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Institutional Frameworks and Contract Structure
The document discusses the oil sector's institutional structure and contract incentives, highlighting key roles and accountability for entities like Pertamina and SKK Migas, along with the associated risks and benefits of state-owned enterprises. It outlines various petroleum agreement types and fiscal relations, emphasizing the need for checks and balances within the regulatory framework. Additionally, it presents different country models, including Norway, Malaysia, and Brazil, to illustrate varying strategies in managing national oil companies and governance structures.
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Institutional Frameworks and Contract Structure
- 1. Patrick Heller Notes formeeting with CSOs Jakarta, October 2015
- 2. Outline A. Oil sectorinstitutional structure – key questions B. Contract structure and incentives
- 3. A. Oil-sector institutionalstructure – Key questions 1. What are the appropriate roles for Pertamina, SKK Migas, Ministries and other institutions? 2. Who shall be responsible for overseeing compliance by oil companies (including Pertamina) with rules and regulations? 3. What mechanisms are in place to ensure public accountability of all of these institutions?
- 4. Investing in empoweringSOE can confer real advantages • Development of national skills • Long-term economic control and financial returns • More effective state control over the pace and development of the industry • Stimulator of local content and positive economic spillovers
- 5. But guaranteeing amajor role for SOE also confers risks Weak Capacity Lack of Market or Public Checks Lack of Access to Capital Conflicting Incentives Political Interference Weak Management and Oversight a. Inefficient Project Development and Revenue Collection b. Unaccountable management of Public Revenues c. Poor Relationships with Citizens
- 6. Inefficient project developmentand revenue collection NOCs IOCs Majors Average revenue per employee, 2004 NOCs $962,000 IOCs $1.8 million Source, Victor 2007 Number of Employees Revenue/Employee($1,000)
- 7. Core Principles: TheChatham House Principles 1 Clarity of goals, roles and responsibilities 2 Sustainable development for the benefit of future generations 3 Enablement to carry out the role assigned 4 Accountability of decision-making and performance 5 Transparency and accuracy of information Source: Chatham House, 2005
- 8. 1. Definition ofroles Policy Monitoring and Regulation Commercial Operations National Development
- 9. Archetype 1: Norway Policy Monitoring andRegulation Commercial Operations National Development
- 10. Archetype 2: Malaysia Policy Commercial Operations Monitoring andRegulation National Development
- 11. A New Hybrid:Brazil Traditional zones (post 1997) Policy Monitoring and Regulation Commercial Operations (Petrobras and other companies compete) National Development (Petrobras retains some)
- 12. A New Hybrid:Brazil Deepwater ―pre-salt‖ areas Policy Monitoring and Regulation Commercial Operations (Petrobras = monopoly operator) National Development (Petrobras retains some) PPSA
- 13. Brazil’s PPSA: anew non-operating NOC • Created by 2010 legislation • Purpose: to manage PSCs and petroleum commercialization contracts in off-shore ―pre- salt‖ – Representing the state in contractor groups— chairs the operating committees – Evaluating E&P plans and enforcing contracts – Monitoring/auditing costs – Sells state share of oil and gas from PSCs • Under tutelage of Ministry of Mines and Energy
- 14. ―Exporting the NorwegianModel‖ Low Political Competition High Political Competition High Institutional Capacity Quadrant I -Consolidate functions initially -Consider separating functions as becomes more pluralistic Example: MALAYSIA Quadrant II -Separate functions Examples: NORWAY, BRAZIL Low Institutional Capacity Quadrant III -Consolidate functions Example: ANGOLA Quadrant IV -Develop technical and institutional capacity Example: NIGERIA
- 15. Different mandates forNOC Commercial Regulatory Quasi-Fiscal Pro's Extensive mandate for SOC Cons • More influence on decisions • Greater access to information (?) • Skills development • Technology transfer • Greater revenues(?) • Less dependence on int’l co’s • Other sources of revenue likely smaller • Potential liabilities • Significant risk • High financial risk • Less efficient than private sector • Neglect of other potentially higher-benefit sectors • Concentration of expertise • More capacity than government agencies • Conflict of interest • More capacity to deliver than the government • Employment and skills • Gains popular support • “State within a state” – infrastructure and other activities • No focus
- 16. 2. Rules onhow NOCs access projects Access rule Example(s) Pros Cons NOC has monopoly over all E&P Saudi Arabia, Mexico (up to 2013) Total national control Disincentives to investment, NOC performance NOC is “concessionaire,” can choose its partners Angola, Malaysia Guaranteed NOC leadership Conflict of interest, some disincentives to performance/ investment NOC has guaranteed stake/role, another body picks partners Brazil pre-salt (ANP) Guaranteed NOC role, with checks and balances Can limit investment NOC competes/ negotiates, but with privileged position Kazakhstan Some performance incentive, still empowers NOC Performance incentive is limited Full competition Norway, Colombia Maximum quality of operators, strong incentives for NOC Could hurt NOC’s development
- 17. Institutional reform inMexico 2,000 2,500 3,000 3,500 4,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Thousandbarrelsperday Mexico Oil Production 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Billionbarrels Mexico Proved Oil Reserves Source: BP Statistical Review
- 18. Institutional reform inMexico Before 2013: • Institutional structure: Pemex as operator and regulator • Access to projects: Pemex monopoly After 2013: • Institutional structure: Regulation by National Hydrocarbons Commission, Pemex role reduced to commercial • Access to projects: Pemex privileged access in ―Round 0,‖ competition for subsequent rounds
