OIL AND GAS PATCH FEELS THE BLUES

UNCLAS SECTION 01 OF 03 PRETORIA 000351

SIPDIS

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

E.O. 12958: N/A
TAGS: ENRG EPET EMIN SENV AMGT SF
SUBJECT: OIL AND GAS PATCH FEELS THE BLUES

REF: Pretoria 215


1. (SBU) SUMMARY: Oil/gas industry players and observers in South
Africa criticize what they perceive as the SAG's arbitrary "taking"
of pre-existing rights under exploration and production contracts.
However, most are not prepared to "walk", having made significant
investment, and are therefore seeking negotiated accommodation to
move forward on exploration and production. South Africa does not
possess rich geology for hydrocarbon and current regulatory
uncertainty has stymied any new entrants for upstream exploration
and production. The downstream refined product market is adequately
provisioned. End Summary.


2. (SBU) OIL PATCH BACKGROUND: South Africa is not hydrocarbon rich
and relies heavily on crude oil imports (300,000 barrels per day)
and coal- and gas-to-liquid refining (200,000 barrels per day) to
supply its consumption (520,000 barrels per day). South Africa
currently produces about 20,000 barrels per day of crude and oil
condensate, mostly from state oil company PetroSA's declining
Oribi-Oryx off-shore oil fields and from U.S. company Pioneer
Natural Resources and PetroSA's offshore Sable Oil Field (both in
offshore Mossel Bay). Pioneer has begun to produce limited gas and
is interested in additional exploration. U.S. companies Forest
Exploration and Anschutz are developing the western shallow water
Ibhubesi gas field. BHP Billiton (with partner Global offshore;
U.S. firm Occidental decamped) was prepared to begin western deep
water exploratory oil drilling, but has shelved plans pending
resolution of its disputes with the SAG over license conversion and
fiscal terms. Canadian CNR is evaluating offshore exploration
potential.


3. (U) Energy Officer and Specialist visited oil and gas
representatives in Cape Town on the margins of the annual Mining
Indaba February 4-7, 2008 to assess the pulse of the sector.

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Pioneer Hangs in There - Gains Limited Accommodation
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4. (SBU) Pioneer Natural Resources General Manager Marek Ranoszek
told Energy Officer and Specialist in a meeting on February 7 that
South Africa was not "open" for oil and gas business. He criticized
officials at the South African licensing authority Petroleum Agency
of SA (PASA) and the Department of Minerals and Energy (DME) for
"expropriating" rights conferred in their pre-existing contracts
during the conversion to "new order" licenses imposed under the 2002
Minerals and Petroleum Resources Development Act (MPRDA). Ranoszek
expressed frustration that the SAG was seeking to change the fiscal
terms of their deal (primarily royalties) and reneging on rights to
international arbitration, despite commitments from previous Energy
Ministers that they would "remain whole". He pointed out that the
SAG has granted no new licenses since implementing the MPRDA five
years ago as companies perceive uncertainty with respect to fiscal
regime and Black Economic Empowerment (BEE) requirements that do not
adhere to international practice in a country which is not
Qadhere to international practice in a country which is not
hydrocarbon-rich. Ranoszek said Treasury was much more reasonable
and commercial-minded to deal with, but it is a secondary
interlocutor after the DME.



5. (SBU) Ranoszek said Pioneer made the business decision to
"strike a deal" with the SAG on license conversion to "new order" in
order to secure the first new production license under the MPRDA.
He described using "horse-trading" via its partnership with PetroSA,
given the significant investment made to date. He said Pioneer had
to give up its rights to international arbitration and give ground
on fiscal terms. Ranoszek did not object to BEE requirements, but
took note of the ambiguity that the long-standing liquid fuels
charter specified a 25 percent BEE requirement versus 26 percent in
the MPRDA. He noted that BHP Billiton had held up its exploration
program (for the second time) - even though it had already arranged
delivery of an oil rig - because of the SAG changing its fiscal
terms and rights under its pre-existing contract, as reported in the
press.


