Oil and Gas Sector Governance
Principles and Practice
Dr Keith Myers
Director, Richmond Energy Partners
Advisory Board Member Natural Resource Governance Institute
April 2015
Acknowledgement and
Disclaimer
Thanks to NRGI and to Richmond Energy
Partners for permission to publish
proprietary information.
The views views and opinions in this slide
pack are those of the author’s and not
necessarily those of NRGI or REP
2
Agenda
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Dynamics of the oil and gas industry
Key Concepts
Good governance principles
Good Governance Functions and Institutions
Policies, laws, regulations and contracts
Examples
DYNAMICS OF THE OIL AND
GAS INDUSTRY
July 1, 2016
The perfect storm part 1 Back to the 90’s
5
The Economist cover March 1999
The perfect storm part 1 Back to the 90’s
Brent Oil price $/bbl 2015 terms (average in the year):
Global production million bareels per day
(red line)
140
Oil prices in 2015 terms
and oil production
120
BP oil production
forecast
100
80
60
Average 1970 - 2015 = $54/bbl
40
20
Brent forward
curve
Feb 2016
Average 1986 - 2002 = $31/bbl
6
The Economist cover March 1999
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
Distribution of proved oil reserves in 1994, 2004 and 2014
Percentage
BP Statistical Review of World Energy 2014
© BP 2014
The geopolitics of oil production/consumption by region
Production by region
Consumption by region
BP Statistical Review of World Energy 2014
© BP 2014
Distribution of proved gas reserves in 1994, 2004 and 2014
Percentage
BP Statistical Review of World Energy 2014
© BP 2014
Gas production/consumption by region
Billion cubic metres
Production by region
Consumption by region
BP Statistical Review of World Energy 2014
© BP 2014
Major gas trade movements 2014
Trade flows worldwide (billion cubic metres)
Source: Includes data from Cedigaz, CISStat, GIIGNL, IHS CERA, Poten, Waterborne.
BP Statistical Review of World Energy 2014
© BP 2014
Eastern Mediterranean – emerging gas province
?
4 TCF
85 TCF
4.9 bcf/d
35 TCF
0.8 bcf/d
KEY CONCEPTS
July 1, 2016
What makes Oil & Gas different?
• Public ownership of the resource
• ‘Rent’ generation
• Finite
• Geopolitical
Key Concept - Resource Rent
Economic rent: Surplus of revenues over all
costs including minimum required rate of return
return
Production costs/price
Price1
return
Rent
Costs including
required return
return
return
Return
Return
Project A
F
E
Project B
Project C
D
• Surplus of revenues net of all
costs of production, including
required rate of return
(“hurdle” rate)
• Ideal base for taxation:
– Satisfies neutrality
– Government owns the
resource that generates the
rent
• But, highly uncertain:
Cumulative Production
Prod1
Cost/Cumulative production curve can
be analyzed:
1. Across countries,
2. Within a single country
3. Within a single project
–
–
–
–
–
Resource existence
Resource quality and size
Extraction costs
Commodity price
Required rate of return
Source – IMF Fiscal Affairs Dept
Tamar Field Economics
Reserves = 10 TCF (1.7 bnboe)
Discovered 2009 – onstream 2013
Production 2015 – 0.8 bcf/d (133 mboe/d)
Gas Sales Price
Development Cost
Operating Cost
Project Operating Profit
Government Tax Take
Source: Noble Energy 2015 annual report, E&Y
= ~$33/boe ($5.5/mmbtu)
=$4.6/boe
=$5.5/boe
=$22.9/boe
=25-59%
The global production cost curve
guides global price and rent distribution
2014 analysis
Oil and gas production barrels of oil equivalent per capita/annum
18
500
450
0
Qatar
Kuwait
UAE
Brunei
Norway
Trinidad & Tobago
Equatorial Guinea
Saudi Arabia
Oman
Turkmenistan
Bahrain
Canada
Gabon
Russia
Azerbaijan
Kazakhstan
Libya
Venezuela
Iraq
Iran
Angola
Timor Leste
US
Algeria
Congo - Braz
Malaysia
Australia
Netherlands
Denmark
Bolivia
Ecuador
Uzbekistan
Mexico
Argentina
New Zealand
Colombia
United Kingdom
Egypt
Thailand
Nigeria
South Sudan
Romania
Brazil
Yemen
Peru
Indonesia
Ukraine
Chad
Vietnam
Syria
Per capita production – a key measure of
economic impact
Oil and gas resource flows per capita 2014
Qatar = 846 assuming 2.2million population, or 6768 boe per Qatari citizen
source BP statistical review 2014, World Bank population data 2012
barrels of oil equivalent per person per year
Gas flows per capita 2014
Oil flows per capita 2014
400
350
300
250
200
150
100
50
Petroleum wealth, dependency and development
Oil and gas revenue as % of total govt. revenue
Source IMF analysis
100.0%
S Sudan
Timor Leste
Angola
Nigeria
75.0%
Qatar
Trinidad
& Tobago
50.0%
Norway
Uganda
Bolivia
25.0%
Ghana
Colombia
0.0%
1
19
10
100
1000
Oil and gas production barrels of oil equivalent per capita per annum 2014
Uganda assumes 175mbd production, OPM analysis
Circle
Proportional
to GDP per
capita
Key concepts – Oil and gas sector and its role in
national development
Fiscal
• Government Revenue
• Price Volatility
Procurement
• Supply Chain
• Labour
• Capital
• Equipment
Oil and
Gas Sector
Energy and
Feedstock
• Energy Pricing
• Petrochemicals
Social, Environmental, Political & Cultural
• Impact on local communities
• Environment
• Geopolitics
• Instability & Conflict
Oil and gas –
The issue of corruption
• Concentration of oil and gas in
emerging markets and unstable
countries
• Frequent dealings with Government
officials
• The reliance of the industry on third
parties – the supply chain
Maintaining the integrity of the
licensing process
Risks of corrupt behaviour to influence license
awards or approvals
• ‘Facilitation’ payments
• Political ‘contributions’ to re-election funds
• Contributions to charitable foundations
• Awards of licenses to related parties
– ‘Local content’, crony capitalism or corruption?
