3.2 Features Specific to the Oil and Gas Sectors

Box 3.1 Key Differences between the Petroleum and Mining Sectors (continued)

7. The prevalence of artisanal miners distinguishes mining from petroleum and presents important policy issues. 8. Taxation in mining tends to favor royalty and profits taxes, while in the petroleum sector the widespread use of production-sharing presents a more complex picture, with a wider range of taxation rates being common, too. 9. A different balance of capital and operating costs in the oil industry makes costs higher at the front end

(to establish production facilities and pipelines); mining has high capital costs but needs more people during production, ongoing equipment investment, and continuous management of local environmental impacts. 10. Mining is more fragmented and geographically spread than oil; it has numerous products in different forms instead of a few relatively homogeneous products.

Box 3.2 Features Specific to the Oil and Gas Sectors

1. National resource companies remain popular in most oil- and gas-producing countries, more so than in the mining sector. 2. Usually, distinct laws will be made for oil and gas activities and for the mining of other minerals. Inevitably, this difference in choice of legal design appears to suggest the existence of underlying differences between the two sets of extractive industries. 3. In the oil and gas sector, a framework approach to legislation is often preferred, with a higher degree of reliance on a related model or standard contract for exploration and exploitation than in mining. 4. Three types of agreement govern the relationship between a host government and investors in upstream oil and gas activities: the concession or license, the production-sharing agreement, and the risk service agreement. Only the first is commonly found in mining. 5. Most oil and gas agreements require the contractor to purchase a proportion of its needed goods and services in the host country from local suppliers to promote linkages to the local economy.

Similarly, they require a hiring preference for nationals of the host country and the use of

training programs to transfer skills and create employment. 6. Stabilization clauses are commonly used in oil and gas agreements. 7. Natural gas discovery and development is commonly treated differently from oil in the basic agreement, with a longer period being given to the appraisal of a gas discovery and fiscal provisions being designed to reflect its different profitability. 8. Contract provisions may require priority allocation of gas to the domestic market and/or set conditions for the authorization of export sales. 9. Gas contracts contain detailed valuation clauses setting out how wellhead prices are to be determined. 10. In award procedures, it is a desirable and increasingly common practice to prequalify applicants for awards. 11. Where significant geological data are available and investor interest is high, a competitive auction is generally considered the best option for awarding contracts. 12. In the award of oil and gas rights, it is the work program that generally has the most influence in decision making, usually combined with a financial variable, such as a bonus, royalty, or profit/ production share.

CHAPTER 3: THE EXTRACTIVE INDUSTRIES 45