6. (SBU) Ranoszek criticized the SAG's approach to the oil/gas
sector in South Africa. He blamed DME Chief Director: Minerals

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Regulations Jacinto Roche as the architect of a new aggressive,
"gimme" approach to application of the MPRDA, which was "sticking it
to" current oil/gas players and chasing away new entrants, despite
an attempt by the SAG to market new blocks. Ranoszek stated BHP
Billiton's partner Global Offshore Oil took the SAG to court, but
lost in its disagreement over license conversion. He noted that
PetroSA and the DME faced skills shortages and PetroSA was
harvesting existing assets and production, but failing to invest in
new exploration and production.


7. (SBU) Former PASA CEO Jack Holliday confirmed to Energy Officer
and Specialist in two separate February meetings that the SAG policy
toward the oil and gas sector had been a "disaster" and DME and PASA
had adopted an anti-business stance. He observed that the SAG
should have "laid out a red carpet" to welcome BHP Billiton's
readiness to move in a deep water rig and invest over $100 million
in exploration, instead of effectively chasing them away. Holliday
speculated that the "new regime" in the ANC and SAG may bring
positive changes.

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Forest Exploration Wants to Develop Gas Resources
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8. (SBU) Forest Exploration International Public Officer Anschen
Friedriche expressed similar concerns to Energy Officer and
Specialist in a meeting on February 4. She said that Forest had
made its application to the SAG for offshore gas field production
(Block 2A) and associated on-shore processing (yet to be determined)
and she expected to gain a favorable and timely response.
Friedriche noted similar issues over fiscal-royalty terms, rights to
international arbitration, and ambiguity in BEE regulation and
quantification. Nevertheless, the company was moving forward in
light of $100 million in investment to date and she expected gas
production to begin in 2011. Initially, PetroSA was to take care of
on-shore off-take, but now Forest planned to deal directly with
Eskom. Friedrich also described the SAG's recent unsuccessful oil
block road show, given investors' uncertainty.

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West Africa Oil Rig Service - Build it and They Will Come
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9. (SBU) South African Oil and Gas Alliance Chairman Steve Hrabar
confirmed to Energy Officer and Specialist on February 4 that there
was ambiguity in the oil and gas business environment and all new
exploration had stopped pending greater clarity. Nevertheless, he
espoused a vision of the Cape Town and Western Cape Saldanha
(Septel) ports serving as construction and service hubs for oil rigs
on Africa's west coast, noting that four rigs were currently under
service in Cape Town. Hrabar called for collaboration between the
port authority and private industry in creating more facilities at
the two ports. He specified that Cape Town would provide "wet work"
and a dry dock and Saldanha would target dry fabrication, repair,
and maintenance, building on its past experience in fabricating and
Qand maintenance, building on its past experience in fabricating and
configuring the gas rig jackets for Mossel Bay. Hrabar noted that
Saldanha's facility was under construction with the National Port
Authority providing the land, Ferrostal assuring funding, and
Grinnaker LTA serving as operator. He admitted that the SAG did not
provide as welcoming a fiscal and custom regime as other countries
like Namibia.

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More Clarity in the Downstream
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10. (SBU) In a meeting on February 6, South Africa Petroleum
Industry Association (SAPIA) Director Connel Ngcukana confirmed to
Energy Officer and Specialist that the downstream refined product
market was tight, but adequately provisioned (Reftel). He advocated
good communication and planning between industry, Eskom (now using
greater quantities in diesel fuel in peaking facilities),and the
SAG to assure adequate product to the market. Ngcukana noted that
South Africa had imported one billion liters in 2006 and three
billion liters in 2007. He confirmed that incremental growth would
be provisioned by imports, but he noted that for strategic, security
and beneficiation reasons the SAG supported constructing a new

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refinery to service the downstream market. Ngcukana supported and
deemed achievable the transformation goal of gaining the fuel
product charter BEE target of 25 percent for employment, equity, and
procurement. Chevron/Caltex is one of six refiners (110,000 barrels
per day) and seven retailers in South Africa.


11. (SBU) COMMENT: Unlike the mining sector, there is a healthy U.S.
commercial presence in the oil and gas business in South Africa's
oil patch in and around Cape Town. Unfortunately, upstream oil and
gas players are feeling beaten down by a government which has them
over the barrel. South Africa will find itself more reliant on
imports and hurting its own energy industry and security of supply
unless it adopts a more welcoming investment environment.

BOST