Domestic market overview

Production

What is the extent of oil and gas production in your jurisdiction?

Over the last five years, there has been marked interest in South Africa’s hydrocarbon resources. Since 2012, several international oil companies – including Shell, Total, ExxonMobil and Anadarko – have acquired offshore exploration interests. Three companies, including Shell, have also applied to explore the Karoo Basin, with a view to extracting shale gas through hydraulic fracturing.

Currently, oil and gas production in South Africa is relatively insignificant. South Africa’s proven oil reserves total approximately 15 million barrels.

The only commercial production of oil and gas in South Africa has been in the Bredasdorp Basin, in a block operated by the Petroleum Oil and Gas Corporation of South Africa (PetroSA). While discoveries have been made off the west coast, in the Pletmos and Orange Basin, none of these fields has yet entered commercial production. A production right has been granted over the Ibhubesi Gas Field in the Orange Basin, but production is not expected to commence until late 2017. 

Consumption

How does domestic energy consumption break down with respect to oil and gas, as well as imports and exports?

As at 2014, South Africa’s total primary energy consumption was satisfied by coal (70%), oil (23%), natural gas (3%), nuclear energy (3%) and renewable energies (1%). Thus, South Africa relies heavily on coal to meet its energy demands.

Approximately 60% of South Africa’s domestic fuel requirements are met by imported crude oil, with 50% of the refined product coming from local crude oil refineries and 10% imported from international refineries. The remaining 40% of demand is met by coal-to-liquids synthetic fuel produced at Sasol’s plant in Secunda (35%) and from gas-to-liquid synthetic fuel (5%) produced by PetroSA from gas extracted from the Bredasdorp Basin.

Other than the small amount of natural gas that PetroSA is producing offshore, all of South Africa’s natural gas requirements are being met by imports. The sole source of imported natural gas in South Africa is via a transmission pipeline which conveys gas from Sasol’s Pande and Temane gas fields in Mozambique. The pipeline is a joint venture between Sasol, the South African Gas Development Company (Pty) Ltd and Companhia Mocambicana de Gasoduto SARL. 

Trends

What are the current trends and future prospects for oil and gas supply and demand in your jurisdiction, and what policies has the government adopted to address these?

Domestic production of petroleum products has been in decline over the last one and a half decades. Recent offshore exploration activity may ultimately lead to discoveries that will reverse this trend.

According to the Government Communication and Information System’s 2012/2013 South Africa Energy Yearbook, South Africa’s energy demand is expected to be twice current levels by 2030. However, there is significant uncertainty regarding future energy demand, which is heavily dependent on economic growth. The Integrated Resource Plan indicates that the prominence of coal in meeting domestic demand is set to decline significantly in the medium term, creating room for other resources – including oil and gas – to meet the demand.

The recent interest in South Africa’s offshore oil and gas reserves has prompted both legislative and policy initiatives which aim to unlock the potential benefits which oil and gas exploration present in South Africa. The Mineral and Petroleum Resources Development Amendment Bill, 2013, which is expected to be enacted by the end of 2016, seeks to provide much-needed legal certainty to enable industry to invest in oil and gas exploration. 

Various policies and programmes have been initiated by government to increase the penetration of gas in South Africa’s energy economy. It is expected that the Department of Energy will publish a Gas Utilisation Master Plan to serve as a framework for establishing the infrastructure and incentives necessary to realise this objective shortly. The government is also developing a Gas to Power Programme in which gas-generated power (generated by imported gas) will be procured from the private sector. It is hoped that this programme will create an ‘anchor gas’ demand that will stimulate the growth of a viable gas sector, which may ultimately be met with indigenous gas resources.

Regulatory overview

Regulation

What are the primary laws and regulations governing the oil and gas industry in your jurisdiction?

