WELL MANAGED OIL AND GAS DEVELOPMENT DEPENDSUPON STRONG GOVERNANCE AS MUCH AS STRONGCONTRACTS. CRITICALLY DISCUSS, WITH EXAMPLES FROMCOUNTRIES, INCLUDING NIGERIA, QATAR, SAUDI ARABIA ,USA OR OTHERS. By: (a) Eleni Zinonos (b) Emilios Frangos (c) Nathan B. Tsormetsri (d) Nina Rapaic (e) Yiannis Philotheou
INTRODUCTION: What is a well managed Oil and Gas development? Effective contracts, with clear clauses. Strong governance, promoting transparency, no corruption. Sustainability and development of local communities and standard of living. Savings for future generations. Correctly investing revenues. Effective risk management. Steady Production pace.
THE IMPORTANCE OF CONTRACTS Set out the primary relationship between the HS and its contractor; Through negotiations the State reaps the benefits of its natural resources; Determination of States revenues and its right to impose health, environmental and other standards to the contractors;
CONTRACTS CONTINUED. Balance between the States and contractors interests, while creating and maintaining a positive investing climate; High possibility of corruption in the oil industry (e.g in the bidding process) because usually negotiations and contract terms are kept private; contracts must be well drafted; Each country will choose the type of contract (Concessions, PSCs, JVs, or SCs) that mostly suits its objectives, socioeconomic characteristics and needs.
5 PRINCIPLES OF GOOD GOVERNANCE 1 Who sets objectives, targets and regulations for the Clarity of goals, roles and sector? How are functions distributed and roles defined? responsibilities How is authority delegated and how are responsibilities defined? 2 How do objectives and regulations contribute to Sustainable development sustainable development? 3 Enablement to carry out the role What does each organisation need to perform its role assigned effectively? How does the government know objectives are being 4 Accountability of decision-making met? and performance How can decision makers be held to account for performance and compliance? 5 Transparency and accuracy of What information should be divulged externally? information
CASE STUDY: CANADA -According to the Government of Canada: It has 14% of proven oil reserves in the world and Canada is the world’s third largest producer of natural gas and second largest exporter.
CASE STUDY CANADA, PT.2 LEGAL FRAMEWORK The O&G industry in Canada works within a complex framework of laws and regulations that govern industry operations such as: Environmental Safety Hiring and personnel Land access Landowner rights Surface and mineral rights Water use
CASE STUDY CANADA, PT.3 REGULATORY FRAMEWORK Federal Regulation: The National Energy Board (NEB) Provincial: oil and gas projects situated within one province are subject to the regulation of that jurisdiction’s energy regulator. Generally, provincial regulators must approve each significant step in the development of an O&G project. The consequences for failure to comply with provincial O&G regulators can include rejections of the project proposal, project termination and production penalties were existing wells are non compliant.
CASE STUDY CANADA, PT.4 A WISE USE OF NATURAL RESOURCES -Export controls - Non-renewable resource revenue Royalties are just one part of the provincial government’s non- renewable resource revenue. In addition to royalties, governments generate oil and gas revenue from land leases and other taxes and fees.
CASE STUDY: INDONESIA Political and Institutional changes led to Pertamina (Indonesian NOC) losing most of its market and political capital. High domestic oil consumption-decreased oil production due to maturity of fields; mismanagement and corruption => losses up to $2bn. Economic governance of oil sector was heavily centralised => unattractive to foreign investors. Revenue management was not transparent; balance sheets were never published, and profits were never revealed. A new law, enacted in 2001, restructured Pertamina, stripping it of its special privileges and monopoly powers => measures to make the company more competitive and transparent.
CASE STUDY INDONESIA, PT.2 Political Reform: increased independence and powers of the Dewan Perwakilan Rakyat (DPR) => parliamentary scrutiny of the executive and parliamentary ability to call the government to account; Social and Press Freedoms: organisations focused on corruption and government probity (e.g Indonesia Corruption Watch, Government Watch, the Indonesian Institute for an Independent Judiciary); Fiscal Transparency and Financial Monitoring: New budget standards and financial management procedures aiming to increase the transparency of government operations; Bank Indonesia, the central bank, has set up a monitoring presence at all state banks and is upgrading its supervisory capacities;
CASE STUDY INDONESIA, PT.3 The Indonesian Bank Restructuring Agency, has been subject to increasing disclosure requirements and external oversight; it is monitored by an Independent Review Committee of four, two of whom were appointed by the World Bank and the IMF. It takes a really long time for a fundamental change to actually take place with regard to governance issues => strong and well drafted contracts could bring a balance to Indonesias weak governance in the sector.
CASE STUDY INDONESIA, PT.4 As PSCs are the main type of contracts used in Indonesia, in order for these contracts to contribute to well-managed oil development, they should include key clauses (States and Contractors take, fiscal regime, cost recovery, accountability etc). Disclosure of key clauses (e.g how revenues are directed in education, health sectors etc) => greater transparency. National laws and regulations are of great importance for the enforcement and implementation of the contracts and for supporting a strong governance => weak enforcement prohibits development and gives room for corruption and mismanagement.
