Gas Amendment Bill: public hearings

Meeting report

Business Unity South Africa (BUSA) submission
Ms Jarredine Morris, BUSA Manager: Energy and Environment Policy, said that BUSA had already engaged in a detailed analysis of the Bill in the National Economic Development and Labour Council (NEDLAC) in 2018, and those inputs had been shared with the Committee. BUSA trusted that the NEDLAC report from that engagement had been shared with the Committee. Hence, the submission would focus on key principles around gas in the economy.

BUSA believed that energy security was second only to the rollout of vaccinations in its importance for the country’s efforts to rebuild the economy. Hence, energy policy around electricity generation must create a framework to ensure that South Africa has the fastest rate of additional capacity generation at the lowest cost. Energy planning should, where possible, also contribute to the decarbonisation of the energy grid. Any unnecessarily onerous, costly, or time consuming requirements should be removed to ensure that electricity generation technology is deployed as soon as possible. However, necessary processes and authorisations should not be circumvented to ensure the fair and transparent procurement of power. Hence, processes must be streamlined so as to recognise the very real energy crisis in the country.

Decarbonisation
BUSA believed that natural gas as a transition fuel would be crucial in the journey towards South Africa’s decarbonisation. Natural gas would initially grow as an enabler to the integration of wind and solar energy into the power system, but would then need to be gradually replaced by other technologies which were still nascent in their development to reach net-zero emissions. This must be done by 2025, in line with the nationally determined contribution that was recently submitted and which the Paris Agreement followed.

Beyond Gas-to-power
Natural gas had applications beyond electricity generation, including chemical production, and in the textiles and mining industries. Currently the top ten industry users contributed more than R150 billion in turnover per annum and employed more than 46 000 people. There was a growing demand for natural gas for industrial use which exceeded its current supply. An enabling legislative framework to facilitate additional supply is key and urgent. As more developed countries, multi-lateral development banks, and other sources of capital come under increasing pressure to halt funding for all fossil fuels, the window of opportunity for this transition was closing.

Gas supply and demand risk dynamics
There had been limited additional molecule availability since 2016, with the Pande and Temane volumes in Mozambique to decline from 1 January 2025 at approximately 10-15% per annum. The outcome and certainty of current risk mitigation strategies for natural gas supply from Mozambique put the certainty for supply of South Africa’s gas needs at risk. The supply of methane-rich gas would decline, which would particularly expose industries in KwaZulu-Natal.

LNG bridging
There was extreme regulatory complexity for liquified natural gas (LNG) infrastructure development as it involved multi-lateral corporation between various departments, such as the Department of Public Enterprises (DPE), Department of Mineral Resources and Energy (DMRE), Department of Forestry, Fisheries and the Environment (DFFE), Department of Trade, Industry and Competition (DTIC), National Treasury, and Department of Transport (DoT). The declining energy supply economics for industry in South Africa, with a high power cost, the supply risk from the current electricity supply, and a declining refinery capacity put South Africa’s economic growth and stability at risk.

BUSA had engaged with DMRE, and hoped to engage further to explore an interim solution for the supply and demand dynamics. BUSA proposed the implementation of a short-to-medium term LNG bridging solution in the ports while government developed the infrastructure provided for in the Bill. Further engagement was needed on this solution, and policy and regulatory misalignment was an enormous challenge which had to be overcome to facilitate the solution (see submission).

Onshore Petroleum Association of South Africa (ONPASA) submission
Mr Francois Joubert, Legal counsel for ONPASA, stated that the South African oil and gas industry was still developing and required local and foreign capital investment for its success. Most mining projects, developmental oil and gas projects were capital intensive and lacked any return on investment for some time after investment, which made investment risky. Hence, certainty, particularly from a regulatory perspective, was needed.

ONPASA hoped to contribute to the creation of a stable and attractive regulatory framework to attract investment into South Africa. Most of ONPASA’s comments applied to an adjusting of the definitions in the Bill, as well as concerns about licensing, tariffs and maximum prices.

The proposed definition of gas in section 1 of the Bill sought to regulate all hydrocarbon gases if they were transported by pipeline or not. This definition was very wide, and may cause uncertainty as it did not distinguish between gas produced and regulated under the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA). Hence, the definition of gas should be amended to explicitly exclude gas that is regulated under the MPRDA. Another overarching concern was double regulation for upstream activities under the MPRDA and the Bill. ONPASA believed that there should be one system which regulated upstream production and exploration and not two systems.