  • The Mineral and Petroleum Resources Development Act (28/2002) – this is the framework legislation in terms of which upstream oil and gas rights are granted and controlled, together with prospecting and mining rights. The government has indicated that it will seek to separate the regulation of oil and gas from that of mining by enacting a separate legislative framework in the medium term.
  • The Petroleum Pipelines Act (60/2003) – this provides the regulatory framework for the construction and operation of petroleum pipelines, loading facilities and storage facilities.
  • The Petroleum Products Act (120/1977) – this regulates the downstream sector, establishing the scheme for the licensing of wholesalers, retailers and manufacturers of petroleum products. 
  • The Gas Act (48/2001) – this provides the regulatory framework for the construction and operation of gas transmission, storage, distribution, liquefaction and re-gasification facilities, as well as for trading in gas.
  • The National Environmental Management Act (107/1999) – this was enacted as framework legislation for environmental management in South Africa. It subjects various activities to environmental authorisation, including oil and gas exploration, production and decommissioning. Since November 2015, the act has also imposed additional environmental obligations, such as the furnishing of financial provision for environmental obligations relating to rehabilitation and remediation of areas in which exploration and production activities have been conducted.
  • The International Trade and Administration Act (71/2002) – this regulates the import and export of petroleum and petroleum products to South Africa. A list setting out the commodities that require import and export permits is published by the minister of trade.

What government bodies are charged with regulating the oil and gas industry and what are the extent of their powers?

  • Department of Mineral Resources – the Department of Mineral Resources administers the Mineral and Petroleum Resources Development Act, which is the principal statute governing exploration for and production of petroleum resources. It is also the competent authority to issue environmental authorisations under National Environmental Management Act.
  • Department of Energy – the controller of petroleum products within the Department of Energy is the licensing authority under the Petroleum Products Act.
  • Petroleum Agency of South Africa – the Petroleum Agency has been delegated various first-tier functions in terms of the Mineral and Petroleum Resources Development Act relating to the acceptance and consideration of applications for petroleum rights and permits. 
  • National Energy Regulator of South Africa (NERSA) – NERSA administers and is the competent licensing authority under the Petroleum Pipelines Act and the Gas Act. 

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.

Transport and storage

Legal framework

What is the general legal framework governing the transportation and storage of oil and gas resources in your jurisdiction?

No overarching legal framework governs the transportation and storage of oil and gas. The Petroleum Pipelines Act establishes the regulatory framework for the storage and transportation of crude oil, liquid petroleum fuels and lubricants. Similarly, the Gas Act regulates the operation of gas transmission, storage, distribution, liquefaction and re­-gasification facilities in respect of hydrocarbon gases transported by pipeline.

Operations which involve the transport and storage of oil and gas must also comply with a range of regulations relating to waste management, air quality, health and safety and hazardous substances. 

Transportation

How is cross-border transportation of oil and gas resources regulated?

South Africa does not export oil and gas. Gas is imported into South Africa via the Mozambique transmission pipeline, subject to the licensing regime under the Gas Act, in terms of which trading and distribution licences must be obtained from the National Energy Regulator of South Africa (NERSA). The importation of crude oil and petroleum products, which takes place by ship, is subject to import control measures and an import permit is required from the International Trade Administration Commission in order to import these products, as discussed below. 

Are there specific provisions governing marine and ground transportation of oil and gas resources?

A range of regulatory provisions apply to the transportation of goods, including petroleum resources, by road and sea. These provisions cover, among other things, the transportation of hazardous substances by road, marine pollution and marine safety. 

Construction and infrastructure

How are the construction and operation of pipelines, storage facilities and related infrastructure regulated?

The Petroleum Pipelines Act establishes the regulatory framework for petroleum pipelines. It stipulates that no person may construct or operate a petroleum pipeline, loading facility or storage facility without a licence issued by NERSA. 

The Gas Act establishes the regulatory framework for the piped gas industry. It applies to all hydrocarbon gases transported by pipeline and expressly to liquefied petroleum gas. Under the act, no person may construct or operate gas transmission, storage, distribution, liquefaction and re-gasification facilities, convert infrastructure into such facilities or trade in gas without a licence issued by NERSA.

