the commonwealth natural resources forum

Proceedings of the Natural Resources Forum, 6-8 April, Marlborough House, London

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Contents

Introduction 3

Opening address - Kamalesh Sharma, Commonwealth Secretary General 4

Welcome Message from Ransford Smith, Deputy Secretary General 7

Welcome Message from José Maurel, Director, Special Advisory Services Division 8

Purpose of the Forum, Daniel Dumas, Adviser and Head, Economic and Legal Section 9

Section 1: Creating a sustainable investment climate

Legal frameworks for sustainable investment in natural resources

Investor attraction and selection process: international industry perspective

Bid round process and practice – The Trinidad & Tobago Experience

Open discussion

10

12

13

16

Section 2: Effective risk allocation

Contract design and negotiation: companies’ perspective

Issues in contract negotiation

Negotiating Mineral Agreements: The Pakistan Experience

Dispute Prevention and Resolution

Open discussion

17

20

21

22

24

Section 3: Issues in taxation of natural resource projects

International benchmarking of fiscal regimes in natural resources

Issues in taxation of natural resource projects: an industry perspective

Fiscal issues and challenges in developing countries: the case of Belize

Open discussion

26

28

29

31

Section 4: Natural resource revenue administration and management

Transparency in Natural Resources Revenue Collection: Challenges

Natural resources revenue management

Transfer pricing, issues and challenges

Implementation challenges and lessons from Tanzania

Open discussion

33

34

37

39

40

Section 5: Managing environmental and social risks

Managing the environmental impacts of offshore oil and gas developments

Regulatory framework for environmental financial risk management

The demand for an ‘environmental protection bond’ and implications for

upstream petroleum licensing

Open discussion

43

45

48

48

Conclusions 50

List of acronyms 51

Appendix A – Participant feedback 53

Appendix B – About ELS 55

Appendix C – About this report 60


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Introduction

The Natural Resources Forum was held between 6-8 April, 2011, at Marlborough House in

London. This was the first Forum of its type organised by the Economic and Legal Section of

the Commonwealth Secretariat’s Special Advisory Services Division. It provided an

opportunity for senior government officials from 18 countries across the Commonwealth to

meet and exchange ideas on the critically important subject of natural resource development.

It also provided an opportunity to share the work of the ELS team1 and show some of the

support available to member states. A fuller discussion of the objectives of the Forum follows

the welcoming messages.

The forum was organised around five half-day sessions, and this report follows the same

structure. This report is not a full, formal set of minutes of the proceedings. Rather it seeks to

capture the main points made by the presenters and a flavour of the rich discussions that

followed each section, reflecting the highly dynamic and rapidly evolving field of natural

resources management. A series of appendices provides further information about the

organisers. Electronic versions of all the presentations, together with further copies of this

report, are available from the ELS on request.

1 A full description of the ELS team, including biographies, is available in Appendix B.


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Opening address

Kamalesh Sharma, Commonwealth Secretary General

“Deputy Prime Minister, distinguished delegates, it is a great pleasure to welcome you all to

Marlborough House, and to the very first Commonwealth Secretariat Natural Resources

Forum.

We are a Commonwealth in microcosm: some 18 of our 54 member countries are here, from

virtually every continent. In conveying my appreciation to Daniel Dumas and my

Commonwealth Secretariat colleagues in the Special Advisory Services Division who have

organised this event, I also recognise other Commonwealth colleagues who will play their part

in their own areas of expertise, and applaud other international players from both public and

private sector who will bring us their own perspectives, and indeed four countries in

particular – Belize, Pakistan, Tanzania, and Trinidad & Tobago – who will share their

experience in detail.

This is another landmark for the Commonwealth Secretariat in its efforts – unfolding for over

thirty years now – to assist member countries to develop their natural resources sector, be it

in oil, gas or mining. At the core of what we discuss today is something supremely ethical. It

concerns our stewardship of the earth and our sharing of its bounty; it concerns not so much

what we inherit from our ancestors, as what we borrow from our children, and all

generations.

We humans and our complex, convoluted world are infinitesimally small, in the face of nature

and natural history. Commonwealth countries – like Zambia and Papua New Guinea – produce

a fifth of the world’s copper that we use to conduct heat and electricity in our houses, our cars.

But copper has been in use for thousands of years – smelted to make tools and artefacts.

The natural world is as old as time: we are the recent arrivals, who need to know where we

have come from, and when we might be headed – if only we knew.

So it is only right that this Commonwealth of values – for that, above all else, is what we are –

should bring both its wisdom and its wherewithal; its best policy and best practice – to so

fundamental a part of national and international life.

We sometimes forget that some of the more developed Commonwealth countries, such as

Canada and Australia, initially achieved their development and wealth to a large extent

because of the role that natural resources played in their economies. Indeed, if managed

properly, the natural resources sector is probably the only economic sector that can, on its

own, help lift a country out of underdevelopment in a relatively short period of time, if wisely

used.

For unfortunately the reverse situation is also equally significant. Mismanaged, revenues from

the natural resources sector can destabilise an economy, fuel conflict and war and corruption.

So, too, can they have a very negative impact on the environment, and create lasting damage

to human habitat.


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I have spoken of the sweep of history, and of resources that have been with us for centuries

and centuries. But so, too, must I speak of the start of the second decade of the 21st Century,

and challenging times in the field of natural resources. Oil and gas prices continue their

upward climb, as growth in demand for conventional energy sources outstrips growth in

supply of these finite commodities. In the case of the mining sector, after a huge drop in

demand for metals in 2008, prices have returned to their pre-recession levels, and demand

remains strong.

So the main objective of this Commonwealth Forum on Natural Resources is to provide an

avenue for our member Governments to discuss key issues in the development and

management of their natural resources.

The Secretariat has been providing assistance to Commonwealth member Governments in the

area of Natural Resources for almost 30 years. In visits to places like Namibia, Botswana,

Tanzania, Belize, I hear of our holistic work – not just advising on managing resources, but on

the legal and fiscal frameworks and rules which underpin successful resource management.

The Secretariat has gained significant experience and expertise, and has built a solid

reputation of “honest broker” in the field. We do so typically with hands-on assistance, on a

country-by-country basis, offering tailor-made expertise from the Economic & Legal team

within our Special Advisory Services Division.

But Natural Resource development is an area of ever-greater complexity, with more and more

at stake as the scale of potential social and economic impacts increase. It is an area tailor-

made for the Commonwealth, and its networks. Just as Commonwealth Trinidad and Tobago

can advise Commonwealth Ghana on stewarding its new-found resource of oil and gas, so can

Commonwealth countries in this room stand side by side in meeting their individual and

collective challenges.

My preface to your discussions is the simple observation that – from a global perspective – the

natural resources challenges we all face are twofold. In essence, they are about ensuring

availability of supply on the one hand; and ensuring acceptability and sustainable

development on the other.

Allow me to say a few words on these two issues.

First, a look at availability of supply.

As we know, many of the world’s largest oil fields are now past their peak, and on their way to

depletion. Added to the growing economies of the world, this is putting enormous pressure on

energy security, and obviously on prices. New oil-rich Commonwealth Countries such as

Ghana, Sierra Leone, Belize and Uganda are now coming into play, in a world of oil prices of

$100 a barrel, rather than $25.

But the real issue nowadays is not just prices, but rather one of security of supply.


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Around the world, companies have been courting countries to secure access to their

resources. Sometimes, this is done by exercising pressure. This is why we believe that the

work we are doing in putting in place adequate legal and commercial frameworks, strong

institutions and good governance principles is essential.

Second, to look at what we are calling ‘acceptability’, which is now at the forefront of the

natural resources debate.

Climate change is a major issue, as the world is struggling to find ways significantly to reduce

carbon emissions. The awful recent events in Japan have reintroduced questions concerning

nuclear energy – one of the few major sources of energy with a relatively small carbon-

footprint. Although in the very long run, nuclear energy will arguably still be necessary (and

this may be in the interest of Commonwealth countries such as Namibia, Botswana and

Malawi as uranium producers), in the medium-term, Liquefied Natural Gas (LNG) will

certainly regain strength.

As you may be aware, with the development of their LNG industry, Tanzania and Papua New

Guinea, among others will soon join Trinidad & Tobago as significant LNG producers. Finally,

in addition to renewable energy, new sources are being looked at, such as Coal-Bed methane

in Botswana. To keep up with the increasing demand in most minerals, the pursuit of new

sources of extraction has intensified, as we are seeing in the in Deep-Sea Mining now

happening in the Cook Islands and Papua New Guinea.

Acceptability also means greater awareness of environmental, social and accountability

issues. The recent Gulf of Mexico oil spill – and the serious environmental damage caused by

the accident – has had profound implications for offshore petroleum development. This is

why our work focuses more and more on environmental issues such as decommissioning of

mining or petroleum facilities, drafting environmental legislation (such as we are currently

doing in Ghana).

Last but not least, acceptability also pushes for greater transparency in the extractive

industries, so that Governments can be held to account regarding the management of natural

resource revenues. There is a growing realisation on the part of governments that while the

extractive process is purely converting a country’s mineral wealth into financial assets, this

wealth is finite. Provisions must therefore be made to secure some of these financial assets, so

that future generations also benefit from the country’s endowment in Natural Resources.

The Commonwealth Secretariat recognises the implications attached to these developments,

and has introduced transparency and revenue management principles in the assistance it has

been providing to member countries.

As such, the Secretariat is currently considering further collaboration with other

organisations, such as with the Extractive Industries Transparency Initiative (EITI).

Our objective is to ensure that, through the transparent and accountable management of

revenues accruing from natural resources, countries can benefit from increased growth,

achieve economic development and poverty reduction, and transform their societies.


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In closing, I hope that you will benefit from this Forum and by discussing the most

internationally acceptable and sustainable practices in the design of policy, legislation, and

contracts in the oil, gas and mining sectors. One of the great values of the Commonwealth is

sharing our experience and supporting each other: hence the title of our Forum – ‘Shared

Practice, Enhanced Wealth’.

I end where I began, with the Commonwealth of Values. If our brains and our hearts are our

own, ‘human’, natural resources, then let us use them. We have seen that ‘physical’ natural

resources can make us or break us: it depends on how we use our human natural resources,

to treat them. Our brains and our hearts should tell us how to treat them – and telling each

other is what this conference is about.

Once again, I thank you for being here this week, and I wish you a pleasant and rewarding stay

in London.”


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Welcome Message

Ransford Smith, Deputy Secretary General

It gives me great pleasure to welcome you to the very first Commonwealth Natural Resources

Forum. I strongly believe in the potential of natural resources to transform societies for the

better. Given the right conditions, the extractive industry can create jobs, strengthen the

domestic private sector, fund public service improvements and contribute significantly to

infrastructure development. Oil, gas and mineral resources can also contribute to inflows of

foreign investment, export earnings, government revenues and national income.

However, we are also mindful of the fact that fulfilling this potential is neither assured nor

automatic. The extraction of non-renewable natural resources (notably, oil, gas and minerals)

has often led to political instability, revenue management challenges, corruption and

increased social tension. It is therefore necessary for resource-rich countries to improve their

legislative and regulatory frameworks, build institutional capacity and strengthen

governance. These are major challenges.

