It is not new that regulatory uncertainty is of great concern for developing oil & gas projects. PWC’s Africa Oil and gas reviews have consistently cited it as one of the top three challenges facing companies operating in Africa. While there may be a certain level of mitigation by the inclusion of stabilization or economic equilibrium clauses in the relevant agreements, to achieve regulatory certainty is essential to have independent regulators to benefit not only the IOCs and NOCs but also the population.
Regulatory agencies exist in the energy industry and in many other sectors to implement regulations, monitor, supervise and sanction the regulated entities, and interact with the different stakeholders, including the government, the market participants, and the general public. The benefits of having strong and independent regulators are vast. They play an essential role in promoting investment, gaining stakeholders’ confidence, and preventing disasters – as the Macondo spill resulted in several regulatory actions.
As a Mexican-trained professional, I can’t help but begin this piece with the experience of Mexico’s upstream regulator, the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) (“CNH”).
Mexico’s Constitutional Energy Reform strengthened the CNH and granted it ministerial-level autonomy. Stakeholders widely see the CNH as a reliable, capable, professional, and trusted regulator who has successfully administered the licensing of blocks and monitors the contracts resulting therefrom. However, recently, President Andrés Manuel Lopez Obrador announced that he and his Cabinet would evaluate whether to merge autonomous institutions with certain ministries. While not expressly mentioned, this proposal may include the CNH. This action would result in the relinquishment of CNH’s independence in favor of the Ministry of Energy and represent a setback in administering oil & gas policy in the country. Such administrative “absorption” could result in the undue influence by the central government, the loss of investors’ confidence – already damaged in the industry -, unfair preferential treatment to Mexico’s NOC (Pemex), the potential loss of CNH’s technical capabilities to monitor and sanction compliance of the 111 awarded contracts, and a decrease in the interaction with the stakeholders.
While such action is not the main topic of this piece, it illustrates the importance of the energy regulators’ autonomy, particularly in a continent where several countries are on their way to becoming (or already are) oil and gas hubs. It is crucial not only to create a sound legal framework but also to incorporate regulatory bodies with de facto and de jure independence from the political system, to maximize the industry development.
Principles for the Governance of Regulators
A regulator must have a proper governance structure to achieve independence and secure the stakeholders’ confidence and trust. While not addressed directly to the oil & gas industry, the African Development Bank Group Electricity Regulatory Index outlines several principles for regulatory governance, which coincide in general with the OECD Best Practice Recommendations on the Governance of Regulators.
Such principles include, among several others:
- Establishing the Authority of the regulator in primary legislation to avoid changes by new political leadership (in Mexico, the CNH was set at a Constitutional level and governed by two federal laws, so any change requires a much harder Constitutional reform).
- Limiting the scope of political influence through the best practice approach to the appointment of commissioners or board members, including conflicts of interest checks, limits on the duration of their mandate, prohibition to work in regulated entities after a certain period, accountability, among others.
- A stable, adequate, and transparent source of funding, aiming to get full financing through fees, taxes, and duties from the regulated sector, and freedom to allocate such resources.
- Transparency and involvement of the stakeholders in the regulatory decision-making process.
- Open access to information via the regulator websites, press statements, press releases, and others.
Regulators in Africa
I have begun to get acquainted with some real efforts towards regulatory independence in my concise experience in the continent. Such are the cases of Angola’s National Agency for Oil, Gas and Biofuels (Agência Nacional de Petróleo, Gás e Biocombustíveis) recently created by Presidential Decree 49/19 of February 6, 2019, replacing the Angola National Company for Oil and Gas (Sociedade Nacional de Combustiveis de Angola) (“Sonangol”) as the National Concessionaire holder of the mineral rights related to petroleum deposits and in charge of regulating, supervising and promoting the execution of petroleum operations, and the Mozambican National Petroleum Institute (Instituto Nacional de Petróleo) created by the Council of Ministers under the Decree 25/2004 of August 20, 2004, incorporated as the regulatory Authority of Petroleum Operations in Mozambique under the supervision of the Ministry of Natural Resources. While both were created by Decrees – not primary legislation – and are under the Ministry’s supervision – which may cause undue influence- they show an example of the right steps towards regulatory autonomy. In fact, both countries have strong upstream activity, which comes to show the investors’ confidence in the current regulation; however, steps could be taken to strengthen it for all stakeholders’ benefit.
As the sector moves to recover from COVID-19, countries need to tackle regulatory uncertainty and grant significant autonomy and independence to the upstream regulators to provide investors and stakeholders the confidence and legal certainty necessary to move ahead with ambitious upstream projects. Giving such independence does not necessarily mean to over-regulate the industry, which may be detrimental in some cases, but rather to create an institutionalized, autonomous, and technically capable regulatory body to manage the widely scrutinized upstream sector. These actions may help countries bring more foreign investment and elevate the major IOCs’ appetite in entering the country.
With a team of energy experts, and wealth of experience garnered in advising multi-nationals on over 25 upstream oil and gas investments and over 30 big ticket midstream investment in 15 countries across Africa, Centurion Law Group are the industry leaders on the African continent. We take pride in effortlessly directing and guiding our clients through the vast regulatory uncertainties on the African continent.
Credit: Andres Vega Sanchez
Centurion Law Group Associate
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 PWC report, Taking on tomorrow: Africa oil & gas review (November 2018), at p. 28.
 African Development Bank Group, “Electricity Regulatory Index for Africa 2020”, httpsss://www.afdb.org/en/documents/electricity-regulatory-index-africa-2020
 OECD (2018), “Improving the governance of regulators and regulatory enforcement,” in OECD Regulatory Policy Outlook 2018, OECD Publishing, Paris, httpsss://www.oecd-ilibrary.org/sites/9789264303072-8-en/index.html?itemId=/content/component/9789264303072-8-en