The proposed definition of distribution in section 1 sought to expand the definition of distribution so that it was no longer limited to the distribution of bulk gas supplies and the transportation thereof by pipelines. This proposed definition would apply to any distribution or transportation of gas with a general operating pressure of more than two bar gauge and less than 15 bar gauge by any means. This may create uncertainty as it did not distinguish between gas produced and regulated under the MPRDA, and hence the definition should be amended. The same applied to the proposed definition of transmission in section 1 of the Bill.

The Bill proposed changing the definition of storage from the holding of gas as a service to the holding of gas in fixed infrastructure. Clarity was needed as to what constituted fixed infrastructure, as compressed natural gas was transported from the point of compression to the supply point via mobile storage units. Further, this definition should be amended to explicitly exclude gas regulated under the MPRDA.

The proposed definition of trading in section 1 of the Bill applied to transmission or distribution companies that sold gas and not to any person who purchased and sold gas, as per the current definition in the Gas Act 48 of 2001. This proposed definition would result in a lot more people having to apply for licences which would lead to an increase in the administrative burden on the National Energy Regulator of South Africa (NERSA). Hence, this definition should apply to the purchase and sale of gas, as it currently did. Further, there should be certainty as to what was regulated under the Gas Act and what was regulated under the MPRDA.

Given the potential economic impact of the definition of eligible customer, the qualifying threshold for an eligible customer should only be determined or amended through a prescribed consultative process. Hence, the word “determined” in the proposed definition should be replaced with the word “as prescribed”.

According to section 15B(1) of the Bill, the proposed number of people obliged to register with NERSA was increased, which would result in increased exemptions from applying for and holding a licence. This provision did not refer to gas produced and regulated under the MPRDA, hence it should be amended to exclude gas regulated under the MPRDA. Further, no time periods were prescribed.

The Bill proposed to repeal the provision in the Gas Act on the disposal of gas assets controlled by the state, but it did not contain an equivalent provision, which meant that a state-controlled entity may sell any of its shares or assets covered by a licence that it acquired pursuant to section 19(2) to any privately controlled entity without an open and transparent bidding procedure. This could lead to corruption. Hence, section 20 of the Gas Act should not be repealed.

The Bill proposed including a separate provision dealing with geographic exclusivity in section 22A which would expand the provision to include distributors and traders of gas. This meant that any distributor and trader of gas granted exclusivity by NERSA had to supply gas to any person within their exclusive geographic area on request, provided the gas could be delivered in an economically viable manner. This proposed provision was concerning as it would prevent distributors and gas traders from trading freely across the country and will lead to anti-competitive behaviors. There should be a similar approach in the gas industry as there was in the petroleum industry. Hence, section 22A should be removed.

The proposed removal of a minimum validity period of 25 years in section 23(1) may lead to uncertainty and hence should be amended to specify the minimum term. Section 23(4) of the Bill did not cater for instances where a licensee wished to assign, cede, or transfer its licence to a related entity. This should be amended. The proposed amendment of s27 sought to empower NERSA to revoke a licence without having to apply to the High Court. The current position under the Gas Act should be retained such that NERSA may only revoke a licence on application to the High Court. The section 22B proposed amendment sought to empower NERSA to regulate all tariffs and maximum prices. ONPASA was concerned if NERSA had the capacity to differentiate how different projects and entities would operate and believed that the amendment restricted the ability of entities to trade freely at competitive prices. The current position under section 4(h) of the Gas Act should therefore be retained such that NERSA may monitor and approve tariffs and only regulate where necessary (see submission).

South African Oil & Gas Alliance (SAOGA) submission
Mr Adrian Strydom, SAOGA Executive Director/CEO, said that the Bill had to be understood in the context of section 24 of the Constitution which imposed developmental and environmental objectives. SAOGA was currently engaged in some of the master-planning of the oceans economy, and had important lessons learnt in that context for use in the gas industry. In the procurement context, it was important to look at the risks and the opportunity to add value to the gas economy when considering the Bill.

Mr Brent Petersen, Attorney at BPP Law, presented the SAOGA submission on individual sections in the Bill. It proposed that the definition of department should be retained. In section 4(d) there should not be an overlap of the discretionary powers of the Minister, hence, section 4(d) should be read to mean consultation with the Act and not the Minister. SAOGA disagreed with the deletion of section 16(c)(2) because it would omit specific information.