This Forum comes at an exciting time for the extractive industries. Extractive industry

commodity prices surged between 2003 and 2008, and then dipped during the global

financial crisis and recession, only to continue in their upward direction from the latter part of

2009. These factors have contributed to an increase in pressure on the governments of

producing countries.

Balancing the need to optimise the benefits from natural resources whilst considering the

need to secure and sustain much needed foreign investment continues to pose a formidable

challenge for countries. This is one of the main reasons for this Forum. I do hope you find the

discussions useful.


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Welcome Message

José Maurel, Director, Special Advisory Services Division

As you may know, the Commonwealth Secretariat has been providing technical assistance

with regard to issues in natural resource management and maritime boundaries for a number

of years. In fact, we have been involved in assisting governments in negotiations and in

establishing legal, fiscal and commercial frameworks for more than 25 years.

The provision of advisory services to Commonwealth Governments on oil, gas and mineral

resource development policies and strategies is a core activity and key competence of SASD.

We maintain the requisite in-house expertise to provide such support and we are assisted

where necessary, by external experts in respect of certain specialised areas.

While many of our member countries such as Belize, Ghana, Sierra Leone and Uganda have

recently discovered oil, many others have had to address issues related to new areas, such as

coal-bed methane (Botswana), and deep sea mining (Cook Islands). Issues related to the

environment, revenue management and transparency are now also key aspects of our work.

We strongly believe that the key to successful management of Natural Resources requires

three essential components: well-enforced legislative and regulatory frameworks, strong

institutions with adequate capacity and a clear role, and good governance according to

widely-shared principles. The Forum will try to address some of these components.

SASD remains committed to assisting countries in making natural resources a blessing to our

member countries, not a curse. I wish you all a fruitful week at the Forum.


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Purpose of the Natural Resources Forum

Daniel Dumas, Adviser and Head, Economic and Legal Section

The ELS has over the years gained significant experience and expertise in the provision of

advisory and technical assistance in natural resources to Commonwealth member

governments. ELS’s primary mode of operation in this regard has centred on adapting its

international know-how to country specific economic and legal challenges in the management

of natural resources.

While member governments have benefited from this approach, it was felt that there was a

need for a central medium for sharing experiences and learning contemporary practices. This

led to the idea to develop the Commonwealth Natural Resources Forum as a capacity building

initiative, for senior Commonwealth member government officials to share and learn with ELS

advisers and industry experts.

Objective of the Forum

The event sought to provide a high-level discussion forum on today’s petroleum and mining

issues for both governments and investors. The sessions took participants through the

fundamentals of developing sound modern and sustainable policy, legislation and agreements

in line with international contemporary practice.

Relevance to Commonwealth Member Countries

In April 2009, ELS successfully launched a report titled “Minerals Taxation Regimes: a review

of issues and challenges in their design and application”, in conjunction with the International

Council on Mining and Metals (ICMM). It was pointed out by DSG Smith in his opening

remarks that such opportunities to interact in this regard did not happen enough. One of the

key recommendations by participants at the launch was for a forum which would foster

interaction on contemporary developments in natural resources between industry

practitioners and governments.

The ELS report ‘Transforming Society through the Extractive Industries’ identified weak

institutional capacity as a significant impediment to sustained development in the petroleum

and mineral sectors of many member countries. While most agencies and technical assistance

programmes focus on developing proper frameworks, countries often do not have sufficient

institutional capacity to properly implement and maintain them. A significant proportion of

ELS’ work focuses on establishing such frameworks. It is felt that additional effort now needs

to be geared towards enhancing institutional capacity. This is the primary focus of the Forum.

The comparative advantage of ELS stems from the interactive hands-on style the team

maintains while working with government officials. There is significant value in the access

which government officials gain into the ‘institutional memory’ of ELS as well as its

international knowledge-base, in addition to a high level of trust which ELS has gained from

experience in advising numerous Commonwealth countries over time.


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Section 1: Creating a sustainable investment climate

Attractive geological prospectivity of a natural resource is a primary consideration for

investment in the extractive sector. However, if a country is seeking to attract investors with

proven technical, financial and operational competence, for the development of its extractive

natural resources, it is critical to demonstrate the presence of suitable legal, fiscal, and

commercial arrangements. This section explores these arrangements, looking at the issues

from the perspectives of both a host government and an investor.

Legal frameworks for sustainable investment in natural resources2

Sustainable investment implies the allocation of resources in the most judicious manner in

order to achieve benefits for both present and future generations. This in turn requires an

effective legal framework, comprising the following elements:

- The constitution: There may be special provisions in the constitution relating

specifically to natural resources, including, crucially their ownership. Generally natural

resources are owned by the state, or a mix of public and private owners.

- National policy: A policy is simply a signpost or a roadmap. There are different policy

models available, including the ‘institutional model’ involving the judiciary or

executive branch of government or the ‘process model’, which involves a broader set of

stakeholders.

- Natural resources laws and regulations: These provide stability and are either

integrated, multidimensional or sector-specific. The Kenyan Energy Act is an example

of an integrated, multidimensional law, dealing with electricity, including rural

electrification, petroleum and natural gas as well as renewable energy, energy

efficiency and conservation. Sector-specific laws can be fragmented and may cover the

oil & gas sector, or mining environmental laws. There is no common denominator

across countries, though in all cases the quality of the regulation is measured in terms

of its ability to strike the right balance between attracting investment and providing

welfare gains to the host country.

- Contracts: These define the legal and commercial relationship between the host

government and the investor. It is important to understand the difference between a

contract (usual in common law, it means the basis of the relationship cannot be

changed); and an administrative permit (usual under continental law, and subject to

alteration). Different contractual models include a concession (royalty/tax licensing

system); a Production Sharing Agreement/Contract (where the government receives

some of the production); Risk Service Contracts; or hybrids. The box below, ‘Varying

contractual models across different oil and gas jurisdictions’, demonstrates the

diversity of approaches available to governments. Bid rounds should be relatively

short3, they should reflect geological prospectivity and socio-economic circumstances,

and they should be robust enough to allow for changing domestic or global socio-

economic and political circumstances.

2 Based on the presentation by Ibibia Worika, Adviser (legal), ELS. 3 Though sufficient time should be allowed for an investor to prepare a bid, bearing in mind that there may be several dozen other bid rounds underway around the world at any one time. Trinidad & Tobago allows companies four months’ preparation time. See box ‘Bidding rounds – an investor perspective’ on page 10.


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- Regulatory institutions: Regulatory institutions are responsible for the implementation

and compliance enforcement of regulations and contracts. There can be well-

developed laws and contracts but without the implementation capacity provided

through regulatory institutions, little can be achieved. If they are well developed,

regulatory institutions can facilitate natural resource development; if not, they may

stifle it. Enforcement can take place via line ministries, agencies or departments (for

more specific elements such as licensing procedures), and independent agencies,

which have some level of autonomy but whose remit is circumscribed by law. State-

owned enterprises may sometimes have regulatory powers, though this can lead to a

conflict of interests.

Varying contractual models across different oil and gas jurisdictions

There are many challenges to effective regulatory enforcement, including conflicting policy

goals, for example the encouragement of extractive sector development combined with

conservation laws. Whenever goals are unclear, the agency may become ineffective. There

may also be ambiguity in regulatory language which can make enforcement difficult.

Investors place a premium on the legal framework being stable and predictable, with clear

mechanisms to encourage good behaviour and punish bad practice. Political stability is also

crucial to investors, and a growing issue, as well as transparency and accountability. Other

important issues include revenue management, the quality of infrastructure, the skill level

among the country’s labour force, and the openness or receptivity of the country to foreign

investors. Regional economic development (or ‘regionalism’ – through organisations such as

SADC4, ECOWAS, the EU) is also critical as it creates a ‘bulwark’ for investors by increasing the

4 A list of acronyms appears at the end of this report.


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size of the market as well as developing a common set of rules which guarantees at least a

minimal level of democratic governance.

Investor attraction and selection process: international industry perspective5

Petroleum licensing is a highly complex process involving the constitution, ownership of

resources and reserves, multiple stakeholders, prospectivity, bid rounds, changes of

circumstances, economic stability, regulatory institutions and an educated workforce6. The

four main groups (or ‘stakeholders’ or ‘co-operants’) affected by the licensing process are the

host community7, the host government (or rights-holder), the investor, and the environment,

including future generations. A balance of interest should be sought between these four

groups.

These four groups are affected by risk, prospectivity and competition. The search for

petroleum is about management (as opposed to minimisation) of risk. There is a huge body of

research on petroleum risk. An industry maxim sates: ‘if you don’t like risk, you’re in the

wrong business’. Regarding prospectivity, there are commonly five types:

- technical prospectivity, which is subject to rapid changes (10 yrs ago, Uganda had

limited prospectivity in the oil industry, now it is considered a ‘hot area’);

- legal/contractual prospectivity, to do with the stability of the legal framework;

- fiscal prospectivity, which relates to prices, and subject to rapid change;

- geopolitical prospectivity, which can be important, for example knowing whether or not

there is a secure, safe pipeline route to the coast; and

- environmental prospectivity, which is a significant issue especially since the BP

Macondo spill8.

Each company accords different weights to the five elements. A valuable element of

prospectivity for investors is whether or not they will be granted bookable reserves. This is

the case in countries including the UK, Norway, Netherlands, US, parts of Latin America, the

UAE and Oman. In other countries including Iran, Iraq and Kuwait, reserves are not bookable.

There is tendency away from awarding investors this right as it is seen as an intangible

essence of a nation state, or a sovereignty issue.

Future challenges include the growing role of increasingly vocal and politically active host

communities, environmental considerations, and the potential for citizens to act as de facto

‘regulators’ (for example by protesting against extractive activity if there is no local social

licence to operate). Islamic law may also have a growing effect on the sector, as could ‘buy-

back’ type contracts as resource nationalism9 takes a greater hold. Prospectivity changes over

time, for example regimes with a low geopolitical prospectivity can improve their rating

surprisingly quickly as investors revise their risk assessments.

5 Based on the presentation by Mike Bunter, B and R Co, Petroleum Consultants. 6 The right licensing policy creates the conditions for an educated workforce: an estimated 350,000-500,000 people are directly or indirectly working as a consequence of a sound licensing regime for the North Sea oil & gas sector. 7 Because of the demands of transparency, host communities are de facto involved in licensing processes. 8 A participant later suggested the addition of a sixth type, ‘corruption prospectivity’, given the increasing level of discussion of this issue across the sector. 9 Resource nationalism is the trend whereby governments claim ownership of natural resources. Venezuela recently announced that foreign investors can no longer book reserves, and Bolivia followed suit shortly afterwards.


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Investors are looking for the largest amount of acreage for the longest period of time for the

lowest cost. By contrast, governments offer the smallest possible acreage for smallest period

in return for the maximum amount of money. These mutually exclusive objectives clearly

require compromise on both sides10. Governments want to attract a large number of investors

into a licensing round - the bigger the market, the better the deal. The government wants to

assess whether investors are suitable for involvement in the territory so they ask for a bid

that includes financial and technical capability as well as management capability. They use a

point scoring system for tender evaluation to make sure investors are suitable. Then the

dialogue between governments and investors can begin.