What rules govern third-party access to pipelines and related infrastructure?

Under both the Gas Act and the Petroleum Pipelines Act, NERSA may impose licence conditions, including that third parties be given access to pipelines. Under the Petroleum Pipelines Act, pipeline and loading facility capacity must be shared in proportion to the needs of users and prospective users, and within the constraints of the pipeline and loading facility, while uncommitted storage facility capacity must be made available to third parties. Under the Gas Act, third parties must be given access to uncommitted capacity in transmission (bulk) pipelines and storage facilities.

Trading and distribution

Regulation

How are oil and gas resources traded in your jurisdiction and what (if any) regulations and procedures apply to oil and gas sales, distribution and marketing activities, both nationally and internationally?

Both oil and gas markets are tightly regulated in South Africa.

The biggest source of natural gas in South Africa is through Sasol’s Mozambique pipeline, which transports gas extracted from Mozambique’s Pande and Temane gas fields. Several companies are involved in the distribution and reticulation of this gas. 

The trading, distribution and reticulation of gas are subject to licensing in terms of the Gas Act. As is discussed in more detail below, the National Energy Regulator of South Africa (NERSA), having determined that conditions in South Africa’s gas markets are not sufficiently competitive, determines a maximum price for each individual gas trader. 

The manufacturing, wholesale and retail of petroleum products are subject to licensing in terms of the Petroleum Products Act. The act prohibits a licensed wholesaler of petroleum products from simultaneously holding a retail license and the retail price of petroleum is set by the Department of Energy.

Petroleum products and blending components are a class of goods that require an import permit in terms of the International Trade Administration Act (71/2002). The International Trade Administration Commission issues import permits for petroleum products on the strength of a ‘recommendation’ to be obtained from the Department of Energy. 

Is oil and gas pricing regulated in your jurisdiction?

The Gas Act empowers NERSA – as the mandated regulator of the electricity, piped-gas and petroleum pipeline industries – to determine the maximum prices to be charged by individual gas distributors, reticulators and traders. However, this power is predicated on a determination by NERSA that there is inadequate competition in the gas industry.

The Piped Gas Regulations were promulgated by the minister of energy to govern the determination of maximum prices. The criterion for maximum price determination is that it enable the licensee to recover all efficient and prudently incurred investment and operational costs, and generation of a profit commensurate with risk. The Piped Gas Regulations also require the set maximum price to differentiate between classes of customer based on volumes purchased.

The Gas Act prohibits discrimination between customers or classes of customer in relation to access, tariffs, prices, conditions or service, except for objectively justifiable and identifiable differences relating to matters such as quantity, transmission distance, length of contract, load profile, interruptible supply or other distinguishing features approved by NERSA.

The price of petroleum products is likewise regulated by the minister of energy. Section 2(1)(c) of the Petroleum Products Act, 1977 empowers the minister of energy to “prescribe the price, or a maximum or minimum price, or a maximum and minimum price, at which any petroleum product may be sold or bought”. 

The retail price of various crude oil products is set by notice in the Government Gazette. The price of fuel in particular is set according to a system referred to as the Regulatory Accounting System. It is adjusted on the first Wednesday of every month in accordance with a calculation carried out by the Central Energy Fund on behalf of the minister of energy. The price reflects both international and domestic elements – specifically, the dollar price of the product on world markets, the retail and marketing margins, transport costs and taxes and levies denominated in local currency.

Occupational health and safety and labour issues

Health and safety

What health and safety regulations and procedures apply to oil and gas operations (upstream, midstream and downstream)?

Health and safety at upstream oil facilities is regulated primarily by the Mines Health and Safety Act (29/1996) (for upstream facilities). This statute is administered by the chief inspector of mines. In addition, with regard to offshore installations, the Maritime Occupational Safety Regulations, Marine Traffic Act (2/1981) and Maritime Zones Act (15/1994) may be relevant.