SAOGA noted that section 22A(2) provided for additional principles which the Minister may impose for applications dealing with exclusivity, but proposed that clarity was required on the scope of those principles as section 4(d) specifically stated that the Minister may prescribe principles. No context was given as to what constituted those principles, hence it would be appropriate for those principles to be specifically addressed and listed so licensees knew under which circumstances the Minister may exercise such unfettered discretion.

SAOGA wanted to ensure that section 22B(1) and (2) confirmed the manner of how NERSA had to determine the tariff and price methodology upfront. It was only appropriate that the Minister’s discretion to impose additional principles be clarified to ensure that the objectives of the Act were met. This would ensure that processes were not delayed and there was growth within the now-nascent gas industry.

Mr Mzi Tyhokolo, SLG (Pty) Ltd Group CEO, said that the amended section 21 sought to broaden the powers of NERSA, with the language of the Bill granting authority to NERSA to determine any licence conditions within the framework. Section 21(1)(g) of the Bill introduced confidentiality concerns as NERSA was given power to demand contractual information at will. Section 21(1)(j) of the Bill created an environment of competing provisions, as NERSA, under s21(1)(p) of the Gas Act already had powers to set maximum prices for the gas industry. The amendment sought to enable NERSA to determine if prices were unreasonable or excessive, which were undefined and subjective. This would result in conflict and confusion, because it did not seem possible for a price to be deemed unreasonable if it was below the maximum price set. This amended provision should thus be removed as it did not serve the market.

Section 21(1)(k) of the Bill allowed NERSA to be involved in dictating the terms with which a licencee should contract or sub-contract. This was problematic as NERSA did not have the capability to do this, and this power should be left to the licencee. Section 21(1)(p) would cause confusion as it did not explicitly indicate if NERSA was empowered to set or rather approve the maximum gas prices. This seemed, albeit inappropriately, to align with sections 34 and 31 of the Bill which sought to give NERSA carte blanche powers. The Committee had to reassess this as the lived experience of a regulator with unfettered discretion did not serve the gas market in any positive manner.

Mr Craig Morkel, Chairperson: SAOGA Gas Economy Leadership Group, said that the Bill regressed from some of the good work done in the 2013 Gas Amendment Bill. There were no regulations for hydrogen, which could lead to challenges for licensing. There was a need to consider an energy charter as much of the energy sector could be dealt with in the private sector without the involvement of the public sector; therefore the Preferential Policy Procurement Framework Act would not apply, which would result in a lack of socio-economic grants and development. There were multiple masterplans in place, which resulted in the question of who would be tasked with coordinating the implementation of these plans effectively. How LNG imports interacted with indigenous gas also had to be considered.

Mr Morkel said that the opportunity existed for procurement. The question had to be asked if natural gas infrastructure would block out supply production of hydrogen and other energy sources.

In the procurement context, it had to be asked if the procurement of the three 1 000 megawatts of power would be completed and if certain facilities would apply the lessons learnt from prior issues in production and procurement. For example, the LNG imports came with the risks of commodity price and exchange rate fluctuations, and it was thus necessary for the relevant contracts to mitigate those risks. Questions had to be asked if preference would be given to foreign interests, or if economic development requirements would be watered down to insignificance, as in previous programmes. There were also questions if the gas to power programme was vulnerable to litigation.

Mr Morkel urged the Committee to consider the SAOGA written submission when deliberating, which was much more substantive than their oral submission.

Sasol submission
Mr Rudi Hiestermann, Sasol Manager: Pricing and Regulation, emphasised what others had mentioned about the importance of gas as a bridging fuel. There were very large industrial bases across the country which were reliant on gas, and the Bill was important to facilitate further involvement in the gas industry to replace the depleting sources in Mozambique.

The operation of gas reticulation seemed, as defined in the Bill, to be reserved as a service provided by municipalities. Municipalities did not currently have any skills to provide this kind of service, and as such this reservation would undermine the facilities and entities which had developed reticulation capacities. Sasol thus recommended that the definition in section 1(zC) be amended so that the regulation of reticulation was a municipal competency with the provision of the service open to entities which had the capacity to operate as such.

