4.13 Taking Action: Recommendations and Tools

living legacy, how do new proposals manage such constraints and limit their impact? 3. Third, adaptation will be required. This is true even when a new, cutting-edge regime is in place. As knowledge of the links between the extractives and wider economic and social transformation grow, the blend of different laws, contracts, other instruments, as well as some of their contents, has to be modified to reflect this. A failure to do so carries the risk that the overall regime will lose its legitimacy and long-term credibility. Currently, local benefit, change of control or transfer of interests, and infrastructure linkages are areas where established approaches are being modified to better achieve development goals. Are formal mechanisms in place to allow future administrations to make adaptations smoothly and quickly, and is the capacity there to achieve this? 4. Fourth, looking ahead, any choice made with respect to a combination of legal and regulatory instruments will need to be adjusted as knowledge grows and capacity increases. The initial choice has to be made with this flexibility in mind, or it must include ways to adapt to a variety of future circumstances. What mechanisms can we put in place to allow for flexibility without creating uncertainty for future investment flows?

Finding 3: Policies are becoming increasingly differentiated among the segments of the extractives sector. They recognize the distinct challenges in each segment. This is evident in the use of gas policies or master plans, greater appreciation of the different approaches to the award of rights that are common in the mining and hydrocarbons industries, and the need to provide overarching justifications for development policies within the extractives sector. An element that affects the legal and regulatory framework in all extractives sectors is the need to sharpen instruments aimed at securing benefits from wider developmental impacts on their economies, such as local benefit. Publication of policy documents online as in the Sourcebook can accelerate this process.

Finding 4: Countries have progressively better defined the nature of subsoil rights granted and the scope of each stage of the entire upstream process, especially in hydrocarbons. The aim has been to facilitate the administration of subsoil rights, to limit interpretation problems and possible areas of dispute, and to integrate the experience the countries have accumulated from implementing previous licenses or contracts. The increasing transparency of contracts in oil, gas, and mining sectors is probably contributing to this process of improvement in the detail of contract design.

4.13 TAKING ACTION: RECOMMENDATIONS AND TOOLS

Legal and regulatory framework

In designing its legal and regulatory framework, each country should take into account general factors such as the mineral or crude oil price; the existence of small, medium, and large deposits or fields; whether they are on-land or offshore or both; whether they are mature and/or frontier areas; and whether they are of a conventional or unconventional nature, for example. Then, if it seeks to achieve an appropriate level of hydrocarbons activity in each of these categories, it will have to develop the conditions that fit its unique combination of circumstances. If a country has only one set of rules for all categories, it will probably succeed in developing only one category of resources or none at all.

Method of award

Any policy on allocation of rights has to be flexible and able to respond to changing geological conditions and to changing global market conditions, especially the expected level and trend of future oil, gas, and mineral prices. These factors are beyond the control of governments and will play a crucial role in determining investors’ strategies and risk assessments. Selection of a method has to reflect these wider contextual variables.

There is an element of discretion in most methods of allocation of rights to extractives. Its scope has to be considered in relation to both the need for (and benefits of) transparency and its value in a government’s local benefit policy or the promotion of environmental and strategic objectives. These play a key role in conferring legitimacy on the overall regime among the wider public. For an award of rights to have long-term stability there has to be a perception that the award has the potential to benefit the public welfare.

Gas extraction

Any petroleum policy has to contain specific provisions on gas, distinguishing between associated and nonassociated sources. This should also address unconventional gas if prospective resources may exist in the country. The policy should include incentives to the private sector to develop gas fields, taking into account the higher costs of doing so, the longer time required to assess its economic viability, and the varying sizes of fields.

An upstream policy for gas is insufficient to promote gas resources. It has to be complemented by a downstream gas policy consistent with the goals given to the upstream policy.

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