The Mines Health and Safety Act prescribes general duties in relation to:

  • health and safety;
  • reporting;
  • recording and investigation of incidents;
  • medical surveillance in certain circumstances;
  • fire precautions;
  • operating procedures; and
  • qualification requirements in order to operate certain equipment.

Furthermore, a number of SANS codes are incorporated by reference into this legislation and full compliance with the standards set out therein is required. 

Health and safety at facilities relating to the transportation of petroleum products is regulated primarily through the Occupational Health and Safety Act (85/1993). The Department of Labour administers the act and its regulations.

The Major Hazard Installation Regulations promulgated under the Occupational Health and Safety apply where the nature of the facility is such that it may pose a risk that could affect the health and safety of employees and the public. The regulations require, among other things, that a risk assessment be undertaken in order to identify the emergency measures and planning that must be in place in respect of the particular installation. 

Labour law

Are there any labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)?

No specific legislative requirements relate to the employment of local personnel in the oil and gas industry. However, the model exploration and production right used by the Petroleum Agency states that the holder of the right shall employ South Africans with appropriate qualifications and experience, giving preference to historically disadvantaged persons, taking into account the operational requirements of the licence holder. The model right specifically states that the holder shall not be precluded from employing non-South African personnel if the required skills are not available in the local labour market. The model right also requires that licence holders report on the number of local persons (classifying by race and gender) and expatriate persons employed.

What is the state of collective bargaining/organised labour in your jurisdiction’s oil and gas industry?

South Africa has a strong collective bargaining environment, with several trade unions across various industries which are active in their respective sectors. 

The Chemical, Energy, Paper, Printing, Wood and Allied Workers’ Union is the largest trade union organisation in the oil sector. The union has traditionally dominated most petroleum refineries and distribution processes, and has a strong presence within the Sasol synthetic fuels operations and the PetroSA coastal gas to petrol operations.

The South African Chemical Workers’ Union has historically dominated Sasol’s operations at Sasolburg and has a majority membership at the National Petroleum Refiners of South Africa oil refinery – a joint venture between Sasol (which holds a 63.64% interest) and Total South Africa (which holds a 36.36% interest). 

Environmental protection

Authorisation

What preliminary environmental authorisations are required before commencing oil and gas-related activities?

Until recently, the environmental regulation of petroleum exploitation was addressed in the Mineral and Petroleum Resources Development Act and the regulations promulgated thereunder. For various historical reasons, minerals and petroleum exploitation was subject to a special environmental regime. However, recent amendments to both the National Environmental Management Act and the Mineral and Petroleum Resources Development Act have brought petroleum within the ambit of the National Environmental Management Act. 

Exploration and production right applicants must now secure an environmental authorisation in terms of the National Environmental Management Act as a condition for grant of the exploration or production right.

Section 24 of the National Environmental Management Act empowers the minister of environmental affairs to list activities that may not commence without an environmental authorisation. An environmental authorisation is granted on the basis of an assessment conducted in terms of the Environmental Impact Assessment Regulations. The minister of environmental affairs in December 2014 published an updated version of the Environmental Impact Assessment Regulations, together with updated listing notices, containing various exploration and production-related activities. 

The required environmental impact assessment encompasses studies and reports evaluating the socio-economic and environmental impacts of the proposed operations. The reports must be subject to at least one round of public participation, with a final report incorporating the comments and concerns of interested and affected parties.

Under this new regime, the minister of mineral resources remains the competent authority to grant environmental authorisations for activities relating to exploration and production, while the minister of environmental affairs will serve as the appeal authority.

Depending on the nature of the facility, other environmental licences and permits may be required, such as a waste management licence in terms of the National Environmental Management: Waste Act (59/2008) or an air quality licence in terms of the National Environmental Management: Air Quality Act (39/2004). Although these are separate statutory permits, the application process has been harmonised with that required for an environmental authorisation under the National Environmental Management Act. Accordingly, such applications will be supported by common studies and reports.

