South Africa: Karoo Fracking Debate Triggers Legislative Overhaul

Last Updated: 20 November 2013
Article by Matthew Ash

The debate surrounding hydraulic fracturing or fracking of the Karoo's potentially massive shale gas reserves continues to rage. There are strong arguments both for and against harvesting the gas which could potentially alter South Africa's energy and development outlook for many years to come. The issue has also triggered major legislative changes.

Matt Ash, head of premier law firm Norton Rose Fulbright's Sub-Saharan African energy division recently discussed some of the key drivers behind the issue as well as some of the legislative spinoffs.

"South Africa is currently beset by a number of socio-economic challenges such as a lack of infrastructure, high levels of unemployment and a looming energy deficit," says Ash. "In a bid to tackle these issues, government has introduced a number of initiatives including the National Development Plan (NDP) and the Integrated Resources Plan (IRP).

"The aim of the NDP is to eliminate poverty and reduce inequality by 2030 in the main, through dramatically improving and expanding the country's infrastructure. The IRP outlines government's strategy for electricity generation through to 2030 and is premised on a scenario which estimates that South Africa will require a staggering 41 346 MW of new power generating capacity by that time.

"Although a mix of energy sources has already been earmarked for providing this capacity over the coming years, the discovery of shale gas in the Karoo basin has changed this outlook."

Ash explains that it was originally estimated that as much as 485 trillion cubic feet (tcf) of gas lay trapped in the shale formations of the Karoo basin. A June 2013 revision conducted by the US Energy Information Administration reduced the estimate to 390 tcf due to geological factors. Even with the revision this means the Karoo basin could potentially play host to the world's eighth largest reserve which has the potential to provide South Africa with hundreds of years of energy worth trillions of rands.

However, to reach and harvest the gas, the controversial method of fracking would have to be employed.

"Those in favour of fracking believe that the reserves could be the answer to South Africa's energy woes and could create thousands of jobs, which dovetails neatly with both the NDP and IRP. Unsurprisingly, government supports the exploitation of the resource, and has gone so far as including it as a key pillar of the NDP," explains Ash.

Government's resolve to incorporate gas into the country's future energy mix was recently underscored by an announcement made by Energy Minister Dipuo Peters who issued a new determination under the IRP stating that additional base load generation capacity equating to nearly 2700 MW must be procured from natural gas. The determination doesn't state whether this gas will stem from local or cross-border sources but it speaks volumes about government's intent on the matter says Ash.

Much of the debate surrounding the fracking issue stems from the fact that South Africa currently doesn't have any fracking - specific regulations that take into account the particular exigencies and risks posed by fracking. The fact that the current exploration and production rights framework weighs heavily in favour of first movers has also proven a major sticking point.

Given the drawbacks, a moratorium on exploration licensing was imposed in 2011. Following an investigation, the moratorium was lifted and the original exploration applications are now being processed.

The applications will, however, be processed in line with the new regulatory framework which will likely favour South African interests and, according to government, will be robust and enforce best practice.

Ash refers to a number of sweeping legislative changes that have already been proposed such as an amendment to the 'first-in-first-assessed' exploration rights principle which could be replaced by ministerial discretion over who is awarded mining rights. The proposed changes have elicited strong reactions from various quarters.

In addition to an augmented framework, government has also introduced an Infrastructure Development Bill which Ash says addresses some of the key obstacles to shale gas development, in particular a landowner's right to refuse to apply for rezoning.

In a nutshell the Bill, which includes an expropriation clause, is designed to speed up strategic infrastructure delivery by extending state powers for the expropriation of land and shortening the approval time for projects by government authorities. The fact that shale gas development has been identified as a strategic initiative under the NDP is undoubtedly a key driver behind the Bill, notes Ash.

"Under the present framework, a landowner is obliged to give mineral rights holders free and unfettered access to the land without compensation for the unhindered exploration for, and exploitation of mineral resources.

"However, only a landowner can apply for rezoning of property appropriate for the mining activity concerned. The landowner can refuse to rezone on environmental grounds. If the land is not zoned appropriately, the landowner can effectively prevent the mineral rights holder from exercising their rights.

"Should the Bill be passed into law, it will grant statutory powers to a Presidential Infrastructure Co-ordination Commission (PICC) to expropriate land required for development in terms of the NDP.

"The power of the state to expropriate land already exists under separate legislation – but that provides for compensation on a willing buyer, willing seller basis. As long as the seller disputes the value of the land and this remains unresolved by a court, no expropriation can take place.

"The Bill proposes a far-reaching departure from this principle. Instead, the Bill proposes compensation on a fair market value basis, with various mechanisms proposed as to how fair market value is to be determined.

"Importantly, the Bill effectively provides for the state to expropriate at its proposed value while allowing the landowner a right to approach the courts after expropriation has occurred, for a fresh valuation. The law would effectively enable the state to acquire land for purposes of the NDP and would prevent reluctant landowners from stalling the acquisition."

Ash adds that government's commitment to the Bill was highlighted when Economic Development Minister Ebrahim Patel stated that the state will carry on with development even where there is court action and that "the state will be expected to take that risk."

Unsurprisingly the Bill has drawn criticism from various quarters. The Centre for Environmental Rights has, besides other concerns, complained that the Bill does not contain a single reference to sustainable development despite numerous commitments made by government to engage in such projects.

The Ludwig Von Mises Institute of South Africa has lodged objections to the Bill. Amongst numerous concerns noted, the clause regarding expropriation was questioned. The institute recommended that the Bill be scrapped.

In a recent presentation to the South African National Energy Association, National Energy Regulator of South Africa (NERSA) member Dr Rod Crompton said that the Bill showed that policy - makers are aware of the various infrastructure development issues facing South Africa but that the Bill "was poorly drafted and did not focus on the right issues."

Ash agrees that the Bill draft isn't perfect but the drafting can be changed and the purpose should be viewed in the context in which it is intended, specifically to fast-track development and improve the country's long term infrastructure outlook, including major energy-related projects.

"Those against the Bill should also consider the fact that the issue is two-sided. Some of Government's previous attempts to expropriate land needed for development have been thwarted by owners.

"It should also come as some comfort that various checks and balances have been built into the legislation. Aspects such as the current use of the land, the history of its use, the history of its acquisition by the current owner and any investment in the property would also be taken into consideration when expropriating.

"Overall, in my view, the Bill is fairly positive in that it will facilitate fundamentally important projects such as that which the Karoo shale gas presents without ousting the oversight of the courts.

"That said it cannot be denied that there are aspects of the Bill which need to be addressed. For instance, the fact that the Bill states that compensation only becomes payable when the amount has been agreed with the state or decided by the courts gives cause for concern. It can cost a lot of money and take years for such matters to be settled which puts great pressure on an owner to accept an expropriation sum.

"Unfortunately the fact remains that South Africa is grappling with major socio-economic challenges which need to be addressed. The country needs to fast-track infrastructural and energy projects. The Bill and augmented mining framework is government's answer to these issues.

"We can but hope that the objections raised will be constructive and will be dealt with appropriately as matters play out. Should the concerns be addressed and the expropriation process be followed in a fair and transparent fashion, both government and those subject to expropriation should be able to reach amicable outcomes that will facilitate the country's growth."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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