GOOD GOVERNANCE
PRINCIPLES
23
What needs to be governed –
The Petroleum Value Chain
Mid
stream
Upstream
Licensing
Exploration
Industry ‘Value Chain’
Regulatory ‘Value Chain’ (World Bank)
Development
Production
Decommissioning
Transporta
tion
Down
Stream
Refining &
Marketing
IMF’s explanations for economic under performance
of some oil exporters
• Weak fiscal and monetary policies to manage oil revenue
volatility.
• Exchange rate appreciation allowed to weaken the non-oil
sector.
• No accumulation of income generating assets to benefit future
generations.
• Weak institutions and administration have created an opaque
environment less conducive to the effective use of oil revenue
for the benefit of the population.
Source IMF – Lifting the oil curse 2004
Good governance principles –
The stakeholders
Government
People /
Investors /
Society
Operators
The National Context
One size does not fit all
Government
Governance
People /
Society
Investors /
Operators
No optimal governance model.
It depends on political and
economic context
Source Chatham House Good Governance Project
Key governance functions
Policy
Regulation
Operations
Source: Chatham House Good Governance Project
Demarcation of governance Functions
Actors
Policy
Regulation
People/Society/Parl
iament
State/Government
Operators/Investors
Input and consultation
Proposals and Approvals
Executive Authority
Operations
Five Governance Principles
1.
Clarity of Goals, Roles and Responsibility
2.
Sustainable development for the benefit of
future generations
3.
4.
5.
Enablement to carry out the role assigned
Accountability for decision-making and
performance
Transparency and accuracy of information
Source : Chatham House Good Governance Project
5 key governance risks
1. Unclear goals, roles and responsibilities between the NOC,
Ministries, and other Agencies leads to inefficient and
ineffective governance
2. Poor policy choices lead unsustainable corporate and
national development
3. Policy goals are not achieved as governance actors have
insufficient means to carry out the role assigned to them
4. Lack of accountability for decision-making and
performance leads to inefficiency, mismanagement
mistrust and conflict
5. Lack of transparent information masks non-compliance
with policies, laws and regulations
Legal and regulatory checklist
Constitution
Is resource ownership agreed and jurisdiction defined
by law? Distribution of power, Checks and Balances?
Clear Policies
Are Government policies for the sector clear and well
communicated and consistent with good governance
principles?
Enabling
Laws
Are the necessary laws in place with an independent
judiciary to enable policy objectives to be achieved?
Enacting
Regulations
Has the law been enacted into effective regulation?
License
Agreements
Are individual license agreements enforceable and
consistent with policy, law and regulations?
Competent
Regulatory Agencies
Are the systems and institutions in place
to monitor and ensure compliance and to achieve
policy objectives?
National Petroleum Policy
• Ideally a stand alone document
• As wide a political backing as possible
• Designed to form a stable platform for long term decisionmaking
• Covers the whole petroleum value chain
• Covers both policy objectives and shared principles/values to
guide decision-making
• National petroleum policy requires enabling laws and is
enacted through detailed regulations
Key topics for a national petroleum policy
1. Resource ownership and jurisdiction.
2. Institutional framework and the demarcation of roles and
responsibilities.
3. Guiding governance principles, e.g. Transparency, Accountability
and Sustainability.
4. State and national participation in the sector.
5. Resource depletion, i.e. the rate of depletion of petroleum
6. Licensing Policy
7. Revenue Management and Revenue Sharing
8. Gas utilisation and domestic energy supply
9. Local content in the supply chain and development of national
expertise
10.International relationships
11.Managing social and environmental impacts
Adapted from Farouk Al-Kasim,
Elements of Petroleum Policy www.norad.no
Before licensing – a checklist
 Exploration and discovery fits in national
development goals
 Impact on other natural and social assets are
accounted for
 Affected communities consulted
 The risks associated with exploration are
minimized.
 Exploration and the allocation of rights are
coordinated with the fiscal regime
 Operators should have the necessary means
(financial, technical, and operational) to fulfill the
license obligations efficiently and safely.
Key questions companies ask before
entering a petroleum license
1. What is the geological risk and reward?
o
What are the chances of making a discovery large enough to be
commercially exploited
2. What are the technical challenges?
o
Do I have access to the technology needed to discover, evaluate and
produce the resource economically?
3. What are the political risks?
o
Expropriation risk, disruption to operations, security and safety, corruption
4. Do the fiscal terms give an adequate return on capital in a
success case?
o
Development and operating costs
o
License terms and commitments
o
Stability of the contract
Final thoughts - the governance
challenge in practice and the trust deficit
• Clarity over ownership and jurisdiction
• National consensus over key policies
• Coherence of laws, regulations, licenses and
tax code
• Competent and trustworthy regulatory
authorities
• Ensuring the integrity of the public
procurement process
• Achieving effective accountability