Bidding rounds – an investor perspective

Investors need to have sufficient time to be able to consider each opportunity as it arises. At

the time of the forum, there were 39 bidding rounds underway around the world, including 10

in Africa, 8 in south-east Asia, 12 in Latin America. For each bidding round that an investor is

considering becoming involved in, the process followed is roughly:

- a company analyst or researcher is requested to provide information for the

management board to be able to make a preliminary decision about whether or not to

enter the bidding round

- if the company decides to take the investment opportunity further, they work out

whether or not to partner with another company and spread the project risk

- if they decide to partner, the new ventures manager (or equivalent) will talk to his

colleagues in other companies to see who is interested

- money is found to fund in-depth evaluation of the opportunity

- the opportunity is evaluated and an offer is made

All of these stages require time and management effort, and compressing the timescale may

cause an investor to walk away from the opportunity.

Bid round process and practice – The Trinidad & Tobago Experience11

Trinidad & Tobago is a small country in the southern Caribbean, covering around 1864m2. Its

current gas production is 4.1bcf/day and although its oil production is declining it would like

to increase it in order to balance oil and gas production. Petroleum production began 102

years ago, so it has a very well-established governance structure. The petroleum industry is

governed by the Petroleum Act (1969), which has had several amendments and is currently

being revised to align it with contemporary circumstances (but without any major upheavals).

The minister is responsible for determining the areas to be made available for petroleum

exploration and development. The minister invites applications for the right to explore and

produce petroleum. Competitive bidding and one-on-one negotiations have both been used

but competitive bidding is now preferred. This has been the policy since 1987 – ‘in a

competitive environment, you get the best out of companies’, notes Helena Inniss. A number

of licences are issued including (rarely) an exploration licence; an exploration and production 10 ‘Relinquishment provisions’ provide part of the solution to this conundrum, see Trinidad & Tobago experience, page 14. 11 Based on the presentation by Helena Inniss, Director, Ministry of Energy and Energy Affairs, Trinidad & Tobago


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licence (more common and gives a company the exclusive right to develop an area); or a

Production Sharing Contract (PSC). Before 1995, there were few PSCs; since then there have

been many more. A PSC doesn’t preclude the option of using the licensing regime, for example

in two big offshore areas which have been under development since the 1970s. Generally

however PSCs are used now, on land as well as offshore.

The PSC approach has been refined since 1995 with changes including allowing more time to

explore in deep water, in recognition of the technical challenges of operating in these areas.

The exploration programme is biddable – the government has its own internal benchmark but

in their experience, when they publish this, the companies tend to stick to it. They have found

that it is better to allow the companies to say what opportunity is worth. The duration of

contracts is 25 years for shallow water, 30 years for deep water (400m or more). The

duration is flexible for gas because it has to include a market development phase. This

additional time is added to the term of contract, and companies are happy with this approach.

There are also ‘relinquishment provisions’ in PSCs because the government doesn’t want

companies retaining acreage indefinitely. At the end of each project phase companies

relinquish acreage until what they get to keep is the discovery that is commercially viable. In

some cases they can ask for acreage to be retained, up to 20%, but the government doesn’t

allow the company to keep acreage anyway – this is a lesson from past experience.

The country has attractive gas provisions and a lot of companies are involved in bidding

rounds. Over time they have chosen to have a fixed cost recovery limit, which is 60% in deep

water, 55% in average depth and 50% in shallow water. The government’s share of profit

petroleum is biddable, and it is price and production sensitive. When these are low, the

government gets a smaller take; when price and production are higher, the government gets a

higher take. The country has had a mixed experience of competitive bidding rounds, though

they have been mostly successful. They are highly dependent on the global environment,

including issues such as supply and demand, and energy security.

There are good perceptions of prospectivity of acreage in Trinidad & Tobago because it has a

stable operating environment, even though the technical prospectivity is lower than in

Venezuela12. The prospectivity of acreage is very important, especially in deep water.

Incentives have been built into PSCs, such as a reduction in petroleum profit tax from 50% to

35%, and an uplift of 40% on CAPEX for exploration drilling. There is a windfall profits tax if

oil prices go over US$90/bbl. The royalty is flexible, between 0% and 12%. With the windfall

profit, companies used to complain that the government took all of the upside, this has now

changed so that companies get a share in the upside. There is also an escrow account which

the investor pays into from start of development (the payment comes from the contractor’s

profit oil – 0.25c per boe). Five years before the operation ends, companies are required to

draw up a plan and bring it to the government, showing the cost of the plan. If more money is

required, the company needs to start paying it in at that stage. If less money is required, the

12 Some companies with offices in Venezuela have moved to Trinidad & Tobago, demonstrating that security of the operating environment is a big factor for investors.


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government keeps the money, since the company operates on a cost recovery basis. The

country has tried to reduce front-end costs to companies and cost recovery has been set at

60%.

The competitive bidding process begins with a technical review of open acreage, which is

sometimes done in the ministry, but tends to be outsourced for deepwater areas. Companies

nominate the acreage they want, and the information is kept confidential to avoid overheating

the bid round. The country decides how many blocks to offer based on its strategic interests

and then makes recommendations to cabinet on the blocks and the terms and conditions of

the bid.

The competitive bidding order by which bids are invited is a very structured process, which

sets out prerequisites and terms and conditions. The bid form is totally self-assessable, there

is a point system and companies can work out what they are likely to receive for different

elements. Up to now, this stage has taken two months. A lot of evaluation time is required to

analyse different numbers and pick the best bid on the basis of this analysis. The contract can

be up to 40 years so the information needs to be correct from the outset.

The government is hoping for the process to take nine months, which includes four months

for companies to evaluate the area and receive internal approvals, and then five months for

the government’s own process. Negotiating the PSC can take a long time, as both parties

sometimes hold hard to elements that are dear to them. In response, the government has

started publishing the model contract and asking for comments. The discussion takes place in

the public domain. The government then responds to comments from companies and others,

trying to take on board as much as possible, and then asks companies to sign a schedule

indicating exceptions to the provisions of the model contract. One month after the award of

contract, the government wants the PSC signed. This approach brings all the big issues up

front, so when negotiations begin, there is a limited number of issues to cover so the process

doesn’t end up too time intensive.

Challenges include completing the process in the stated time; the dynamic, volatile global

environment; and accidents and environmental considerations. Deep water drilling will begin

for the first time fairly soon. Bids have been received and are currently being evaluated. The

future of the oil industry in Trinidad & Tobago will be focussed on deepwater production.


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Open discussion

What are the pros and cons of signature bonuses?

- There are none in Trinidad & Tobago for deep water, to try and keep front end costs

down13. For shallow water, where there is more competition, a signature bonus was

required, in the range of US$2m - US$12.8m.

- Signature bonuses are currently US$0.5bn in Angola for 6000sq km of deep water

acreage, per contract area. Angola is regarded as highly prospective. For a less

prospective area, signature bonuses may not be appropriate.

- Many NGOs dislike signature bonuses because it represents a large cash payment

which could be misused – it presents an opportunity for corruption.

What does it mean for citizens to act as regulators?

Communities may feel resentful about the presence of oil in their territory and citizens may

end up acting as ‘regulators’. For example the Wessex basin in the UK is a petroleum

prospective area and official ‘area of outstanding natural beauty’. The government in London

licenced acreage to a foreign oil company and failed to bring the local community along in the

process. When the first seismic trucks turned up, people lay down in the road to stop them.

Why do some governments provide incentives for gas exploration rather than for oil?

There is a lot of ‘stranded gas’ around the world, often in very remote, intercontinental areas.

If the pipeline is sufficiently long and selling price sufficiently low, it is possible for the gas to

have no commercial value, so an incentive is required to make it commercially viable.

13 Rig costs can approach US$1m/day for deepwater production.


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Section 2: Effective risk allocation

Investors in the natural resources sector prefer to be able to operate within the context of an

established legislative framework, but also expect that certain key issues of importance to

them will be substantially negotiable. This section focuses on contract design and

negotiations. The first part will address issues such as what should be set by law versus

contract, which parameters should be fixed or open for negotiation, and how to best handle a

negotiation process. The second part of the session will focus on elements most frequently

raised during negotiations between governments and companies, such as provision for

discretionary power, stabilisation clauses, and dispute prevention and resolution.

Contract design and negotiation: companies’ perspective14

There is often a sense of frustration among investors that they struggle to convey their

messages to governments. This is not due to translation difficulties but rather to differences of

culture – ‘what happens when worlds collide’, according to Peter Roberts. A number of issues

come up time and again in negotiations between investors and governments, these are

described below.

Local content

When investors say that ‘local content rules must be sensible and proportionate’, they mean

that ‘it will be impossible to do the work if the rules are unrealistic about what skills and

materials can be procured locally’. One example was a requirement to make pipelines using

only materials from Indonesian steel mills, but local producers lacked the technical capacity to

undertake the high pressure, high temperature welding required, making it impossible for the

company to adhere to the requirements.

Tax rates

When investors say that ‘taxes should be favourable to the investor’, they mean that ‘tax terms

should be favourable, but at the very least, they should not be worse or less attractive than

anyone else’s tax terms (including local companies).’ Tax stabilisation clauses or other

measures can be used to guarantee equal and fair treatment. This principle can be applied

across all fiscal issues.

Government take

When investors say that ‘there should be a proportionate allocation of profits and

hydrocarbons between the government and the investor’ this means that the cost recovery

element should not be blocked by the requirement to pay an early royalty (though investors

are mindful that the government wants some kind of early economic benefit) (also, see

comment box on ‘Domestic market obligations’, below).

14 Based on the presentation by Peter Roberts, Ashurst LLP


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Domestic Market Obligations

Many developing countries, particularly those facing fuel shortages or energy security issues,

may require companies to sell a proportion of oil and gas that they produce to the domestic

market under a domestic market obligation (DMO). The prices offered domestically may well

be lower than the price on the international market, which means that investors do not like

these obligations from a financial point of view (though they may accept the need for such

obligations).

An investment strategy is based on selling products at the best price available on the

international market, so the obligation to sell at an artificially low price reduces a company’s

profits. When setting the rate of DMOs, governments should therefore be mindful of the

impact on the investor’s overall profitability and maintain the obligations at a fairly low level.

Change in law/regulatory application risk

Legal stability is important to investors. They worry that at some point there might be a

change in the way regulations are applied to the project, which will have an adverse effect on

the investment. They would like upfront protection from this, which means stabilisation

provision (treaty protection), to protect them from expropriation of their interests.

‘Expropriation’ in this case refers to everything from an asset seizure to ‘creeping

expropriation’ whereby the regime changes subtly. Investors want governments to exercise

their power objectively and fairly, but recognise that governments may react negatively to

this view since it sounds like it is a curtailment on its sovereign powers. The investor’s view is

that, if there is re-regulation of the sector, it should affect all companies (including local ones)

equally.