The minister of mineral resources has published Technical Regulations for Petroleum Exploration and Exploitation in terms of the Mineral and Petroleum Resources Development Act, which apply to onshore exploration and production operations. The regulations establish comprehensive technical and environmental standards for the conduct of hydraulic fracturing in South Africa. They govern, among other things, well design and construction, well abandonment, drilling fluid management of waste and management of water. They also appear to supplement existing regulation of environmental impact assessments.

Requirements

What environmental protection requirements apply to the operation of oil and gas facilities?

Companies must comply with the conditions of the environmental authorisations when conducting exploration or production activities. When applying for renewal of an existing licence, companies must submit a report reflecting the extent of compliance with the conditions of the environmental authorisation

Under the National Environmental Management Act, an exploration or production right holder must also make financial provision for the rehabilitation, closure and ongoing post-decommissioning management of negative environmental impacts by way of an insurance policy, a bank guarantee, a trust fund or cash. The quantum must be determined through a detailed itemisation of all activities and costs required to implement final rehabilitation and decommissioning and remediation of any latent residual environmental impacts in accordance with plans and studies submitted to the Petroleum Agency as part of the application for an environmental authorisation. At any given time, the holder must ensure that the financial provision is sufficient to cover the actual costs of implementing these measures for a period of 10 years.

In addition, the standard form exploration and production right provides that the holder undertakes to “defend, hold harmless and indemnify the state from and against any and all claims, costs, charges, liabilities and expenses, including reasonable legal costs that may be instituted against or suffered by any member of the state as a result of injury to or death of any person or damage or destruction to any property or the environment arising from the negligent or unlawful acts or omissions of the holder”.

Consequences

What are the consequences of failure to adhere to the relevant environmental regulations and to what extent can operators be held liable for environmental damage?

With respect to enforcement of environmental compliance, the National Environmental Management Act provides for the appointment of environmental management inspectors within the Department of Mineral Resources to police compliance with environmental obligations. Such environmental management inspectors enjoy particularly wide powers. They may, without a warrant, interrogate persons suspected of contravention of the National Environmental Management Act or other environmental statutes and collect evidence by copying documents and extracting samples from the site. An environmental management inspector may also issue any person with a compliance notice directing specific measures. Failure to comply with a compliance notice may result in revocation of the environmental permit or authorisation in respect of which the infraction occurred, and possibly prosecution.

Section 28 of the National Environmental Management Act imposes a broad duty of care on right holders in respect of preventing environmental degradation and requires that every person that causes, has caused or may cause environmental degradation or pollution take reasonable steps to prevent, mitigate or stop such degradation or pollution. This section enables the director general of the Department of Mineral Resources to direct the person causing damage to cease any activity, evaluate and assess the impact of activities on the environment and take measures to remedy these effects. If the holder of a right fails to comply with the directive, the director general may take the steps necessary to remedy any ecological degradation and pollution and recover the costs required to fully implement the rehabilitative measures from the right holder.

In terms of Section 34(7) of the National Environmental Management Act, any person who is or was a director of a firm at the time of the commission by that firm of an offence under various environmental statutes set out in Schedule 3 to the National Environmental Management Act shall himself or herself be guilty of the offence, and be liable on conviction to the penalty specified in the relevant law, if the offence in question resulted from the director’s failure to take all reasonable steps that were necessary under the circumstances to prevent commission of the offence. Scheduled offences include breach of the Section 28 duty of care and offences established in other environmental legislation, such as the statutes regulating water, air and waste. For example, Schedule 3 lists Sections 151(1)(i) and (j) of the National Water Act, 1998. In terms of this section, it is an offence to unlawfully and intentionally or negligently commit any act or omission which pollutes or is likely to pollute a water resource, or unlawfully and intentionally or negligently commit any act or omission which detrimentally affects or is likely to affect a water resource. Proof of the offence constitutes prima facie proof that the director is guilty under Section 34(7). 

