U.S. OIL FIRM FOREST'S TRAVAILS

UNCLAS SECTION 01 OF 02 PRETORIA 002400 SIPDIS SENSITIVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, ISN, EEB/ESC AND CBA DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER DOC FOR ITA/DIEMOND E.O. 12958: N/A TAGS: ENRG EPET EMIN EINV SENV SF SUBJECT: U.S. OIL FIRM FOREST'S TRAVAILS REF: Pretoria 351 This message is sensitive but unclassified, not for Internet distribution. ¶1. (SBU) SUMMARY: U.S. firm Forest Oil Company's local presence - Forest Exploration International - is struggling to move its production license application out of a three-year regulatory limbo. Forest is frustrated with bureaucratic slowness and/or incompetence. Forest believes that it can produce significant off-shore gas off the Western Cape, which could help resolve South Africa's power crisis. Forest is considering posting an official to Cape Town to establish its local presence and promote its project. End Summary. -------------- Forest Sells Big Plans for Gas -------------- ¶2. (SBU) Forest Exploration International Director John Langhus told Charge d'Affaires and Acting Economic Counselor in an October 14 meeting that Forest was disappointed with slow progress on its application for production licenses on the offshore Ibhubesi gas field, off the Western Cape in South Africa. Langhus said Forest had been mired in application regulatory limbo for three years and has had a completed application for a "new order" (under current law) production license for two blocks stuck with the state Petroleum Association of South Africa (PASA) for over one year. Langhus criticized PASA as an obstacle, noting that their application still would still need to proceed to the Department of Minerals and Energy (DME). Langhus said that PASA was dealing with only five oil/gas applications, while the DME was dealing with hundreds of mineral applications with far greater results. He suggested that bureaucratic slowness at PASA was caused by incompetence or bad faith. ¶3. (SBU) Langhus said Forest was considering a $2 billion, 20-year investment in drilling and development, including 99 wells and four high-tech production platforms. He said Forest had production and exploration license applications for two adjacent off-shore blocks lodged with PASA. Langus said Forest could land gas 36-42 months after the granting of a production license by the SAG, aiming at 225 million cubic feet gas per day. Langhus was frustrated that gas regulators did not appreciate the significance of new gas development to help resolve South Africa's power crisis. He said Forest was considering a range of options from gas-fired independent power producers to increasingly ambitious gas pipelines to Saldanha, Cape Town, Mossel Bay, and Coega. Langhus noted that gas-fired plants could be developed rather quickly and could replace expensive use of kerosene and diesel at the Atlantis plant north of Cape Town. He admitted that Forest should have done a better job in explaining and promoting its plans with local and national government officials and to that effect should have had a Forest official placed on the ground. Langhus said he was considering posting himself to Cape Town, depending on results with the SAG. If he was NOT successful in obtaining progress in securing the production license during this visit, he would come to Cape Town. If he was successful, he would Qvisit, he would come to Cape Town. If he was successful, he would not come. -------------- Open For Business - or Not? -------------- ¶4. (SBU) Petroleum Agency SA (PASA) reports directly to the Minister of Minerals and Energy and is the official agency responsible for the promotion and regulation of South Africa's petroleum and natural gas (including coal-bed methane) resources. PASA issues exploration and production licenses with the Minister's approval, regulates and monitors both off-shore and on-shore exploration and production activities, and is the custodian of the national exploration and production database for petroleum resources. According to an energy consultant, if PASA recommends the granting of a license, the Minister is obliged to rubber-stamp its approval within a certain time limit (in theory). This does not happen in practice, but companies have so far been reluctant to aggressively push or to take the Minister to court. PRETORIA 00002400 002 OF 002 ¶5. (SBU) COMMENT: Mission has been in regular contact with Forest Oil Corporation and other foreign oil and gas companies over the years and has heard the frustrating anti-business or "not open for business" stance of PASA and DME. Forest's desire to jump-start gas production and utilization would be a good news story in hydrocarbon-poor South Africa, especially as the project could help resolve the power crisis. Forest has established a BEE partner, including well-placed businessman Tokyo Sexwale, and uses mining expert Peter Leon as their attorney. It is remarkable that even with these high-powered connections, their production and exploration licenses are still stuck. Forest admits that it needs to be present on the ground to better establish its presence and promote its project. ¶6. (SBU) COMMENT CONTINUED: Forest's experience contrasts dramatically with Westinghouse which established a local office, acquired a local company, joined the American Chamber, and assumed a position on its board. Sixteen months later, Westinghouse has secured a major presence in South Africa and is on the verge of winning a multi-billion dollar contract. The lesson learned is that U.S. companies cannot do serious business in South Africa without a substantial local presence. LALIME