There is a split view among investors on the value of termination payments (whereby an

investor takes money from the government in the event of a loss of the project), with some

seeing them as a useful form of insurance, and others more tentative because the government

may see an opportunity to sequestrate the project and buy out the project.

Remittability

Investors believe there should be free remittability of cash and hydrocarbons from the

country, which means that cash generated by the investor should be remittable without

exchange controls, and hydrocarbons should be exportable (subject to domestic market

obligations).

Dispute resolution

There should be some mechanism to ensure that disputes are resolved fairly, amicably,

objectively, and in a way that doesn’t stultify continuing operation of the project. This could

be undertaken under local government law rather than international law, but disputes need

to be settled via an international panel in a place outside country (e.g. via ICSID – see section


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on dispute resolution later in this report). This means that the host government needs to

agree to abide by the findings of an international process/arbitral award.

Government control

The investor must be free to operate the project as it sees fit15. This does not mean ignoring

local standards, or reporting and data sharing requirements, but rather, being free to operate

in the best interests of itself, its shareholders, and the local communities affected by the

operations. Governments should have no say in key decision making, particularly:

- initial commerciality of the project: this refers to circumstances where an investor may

decide that there is not enough oil to be commercially recoverable, but the government

might disagree, pointing to high oil prices, and insist on production regardless of

whether the finances hit internal rates (there can be similar debates about the size of

blocks);

- ongoing production: this refers to times where, because of high tax rates and low

prices, investors are inclined to buy gas in rather than producing it, but the

government insists that the facility runs regardless of the investment climate; and

- final decommissioning: at the end of the life of project, whose argument prevails about

what ‘end of life’ means – the company may see a decline in production and announce

end of project, the government might disagree and say that there is plenty of resource

left.

Government participation

Investors say that government participation in a project is not necessary, but if it happens, it

should be on fair and reasonable terms. For example a government may reserve the right for a

national oil company to back into a contract and take 10% of the equity. The concern for an

investor is that a government will seek to exercise this because they are concerned about how

the block is being operated by the investor, and what information is being provided to the

government (the true extent of hydrocarbon plays, the difficulty of the geology, whether or

not it is a viable project, etc.).

The investor view is that if the concession is set up so there is enough information flowing,

and the domestic market obligation is being fulfilled, there’s no need for a government to back

into the concession. If it happens, investors want to know that government participation will

be ‘full value’, that is, they need to pay to participate, and if there are carried interests (which

the investor would rather not have) then they should be hard/repayable, preferably with

interest.

Recognition of international standards

The government should recognise the investor’s imperatives towards upholding international

standards, and investors like to see wording in the contract referring to ethical standards

including bribery prevention. Investors also like to be seen to be upholding critical corporate

responsibility standards, with an external audit to demonstrate that they are doing so.

15 Makbul Rahim (see next section) makes the following point: ‘It is important to minimise government discretion to the bare minimum of circumstances where critical public interest is involved. In those cases, there should be clear objective criteria on how this discretion will be exercised.’


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Issues in contract negotiation16

The key question in this section is how a contract, as an instrument, relates to a country’s

legal and regulatory regime. A basic principle of a contract is that it cannot be inconsistent

with the law – not only the petroleum/mining law but also the environmental law. The

licensing regime sets out minimum terms and conditions in law – the government wants to set

out core non-negotiable principles and make them generally applicable. There may be some

provisions which allow some flexibility, for example regarding the rate of relinquishment, or

the retention period in natural gas projects. However in general the law is non-negotiable and

there is a need for a contract in order to be able to tailor projects to the requirement of an

investor. A contract is therefore an instrument that seeks to provide a degree of

assurance/stability to the overall project.

A negotiation process might begin with a model contract which is synchronised with the law,

indicating to investors how they are expected to carry out a project, what provisions apply to

them and so on17. If there is competitive bidding, involving a licensing round, followed by

evaluation of bids, the conclusion is a selection of bids with which the government negotiates.

In mature oil and gas countries, cash auctions may be the best approach, but they may not be

applicable in new markets. In such cases, a negotiation process coupled with a competitive

bidding process may be more appropriate.

A concern for an investor relates to ancillary rights such as a drilling permit. Often, in

negotiations the company may draw up a very long list of ancillary rights. The government

should negotiate a procedure in which all ancillary rights are granted to investors, while

fulfilling those rights in the respective legislation. Subject to those rights being met, the

institutional arrangements can be worked out, for example by convening a coordinating

committee of the investor and relevant ministries.

Contractual considerations often boil down to risk management – if there are risks that are

better managed by the company, they will take responsibility. If there are projects risks that

governments have control over, these will be of concern to the company.

During contract negotiations governments are keen to enhance national capacity. One way to

do this is through participation. This is not just about an equal balance of fiscal responsibility

but also includes issues such as technology transfer, provision of employment, local content,

encouraging local businesses, training and skills development, local processing.

Negotiating Mineral Agreements: The Pakistan Experience18

Pakistan is relatively new to large-scale mining. A model mining agreement has been

developed which addresses the concerns of governments, communities, mining companies

and other stakeholders. It provides clarity over the basis for negotiations, sets out the

substantive rights and obligations of mining companies under law. It also acts as a legal

16 Based on the presentation by Makbul Rahim, MMR Consultants 17 Trinidad & Tobago’s practice of allowing a four-month period for investors to critique model contracts was welcomed by the audience. 18 Based on the presentation by Irshad Ali Khokhar, Director General Minerals, Ministry of Petroleum and Natural Resources, Pakistan.


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instrument to provide stability, assurance, and investment security for mining activity in the

country. Governments are bound to the agreed terms for the duration of the agreement unless

amendments are mutually agreed.

Mining agreements are not the usual way to regulate a mining operation and their use is

restricted to large-scale operations involving foreign investors. It provides a mechanism to

clarify how much of the regime should be fixed in legislation and how much should be left

open for negotiation. Pakistan’s model mining agreement covers a wide range of areas

including rights and obligations; investment protection; financing, royalties and taxation;

corporate social responsibility; and protection of environment and reclamation.

Located in western Pakistan, Reqo Diq is the world’s fifth largest copper deposit with

estimated reserves of 2.20 billion tonnes of copper ore. The first agreement to develop the

deposit was signed in 1993 and ownership has shifted a number of times since then. Most

recently a series of scoping, feasibility and Environmental and Social Impact Assessment

(ESIA) studies have been undertaken, for a total investment of US$435m, of which US$214m

covers exploration activities. The draft mineral agreement covers fiscal systems, dispute

resolution, regulatory issues and infrastructure, setting out such details as the life of the mine

(56 years), and involving the government of Balochistan as regulator, the government of

Pakistan as guarantor and regulator, and the investor (Tethyan Pakistan).

There are a number of important commercial terms set out in the draft agreement. These

include a reduction in corporate tax from 35% to 25% and stability for the full life of the mine.

50% of tax payments can be withheld by the company in return for specified infrastructure

obligations. Regarding royalty: the investor will pay 2% of gross sales proceeds for the life of

the agreement, with 50% of the tax available as an offset as above. The infrastructure

obligations cover power supply, a road connection from Gwadar Port, and a rail connection

from Karachi to locations near to the deposit.

The agreement is based on a number of precedents from power and petroleum sectors as well

as from competitors. There are however a number of new elements that the government has

not dealt with before, including the infrastructure obligation, the use of an export processing

zone for the life of mines, and a dispute resolution mechanism.

A detailed review process has been undertaken for the mineral agreement over the course of

the last few years, between the three main parties involved. Many amendments and reviews

have taken place over this time. For example the company sought to self-govern mining

operations in a number of areas, but this proposal was blocked by the government. Other

counter-proposals were made by the government parties in the areas of infrastructure, tax

exemption and dispute resolution (for example, the use of ICSID19 for international

arbitration). There was also detailed negotiation about the split between investor take and

government take.

19 The International Centre for the Settlement of Investment Disputes.


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Many of the outstanding issues have been settled via the input of a high-level, 13-person

steering committee headed by the Minister for Petroleum & Natural Resources and including

government representatives from a range of departments at national and regional levels. The

steering committee is currently meeting for the second time with a view to resolving

outstanding issues including the settlement of the royalty rate, the operational obligations

relating to social development, and value addition up to the final refining stage. Pakistan is in

a strong position at this pre-agreement stage because of the mineral potential and the

international competitiveness of its regimes. The government hopes to conclude negotiations

with TCCP (the investor) in the very near future.

Dispute Prevention and Resolution20

Dispute resolution is a critical matter that investors expect to be taken into consideration

when they are deciding whether or not to invest. The ideal is for disputes to be resolved in an

orderly, lawful and amicable manner, while preserving the contractual relationship if

possible. A number of different dispute resolution options exist, with an overall trend towards

harmonisation under international law. ELS assists member countries to address dispute

resolution issues, including through the development of model contracts and agreements.

Disputes often arise over an interpretation or application of an agreement or contract

between a government and an investor. These are known as ‘mixed disputes’ (public-private

disputes, as opposed to disputes between two private parties). The extractive industries

require high capital outlays, long contracts, a range of technical issues, and sovereign risk - all

of which creates a broad scope for dispute. It is therefore vital for the government and the

investor to consider in advance, within the contract, how disputes will be resolved, for

example through the use of a model contract or agreement. Such documents reflect

internationally agreed standards and practices.

There is a continuum of options from highly informal through to formal, adversarial, rules-

based processes. The majority of disputes are resolved informally through negotiations,

which are the most efficient way to deal with concerns and allow the contractual arrangement

to continue. When negotiation fails, the first fallback position is usually to seek third party

intervention, whose central tenet is for the parties to consent to be bound by the findings of

the process. International arbitration is a last resort. The categories further break down as

follows:

Fact-finding: This model helps to clarify issues and resolve a dispute before it gets out of hand.

It results in report limited to findings of fact, and parties are free to decide how to give effect

to the report.

International conciliation: Under this model, parties agree to appoint a conciliator or

commission to clarify issues and secure agreement. This is a formal process which doesn’t

involve rendering of a binding award. It ends with a report containing recommendations, and

if parties have agreed on plan of action, that report can contain the agreement. Conciliation is

20 Based on the presentation by Joshua Brien, Adviser (Legal), ELS.


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less adversarial than arbitration and more and more international organisations have applied

this approach.

Expert determination: This model is often used in conjunction with arbitration and features a

qualified expert who resolves issues, especially those of a technical nature for example

regarding the payment of royalties. This can be an informal process (which is quick and

cheap) and results in binding determination by the expert, unless parties have agreed

otherwise. ELS has worked with the government of the Seychelles on a clause on expert

determination, designed as an adjunct to formal dispute process – the two elements can work

together.

International arbitration: This is the most costly and time-consuming model, but some

disputes can’t be resolved by any other means. It involves the appointment of an arbitrator or

tribunal which issues an award to the parties to resolve the matters in dispute, and results in

a decisive outcome –the rendering of a binding and enforceable award.

The best known rules covering dispute resolution have been developed under the United

Nations and are known as UNCITRAL21. They cover all procedural issues. A number of bodies

apply international arbitration rules, such as the Permanent Court of Arbitration (which was

originally established for state-to-state disputes, but now works on mixed disputes, including

those relating to natural resources). ICSID provides another forum for the resolution of mixed

disputes under the Washington Convention. There are 157 parties to the convention,

including 41 commonwealth member countries.