The financial implications of a conviction under the National Environmental Management Act are significant. It is competent for a court, simultaneously with consideration of the criminal penalty, to enquire summarily into and assess the monetary value of any advantage gained or likely to be gained by such person in consequence of that offence and, in addition to any other punishment imposed in respect of that offence, order the award of damages or compensation or a fine equal to the amount so assessed.

The principles set out in Section 28 of the National Environmental Management Act are underscored by Sections 44 and 45 of the Mineral and Petroleum Resources Development Act, which provide that if any exploration or production operation causes or results in ecological degradation, pollution or environmental damage, or contravenes the environmental authorisation, the minister of mineral Resources may, in consultation with the minister of environmental affairs and tourism, direct the right holder to investigate and report on the impact of the ecological degradation, pollution or contravention and take any steps specified by the minister in the directive. If the holder of a right fails to comply with the directive, the minister of mineral resources may take the steps necessary to remedy any ecological degradation and pollution and recover the costs required to fully implement the rehabilitative measures from the right holder.

The Mineral and Petroleum Resources Development Act also empowers the minister of mineral resources to cancel or suspend any right if the holder is in contravention of any condition of the environmental authorisation. 

Taxes and royalties

Taxes

What taxes (direct and indirect) and/or royalties apply to oil and gas activities in your jurisdiction (including upstream, midstream and downstream activities)?

Oil and gas companies are liable for income tax and capital gains tax imposed in terms of the Income Tax Act (58/ 1962), value added tax (VAT) levied in terms of the VAT Act (89/ 1991) and royalties imposed in terms of the Mineral and Petroleum Resources Royalty Act, read with the Mineral and Petroleum Resources Royalty (Administration) Act. Other potential liabilities include transfer duty on the transfer of immoveable property and securities transfer tax on the transfer of securities (eg, shares). The South African Revenue Services (SARS) is tasked with collecting revenue and ensuring compliance with tax laws.

South Africa applies a residence-based income tax system, meaning that South African residents are subject to income tax on their worldwide income, while non-residents are taxed on their income from South African sources. Residents are further subject to capital gains tax on their worldwide capital gains; while non-residents are subject to capital gains tax only in respect of capital gains arising from the disposal of immoveable property (including an interest in or right to immovable property) situated in South Africa, or moveable property attributable to a permanent establishment in South Africa, unless a double tax agreement provides otherwise

Resident and non-resident companies are subject to income tax at a rate of 28% and to capital gains tax at an effective rate of 22.4%.

The Tenth Schedule to the Income Tax Act deals specifically with the taxation of oil and gas companies and contains a number of favourable provisions. The Tenth Schedule establishes a special dispensation in respect of deductions from oil and gas income. The Tenth Schedule also authorises the minister of finance to conclude binding fiscal stability agreements with an oil and gas company (which are transferable in accordance with the Tenth Schedule). 

The Income Tax Act defines a ‘resident’, in relation to juristic or legal entities, to mean any person that is incorporated, established or formed in South Africa or that has a place of effective management in South Africa. Branches of offshore companies will not fall within the definition, but they could still be subject to South African income tax and capital gains tax on the basis that they derive income or capital gains from a South African source, unless they can rely on a double tax agreement for protection.

South Africa imposes withholding taxes on dividends, royalties and interest.

Until March 31 2012, a resident company was subject to secondary tax on companies, a second tier of corporate tax on distributions of profits, at a rate of 10%. This was replaced with a dividends tax with effect from April 1 2012. In contrast to secondary tax on companies, dividends tax is a tax on the shareholder receiving the dividend, although it is collected by the company declaring the dividend. Dividends tax is imposed at a rate of 15%, but may be reduced to 0% in terms of the Tenth Schedule or in terms of a double tax agreement – in the latter case, generally to not lower than 5%. 

