STUART THEOBALD: Don’t let petroleum bill prove that resource nationalism is a curse

Hopes of substantial economic dividends from a new oil and gas industry are being vanquished

This column was first published in Business Day 

SA is firmly embracing resource nationalism. As the country dives into this uncertain policy approach, hopes of substantial economic dividends from a new oil and gas industry are being vanquished.

The new Upstream Petroleum Resources Development Bill, published on Christmas eve, is the latest and clearest step towards resource nationalism in SA. The bill calls for a 20% free equity interest in all gas and oil exploration and production for the state, via PetroSA. The parastatal will have full voting rights attached to the 20% (known as a “carried interest”), which will presumably mean it will have board seats too. It must also have an operating agreement with the operator of the asset.

This entrenches resource nationalism further after the 2018 Mining Charter, which remains mired in litigation.

The bill fits the direction of evolution of wider African resources policy. The disastrous postcolonial statist model of resource development gave way to the Washington Consensus private sector-led model in the 1980s.

However, driven by domestic concerns that multinationals were getting rich in Africa amid a sea of poverty, a third way has been emerging over the past decade. It introduces the hand of the state to guide the private sector to ensure maximum domestic revenue and development spillovers into the domestic economy from resource extraction.

Resource nationalism of this sort has not yet been properly tested anywhere. Similar laws have been implemented in several African countries in the past few years, including Tanzania, the Democratic Republic of the Congo, Mali and Zambia. In most of these there has been sharply negative consequences for mining investment, and implementation has often been delayed or fudged.

These policy regimes have not yet reached a steady state in which the consequences of the approach can be assessed.

Botswana is often cited as an example of longer-term resource nationalism because of the joint venture between its government and De Beers in Debswana. But this single example was created in a different era and the government has been a strongly supportive partner in it.

As oil and gas is a sunrise industry for SA, while it clearly needs new resource opportunities, the stakes are high. Apart from the economic impact of the development of the industry itself, gas has the potential to solve some of SA’s energy challenges as part of the energy mix alongside renewable energy production.

A major offshore gas discovery in 2019 by French producer Total, and shale gas in the Karoo, indicate the potential for a big new gas industry. The SA Oil & Gas Alliance has estimated that the resource discovered by Total could generate R1-trillion of economic activity over the next 20 years.

But the initial bill might be far from what eventually finds its way into law. Minerals policy development in SA has been following a predictable pattern, one that seems undisturbed by Cyril Ramaphosa’s presidency, despite his promises to prioritise certainty. An extreme policy is initially published and then, after vociferous reaction, some middle ground is found. That has been the approach with all iterations of the Mining Charter, as well as the decade-plus of draft amendments to the Mining and Petroleum Resources Development Act.

Policy takes far longer to develop than it should, leading to considerable delays to investment by businesses. SA has dramatically lagged the investment rates of other resource-intensive economies such as Australia, Canada and Brazil over the past decade.

Independent regulators

The carried interest provision of the bill is the most obvious problem. When the government has the power to simply tax an extra 20% of profits, why should it want to own 20% as well? The answer, from a resource nationalist perspective, is that the government’s stake can be used to direct companies to serve the national interest. That is obviously a red flag for private sector investors. Having a shareholder with board seats alongside you whose interests are clearly at odds with profit maximisation introduces considerable uncertainty, while political interests find their way to the board table.

It also means the government faces conflicts as regulator, owner and operator. The resource industry needs clear and effective enforcement of environmental and safety standards, which require independent and tough regulators. While one can imagine a scenario in which the government is able to manage all these conflicts, given the recent history of state-owned enterprises in SA, including PetroSA, confidence is low.

The carried interest proposal should be abandoned. It will not achieve any outcome for the government that can’t better be done through effective regulation and taxes. It merely creates unacceptable risks for the private sector and introduces conflicts for government.

The oil and natural gas industry provides an obvious opportunity to add positive economic momentum while it is desperately needed. The bill is now in a consultation process, providing an opportunity for Ramaphosa to demonstrate in the next draft that he is listening to investors’ concerns.

  • Theobald is chairman at Intellidex