ICSID provides an international agreed mechanism for the resolution of disputes between

states, and mixed disputes. Awards are binding and may be reviewed, revised (or annulled).

ICSID is increasingly popular and has such a full case-load (many of which are from Latin

America) that resolution of cases has slowed down. Many cases brought before ICSID involve

natural resources, such as the cancellation of oil concession. If a company succeeds in

characterising a dispute as an investment dispute they are able to have it heard at ICSID.

21 United Nations Commission on International Trade Law.


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Open discussion

Comment from a participant:

The challenge for most developing countries is that they have laws which are old and require

updating, hence, many countries do not have agreements for reciprocal investment and

protection of the government. Contracts are often negotiated at different times, under

different circumstances, which is why at particular times certain concessions may be offered.

However, investors often allude to precedent and attempt to circumvent the new policies of a

government, being reluctant to enter into new or revised agreements. It must also be

remembered that the mining and petroleum industry are distinct. Hence, laws and model

documents/agreements should be tailored accordingly.

Does being a signatory to ICSID allow a host government to be involved in the arbitration

process?

Any country that is a party to the treaty which established ICSID has an opportunity to put

forward their concerns, and be involved in many of the processes surrounding the arbitration,

including the selection of the panel and forum

Is it possible to write into law the method by which disputes will be handled?

There can be and there are instances when countries have laws which require and refer to

arbitration, yet when they don’t have such laws in place, resolution of the dispute is usually

decided on an ad hoc basis. In this regard, in order to prevent such ad hoc resolution of

matters, it is prudent to include dispute resolutions provisions in model law or contract which

will form part of negotiations between the investor and host governments.

The Trinidad & Tobago PSC example showed that one can go outside the ambit of the law, to

the extent that matters can be negotiated for, even if the law has not yet been amended or

revised to address such prevailing issues at that time.

The government often encourages investors to be involved in the country, yet at times when the

government wants to be involved in critical decision making situations the investors declare that

the government should not be involved. In this regard, how can government know and be

assured that the interest of the country is being taking into account?

Citizens are the stewards of a country’s natural resources, hence, although investors are often

ignorant of the public interest and may adopt aggressive negotiation tactics, there is a need

for investors to be aware of what is reasonable, what is unreasonable and how to be sensitive

to negotiations.

A balance needs to be attained between the objectives that an investor wants to achieve and

the matters where the government wishes to stand firm. Robust and open negotiations from

the outset, which allow for clear channels of communication between the government and

investor throughout the project, can help to avoid difficulties further down the line.


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There is often a conflict between government objectives and investor objectives and a

government will need to provide for and balance the rules and legislative provisions that

support the public interest and yet, can attract investment.

There is a perception that the investor does not want local content, but can’t these requirements

benefit the investor as well as the government?

Local content can benefit investors over the long term in a number of ways, for example

through increasing the size and diversity of the domestic private sector (and therefore the

quality of the supply base), or through increasing the pool of skilled employees available for

recruitment to the company. Both of these elements may in turn reduce the investor’s costs

because it becomes cheaper to access these resources locally as compared with bringing them

in from an international location. However, in the short term, meeting local content targets

usually represents a cost to the investor because it requires capacity building for local

businesses or potential employees. These costs can sometimes be shared between companies

and governments (and international development organisations).

Usually an investor decides to invest depending on geology of area and legal framework, but

what are the other critical features of a regulatory regime that foster investment?

The legal framework of a country should be clear and stable but also dynamic, in relation to

policy changes. Generally, at any given time law is evolving, however, it cannot or should not

be developed to respond retrospectively to new policies and prevailing issues at a particular

time.

Does ICSID waiver sovereign immunity?

There is immunity from suit and immunity from execution. ICSID removes the immunity from

suit to the extent that an arbitration award is to be treated as akin to a final judgment of a

court of competent jurisdiction. However, execution against government assets is an entirely

different matter which is not under the purview of ICSID.


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Section 3: Issues in taxation of natural resource projects

Many resource-rich countries have special fiscal regimes relating to the extractive sector,

given the unique nature of the industry. Where governments choose to set up these regimes,

they are faced with a range of complex questions. The first part of this section covers the main

considerations for taxation of the extractive sector, making a case for why they should be

taxed differently, and discussing various tax instruments and the main characteristics of an

effective fiscal regime. The second part will consider the question of government take and

international fiscal competitiveness.

Tax administration of extractive natural resources has presented significant challenges for

governments. The problem is often not in the fiscal regime itself but in the failure to enforce

fiscal rules. This section explores tax administration practices that can help a government

maximise its revenue collection, including the appropriate determination of tax liability,

transfer pricing, tax filing, and auditing.

International benchmarking of fiscal regimes in natural resources22

When considering different fiscal regimes and comparing competitiveness, the conventional

wisdom is that the more competitive a country’s fiscal system, the more likely it should be

that the country will attract investment. This is because of the perspective that international

capital is mobile, and investors will go elsewhere if the regime is uncompetitive. However, as

of 2008, in the oil sector, about 150 countries were offering investment opportunities and 200

companies were pursuing these opportunities. The assumption that the bargaining power lies

with the company is increasingly not the case (see comment box, below: ‘Negotiation power

swings back to governments?’).

The Commonwealth Secretariat’s benchmarking work in this area helps governments to

assess the quality of their fiscal regimes by comparing practices with a range of peers. This

helps countries stay abreast of good practice and ensures that countries are not

comparatively short-changed. This is based on the idea that a country’s bargaining position is

enhanced when it is clear what’s on offer from peer countries.

Negotiating power swings back to governments?

The view that the competitiveness of a fiscal regime is a critical determining factor in its

success held sway for a long time when prices were relatively low and resources and reserves

appeared plentiful. During these periods governments were wary of asking for too much from

companies. In the last few years, however, bargaining power appears to have shifted back into

the hands of governments.

Chinese oil demand alone (11bn barrels per day) is driving the market in an unprecedented

way and its demand will soon be higher than that of the US. Meanwhile it costs US$70/barrel

to produce oil from Canadian tar sands. Therefore, as demand increases, and the quality of the

remaining oil diminishes, a company’s options are limited.

22 Based on the presentation by Ekpen Omonbude, ELS Economic Adviser


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The point was underscored by Andre Cho, director of petroleum for the government of Belize,

who agrees that countries are in a strong position with respect to negotiating terms, and that

governments often underplay their hand. His view was that, as the number of oil fields

worldwide dwindles, companies will increasingly have to accept the terms that they are

offered by government.

There have been three broad periods of fluctuation in oil prices since the mid-1970s (see

diagram below). During the period up to the early 1980s, this was a period of increased

government revenues as the profitability of projects went up. This coincided with a period of

nationalisation, and the prevailing philosophy was to try and get more out of project

revenues. Between the early 1980s and the turn of century, there was an increase in countries

offering acreage, lower prices, and better technology allowing companies to go offshore. This

resulted in a shift in bargaining power from governments to investors.

From the period 2003 to the present, the high spike in oil prices has led to a growing shift in

ownership of acreage from companies to governments. Increased oil prices have returned

increasing revenues to projects. Governments signed deals when prices were low and there

have been questions over the amount of revenue earned, and a general tendency to want to

bring investors back to table and re-think contracts. There has been a temporary slowdown in

the renegotiation drive, but as prices go up again, so will the renegotiations.

Three phases of oil price fluctuation since the 1970s

The diagram shows that, in general, when oil prices are high, a government’s negotiating

position is stronger than when oil prices are lower.

The benchmarking exercise comprises three phases. The analyst selects a group of countries

with similar technical, legal, fiscal and environmental characteristics. The ‘fiscal burden’ is

assessed in order to identify the level of government take and measure the impact of the

regime on government cash flow, as generated by a hypothetical extractive sector project. The

next step is to identify the main sources of government revenue and assume a field size


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(including import duties, royalties, income tax, additional dividends etc). The model does not

include minor fees such as rents, licence fees, bonuses and so on, even though signature

bonuses can reach into the hundreds of millions of dollars.

The next step is to determine the fiscal burden – if revenues are received later rather than

earlier, the government may have to find other sources to meet budget commitments, through

raising taxes, reducing expenditures, increasing government borrowing and so on. This can

also be analysed from the perspective of budget surplus and the development of a sovereign

wealth fund which may bring a return to the government. There is also an opportunity cost in

making the investment at the current time rather than later, and this is considered in the

model.

Next the model considers how long it would take investor to recoup cost of investment, and

the responsiveness of the government take – how much does the government get in return as

the profitability of the project increases? In reviewing a number of different regimes, it shows

that a number of oil regimes are progressive and a number are regressive, but in the mining

sector only two or three regimes are progressive. In a progressive regime, as profitability

increases, so does the government take. Different measures can be used to delay or speed up

the incidence of fiscal burden. For example the front-end burden can be reduced, which is

valuable from an investor’s perspective, but may not be so good for the government as it is

often looking for early signs of benefit from a project’s presence.

Having undertaken the benchmarking exercise a country can identify the areas where

adjustment is required in order to ensure at least a minimal revenue to government. Simple,

profit-based regimes are effective from the point of view of being low-maintenance and

easily-established. Non-fiscal characteristics must also be taken into account, for example

geological prospects, infrastructure, political and environmental risk, and so on. There is a

constant feedback process involved.

Issues in taxation of natural resource projects: an industry perspective23

What makes a tax regime attractive to investors? This question can be considered with

reference to the UK’s oil and gas regime. The UK’s is a mature regime – production peaked in

1999 and has fallen off since. There are substantial reserves left but they are in decline due to

the high cost of recovery and a changing tax regime. However, fiscal receipts still comprise

about 25% of UK corporate tax take. This is expected to decline in the medium term, but there

has been a recent tax increase so receipts will remain high in the short term. There remains a

fair amount to play for in UK reserves, including shale gas. The decline in the sector is not

inevitable and can be influenced by government policy.

There has been constant adjustment to the UK’s oil and gas regime. For example in 2002,

when the government introduced a supplementary charge when oil and gas prices started to

rise, this prompted a series of changes over the next ten years. A number of countries

followed suit with ‘windfall taxes’, but the UK was first. From an investor perspective, stability

23 Based on presentation by Roman Webber, Partner, Deloitte


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is important and a fiscal stability clause can be very valuable to an investor. Knowing that net

present value (NPV) won’t change halfway through the project is important to companies –

recent cuts in NPV have been very badly received and the UK has recently fallen in terms of

international competitiveness.

An important concept for investors is creditability, which is the idea that a company shouldn’t

pay additional tax in its home country above what it has paid locally. In other words there

should not be double taxation and host countries should ensure that tax is creditable for

investors elsewhere. If this is not the case an investor’s fiscal burden could be doubled. It

becomes complicated in production sharing arrangements where the government may pay

tax on the investor’s behalf, which seems like a good deal, unless the investor is still liable for

the tax in the home country.

