Cablegate: U.S. Oil Firm Forest's Travails

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UNCLAS SECTION 01 OF 02 PRETORIA 002400

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DOC FOR ITA/DIEMOND

E.O. 12958: N/A
TAGS: ENRG EPET EMIN EINV SENV SF
SUBJECT: U.S. OIL FIRM FOREST'S TRAVAILS

REF: Pretoria 351

This message is sensitive but unclassified, not for Internet
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1. (SBU) SUMMARY: U.S. firm Forest Oil Company's local presence -
Forest Exploration International - is struggling to move its
production license application out of a three-year regulatory limbo.
Forest is frustrated with bureaucratic slowness and/or
incompetence. Forest believes that it can produce significant
off-shore gas off the Western Cape, which could help resolve South
Africa's power crisis. Forest is considering posting an official to
Cape Town to establish its local presence and promote its project.
End Summary.

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Forest Sells Big Plans for Gas
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2. (SBU) Forest Exploration International Director John Langhus
told Charge d'Affaires and Acting Economic Counselor in an October
14 meeting that Forest was disappointed with slow progress on its
application for production licenses on the offshore Ibhubesi gas
field, off the Western Cape in South Africa. Langhus said Forest
had been mired in application regulatory limbo for three years and
has had a completed application for a "new order" (under current
law) production license for two blocks stuck with the state
Petroleum Association of South Africa (PASA) for over one year.
Langhus criticized PASA as an obstacle, noting that their
application still would still need to proceed to the Department of
Minerals and Energy (DME). Langhus said that PASA was dealing with
only five oil/gas applications, while the DME was dealing with
hundreds of mineral applications with far greater results. He
suggested that bureaucratic slowness at PASA was caused by
incompetence or bad faith.

3. (SBU) Langhus said Forest was considering a $2 billion, 20-year
investment in drilling and development, including 99 wells and four
high-tech production platforms. He said Forest had production and
exploration license applications for two adjacent off-shore blocks
lodged with PASA. Langus said Forest could land gas 36-42 months
after the granting of a production license by the SAG, aiming at 225
million cubic feet gas per day. Langhus was frustrated that gas
regulators did not appreciate the significance of new gas
development to help resolve South Africa's power crisis. He said
Forest was considering a range of options from gas-fired independent
power producers to increasingly ambitious gas pipelines to Saldanha,
Cape Town, Mossel Bay, and Coega. Langhus noted that gas-fired
plants could be developed rather quickly and could replace expensive
use of kerosene and diesel at the Atlantis plant north of Cape Town.
He admitted that Forest should have done a better job in explaining
and promoting its plans with local and national government officials
and to that effect should have had a Forest official placed on the
ground. Langhus said he was considering posting himself to Cape
Town, depending on results with the SAG. If he was NOT successful
in obtaining progress in securing the production license during this
visit, he would come to Cape Town. If he was successful, he would
Qvisit, he would come to Cape Town. If he was successful, he would
not come.

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Open For Business - or Not?
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4. (SBU) Petroleum Agency SA (PASA) reports directly to the
Minister of Minerals and Energy and is the official agency
responsible for the promotion and regulation of South Africa's
petroleum and natural gas (including coal-bed methane) resources.
PASA issues exploration and production licenses with the Minister's
approval, regulates and monitors both off-shore and on-shore
exploration and production activities, and is the custodian of the
national exploration and production database for petroleum
resources. According to an energy consultant, if PASA recommends
the granting of a license, the Minister is obliged to rubber-stamp
its approval within a certain time limit (in theory). This does not
happen in practice, but companies have so far been reluctant to
aggressively push or to take the Minister to court.

PRETORIA 00002400 002 OF 002

5. (SBU) COMMENT: Mission has been in regular contact with Forest
Oil Corporation and other foreign oil and gas companies over the
years and has heard the frustrating anti-business or "not open for
business" stance of PASA and DME. Forest's desire to jump-start gas
production and utilization would be a good news story in
hydrocarbon-poor South Africa, especially as the project could help
resolve the power crisis. Forest has established a BEE partner,
including well-placed businessman Tokyo Sexwale, and uses mining
expert Peter Leon as their attorney. It is remarkable that even
with these high-powered connections, their production and
exploration licenses are still stuck. Forest admits that it needs
to be present on the ground to better establish its presence and
promote its project.

6. (SBU) COMMENT CONTINUED: Forest's experience contrasts
dramatically with Westinghouse which established a local office,
acquired a local company, joined the American Chamber, and assumed a
position on its board. Sixteen months later, Westinghouse has
secured a major presence in South Africa and is on the verge of
winning a multi-billion dollar contract. The lesson learned is that
U.S. companies cannot do serious business in South Africa without a
substantial local presence.

LALIME

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