed by the Petroleum Bill (once finalised) instead of falling under the Mineral and Petroleum Resources Development Act (MPRDA). The Bill will govern, inter alia, a reconnaissance permit and a petroleum right, comprising the exploration and production phases. The term “petroleum right” (PR) is used in the Bill and refers to a right both to explore for, and produce petroleum.

A few key points of the Bill are highlighted below:

State’s carried interest
The Bill provides for a 20% State carried interest. “Carried interest “ is defined as “State participation through an interest in a petroleum right as contemplated in section 34, which interest vests exclusively for the benefit of the State and the costs of which are borne by the carrying holder of a petroleum right”. The State has the right to the 20% carried interest in PRs, in both the exploration and production phases. The State’s 20% will be held by the State Petroleum Company (SPC).

The carrying holder or holders are, however, entitled to recover 50% and 100% of the State’s share of exploration and production costs, respectively, which will be recoverable from the State’s proportionate share of production or revenue. Cost recovery rules which govern the recovery of the costs will be prescribed by regulation and to the extent necessary, further amplified in the terms and conditions of the PR. The SPC must enter into a joint operating agreement (JOA) with the holder or become a party to an existing JOA and appoint a minimum of two or more representatives to the joint operating committee. The SPC is entitled to full participation including a corresponding percentage of voting rights as determined in the JOA.

The Bill states that PRs may only be granted to a company incorporated in South Africa under the Companies Act of 2008. Where a PR is to be held through an unincorporated joint venture, all companies that are parties to the joint venture must be incorporated in South Africa.

Transitional Provisions
The Bill contains transitional provisions, to ensure security of tenure in respect of current exploration and production rights and to give the holders of these rights an opportunity to transition to the Act.  These provisions clarify that where an application for an exploration or production right has been submitted under the MPRDA but has not been finalised on the date the Act takes effect, the application will be finalised under the MPRDA. Further, they provide that an exploration right in force before the Act takes effect continues to be in force until expiry of its term, subject to the terms and conditions under which it was granted. In the case of a production right, the right will remain in force for five years after the Act takes effect, or expiry of its term, whichever is earlier. The transitional provisions also provide for the conversion of current rights to petroleum rights under the new legislation.

Conclusion
Although the Bill clarifies certain queries raised after publication of the first Bill, it still raises some interesting tax and structuring queries. Industry players will also be watching carefully for any changes to the current income tax regime applicable to oil and gas companies, contained in the Tenth Schedule to the Income Tax Act, based on comments that change can be expected in this area. There are no tax provisions in the 2021 Bill and any such changes are expected to be dealt with separately.  More changes mean more uncertainty so watch this space!

Contact us if you’d like to discuss how this could impact your business.

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