Accounting for tax is important and depends on where the company is incorporated and

listed. A company may use the UK or US GAAP (generally-agreed accounting principles) or the

IFRS standards. If companies have to book two ‘hits’ to their accounts (ie where tax is not

creditable) they tend to react badly. If a government must make changes to a fiscal regime it is

important from an investor’s perspective to make all the burdens happen at once so that

companies can account for it effectively.

Work has been undertaken by a consultancy, IHS CERA, to understand how domestic tax

regulations of various jurisdictions can impact the competitiveness of a bid for an overseas

project. For a US-based company, for example, how would the US tax regime affect a

company’s bid for work in Nigeria? Certain classes of investors are affected in different ways –

US investors may be adversely affected as opposed to nationally-owned companies and

independent companies, who pay low tax in their own countries.

Another important point for investors is clarity over the interaction of a country’s tax

provisions with local law. A PSC can either be independent of local law, or part of it, or

enshrined in it. The tax liabilities differ in each case and it is important for the investor to

have clarity as it may determine the creditability of taxes as well as the form in which tax is

paid. If local law insists on having a locally-incorporated company, this can restrict foreign

investors. In conclusion, a number of factors come together to make a successful regime from

an investor perspective – and the key impacts are sometimes in the details and not

immediately obvious when a change is introduced.

Fiscal issues and challenges in developing countries: the case of Belize24

Developing countries face highly complex challenges in attempting to exploit newly-

discovered natural resources in a responsible and sustainable way. In Belize, oil was

discovered in 2005 and a huge burden of work was involved in order to put in place the

infrastructure to respond to the discovery. Historically (since the late 1950s), most surveys

had taken place offshore, with many exploration wells drilled onshore in the same period.

When oil was discovered in 2005, many more companies arrived in search of exploration

24 Based on the presentation by Andre Cho, director of the geology and petroleum department in the ministry of natural resources and the environment, government of Belize.


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licences. 45 new wells have been developed since 2005 and four seismic surveys undertaken

(there had been none prior to 2005). The box below (Belize’s petroleum revenues, 2006-

2010) shows the rapid recent growth in the sector.

Belize’s petroleum revenues, 2006-2010

The first offshore discovery was in central western Belize, a fairly small field, where

production started in 2005. Production began quickly because the government wanted

revenues, and the small field impacted the country significantly. Many challenges arose,

largely due to a lack of experience in the sector, including a lack of staff; legal and contractual

deficiencies; and fiscal deficiencies (for example, high auditing costs compared to Trinidad &

Tobago). An immediate response was required and the government asked Trinidad & Tobago

for advice and technical assistance. The Trinidadian Prime Minster sent a senior

representative to provide advice. ComSec also provided assistance, for example through

providing a review of petroleum legislation and updating the model PSA. The ComSec’s ELS

team also helped develop a petroleum revenue management fund.

New personnel were hired in Belize, increasing staff levels from one to seven, and the UN was

approached for funding to build capacity in order to create a pool of in-house consultants in

favour of external consultants. The legal regime was developed in consultation with a number

of other departments including the income tax department. The fiscal regime was a hybrid

royalty/tax regime and PSA regime, where the government had a 10% buy-back option. This

was very difficult to administrate and included a negotiable royalty (a minimum of 7.5%).

Income tax was fixed (therefore regressive) and the minister of finance changed the income

tax regime without alerting the petroleum department. The wording on the government’s

10% option was ambiguous, i.e. whether it referred to 10% of commercial fields or 10% of the

entire project. These weaknesses were resolved, including the proposed development of a

public participation vehicle to enable the citizens of Belize to share in the profits from oil

projects. Other adjustments to the regime didn’t go as planned due to a change of government.

The new terms for investors included a requirement to provide degree-level training in

petroleum areas; to contribute to an environmental common fund (with the amount based on

the prospectivity of the field); and there would be no signature bonuses. Different fields were


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mapped to ensure an adequate state take (low-medium-high), with the royalty higher for

onshore than deep offshore.

Belize’s revenue management fund is not yet established. The idea is that this would take

money from royalties, PSAs, income tax and the government’s 10% interest (excluding the

public participation vehicle, if it is accepted). An oversight committee would manage the fund

and provide transparency, along with a public information office which would clarify what

revenues had been collected. The government could invest the money outside the country,

with an annual transfer going from the fund to the government budget annually on the basis

of an agreed formula. There would be clear rules regarding withdrawal and use, and these

rules would be enshrined in law so that no administration could change it unless there was a

¾ majority vote in the house. An Act of Parliament was passed in 2007 to implement the fund

but it has still not been set up due to the new administration’s fears that they will not be able

to access revenues.

Open discussion

What are the opportunities and challenges in recovering infrastructure development costs from

investors? Should governments provide the infrastructure?

If an investor states that infrastructure needs to be provided by the government, the costs

need to be factored into whatever fiscal package is agreed. If an investor meets the cost of

infrastructure development (for example, transporting production to a port), this would also

need to be reflected in the fiscal package (ie the government take may need to be adjusted).

Governments can invest in these projects in a number of ways, for example via tax allowances

if an investor pays for the infrastructure, or by government participation if the infrastructure

has some kind of public usage (for example, road building). This could be in the form of

concessional financing either through a development finance institution or via user fees.

If you already have an income tax act governing taxation, is there any advantage in having a

specific petroleum tax in addition?

In the experience of Belize, it is better to have a separate petroleum taxation law. There are

three elements in Belize: one relating to income tax (25%), a second on petroleum (40%),

with its own regulations and guidelines, and a third is a corporate tax based on gross revenue

rather than income.

Which of the 23 mining regimes are progressive, and how do you transform a regressive regime

into a progressive one?

The two progressive regimes are Swaziland (based on recommendations prepared by ELS)

and Uganda. Pakistan’s regime is expected to be progressive but is currently under

development. Simple instruments can make a regime progressive. The key is to identify a

threshold of profitability after which tax increases – linked to the investor’s expectations of

the profitability of the field. Whether to enshrine this in contract or in law depends on

capacity, country context and so on.


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What are the benefits of a windfall tax?

Flexibility is essential in capturing money from price peaks. If you can take account from the

outset of price changes and cater to upward as well as downward movements this encourages

flexibility while also providing a degree of stability for the investor. In these cases companies

know that as they get more profitable they will be taxed more. It is better to make these

arrangements from the outset rather than as a windfall tax as it increases stability. Another

difficulty with windfall taxes, from an investor’s point of view is that at time of high prices, the

cost of their inputs (steel, fuel, etc.) also increase so the overall increase profitability may not

be as dramatic as it might appear.


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Section 4: Natural resource revenue administration & management

Large sums of revenue from extractive production can cause adverse socio-economic impacts

if poorly managed. Many governments are now putting in place revenue management

mechanisms to ensure reliability, transparency, and accountability in the collection,

allocation, and utilisation of natural resource revenue. The section explores key

considerations for designing these mechanisms, such as natural resources funds, with

examples from around the world.

Transparency in Natural Resources Revenue Collection: Challenges25

The Extractive Industries Transparency Initiative (EITI)26 has its origins in the concept of the

‘resource curse’, or the paradox of plenty. Simply put, these theories state that a sudden flow

of natural resource revenues in a developing country, can have a destabilising impact on

economies and societies. Every study that looked into this phenomenon pointed to the need

for transparency – the need to know how much money is coming from the extractive sector.

Transparency can lead in turn to greater accountability and better governance of the sector.

A sustained campaign by a huge coalition of NGOs called Publish What You Pay pressured

companies to declare their payments in countries where they were operating. Companies said

that this would break confidentiality clauses on their contracts. A discussion followed about

whether or not this was the real reason, but in any case, it became necessary to involve

governments in the process, as well as civil society oversight. This tri-partite approach was

the basis for the EITI (see diagram below for a visual overview of how EITI operates).

25 Based on the presentation by Eddie Rich, deputy head, Extractive Industries Transparency Initiative. 26 Eight Commonwealth member countries are already implementing the Extractive Industries Transparency Initiative (EITI), and the experience may be relevant for several more countries.


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EITI aims to be a global standard and has been endorsed by many international organisations.

A number of supporting countries and organisations provide technical and political

assistance. The heart of the EITI is the report. This consists of information provided by

companies about what they pay to governments, combined with information provided by

governments about what money they receive from companies. The two sets of figures come

together in an independently-verified ‘reconciliation report’ in a process overseen by a

multistakeholder group.

This report then acts as the basis for wider dialogue, since if governments are sitting down

with companies and citizens the debate is not just about revenues, but a whole set of

accountability and management issues in the extractive sector including licences, operations,

how the money is spent and so on. Local processes are country-owned – the country decides

what the group most needs to discuss and what the report should cover. Internationally, 20

indicators are used to decide whether a country is compliant with the EITI rules. So far, 11

countries are in compliance, 67 reports have been produced and 0.5 billion people have

access to information on extractive sector revenues, many for the first time.

The quality of the data in reports is variable, but even though the first report in each country

is often quite weak, each one tends to improve along with the quality of discussion. There can

be some discrepancies between what companies pay and what governments receive. Often

these are accounting errors, but sometimes more corrupt activity is taking place.

EITI is not right for every country and it depends whether the process of resource extraction

is an issue of contention and debate. In each of the 35 countries where it has been applied

there have been different outcomes and benefits, though a common theme has been the

building of trust and dialogue. Australia is currently piloting the initiative following a big

debate last year about a mining ‘supertax’. In Liberia, the minister says that EITI attracts high

quality FDI; in Nigeria and Azerbaijan they say that their countries’ credit ratings have

improved. In other countries EITI has led to an improvement in tax collection systems, having

highlighted where companies have been avoiding tax. IMF and others are interested in

helping countries to improve fiscal management and companies are interested because it

helps create a more level playing field.

Natural resources revenue management27

Good natural resources revenue management proceeds from the perspective that revenues

related to the extractive industries are fundamentally different from other types of revenue.

Proper management of these revenues requires three elements: 1) adequate frameworks, 2)

strong institutions acting according to 3) good governance principles.

Natural resource revenues can also be different for a number of reasons. One good example is

the phenomenon of ‘Dutch Disease’, which affects all resource-rich countries, regardless of

their state of development. One of the causes of Dutch Disease is a labour shift towards

extractive companies, which pay better than other companies, leading to an inflationary

27 Based on the presentation by Daniel Dumas, adviser and head, ELS. See also Daniel’s report, ‘Transforming society through the extractive industries’ (Commonwealth Secretariat, 2010).


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pressure on the job market. The most important impact that leads to Dutch Disease is the

exchange rate. Increasing export revenues are pegged to the dollar, and a host currency tends

to inflate and become less competitive. The Dutch Disease effect hits small economies harder

than large economies.

Natural resource revenue can also be seen differently from other forms of revenue since it is

not really income in the traditional sense, but a translation of wealth lying under the ground

into cash and financial assets. In this way it is more like a bank account, and each time an

ounce of gold or pound of copper extracted, it is gone forever – there is no opportunity to

make additional deposits.

