VZCZCXRO3681
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0351/01 0521309
ZNR UUUUU ZZH
R 211309Z FEB 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3534
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0747
RUEHRL/AMEMBASSY BERLIN 0604
RUEHBY/AMEMBASSY CANBERRA 0623
RUEHLO/AMEMBASSY LONDON 1434
RUEHMO/AMEMBASSY MOSCOW 0747
RUEHOT/AMEMBASSY OTTAWA 0576
RUEHFR/AMEMBASSY PARIS 1286

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. 
 
--------------------------------------------- ------- 
Pioneer Hangs in There - Gains Limited Accommodation 
--------------------------------------------- ------- 
 
¶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 
 
PRETORIA 00000351  002 OF 003 
 
 
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. 
 
--------------------------------------------- ---- 
Forest Exploration Wants to Develop Gas Resources 
--------------------------------------------- ---- 
 
¶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. 
 
 --------------------------------------------- --------- 
West Africa Oil Rig Service - Build it and They Will Come 
 --------------------------------------------- --------- 
 
¶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. 
 
------------------------------ 
More Clarity in the Downstream 
------------------------------ 
 
¶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 
 
PRETORIA 00000351  003 OF 003 
 
 
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