If natural resource wealth is to benefit populations as a whole, governments need to put in place local content structures and solid regulatory frameworks for oil, gas and minerals extraction.
By Beatriz Mangue, Associate Attorney at Centurion’s Malabo office
A nation’s natural resources, should be a source of wealth and prosperity for all citizens. Often, however, countries with great natural resource wealth face huge obstacles in ensuring that wealth benefits society as a whole.
This issue is especially prevalent in developing nations. Norway, a highly developed country with plentiful oil reserves, leads the United Nations Human Development Index, in large part due to the equal distribution of its oil wealth. In stark contrast, Niger ranks last on the list despite its plentiful mineral reserves (and potential for oil and gas production).
Key solutions for overcoming this disparity include developing strong local content policies and attractive regulatory and tax programs.
Developing a strong local workforce is a strong first step toward economic sustainability, and policies encouraging this development should be promoted. Creating a stable and open regulatory framework, which is attractive to local and international investors alike, is similarly important to economic development. While local content and open regulations are different strategies for ensuring natural resources benefit the country as a whole, they are two faces of the same coin. The improvement of one benefits the other.
Developing local content
A 2013 report by the World Bank, “Why is local content relevant in the oil, gas, and mining sectors?” states that the petroleum and mining industries exert significant pressure for job creation and “development of a domestic private sector” in underdeveloped countries.
Importantly, the report notes that, “Even small gains in the share of local supplies to petroleum and mining projects often represent large opportunities for affected communities.” Job creation; corporate social responsibility projects that enable community-based development; technology transfers; and training programs are all tangible and long-lasting impacts of strong local content policies.
Despite a recognition of the importance of local content, a recent survey completed by Gas IQ and shared at the 12th Annual Global Local Content Summit showed that 43 percent of participating governments, national oil companies, international oil companies, and service providers believe that their current local content programs could be greatly improved.
International oil and gas companies move to a country rich in oil and gas with one goal: to find and produce hydrocarbons. If they do not find the resources, the company will ultimately leave the country. If they do find resources, the country needs to find a way to participate in their production, and there are two important policies that have been included in regulations in many countries for oil and gas producers: an obligated partnership between an IOC and a NOC; and that the equipment used on an oil and gas field is owned by the state.
While this second policy is beneficial, if the nationals of the country do not know how to operate the equipment or the field, the country has a problem. For this reason, operators are obliged to not only integrate nationals in operations, but also transfer technology through training. If the international companies fail to do so, then access to the resources should be denied. Nigeria, for example, has included a clause in its local content regulations by which an operator must have a program for promoting the transfer of technology. The regulation also requires operators to submit an annual plan aimed at promoting the effective transfer of technologies from the operator and its partners to Nigerian individuals and companies.
When drawing up a comprehensive local content plan, governments should focus on both the building of local capacity in goods and services for which the petroleum sector has an immediate need, and collaborating with companies to develop training and hiring programs. The transfer of technology is crucial to gain independence from international oil and gas companies in developing countries.
As technology continues to improve and the expense of technology continues to grow, it becomes even easier for local populations to get left behind. Chris Bredenhann, a partner at PwC in South Africa, stated, “the oil and gas industry is faced with a higher entry barrier because technology and jobs tend to be more complex, highly specialized and costly.” Well-developed technological infrastructure is essential for the oil and gas industry to work. Translating this need into local content requirements, infrastructure should be included in the corporate social responsibility programs of international oil companies.
Investments in infrastructure must be made with the country’s current needs in mind, but a good strategy should also look further to the future and create unique opportunities for investment. For example, governments could grant economic incentives to speculative companies willing to invest in collecting geological data, as it reduces uncertainty. This way, governments will be able to attract the best partners and increase its power in negotiations.
Should state regulation establish that IOCs can comply with their obligations by supporting community projects, these may include a broad variety of activities like building roads, hotels and churches. However, these activities should not be viewed as a substitute for more focused community projects that promote independence from the oil and gas industry in communities.
Regulation plays a key role
In developing countries, many investors are concerned about the uncertainty of regulatory frameworks, as regulations and enforcement can deeply impact the outcome of operations. IOCs normally have great power in negotiations, so that small oil and gas companies are typically the ones suffering from this uncertainty. An ongoing problem is tax-related, with some companies receiving ministerial exemptions. This type of policy-making and administration leads to uncertainty.
Instead, a windfall profit tax system would benefit investors as well as the government, and consequently, citizens. This means that when a company experiences a sudden, unexpected rise in income, higher tax rates should be automatically applied. In doing this, companies do not feel pressured when oil prices are low, but they understand that when prices are high, their proportional contribution must be greater.
International investors need to understand that the resources they are exploiting belong to the citizens of a host country, and the extraction of these natural resources should be linked to an increase the quality of life of all the citizens. In the public sector, governments should enhance transparency to diminish uncertainty and focus on the development of each country’s greatest resource: its human capital. This is the best long-term investment for a country.