Another characteristic of natural resource revenues is their volatility. This makes it difficult to

balance the state budget. There is also the question of resource rent. The price at which the

products of the extractive sector are sold has no relation to cost of production at a single

operation. A barrel of oil can be extracted for less than US$10 in the Middle East while it costs

US$70 to produce the same amount from the Alberta tar sands. This gap is known as the

resource rent. It is essential that the fiscal regime is flexible enough for the government to

capture this additional value, since countries are the holders of the resources rather than

companies.

Introducing ‘the Five Ss’

Stabilisation

As discussed, mineral prices (and revenues) are volatile and there is a need to protect the

budgeting process. Funds should be built up during boom times and drawn down in times of

low prices. Where there is significant price volatility it becomes difficult to set a threshold

price. Stabilisation can help with managing a government budget, but it doesn’t help with

saving for future generations. If the threshold is at the correct price, the money available goes

up and down but there is no overall build-up of wealth.

Sterilisation

The purpose of sterilisation is to mitigate Dutch Disease effects, which is particularly urgent

for small economies. Norway invested all its revenues outside the country, because the

government realised that they had to sterilise the revenues. Although they have been doing

this since the outset, Norway has one of the highest costs of living in the world. This becomes

even more difficult in developing countries where non-natural resource revenues are small.

Some countries have found that the cost of living becomes very high in areas where there is a

lot of extractive activity. All the money coming into the country causes major inflation which

is hard to manage. It also causes a lot of problem for other economic sectors which tend to

become less competitive and sometimes even disappear.

Savings

Countries need to save some financial assets for future generations. This is difficult because

countries (especially developing countries) have ongoing budgetary needs. The question of

saving relates to ‘flattening’ the revenues from EI (see diagram below which shows the


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uneven nature of revenues across the project life cycle), by transferring money in increasing

amounts per year and saving the surplus for future generations. The best scenario, where

there is genuine intergenerational equity, is that once minerals are depleted, there are

sufficient savings in the country’s savings fund to be able to maintain the same levels of

budget transfer in perpetuity.

Typical petroleum revenue cash flow across a project

The green, jagged line shows typical income from petroleum revenues over time. Note that at

the line falls away at the end of the project. The orange line shows the ideal ‘flattening’ of the

revenues which is achieved through saving a certain amount each year, such that the

revenues continue to provide an income to the country following the closure of the project.

Safeguarding

An intrinsic problem with natural resources funds is that the build-up of funds into a single

fund makes it very visible and tempting for a government to use. Hence the fund needs to be

designed in a way that makes this difficult to happen, for example by ring-fencing it.

Socio-economic development

Although saving is important, it is necessary in developing countries to find a way to use some

revenues for infrastructure, roads, electrification, health and education. If a government

spends wisely, these will also be of benefit to future generations. Spending per se is not bad if

done the right way. Often the projects begin well but with more and more money available the

quality of investments reduces. For example as a result of petroleum revenues, the Timor

Leste government budget tripled in matter of years and there was insufficient capacity to

manage the additional inflow of money. Investment requires strong institutional capacity in

order to be efficient.


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Transfer pricing, issues and challenges28

Transfer pricing29 is gaining more importance due to the greater interest in transparency.

Large parts of the global economy are now short of cash, for example in the UK, the

government is trying to get a lot of tax from banks and the natural resources sector. This has

been termed the ‘dash for cash’. There is a lot of money in the energy and natural resources

sector (rather than in banks). In the recent UK budget there was an increased levy on

exploration in the North Sea.

From the perspective of companies, tax equals cost, so tax efficient planning is good for

shareholders, as long as no rules are being breached. The competitive nature of the global

economy is also causing complexity as companies want to be more efficient. The energy and

natural resources sector has seen a big wave of takeovers of less efficient companies. A lot of

energy/natural resource companies have roots in colonial administration, the operations

were little fiefdoms where materials were extracted with little communications with head

office. This is now changing and many companies are much more centralised. There is a need

to raise funds to open a mine or oil field, it’s a very capital intensive business, requiring a lot

of funding and a lot of controls (see diagram below, ‘Financial risks along the natural

resources value chain’).

Financial risks along the natural resources value chain

Extractive sector companies are now more like other multinationals where there is a

centralisation of administration and risk. For example, diamonds were traditionally sold in

the UK or US, but now China and India are the biggest markets. For a company the challenge is

how to ensure that diamonds are cheap in China and India but expensive in the US and UK?

There are therefore lots of interactions between different parts of multinational enterprises. It

is a fast-moving and rapidly changing business environment, barriers to trade and investment

have come down, and there are more IT and communications.

Meanwhile all governments are short of cash and there are aggressive tax authorities at home

and abroad. If you need those revenues as a government, how do you collect a fair share of

28 Based on the presentation by John Neighbour, partner, KPMG 29 Transfer pricing relates to the selling of goods or services between divisions of the same company.


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profits from natural resource development? The complexity in the value chain makes it

difficult to work out the value of stuff coming out of ground when there is a whole range of

transactions to realise the value. Do countries have the capacity to police whatever transfer

mechanism they put in place? How do you build the capacity as a developing country? How do

you seek to collect the economic value from natural resources through income tax and

corporation tax? It is necessary to work out what the profits are, which involves complexity.

Some have tried to collect tax on transactions like licence fees and royalties (which raise the

cost of business for companies).

Using the example of diamonds: the stones are extracted from the ground, for example in

Namibia, and then sold on in London or New York. A company such as De Beers may have a

joint venture with the government to mine and the company undergoes a whole series of

transactions to sort, polish, market, then distribute the diamonds. All of this may be

undertaken by Rio Tinto, and all governments want to tax the company on whichever element

of the value chain takes place in their country.

A lot of money is spent by companies trying to extract natural resources through exploration

projects that come to nothing. Money is spent on extraction technology - equipment and

funding and technical support to work out how to undertake extraction. Companies are

putting a lot of services into the mine to extract the products efficiently. Once the products are

extracted, some kind of trading takes place – there is a need to sell it to people. The product

may be processed through the company’s own value chain, or it may be sold on an open

market, so a trading strategy is required. Many people in London are trading these materials,

some of them work for the multinationals, others don’t. There is quite a lot of risk in the

trading function.

The extractive sector activity also requires capital investment in transport, insurance,

shipping and so on. These represent more transactions. If there is no trading but value is

added (ie cutting and polishing diamonds) within the company, labour intensive processes

are required. At the end of the value chain, the company needs to make a profit on the sale to

the consumer. Distribution is another cost – there is no point having lots of diamonds if you

can’t sell them. A company needs someone to help with transport, sales and marketing, and

lots of skills are required to sell them on. There is also a lot of branding, which also adds

complexity for transfer pricing.

Overseeing the entire process is the company’s headquarters, which needs to decide where it

should put its limited capital. There is a lot of risk in the business and a company could spend

a lot of money on a mine and it may flood or the political situation may change. Some

countries require a performance guarantee, so that if a mine goes ahead a government

receives income regardless of the success of the project, further adding to the company’s

costs.

Exploration has a big environmental risk, the project could pollute local water sources

because some of the chemicals used to extract minerals are toxic. If things go wrong, someone

has to pay. In the trading business there is a credit risk if someone goes bankrupt. There are


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also market risks – there might be a long-term supply contract but the price might not go the

way you expect. Also there are foreign exchange risks, if you are not in a dollar denominated

country.

All of this explains the trend towards centralisation of risk management. Rather than all mines

within a company seeking their own markets, global companies are setting up centralised

trading and risk management hubs which will buy all the product and sell it internally or to

some other body. For example some iron ore might go to an aluminium smelter and other iron

ore might go to Chinese industrial customers. The trading arm takes the risk that the price

will go down. Companies centralise what they are good at, which is maximising profits. Buying

and selling at the right price needs specialised trading people.

Strategic management should also be centralised– before China’s emergence, iron ore did not

seem like a good investment so many companies exited from that business. Now iron ore is a

highly priced commodity, subject to negotiations with Chinese government. There is a lot of

complexity for a multinational to work out which product to be in and how to do business in

that product. Do you sell it in the spot market or negotiate long-term deals with Chinese

SOEs? All this can make it hard to make the link between someone extracting the metal and

the strategic vision of the company’s headquarters.

There are other issues relating to price control and companies want to remove volatility in

pricing. Price risk can be taken out of the local country by giving them a guaranteed price for a

product but this poses the risk that ultimately the price may go down (this works out well for

governments but not for investors). Procurement is another big issue. A lot of companies use

the products they extract so they may have a separate procurement entity picking up iron ore

production from around the world. This entity will then source extra production from others

and negotiate a discount because they are buying so much of it. Who gets the reward from

that procurement exercise – the person who has undertaken the negotiation, or the country

where the items were made?

Transfer pricing is increasingly in the media. It can be used to avoid tax, as a way to abuse a

company’s position. However it is also fundamentally important to get the profits right in

order to stay in business.

Implementation challenges and lessons from Tanzania30

Tanzania has faced a number of challenges in its mining regime over the past few decades.

Responding to these challenges, in 2010, a new National Mineral Policy and Mining Act were

passed in order to integrate the mining sector with the rest of the economy and enhance the

sector’s contribution to poverty alleviation. Challenges faced over preceding years included

the absence of a thin capitalisation restrictions rule, the absence of ring-fencing provision in

the 1973 Income Tax Act, and an inadequate contribution of the growing mineral sector to the

rest of the economy. Mining Development Agreements (MDAs) were also found to be

inadequate, due for example to the insufficient involvement of technical staff during their

30 Based on the presentation by Handley Mafwenga, Tanzania Minerals Audit Agency.


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preparation, and the inadequate sharing of information between government institutions

involved in the compliance enforcement of MDAs.

Other challenges included environmental degradation (companies were undertaking

inadequate feasibility studies), and the failure of companies to update their environmental

management plans in line with changing levels of risk. There was also a low level of corporate

tax, as well as inadequate mine site closure, low participation of Tanzanians in the sector

(only foreign companies could access the required levels of capital to run mines), and poor

infrastructure in mining areas. Past efforts by the government to implement reforms had little

success. Companies have made financial contributions to support infrastructure which could

be used for development, including schools, hospitals and an adequate water supply in some

areas. However the infrastructure has not been made publicly available to the extent it might

otherwise have been due to security issues, particularly in remote mine site areas. All of the

challenges have been exacerbated by the lack of government capacity to administer the

sector.

All of the above provided significant scope for an overhaul in 2010. A number of fiscal

incentives were offered including tax incentives to companies providing environmental

protection. Other measures were taken to encourage local ownership and participation in the

sector, and to exempt mining companies from VAT on imported goods. A number of tax

liability measures were implemented including the establishment of a new thin capitalisation

restriction rule and new ring fencing measures. A transfer pricing risk assessment review has

been undertaken in response to the fact that there is currently no transfer pricing regulation

or guideline in Tanzania. The review has identified a set of indicators for transfer pricing and

identified three main types which are relevant to the country: transfer pricing within distinct

operations of a single company; related party loans; advance pricing arrangements; and

transfer of inter-group services.

