4.8 Why Regulations Are Necessary

areas where good geological data is available and where there are strong indications of interest from more than one potential applicant, governments are more likely to offer licenses on a competitive bidding basis. The key is to ensure that rights are offered on a fair, transparent, and timely basis. It should also allow for dispute settlement processes in the event that disputes arise.

In the face of allegations that this method leads to a hoarding of rights, some have proposed the adoption of a “use-it-or-lose-it” regime, whereby the licensee has to explore, mine, or relinquish its rights.

Competitive bidding for mineral rights. Where deposits have been previously explored and new development and production rights are being offered, competitive bidding should be used. Governments are encouraged to develop in detail their strategies for mining activity prior to bidding, which is in itself a positive development. There are successful examples in Peru and Afghanistan.

Two examples of new development and production rights being offered are, first, when land is released by an NRC back to the government for licensing to private investors, and second, when a license holder hands back land for which more detailed geological data has been provided to the government. In both cases there may be several investors competing for the same license; in these cases only competitive bidding should be used (Global Witness 2008, 11, 20). In the case that land is offered for competitive bids and there is only one qualified bid, that bid would, of course, be the winner.

Competitive tenders also become appropriate in postconflict and fragile states where mineral assets, including past operating mines, have become separated from the holder of prior rights. As governments strengthen their regulatory control and improve their knowledge of the resource base, the need for a competitive award of mineral exploration and exploitation rights grows. The Aynak copper deposit in Afghanistan is an example (Stanley and Mikhaylova 2011, 7), and other examples can be found in many African postconflict countries, such as Liberia, Mozambique, and Sierra Leone. The existing body of geological interpretation may, however, prove to be of limited use for mining company applicants.

Tendering requires some upfront costs from the bidders, and if there is an element of administrative or political uncertainty, or a lack of transparency, it may fail to attract investors. In some countries of the former Soviet Union, the process has been adopted and proved time consuming and expensive for investors (Clark et al. 2003). Payments have been required, as well as higher taxes and royalties than in neighboring countries.

Good practice calls for a transparent competitive bidding process that can be accomplished by ensuring access to all qualified bidders and having standardized bidding documents that include (1) all available geological information, (2) confirmation that the land is unlicensed, (3) details of the applicable legal regime and procedures, and (4) full details of the rights that will be granted to the winning bidder.

Mining bidding criteria. Single bidding criteria (usually an upfront cash premium with staged payments) are simpler to apply than multiple bidding criteria. A single bidding criterion can be either (1) an upfront premium or (2) the value of the work program to be undertaken. In either case, the winning bidder should submit a bankable feasibility study within a given time or risk forfeiting the license.

If a set of multiple bidding criteria are used, factors such as upfront cash payment, conditional payment, and/or minimum exploration expenditure can be combined. This can be achieved through an equation that creates a numerical value. However, any combination that includes a work program evaluation will involve subjective judgments on the part of a committee evaluating the work program. In the case that mining exploration is being competitively bid, it is quite rare that an upfront cash premium or a future payment is used, because mining companies do not see sufficient value to bid such a payment. Typically, however, an exploration work commitment will be competitively bid. Relevant considerations include the following:

1. Cash bonus bidding, which is generally considered to be less efficient in frontier areas 2. Use of area-wide licensing, in which the government takes into consideration the bidders’ expressions of interest in other areas 3. Market segmentation, which takes into consideration the bidders’ technical and financial ability to pursue different types of exploration activities (Tordo 2007)

4.8 WHY REGULATIONS ARE NECESSARY

While matters of fundamental principle will typically be settled in a law and be authorized by the legislature, some rules need to be made that build on these principles and can be periodically adjusted without having to go through the normally long process of adopting a new law. This is the basis for the adoption of secondary rules, called regulations.

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Regulations complement laws and contracts, filling in the details essential to their implementation. Typically, legislation should authorize the competent authority to make regulations from time to time, providing the detail and procedures by which to implement the policy objectives for the EI sector and by reference to specific enabling provisions of the legislation. Regulations are subsidiary instruments of the EI sector legislation and should never be inconsistent with it.

Regulations should focus primarily on technical and operational matters (such as licensing procedures; contract area; monitoring, inspection, and control of operations; reports on operations; and operational standards) but may also include fiscal elements (such as royalty definitions, surface rental, fees, and fines), cost and volume audits, and/ or social and environmental requirements. In some cases, regulations may even specify the competent authority or authorities in the EI sector.61 In the area of local benefit, one can expect the general principles to be set out in a basic law, but the detail is better suited to regulations, involving specific mechanisms to achieve the law’s general objectives. The Mozambique Petroleum Law of 2014 and the regulations it envisages illustrate this.

A failure to understand the different roles of primary and secondary legislation means that matters of detail may be dealt with in the main law—whether petroleum, mining, or in some countries, like Kazakhstan, in both. As knowledge of the EI sector grows, there will be pressure to amend the rules accordingly. If all matters, including essentially technical ones, are covered in a comprehensive law, the tendency will be to require amendments to the primary law. It will quickly become an unwieldy, complicated instrument, largely impenetrable to investors and citizens alike. A response to this problem is to issue guidance notes as aids to interpretation.

In the early stages of EI sector development, regulations may focus on main principles rather than detailed rules, leaving details to be elaborated at a later date based on growing EI sector experience and understanding. There are, however, a number of critical provisions related to resource management that should be recognized at the outset, including the right to receive all relevant information, the right to inspect, and the right to issue more specific rules as the EI sector develops.

A general trend has been for regulation to become more performance based under a goal-setting approach as opposed to prescriptive in character. The latter approach is reliant on the application of a rigid framework in which step-by-step compliance is required and inspections and audits are common. The former sets outcomes to be achieved and is more flexible about how the company meets the outcomes that the government is seeking. In the EI sector such an approach is becoming much more common. It is standard in environmental practice. It does mean that government needs to be clear about what outcomes it is seeking and how it will assess and monitor the companies. At its best, it can encourage companies to innovate and lower the cost of reaching specific outcomes by applying new technologies which improve performance.

Regulations in the EI sector typically fall into two major categories: (1) resource management and (2) health, safety, and environment matters.

Resource management

Regulations directed at resource management are now common practice and are vital to effective EI sector oversight and control. This is an area in which good practice may not be a sufficiently high standard to recommend, irrespective of the context. Rather, the best available practice may well be essential. These regulations generally focus on the following: (1) regular and comprehensive reporting; (2) transfer of all significant data, analyses, and samples obtained in operations; and (3) consultation, consent, and approval requirements at critical stages of operations.

Typically, requirements are numerous. They include reporting and, where appropriate, consent or approval by the governmental authorities at each of the following junctures in the implementation of the EI Value Chain: (1) reconnaissance, (2) exploration work program implementation, (3) drilling, (4) discovery, (5) appraisal, (6) commerciality, (7) development plan and any revisions thereto, (8) reservoir management and production, (9) late field or mine life plans, and (10) decommissioning plans.

Beyond their immediate relevance in ensuring adherence to good oil field practice, one can expect these regulations to provide vital inputs to broader policy decisions on licensing, the pace of sector development, state participation, social and environmental safeguards, and macroeconomic planning.

Health, safety, and environment requirements

Regulations dealing with social and environmental concerns have become critically important in the management of the EI sector and are dealt with in more detail in chapter 9.

However, at the basic level, there exists a well-developed international practice on HSE standards.62 These standards

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