5.2 Organization in the Public Interest

Specific issues arise in the organization of oil, gas, and mining activities that require special attention. On the basis of the agreements between states and investors (discussed in chapter 4), many other agreements are concluded, covering, for example, joint ventures and subcontracting for services and supplies, for gas sales, and for transportation. The range of agreements goes well beyond the scope of the Sourcebook. However, the kind of governance that they establish is often investor led or driven by “industry best practices” developed over time and through experience in many different countries. An example is the widespread use of joint operating agreements in the hydrocarbons sector. Increasingly, the focus of governments on securing wide benefits from oil, gas, and mining makes it necessary for them to understand better these second order agreements and the investor-led governance they establish. Some of the common topics will be examined in the second part of this chapter.

5.2 ORGANIZATION IN THE PUBLIC INTEREST

The challenges of building government institutions are well known. A central theme in much of the literature on development is the importance of capacity building, particularly to equip countries new to oil, gas, or mining development for the specialized tasks of oversight. A wide variety of educational programs has sprung up in centers around the world to meet the need for specialists. Yet if the goal is extractives-led, nationwide development, the kind of knowledge needed by states goes beyond technical information; they need an understanding of the kinds of organizational structures that are typical in the oil, gas, and mining industries and the challenges that such structures present for oversight and partnership. Without sound knowledge of standard approaches to EI governance, and how government interventions can fit into or modify them, governmentdriven efforts to make the sector work properly to achieve overall social and economic benefits may have limited and disappointing outcomes.

Responding to the challenges of sector organization benefits from knowledge of the ways other governments have designed their sectors for oil, gas, and mining activities. In the hydrocarbons sector, the Norwegian approach has had a strong influence on current thinking.1 One of its key features is the separation of regulatory and commercial functions. Instead of entrusting both to a state company, this approach places them in separate institutions (table 5.1). A recent example of this from an African country can be found in the regulatory scheme for petroleum activities in Uganda (see table 5.2).

In practice, the Norwegian approach has not proved an easy one for many countries to adopt. It argues against a consolidation of domestic sector capacity. That is less attractive when there is a lack of skilled personnel and institutional capacity. (In practice this is a common problem). Where those conditions apply, a consolidated approach may be better able to deliver near-term results. Consolidation may even be a step toward a later separation of functions, although once established a consolidated approach will of course create vested interests that make a later separation difficult. In mining, Botswana and Chile have enjoyed success similar to Norway’s in the

Table 5.1 The Norwegian Approach: Dividing Institutional Governance Tasks and Responsibilities

Task Responsibility

Policy making Ministry/parliament

Legal framework Ministry/parliament

Ownership to resources Ministry/regulator

Collector of tax or share of production Ministry/tax regulator/ state-owned company

Regulatory work Independent regulator or government directorate

Commercial activities State-owned or private, national companies or international oil companies

Source: Norwegian Petroleum Directorate.

Table 5.2 Ugandan Regulatory and Institutional Framework

Directorate of Petroleum in Ministry of Energy and Mineral Development Supports policy formulation and licensing of acreage

Petroleum Authority of Uganda Regulates and monitors compliance of petroleum operations

Uganda National Oil Company Ltd. Moves the country’s commercial interest in production-sharing agreements forward Creates joint ventures across the petroleum value chain

Source: Petroleum Authority of Uganda

116 OIL, GAS, AND MINING

development of extractive resources. For reasons that will be discussed, they may offer lessons for optimizing sector organization, but these are well short of a prescriptive template or model for others to follow.

Governance: Who does what?

The roles and responsibilities of different ministries and agencies need to be clearly defined and enforced. This helps to avoid overlapping or conflicting competencies and roles in policy making, rulemaking, and monitoring. At the same time, it prevents gaps in regulatory responsibility. Moreover, if the overall policy objective is to utilize the extractives sector for wider economic development and benefits, it is important to ensure that institutions and agencies are working to this end and not discouraging such development by their actions.

Typically, there are 10 key institutions that share responsibilities in the management of oil, gas, and mining:

1. Executive bodies 2. Legislative bodies 3. Sector ministries 4. Regulatory agencies 5. National resource companies 6. Finance ministry 7. Taxation authority 8. Central bank 9. Economic planning ministry 10. Environment ministry

Close coordination among these, while admittedly difficult to achieve, is essential to effective extractives sector management. An illustration of how some of the above institutions are organized in an interrelated and successful way in Norway is provided in figure 5.1. In addition to the entities in the figure, Norway also has two state-owned bodies, Gassco and Petoro, which report to the Ministry of Petroleum and Energy. Gassco has an “architect role” with authority over the further development of the gas infrastructure. Petoro is a 100 percent state-owned enterprise that handles the state’s direct financial interest.

Cohesiveness is highly important since conflicts among the various roles are potentially damaging, both to the achievement of the state’s goals and to the scale and tempo of investment. The challenge of coordination can be particularly daunting in states with federal or decentralized structures. Addressing these challenges effectively requires a high level of capacity in the institutions charged with sector management and regulation.

Each of these institutions needs to have sufficient resources and staff to fulfil its mandate, commensurate with

Figure 5.1 State Organization of the Norwegian Petroleum Sector

Stortinget (Parliament)

Government

Ministry of Climate and Environment Ministry of Labour and Social Affairs

Norwegian Environment Agency

Petroleum Safety Authority Norway

Source: Norwegian Petroleum Directorate. Ministry of Petroleum and Energy

Norwegian Petroleum Directorate Ministry of Finance

Petroleum Tax Office Government Pension Fund Global

CHAPTER 5: SECTOR ORGANIZATION AND REGULATORY INSTITUTIONS 117