Will Total face a tax sting?

Total’s announcement of a significant oil and gas discovery on the offshore Brulpadda prospects was greeted as a “catalytic find” by President Cyril Ramaphosa and a “game changer” by resource minister Gwede Mantashe.

Investors, however, should keep a close eye on the fiscal regime:

• South Africa’s “very generous fiscal terms” could soon be a thing of the past, says Harriet Okwi, an African energy consultant with Okwi & Partners in Paris. “Authorities may see [the discovery] as leverage.”
• Tanzania, Uganda, Kenya, and Mozambique all amended fiscal terms and/or petroleum legislation once substantive finds were made.
• A “key pressure point” for foreign investors will be whether any changes to the fiscal regime are retroactively applied, as has been the case in Tanzania. Okwi says this is “unlikely” in South Africa but “can’t be ruled out”.

The economic context:

• According to Société Générale Cross Asset Research’s Emerging Markets Outlook for 2019, the prospects for growth and fiscal consolidation in South Africa are very limited.
• The Ramaphosa administration inherited a debt to GDP ratio of 53% and needs to fund social and educational programmes.

“Let’s not get too excited”

Okwi, formerly a senior Africa oil and gas analyst with IHS Markit, says the “game changer” claims are overblown. She says the amount of the resource that will ultimately be available is “far from clear”.

• In the case of Mozambique it took a string of discoveries over several years.
• Mozambican finds and the associated development costs were a genuine “game changer” as they dwarfed the country’s GDP, which will not be the case for South Africa’s much larger economy. “Let’s not get too excited,” she says.
• Production also takes time: Adewale Fayemi, managing director for exploration and production for Total in South Africa told BizNews that, “the typical development of deep offshore from first find to start of production is not less than eight years”.

What is Total saying?

Total’s chief executive Patrick Pouyanné says that the discovery, in an area known for massive waves and strong currents, “could be around 1 billion barrels of total resources of gas and condensate”. Total, with partners Qatar Petroleum, CNR International and the Main Street consortium, plans to acquire 3D seismic data this year, to be followed by up to four exploration wells.

Looking ahead

The discovery means a“de-risking” of the area in exploration terms, Okwi says. It will incentivise other companies to explore, but some will adopt a “wait and see approach”, requiring further analyses before making any substantive investments. It may also prompt an increase in M&A activity. This is likely to be in the form of farm-in and farm-out of exploration assets, as has previously happened in frontier East Africa, according to Okwi. The wave of M&A will likely attract more Asian players, such as the Thai National Oil Company, Mitsui, India’s ONGC as well as Chinese firms, she says.
South Africa, Okwi notes, is already highly experienced in managing revenues from extractive industries and has stronger institutional capacity and transparency than most of its regional peers. “There is little worry about the receipts being siphoned off,” she says. That might strike some observers of the current graft trials in South Africa as optimistic, but South African courts remain strong.

The find could also alter South Africa’s energy mix, helping shift dependence on imported crude. The “most prudent” thing to do would be to use local natural gas to improve power generation, lower energy costs and reduce coal dependence, says Okwi.