WELL MANAGED OIL AND GAS DEVELOPMENT DEPENDS UPON STRONG GOVERNANCE AS MUCH AS STRONG CONTRACTS. CRITICALLY DISCUSS, WITH EXAMPLES FROM COUNTRIES, 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
Transcript
1. 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
2. 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.
3. 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;
4. 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. 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
6. CASE STUDY: CANADA -According to the Government of Canada:
It has 14% of proven oil reserves in the world and Canada is the
worlds third largest producer of natural gas and second largest
exporter.
7. 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
8. 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 jurisdictions 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.
9. 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 governments non- renewable resource
revenue. In addition to royalties, governments generate oil and gas
revenue from land leases and other taxes and fees.
10. 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.
11. 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;
12. 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.
13. 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.
14. 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 Statoils 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.
15. 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.
16. 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.
17. 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, Norways reserves will run out within the
next 10 years. The government of Norway supports that their
reserves will last for the following 40 years.
18. 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
19. 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.)
20. 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.
21. 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.
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. REFERENCE: Harry Doust, Ron A Noble, Petroleum Systems in
Indonesia (2008) 25 Marine and Petroleum Geology 103 Peter Eigen,
Fighting Corruption in a Global Economy: Transparency Initiatives
in the Oil and Gas Industry (2006-2007) 29 Hous. J. Intl L. 327.
Erik Berglof, Stin Claessens, Enforcement and Good Corporate
Governance in Developing Countries and Transition Economies 21(1)
The World Bank Research Observer 123 Douglas Yates, Enhancing the
Governance of Africas Oil Sector (2009) SAAIA Occasional Paper
No.51 Natasha Hamilton-Hart, Anti-corruption Strategies in
Indonesia (2001) 37(1) Bulletin of Indonesian Economic Studies 65
Glada Lahn and others, Good Governance of the National Petroleum
Sector (Chatham House, April 2007) Michael Likosky, Contracting and
Regulatory Issues in the Oil and Gas and Metallic Minerals
Industries (2009) 18(1) Transnational Corporations 1, available at
Silje Aslaksen, Corruption and Oil: Evidence from Panel Data (2010)
Paul Stevens, Resource Impact-Curse or Blessing: A Literature
Survey? (IPIECA, 25 March 2003)