Precept 3

Precept 3

The government should encourage efficient exploration and production operations, and allocate rights transparently.

See Precept 1 on forming the national resource strategy, legal and regulatory framework.

The government’s challenge is to ensure exploration and production operations are carried out efficiently within a comprehensive national strategy and to establish a legal and regulatory framework as far in advance as possible.

Verify jurisdiction over areas to be licensed for exploration

The national government should verify that it has uncontested jurisdiction over the areas it intends to open for exploration. This applies both domestically and with neighboring countries including provisions for joint development of discoveries that straddle national borders.

Build and maintain a good understanding of the resource base

Government officials must build a thorough understanding of their country’s resource base—both the quantum of resource and its geographic distribution. The quantum of the resource base informs key decisions on the rate of exploitation and potential future revenues. Information on the geographic location guides the establishment of property rights and exploration licenses within the country and future social and environmental impacts.

Pre-licensing investment in geological and geophysical surveys, funded by the government or external donors, can provide a high return on investment for the government if the resulting information increases the attractiveness of the geology to investors, thereby attracting higher bids. However, more knowledge can also make the geology appear less attractive if it demonstrates the geology is less favorable for discoveries.

The government has a duty to collect, store and analyze technical information arising from all exploration operations carried out under its jurisdiction. This information is key to building the government’s geological understanding, which will serve to strengthen its negotiating position with investors and better enable it to optimize the licensing regime. To this end, the government should ensure that investors provide all technical information in an understandable format.

Secure property rights and decide on areas to open for exploration

Before licensing exploration activity, the government should establish property rights under national law for both the resources to be extracted and the surface resources such as pasture land and water in areas to be opened for exploration.

Authorities should carefully consider the size and boundaries of exploration licenses, carefully taking into account the underlying geology and size and location of potential exploitable deposits. At the early stages of exploration, licenses are usually very large as the location of prospective geology is not well defined. The license regime needs to allow for the reduction in the size of licenses as exploration progresses in order to prevent too much of the resource base being located in any one license. Licensing authorities must take care with regards to the sequencing of license awards to ensure that the government can benefit from land value increases resulting from discoveries.

See Precept 5 on environmental analysis and ongoing regulation.

Finally, the government should consider whether the environmental risks, from pollution, for example, are worth the potential reward. The government should either decide to prevent exploration in environmentally and socially sensitive areas or take steps to mitigate these risks.

Select an appropriate method to allocate rights

See Precept 6 on the operational roles state-owned companies might have.

The government must decide who should undertake exploration and production operations and under what terms. If the government allows private sector companies to participate, it can use either direct negotiations on a license-by-license basis, or licensing rounds where one or more licenses are awarded by a competitive process.

Well-designed auctions are preferable since competitive bidding should secure greater value for the country and auctions can also help overcome information deficits that the government may have relative to international companies. Auctions are also inherently more transparent than direct negotiations, helping to mitigate the risk of inappropriate companies or individuals receiving exploration and extraction rights.

Auctions’ success typically depends on a minimum of three bidders. Without sufficient interest from bidders, opting for a competitive allocation process is not likely to be a suitable choice by the government. This may be the case if there is insufficient geological information—more likely in mineral than petroleum licensing. Where there is insufficient competition for auctions, the government should use a licensing round with strict minimum technical criteria instead.

Regardless of the method used, there are a number of principles that can strengthen the position of the government in the allocation process. The government should disclose information on allocation procedures; the contracts awarded, including fiscal and tax terms; the beneficial ownership of all license holders; the agreed work program; and financial commitments and any fiscal terms particular to the license.

The government should pre-qualify bidding companies to ensure that potential license-holders have sufficient technical and financial capacity to execute a resource development program, and sufficient experience in managing the environmental risks associated with the project and related infrastructure. The government should also decide whether to encourage joint bids and whether to reserve the right to allocate equity interests within licenses.

Third, the government should limit bidding to a small number of terms to allow clear comparison across bids. These might be terms on the work program, signature bonuses, and local content provisions. Competition or negotiation need not solely concern the price of the extraction right, but on the other hand too many variables increase complexity, erode the transparency of evaluation, and increase administrative costs.

Fourth, the government should try to ensure there is no need to negotiate terms after companies have bid. This is helped by clear and transparent bid terms, and model contracts.

Finally, the government should undertake careful assessments of the value of services or infrastructure given as part of barter deals in exchange for extraction rights. Where there is significant uncertainty, the government should consider avoiding such deals. Barter deals are often inherently opaque and may provide opportunities for corruption.

Ensure development plans conform to government objectives and approve them in a timely manner

See Precept 5 on environmental and social aspects of the project development plan, Precept 10 on local content and infrastructure

After commercial discovery and appraisal work, license holders will draw up development plans for the exploitation of the discovery for approval by the government and its agencies, and in some cases, parliament. The government should ensure that development plans are cost effective, consistent with its policy objectives regarding resource depletion; use of infrastructure, health, safety and environment; and local content and employment provisions. In addition, plans should provide for the eventual abandonment of the project site, including clean-up and restoration.

The government should review plans thoroughly, in a manner that is timely and consistent with any contractual obligations. This requires sufficient technical expertise at the right time, and an efficient approval process characterized by coordination between the relevant ministries and agencies.

Maintain accounts of the physical resource

Maintaining accounts of the physical resource base—in terms of production volumes, proven reserves and uncertainty ranges, discovered resources and remaining exploration potential—is an important foundation for policy-making and regulation of the industry. Such accounts, along with information on revenues and costs of extraction, can show how much revenue the government might expect in the future, how much should be saved, and the pace of exploration activity. Ultimately this can help the government to maximize the benefits from the exploitation of the resource base.

Further Precept Details
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