CASE STUDY: NORWAY The Norwegian model is considered by many as one of the most successful governance models for managing Oil & Gas Industries, this is due to the following: A Permanent Oil fund Statoil’s strategic moves. Number 1 investor in Norway is the Government. All information is shared. Clear and Obvious separation of powers. From license award to production in under 3 years.
CASE STUDY: NORWAY, PT.2 Norway has a very inviting environment for foreign investors: (a) They provide the IOC with a seismic test (b) Reduced upfront cost: Special Licence agreement based on work plan rather than bids (Free from political influence) (c) Shared risk as in most cases the government owns big share of the field through Statoil (d) Tax Stability: 78% despite the amount of oil Produced. (e)Norway wants fields developed fast and they will spend money. (f) Rapid deductability of development cost.
CASE STUDY: NORWAY, PT.3 The Norwegian Oil Fund: Probably the most significant factor of success. Only 4% of the incomes are extracted from the fund annually. Transparency: All information is shared as the Norwegian government strongly believes in and actively supports transparency internationally. Environmental & Safety issues: Very Carefully approached by Petroleum Safety Agency by implementing regulations and legislative acts.
CASE STUDY: NORWAY, PT.4 Criticism Norway during the early development of their Petroleum industry decided that they would produce at a steady and medium pace. Something that many consider that they have not done as they may go from licensing to extraction within 3 years. Predictions say that if production continues at the same rate as it does now, Norway’s reserves will run out within the next 10 years. The government of Norway supports that their reserves will last for the following 40 years.
CASE STUDY: RUSSIA The exploration and production of subsoil resources, including oil and gas is based on a licensing regime. Main body of legislation is contained in the Federal Law “On Subsoil 1992” The licensing regime is administered by the Ministry of Natural Resources and Ecology of the Russian Federation and federal agencies under its jurisdiction. Three types of Subsoil licences Exploration licenses Production Licenses Combined licences
CASE STUDY: RUSSIA, PT.2 State Control over Foreign Investments in the development of Major Oil and Gas Deposits Strategic investment law (2008) requires a foreign investor to obtain the prior consent of the Governmental Commission if the foreign investor will acquire control over a strategic company assuming that it fulfills certain requirements . Restrictions Related to Deposits of Federal Significance (licenses on E&P and Combined licences are issued pursuant to a decision by the Russian government based on the results of an auction or tender or upon the discovery of a deposit of federal significance.)
CASE STUDY: RUSSIA, PT.3 State Secrecy of reserves: Under Russian legislation the information with respect to reserves of certain specified mineral resources (including oil and gas) and their production in the Russian Federation as a whole, in any particular Russian region, or with respect to any major deposit (i.e., a deposit with reserves in the amount of more than 60 mln tons of oil or 75 mln m3 of gas) is treated as information of state secrecy.
CASE STUDY: RUSSIA, PT.4 Lack of transparency -Transparency International said in its 2011 annual report that Russias natural gas monopoly Gazprom was one of the most non-transparent oil and gas companies in the world. The Russian Federal Financial Monitoring Service (“Rosfinmonitoring”) has set forth a draft law, introducing amendments to a number of legal acts and aimed at increasing the transparency of currency transactions and at strengthening anti-money laundering measures in Russia.
CASE STUDY: NIGERIA Clarity of Goals, and responsibilities The establishment of a new National Oil and Gas Policy in September 2007 to:A. To govern the operations of the industry.B. To design a detailed regulatory framework to guide the operations of all in the industry.C. To ensure that new policy, regulatory, management, commercial and credible research institutions in the industry are available.
CASE STUDY: NIGERIA, PT.2 Transparency and accuracy of information S. 39 of FRB sets out the basis for savings funds. S. 56 of FRB ensures imprisonment of officers for failing to perform obligations or giving false statements. 3 years minimum jail sentence for contraventions. Sustainable development for the benefit of future generations The establishment of the Fiscal Responsibility Bill (FRB) TO:A. Commit all tiers of Government to fiscal prudence and sound financial management.B. Improve inter-governmental fiscal coordinationC. To secure greater macroeconomic stability.D. For greater transparency and accountability in public finance.
CASE STUDY: NIGERIA, PT.3 Enablement to carry out the role assigned S. 2C of FRB ensures that Council shall cause to be prepared an expenditure and revenue framework setting out:A. Estimates of aggregate revenues for the federation for each financial year based on predetermined commodity reference price adopted.B. Aggregate financial ceiling for the federation for the financial year.C. Aggregate tax expenditure and minimum capital expenditure floor for the financial year.
CASE STUDY: NIGERIA, PT.4 Accountability of decision-making and performance. S. 2of FRB empowers the Fiscal Responsibility Council to: Compel any person or Government institution to disclose information relating to public revenues and expenditure. Fiscal Management Council responsible for:A. Monitoring and enforcement.B. Investigates and forwards violations to Attorney General for prosecution.C. Finance Ministers held liable and subject to punishment.
CONCLUSION In order to have a well managed oil development you need both strong contracts and good governance. Depending on the nature of each country, governance or contracts have a more significant role. In countries where governance is strong and effective, the necessity for strong contracts is very limited. On the other hand though if governance is not present or strong in a country, effective contracts may be required in order to maintain a good relationship between the parties and sustainability of development.
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