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Exploration and production

Rights

Who holds the rights to oil and gas reserves in your jurisdiction?

The Mineral and Petroleum Resources Development Act vests South Africa’s mineral and petroleum resources in the nation of South Africa, with the minister of mineral resources acting as the custodian of South Africa’s petroleum resources on behalf of the government.

Is there a distinction between surface and subsurface rights?

South African law recognises a separation between surface rights and mineral/petroleum rights. This distinction is given statutory effect in the Mineral and Petroleum Resources Development Act, which vests all of the nation’s mineral and petroleum resources in the state and empowers the minister of mineral resources to grant rights to explore for and extract these resources, subject only to payment of reasonable compensation to the landowner for any resultant diminution in the usefulness of the land. 

The Mineral and Petroleum Resources Development Act expressly provides that a mineral or petroleum right is a property right. It also stipulates that the holder of a mineral or petroleum right is entitled to establish such plant or infrastructure in the subject area that it needs to conduct its operations. 

What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?

South Africa operates a licensing regime whereby access to petroleum resources is obtained through an application to the minister of mineral resources. Such applications are processed on a first come, first served basis. Petroleum rights are available in the following forms:

  • Reconnaissance permit – this non-exclusive permit entitles the holder to carry out geological, geophysical and photo geological surveys. 
  • Technical cooperation permit – this exclusive permit entitles the holder to conduct a technical cooperation study, based on an analysis of data held by the Petroleum Agency of South Africa. The holder of a technical cooperation permit has the exclusive right to apply for and be granted an exploration right in respect of the area covered by the permit.
  • Exploration right – this right entitles the holder to conduct exploration operations and all incidental activities on the acreage. Relinquishment of a portion of the exploration area is usually required upon renewal of an exploration right. Although the extent of the area to be relinquished is not prescribed by legislation, it has become common practice for the relinquishment requirement to take the following form:
    • 20% relinquishment of the exploration area on completion of the initial exploration period;
    • thereafter, not less than a 15% relinquishment of the exploration area on completion of the first renewal period and not less than 15% relinquishment of the exploration area on completion of the second renewal period.
      The holder of an exploration right enjoys an exclusive right to apply for and be granted a production right over the exploration area. 
  • Production right – this right entitles the holder to conduct production operations on the acreage.

Exploration and production rights confer a limited real right in respect of the acreage over which they are granted. 

What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?

An applicant for an exploration or production right must submit an application in accordance with the requirements of the Mineral and Petroleum Resources Development Act to the Petroleum Agency, together with the prescribed fee. Applications are processed on a first come, first served basis and the minister of mineral resources does not have discretion to refuse to grant a right where the application meets the requirements of the act. This is subject to the proviso that in the case of contemporaneous applications, an application by a historically disadvantaged South African (as defined in the Mineral and Petroleum Resources Development Act) will be given preference.

In submitting an application for an exploration right, the applicant must, among other things, demonstrate that it has access to financial resources and the technical ability to conduct the exploration optimally and in accordance with an exploration work programme (which must be submitted as part of the application). 

Joint ventures

Are there any special legal provisions applicable to joint ventures?

There are no specific legislative provisions relating to joint ventures. However, the use of joint operating agreements (JOAs) may have tax consequences relating to value-added tax, particularly in circumstances where the JOA contemplates product sharing rather than revenue sharing. 

Third parties

Can exploration and production rights be transferred to third parties?

The Mineral and Petroleum Resources Development Act prohibits the transfer of a right, an interest in a right or a controlling interest in an entity holding a right without the permission of the minister of mineral resources (except in the case of a change of controlling interest in a listed company), which is obtained through an application process wherein the acquiring party must demonstrate its compliance with the conditions for grant of a right, including that it has the financial and technical ability to carry out the proposed operations.

Pending amendments to the Mineral and Petroleum Resources Development Act would extend this prohibition to the transfer of an interest that does not result in a change in controlling interest in the entity holding the right.

Fracking

Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?

In 2011 the minister of mineral resources imposed a moratorium on the acceptance of new applications for hydraulic fracturing exploration rights; in 2012 the moratorium was extended to the processing of existing applications. A technical task team was appointed to investigate the risks associated with the use of this technology in South Africa, and specifically the Karoo Basin. In September 2012 the technical task team released a report entitled “Report on Investigation of Hydraulic Fracturing in the Karoo Basin of South Africa”, which recommended that the existing regulatory framework be augmented with appropriate regulations, controls and coordination systems, and thereafter that exploration through hydraulic fracturing be permitted.

In February 2014 the minister of mineral resources published a notice which extended the existing moratorium on applications for relating to shale gas in the Karoo region. However, existing applications, such as those of Shell, received and accepted before February 1 2011 are excluded from the moratorium. The notice provides that if, in the interim, the existing applications are granted, the applicants will not be entitled to conduct hydraulic fracturing until the technical regulations have been promulgated.

Pursuant to this recommendation, the minister of mineral resources has promulgated the Technical Regulations for Exploration and Exploitation of Petroleum under the Mineral and Petroleum Resources Development Act

Despite publication of the regulations, the government is still processing exploration right applications to explore for shale gas in the Karoo Basin.

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