- 19. 3. Fiscal relationsbetween SOE and the State All revenues to consolidated fund/special funds, NOC to receive allocation from parliament NOC can retain a predefined part of revenues from the petroleum sector NOC retains all revenues from production share/equity and pays taxes and dividends to the state Explanation Degree of State control 1 2 3 High Low • All revenues will be transferred to the consolidated fund • NOC present her budget and get budget approval before receiving funding • Part of petroleum revenues that can be retained are set by law • All revenues in excess are transferred to the consolidated fund • NOC operated as a 'normal' commercial entity with the state as majority (or sole) shareholder • NOC pays royalties, taxes and dividends to the state
- 21. 4. No matterthe institutional model, checks and balances on regulatory agencies and NOCs are critical • Anti-corruption rules for leadership and staff • Strong performance benchmarks • Consistent public reporting • Technocratic and independent boards • Thorough audits by independent auditors • Rigorous oversight by a well- informed parliament
- 22. B. Contract structureand incentives “As far as possible, terms should be written into legislation that can be more clearly scrutinized; any remaining concessions which depart from standard legislated terms should be submitted to and approved by the legislature. “
- 23. Types of Petroleumand Mineral Agreements Agreement Type Key Features Examples Concession (Royalty/Tax) Company owns 100% of the produced resource UK, US, Colombia, Brazil Production Sharing Produced resource is split among government and company, company gets entitlement to recover costs plus some share of profit Indonesia, Azerbaijan, Angola Service Contract Government retains ownership, companies are paid a fee Iran, Iraq, Mexico, Bolivia
- 24. Revenue from Sales Royalty:% of Gross Gross Revenue to Company Production Costs Profits Profit Tax After-Tax Profit Key Green = State Share Pink = Contractor Take-Home A B C D Concessions: Financial Flows
- 25. Concessions: Key Issues SubjectConcession Features Direction of Payments Contractor pays government Distinguishing Government Revenue Streams Royalties and Income Taxes Other Possible Revenue Streams Bonus, Dividends from State Equity, Dividend Withholding Tax, Windfall Profits Tax, Fees Key Issues in System Design • Setting appropriate royalty • Tax rates and rules on deductions • Providing some measure of progressivity Advantages Simplicity Disadvantages No built-in progressivity, alignment of incentives
- 26. Total Oil Produced Royalty:10 to 20% After-Royalty Net : 50% Cost Oil Profit Oil Sales by Sonangol* Sales by Contractor Group Profit Tax 50% After-Tax Profit Key Green = State/Sonangol Share Pink = Contractor Take-Home * Profit Oil Split between Sonangol and Contractor varies by contract. Sonangol retains 10% of its revenues, reverts rest to Treasury. A B C D E PSA Financial Flows: Angola
- 27. PSA Examples: Profit-oilsplit Cumulative Production Profit-oil split < 350 mb 20% state / 80% contractor 351 – 750 mb 35% state / 65% contractor 751 – 1000 mb 45% state / 55% contractor 1001 – 1500 mb 50% state / 50% contractor 1501 – 2000 mb 60% state / 40% contractor Production-based: Nigeria (Bonga deepwater) Internal Rate of Return Profit-oil split RROR < 16.75% 30% state / 70% contractor 16.75% < RROR < 22.75% 55% state / 45% contractor RROR > 22.75% 80% state / 20% contractor IRR-based: Azerbaijan (ACG)
- 28. PSAs: Key Issues SubjectPSA Features Direction of Payments Contractor pays government taxes and (sometimes) royalties; Government sells share of petroleum Distinguishing Government Revenue Streams Production share Other Possible Revenue Streams Royalties, Income Tax, Bonus, Dividends from State Equity, Dividend Withholding Tax, Windfall Profits Tax, Fees Key Issues in System Design • Cost Recovery Rules • System for Production Split • Oversight of National Oil Company Advantages Direct government role in oil sales, alignment of incentives, easy to build in progressivity Disadvantages Increased potential for conflict of interest
- 29. Contract allocation: Competitivebidding success factors • Well-tailored legal framework / institutional structure • Transparent process; implemented as designed • Objective qualification and assessment criteria • Competitive but realistic fiscal conditions • Disclosure of company ownership and of agents helping win contract • Conflict of interest regulations • Independent authority in charge of allocations
- 30. Stabilization clauses Public Law Private Law “The Governmentguarantees to the Contractor, for the entire duration of this Contract, that it will maintain the stability of the legal, fiscal and economic conditions of this contract, as they result from this contract, the law and regulations in force on the effective date. ”
- 31. In most OECDcountries, no stabilization clauses 1997: Basic oil sands royalty regulations established 2007: Government raises royalty rates by executive action, to apply to all projects 2010: Government launches “Royalty Competitiveness Review,” changes royalty system to give incentives to businesses “Oil Sands” royalties in Alberta, Canada http://www.energy.alberta.ca/About_Us/1133.asp
- 32. New legislation, rules onlyapply to new contracts going forward. Individual negotiation on particular contract issues. Ex: Denmark Systematic process of reviewing/ renegotiating all contracts. Ex: Guinea “These are the new rules. Take them or leave them.” Ex: Venezuela, Bolivia Most conciliatory Boldest
- 33. Citizen understanding andengagement with contracts http://www.revenuewatch.org/publications/contracts-confidential-ending-secret-deals- extractive-industries
- 34. EITI and ContractDisclosure • The EITI Report should provide an , and include a reference or link to the location where these are published. (§3.12(b)) • The EITI Report must document the related to both exploration and exploitation, including relevant legal provisions, actual disclosure practices and any reforms that are planned or underway. (§3.12(b)) • EITI implementing countries are encouraged to that provide the terms attached to the exploitation of oil, gas and minerals. (§3.12(a))
- 35. Tool for analysisand comparison: www.resourcecontracts.org
- 36. Citizen awareness ofcontracts— examples citizen guides CSO- parliament collaboration financial modeling and web-based collaboration citizen scrutiny of legal compliance