Well Managed oil and gas development

1. 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

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 State's revenues
and its right to impose
health, environmental and other
standards to the contractors;

4. CONTRACTS CONTINUED.
 Balance between the State's 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 world’s 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 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.

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 government’s 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 Indonesia's
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 (State's and
Contractor's 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
 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.

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, 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.

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 Russia's 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 coordination
C. 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.

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