Imports and exports

What taxes and duties apply to oil and gas imports and exports?

Customs duties are payable in respect of imported goods at varying rates. 

In addition, VAT is payable in respect of goods and certain services imported into South Africa. Persons (irrespective of whether they are resident or non-resident) that make taxable supplies in the course of an enterprise conducted wholly or partly in South Africa must register as VAT vendors, provided that the minimum threshold is reached. VAT vendors collect output VAT from their customers and claim credits for input VAT paid by them. The difference is paid to SARS.

As a general rule, VAT is imposed at a rate of 14% in respect of the supply of goods or provision of services by a registered VAT vendor, or on goods and certain services imported into South Africa. There are certain exemptions from VAT and some supplies (eg, the export of goods and services from South Africa) are subject to VAT at a rate of 0% (referred to as ‘zero-rating’).

A person must register as a VAT vendor if it carries on an enterprise and the total value of taxable supplies during the previous 12 months exceeds R1 million or will exceed R1 million within the next 12 months.

Decommissioning

Regulation

How is the decommissioning of oil and gas facilities regulated?

The holder of an exploration or production right is required, in terms of Section 43 of the Mineral and Petroleum Resources Development Act, to obtain a closure certificate upon the lapsing, abandonment or cancellation of the right or cessation of the operation, or in respect of any portion relinquished. An application for a closure certificate must be submitted to the Petroleum Agency within 180 days of the lapse of the exploration right. Decommissioning of an exploration or production operation is also subject to environmental authorisation in terms of the National Environmental Management Act. The environmental assessment process in support of this application must be initiated prior to submission of an application for a closure certificate, as there is a streamlined process for consideration of these two applications.

Upon closure, an exploration or production right holder must execute approved rehabilitation and closure plans.

Dispute resolution

Disputes

How are oil and gas disputes typically resolved in your jurisdiction?

Unless otherwise agreed between the parties, disputes are heard by local South African courts. However, arbitration is becoming an increasingly popular means of resolution for parties to commercial disputes. Arbitration in South Africa is governed by the Arbitration Act (42/1965), but the rules and procedures for arbitration are agreed between the parties, with the rules of the Arbitration Foundation of Southern Africa used most frequently.

With regard to disputes between a right or permit holder and the regulator, the model exploration right currently being utilised by the Petroleum Agency provides that in the event of a dispute, the parties will use their best efforts to settle the dispute in good faith at a meeting which shall last for no longer than seven days. If consensus cannot be reached between the parties, the parties may take whatever action is then available to them at law. In disputes of a geoscientific, environmental or technical nature concerning the parties’ obligations under an exploration right, the model right provides for binding expert determination in the event that the parties fail to settle the dispute by negotiation.

Anti-corruption measures

Dishonest practices

What regulations and procedures are in place to combat bribery, fraud, collusion and other dishonest practices in the oil and gas sector in your jurisdiction?

The primary legislation aimed at combating corruption and fraud in South Africa is the Prevention and Combating of Corrupt Activities Act (12/2004). The act creates a general offence of ‘corruption’, which is broadly defined as directly or indirectly receiving or giving gratification from or to another person in order to act or influence the other person to act in a manner that:

  • is illegal, dishonest, unauthorised or biased, among other things;
  • amounts to breach of a position of authority, breach of trust or violation of a legal duty or set of rules;
  • is designed to achieve a unjustified result; or
  • amounts to any other unauthorised or improper inducement to do or not do anything.

The act applies across the private and public sector and persons convicted of offences under the act are liable to a fine or imprisonment, including life imprisonment.

The act also makes it a criminal offence for a person in a position of authority who has knowledge or suspicion of an offence of corruption, theft, fraud, extortion, forgery or uttering a forged document (in excess of R100,000) to fail to report this to the South African Police Services. A person in a position of authority who fails to report knowledge or suspicion of corruption can be imprisoned for up to 10 years.