AMENDMENTS INTRODUCED BY THE MPRDA BILL REGARDING THE PETROLEUM PROVISIONS

Monday, August 25, 2014
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The primary implications for the petroleum industry arise from clause 63 of the Mineral and Petroleum Resources Development Amendment Bill 2013 (MPRDA Bill) which inserts into the principle Act section 86A dealing with “State participation on exploration and production rights”. Free carried interest Section 86A (1) entitles the State to a 20 percent free carried interest in new exploration and production rights.

“Free carried interest” is defined in clause 1 of the MPRDA Bill as “interest allocated to the State in exploration or production operations without any financial obligation on the State”. We regard it as significant that earlier formulations of this subparagraph provided for a 20 percent free carried interest in “all new exploration and production rights, from the effective date of such rights, including in production rights derived from existing exploration rights” whereas the final version applies only to new exploration and production rights.

Although the provision is now rather ambiguous, the new wording denotes a possible change in intention, namely, that the entitlement to a 20 percent free carried interest does not arise in respect of production rights derived from existing exploration rights. While the new section 86A(1) clearly envisages that the State will not be liable for past exploration and production costs, the Act is silent on whether the State bears an obligation to contribute a proportionate share of future costs in respect of its free carried interest. Although such an obligation exists in many other jurisdictions, the plain meaning of section 86A(1) read with the definition of “free carried interest” in clause 1 of the MPRDA Bill suggests that the State will not at any stage be obligated to contribute to costs in respect of its free carried interest.

State Participation Interest Over and above the 20 percent free carried interest, the State is entitled to an unlimited participation interest in any exploration or production right. This entitlement may be exercised either through a production sharing agreement or through acquisition of the interest in the right at an agreed price. There is no time limit placed on this entitlement, meaning that, unless this matter is provided for in regulation, it endures for the full period of production.

The clause originally provided for acquisition at “fair market value” but was later changed to “agreed price”. However, no provision has been made for a situation in which the State and the right holder/s cannot reach agreement on the price of the interest to be acquired. The State is, nevertheless, entitled to an unlimited participating interest. It seems then that section 86A (2) authorises an expropriation of the interest in an exploration or production right and compensation that is just and equitable in terms of section 25 of the Constitution would be payable to right holders.

Earlier versions of the MPRDA Bill also placed a limit of 30 percent on the State’s entitlement in respect of the participation interest and a limit of 50 percent on the total interest (free carried and participation) that could be held by the State in any exploration or production right.

These limits were removed during the final  deliberations of the Portfolio Committee on Mineral Resources (“the Committee”) in the week prior to the second reading of the MPRDA Bill in the National Assembly. It became clear during the meetings of the Committee that the section is intended merely to be empowering and that the Department of Mineral Resources does not envisage that the State will acquire the maximum participating interest. However, this remains a possibility.

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