26 Mar 2019
Exploration for oil or minerals is a risky activity. And when a significant find is made, there is the further risk that the terms allowed to the finder may turn out to be adverse. The larger the resource proved, the more adverse these terms are likely to be.
Any original successful risk taker is hostage to the government of the country where the discovery was made. With any potentially valuable discovery under the ground or water, what was essentially unknown will have become much more of a valuable known. Accordingly, the share of the value added allowed to the discoverer can easily become a matter of ex-post negotiation, rather than a rule of previously agreed laws.
Exploring for oil or gas in deep, turbulent South African waters is a particularly risky endeavour. Rules applying to exploration for oil or gas are still to be re-drafted and voted upon. Yet, despite all this inherent uncertainty – all the known unknowns – Total and its partners went ahead and explored off our coast. They have discovered what is clearly a significant quantity of hydrocarbons in their concession area 275km south of Mossel Bay, called Brulpadda. They will be drilling further wells to determine the fuller potential of the gas and oil available for exploitation.
How then should South Africa respond to this fait accompli, a new economic opportunity of great potential significance? Surely, it should be to maximise the output of oil and gas? Taxes or royalties can and will be levied on it. However, it would have to be of an internationally comparable and competitive scale to encourage production and further exploration activity.
Given a natural concern for safety and the environment, the business of bringing the oil and gas to the market should best be governed by no other factor than maximising output at minimal cost. What is in prospect, if all goes well, is construction activity on a large scale undertaken over many years. Drills will be sunk from the platforms to be built, served by helicopters and launches with bases and workers onshore. Pipelines will be laid to bring the oil and gas onshore and to extend the network to new refineries and their customers in the urban areas. Further capital expenditure in the oil and gas intensive industry (for export and the local market) will become feasible off the newly established grids. The economy could take off.
To make the best of what has become possible, minimal consideration should be given to any other potential interests in the resource, other than the general interest in faster economic growth. Any interests that might impose themselves on the project managers and the capital providers should be actively disallowed.
Construction companies and those that are free to hire them, should be allowed to bid competitively for work and to organise that work as best they see fit. They should be subject to minimal interference in the form of patronage, crony capitalism, corruption and extortion.
The genuine public interest in redistributing the benefits of the project would then be satisfied by the extra revenue generated for government, not by opportunistic rent seeking. The extra revenue could be spent for the benefit of the poor in better-funded schools and hospitals or cash grants, maybe even lower tax rates; a case of growth and then redistribution, rather than erratic redistribution at the expense of growth. It would represent a true game changer for the SA economy.
*"Wet gas" is gas that contains a small amount of oil
About the author
Prof. Brian Kantor
Brian Kantor is a member of Investec's Global Investment Strategy Group. He was Head of Strategy at Investec Securities SA 2001-2008 and until recently, Head of Investment Strategy at Investec Wealth & Investment South Africa. Brian is Professor Emeritus of Economics at the University of Cape Town. He holds a B.Com and a B.A. (Hons), both from UCT.
Receive Focus insights straight to your inbox