Mr JP Meintjes, Sasol Vice President: Legal Energy Business, said that in the Gas Act the production of gas was defined in a manner which included the synthetic production of gas as well as the upstream production of other normal gases. In the proposed amended definition there was a requirement for producers and importers of gas to register with NERSA. However, the licensing and regulation of the production of gas did not fall within the ambit of the Gas Act and remained within the MPRDA ambit. The amended definition of production would not expressly include the production of synthetic gas.

The amendment to the definition of trading from the purchasing and sale of gas to the sale of gas to certain entities has the consequence that there would be a double regulation. This is because the gas producer, if from a manufactured or upstream source, which sold that gas would be engaging in trading and would be required to obtain a trading licence from NERSA in addition to the licences and concessions already required under the MPRDA. Moreover, as a trading licensee, such producers would fall within the ambit of the price regulation under the Bill. There would thus be more onerous compliance measures placed on such producers.

To address this concern and to distinguish the regulation of upstream production activities and downstream trading activities, Sasol recommended that the definition should include the phrase “purchase and sale of gas”.

The proposed section 22B provided for the regulation of tariffs and prices by NERSA. The Bill also intended to expand the jurisdiction of NERSA to include the regulation of distribution tariffs, which would not bring about any major implications. On price regulation, as the compensation for the sale of the gas, section 21(1)(p) and its amended version maintained the requirement that inadequate competition had to exist in the market for NERSA to establish jurisdiction to set maximum prices. However, looking at section 22B, this condition for jurisdiction was absent, which would result in ambiguity. Sasol recommended that a cross reference to section 21(1)(p) or a reference to the requirement of inadequate competition be included in section 22B.

Commodity prices such as gas were difficult to successfully regulate as regulation could not foresee market dynamics, provide flexibility, cater for multiple sources of supply, or accurately value for specific applications. Hence, moving away from the current approach and obliging NERSA to regulate all tariffs at all prices would result in a one size fits all approach which may result in a lack of consideration of various factors. Hence, section 22B should provide for the approval of maximum gas prices by NERSA.

Sasol welcomed that the Bill explicitly mentioned the gas masterplan in section 28A, but it was concerning that time constraints for the completion or frequency of these masterplans were not included. Hence, there should be a requirement that the first masterplan be published within a certain time after the promulgation of the Gas Amendment Act, as well as further masterplans thereafter. The process introduced in section 28B was a positive move to support the implementation of the gas masterplan.

However, it was concerning that provision currently created a two-step approval process: a ministerial determination and obtaining the correct licences or approvals from NERSA, which resulted in uncertainty on the jurisdiction and decision-making powers between the Minister and NERSA, as well as procedural delays. The requirement of licencing to be exercised by NERSA here may negatively impact NERSA’s independence as required by the Gas Act. Hence, the guidance provided by the Minister should be channelled through the powers to make regulations provided in section 34. This relationship should be carefully considered (see submission).

Congress of South African Trade Unions (COSATU) submission
Mr Tony Ehrenreich, COSATU Western Cape Secretary, said the Bill was welcomed as it was progressive and long overdue. Gas was a key potential economic sector and it had the potential to create jobs, attract significant domestic and international investment, and contribute towards infrastructure development. The Bill addressed gaps in the Gas Act, and ensure full compliance with government’s BBBEE legislative requirements. Further, the Bill empowered NERSA to play a critical role on tariffs and price setting. NERSA was also required to operate transparently.

The Bill required the Minister to develop and adopt an integrated gas development plan. This would help ensure that this plan was indeed implemented. Further, the Bill compelled government to hold the gas industry accountable. The Bill provides for stiff penalties to ensure that breaches of compliance were dealt with adequately. This will help to protect workers, the community and the environment.

COSATU pledged to support the speedy passage of the Bill, as it would sufficiently enhance the gas industry and play a significant role in boosting the economy.

The Chairperson asked Members if they had any questions of clarity on the submissions. There were none. He reminded everyone that the Committee had not yet engaged on what each Member’s attitudes were towards the Bill, and at the current stage the Committee was only dealing with what the DMRE had proposed. Thus, the Committee may arrive at a point where it rejected some of the proposals, or all of the amendments, or add its own proposals. He thanked the presenters for their submissions. He said that the Committee was not done with public hearings, and would be starting early in 2022 in the Eastern Cape and continue to the Western Cape, the Northern Cape, and finally the Free State.

The Committee minutes for 31 August; 1 September 2021; 16 19, 23, 30 November 2021 were adopted. The Committee will meet on 7 December 2021.

The meeting was adjourned.