The basis for royalties was adjusted, for example changing the basis for the determination of

royalties from net-back value to the gross value. The possibility of revenue forecasting

modelling is also being explored. The Mining Act 2010 allowed for the government to

negotiate free carried interest (a percentage ownership in a mining operation without

investment). The government’s tax filing and auditing has been significantly enhanced, for

example with the development of the Tax Audit and Investigations Department to include a

new Large Taxpayers Department responsible for counteracting fraud. All of these measures

are intended to create a fiscal regime that is fair and equitable, stable and predictable, non-

discretionary and internationally competitive.

Open discussion

Should EITI include the disclosure of mining and petroleum agreements or is this a breach of

confidentiality?

There are clearly different requirements in different countries, and the EITI is not a silver

bullet solution for every issue. However the initiative can act as a platform for wider reforms

and discussions, for example in Sierra Leone there is a big debate about MDAs inspired by the


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EITI process and informed by information from the EITI report. Although EITI at its core is

not addressing the disclosure of agreements directly, it provides a form where the issue can

be discussed in an open and non-hostile environment. In Sierra Leone, this is contributing to a

Mining Act which includes language on the EITI and this is helping to inform developments on

MDAs.

Does the Dodd-Frank legislation conflict with EITI?

The Dodd-Frank legislation relates to a requirement that all US-listed extractive companies

must list the payments they make to all governments where they are operating. This covers

much of the same ground as EITI but the two are not in competition. The question it how to

make the most of the two in order to make them complementary. For example Dodd-Frank

only covers companies listed in the US and in most host countries, mining companies are not

US-listed. Petroleum companies are often national companies and also unlisted. Also the

information collected in the NYSE doesn’t necessarily help progress the debate in the host

country if it simply stays in the US. EITI helps to establish a forum for discussion among

citizens in their own countries. Rather than being an initiative to help northern NGOs

campaign against oil companies, it is a way to create a platform for dialogue and greater

accountability in the sector. The question is how information produced by Dodd-Frank

informs in-country debate, rather than a question of one being voluntary and the other being

mandatory.

Could there be greater contract transparency?

A country signing a contract needs the approval of the counterpart before publishing it, but

companies always make claims about intellectual property and technological know-how that

is confidential. They worry that if the contract is made public they may lose competitive

advantage in the marketplace. If a country really wants to disclose contracts and make them

public, one way is to put the burden of proof on the shoulders of companies, to ask them to

explain what provisions of the contract will affect their competitive position in the

marketplace, and then the government will be able to make a judgement based on their case.

There could be a trade-off where contracts are published with some deleted provisions.

Is corruption a driving force for joining the EITI?

This characterisation doesn’t quite fit, given the examples of Norway, Indonesia, possibly

Australia as well. EITI is designed to address resource curse issue, including systemic poverty

and corruption. It has evolved beyond those issues to some extent but it is still useful for

addressing these problems. There a range of reasons why countries sign up, they might be to

do with issues of tension around extractive industries, whether the country is receiving the

right return on investment on its minerals, whether the production levels or the expenditures

are set correctly. The point is not to decide whether or not to do EITI based on what other

countries are doing but whether it’s important for the particular country in question.


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What is best practice when it comes to transfer pricing?

Tax incentives are an important element of the policy mix to encourage investment and to get

a decent tax base to fund development. From an investor perspective, often the lowest

possible royalties are desirable as they are a big cash cost to the business. If transfer pricing

can be made to work effectively it can eliminate double taxation. However transfer pricing is

not just about extracting minerals – having a thin capitalisation restriction rule is also

essential so there is tax base from other industries. There also needs to be the capacity

available to administer transfer pricing mechanism, and the OECD is working to build capacity

in this area. More could be done, given that natural resources are global in nature, so getting

databases and technical support is not impossible. This would act as the basis for helping

countries on transfer pricing principles. The important thing to remember is not necessarily

to collect all possible taxes from transfer pricing but to be aware that transaction taxes raise

the cost of doing business in the country. It can be helpful to look for the simplest part of the

value chain to tax, and then focus on that element.

Will the EITI expand its scope to include revenue management?

The core of EITI is about disclosure of revenues, not revenue management. Many EITI

stakeholders would like EITI to expand its scope but there is strong reluctance from the Oslo-

based initiative to appear to be telling countries how to manage and spend their resources.

EITI is a core standard from which discussion can proceed. In Nigeria for example the EITI has

looked not just at revenue transparency but at a physical audit of the entire sector, including a

process audit. Their EITI reports make detailed recommendations on the running of the entire

sector, which has led to a trade and industry bill. In Liberia, the initiative is covering forestry

as well as extractive companies, as well as considering contract transparency. In Ghana, the

initiative has extended to a sub-national level, looking at how regional and local governments

spend money from the extractive sector.


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Section 5: Managing environmental and social risk

Extractive sector activities are inherently associated with adverse environmental and social

impacts at all stages of their project cycle, from the exploration stage to the end of production

life. When a company begins operations in a country, there should be a clear understanding

that there is an underlying social contract to operate within environmentally and socially

acceptable standards.

In this regard, governments are concerned that operations are carried out in an

environmentally sustainable and safe manner, and there are safeguards to effectively prevent

the cost of environmental protection being passed to them. This section addresses

environmental risk issues and mechanisms that can be put in place to reduce country

exposure in the event of an environmental incident. In addition, there is discussion of

instruments that can ensure adequate decommissioning, both in mining and petroleum

projects.

Managing the environmental impacts of offshore oil and gas developments31

The coastal environment is the most dynamic and interrelated environment on the planet.

Coasts have legally defined physical boundaries but ecological boundaries are more difficult

to define. A subtle change in the coastal environment can trigger significant effects down the

chain and cause unexpected impacts – for example taking out top predators such as tuna or

game fish can have a big impact on fisheries.

The marine environment has a vital role in supporting economic prosperity. ‘Ecosystem

services’ are gaining more international attention from NGOs and governments. These

services include natural resources such as oil, gas and minerals; food (fish are a big source of

protein worldwide); a support function (processing nutrients at a global level); a buffer to the

coastal environment; and climate regulation (coastal habitats such as mangroves and marshes

can uptake five times more carbon than tropical rainforests). They also have huge cultural

value around the world. Some estimates put the annual contribution of marine ecosystem

services at more than US$20tr.

Oceans have received a lot of attention in the last 20-30 years at an international level and a

governance framework has emerged. The UN Convention on the Law of the Sea (1982)

provides for states to use and access resources in the marine environment as well as placing

obligations on them to protect and preserve these areas. The Convention on Biological

Diversity is another important instrument and in the last decade the two conventions have

been interpreted together. There are also regional seas agreements, some of which are

stronger than others. The Mediterranean Action Plan, for example, has many oil and gas

related provisions.

In addition to these instruments there are a range of soft law mechanisms. Since UNCED in

1992 statements and resolutions are being used, particularly by NGOs to push the

environmental protection agenda. The UN General Assembly also has a standing item dealing

31 Based on the presentation by Julian Roberts, legal adviser, ELS


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with the oceans and it has adopted a number of resolutions over the last 5-6 years regarding

oceans and the law of the sea.

All of these laws and conventions create a number of management challenges for the oil and

gas sector and also for governments in managing the sector. 25% of known reserves are

offshore and consumption will increase by 50% by 2050. More then 40% of the world’s

population lives within 150km of coasts and there is increasing pressure on the marine

environment. The biggest unknown is the impact of climate change. There is lots of

speculation about sea level changes but general uncertainty about what the impacts might be.

In regard to offshore oil and gas installations, oil spills are seen as the worst environmental

impact – the most visible and with worst short-term impacts. The BP Macondo spill has

exacerbated this perception. However oil spills are not the worst impacts. More important are

day to day operational discharges, the use of fluids in drilling, sewage, and venting or flaring

of excess gas, as well as physical disturbances, for example from pipelaying. Drill cuttings are

also a problem and there are legacy issues in the North Sea, but generally industry and

regulators have responded well and the sector is now better managed.

Installation is only part of the picture. A project begins with a seismic survey which has a

potential impact in areas with fisheries. Then exploration wells are required, and these bring

another set of impacts. Once a viable prospect has been established, construction is required

leading to further disturbances, and then the installation itself may be in place 20-25 years.

Finally there is decommissioning and its impacts.

The focus of attention can be widened further. For example at the Gorgon gas field off

Western Australia (the biggest LNG project in the world), all the elements listed above are

underway but also there are pipelines and sub-sea equipment associated with delivering gas

to the processing facility. And there is a need to get gas to shore via pipelines, and once ashore

it needs to be processed in shore-based facilities. Then the gas needs to be sold and sent

somewhere, involving shipping activities. Therefore, a single platform in the middle of the sea

is the centre of a whole network of interactions and impacts, many of which are coastal in

nature. It is therefore necessary to look at the whole lifecycle and consider impacts across the

full project.

The major impacts associated with a project include seabed disturbance, especially if

dredging or reclamation is required. Underwater noise is becoming more of a concern at an

international level, as it is difficult to regulate. Other impacts include habitat damage/habitat

loss (especially in relation to reclamation), and the spread of invasive species caused by

drilling rigs, which are mobile and have potential to move species from one part of world to

another. Also there may be loss of amenity to local communities and businesses, and the

impact of downstream or upstream effects, which can lead to erosion, the risk of discharges,

and seabed subsistence when a well is drilled.

Unlike the shipping industry, which is regulated at a global level, there is limited global

regulation covering oil and gas. Some international law applies however, for example the


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International Maritime Organization has a number of regulations related to drilling rigs and

oil pollution, and some regional seas agreements have well developed annexes in this area.

Regulation ranges from prescriptive state intervention through to industry self-governance.

Russia, for example, is highly prescriptive, and goes into great detail on the quality of

emissions (though the regime is not well administered). Less prescriptive are regimes such as

the North Sea or the US, and Australia and New Zealand even more laissez faire.

A multi-agency approach is typically used, involving the mining, maritime and labour

ministries. This offers a comprehensive approach but it requires good communication

between ministries. For example when the licensing round takes place there may be no

consideration of environmental issues, and if environmental considerations are made after

the fact then they become difficult to be managed. Getting various parties engaged together at

an early stage is important because natural resource development can have implications

across a range of different industries, for example if there is a strong fishing industry there

may be a clash with oil and gas. More integrated planning approaches are becoming more

common.

Companies appreciate the certainty of strong and clear regulation and increasingly there is an

onus on the industry to identify impacts and mitigate them. For smaller countries looking at

developing these industries, partnership between governments and business can be very

effective. Companies can share technical know-how and emergency response capability.

Countries are looking at this approach in the wake of the BP Macondo spill.

Three tools are becoming mainstream in this area. The first is Strategic Environmental

Assessment (SEA). Conventional environmental impact assessments tend to be undertaken at

a project level, whereas an SEA is a high-level assessment. It has been used in the UK for

licence rounds and the World Bank has been using this approach in a number of countries.

Marine spatial planning is a tool within an SEA and allows a country to visually represent

different uses of marine space and look at the areas to be protected. Mapping the coast

visually shows interactions and areas of potential conflict, which areas are available for oil

and gas and which aren’t, which are available for shipping and which aren’t. The third tool is

the use of marine protected areas, a concept that refers to the control or limiting of activities

in certain areas. There is a perception that these areas are all about fishing, but in fact the

scope is much broader. They can be used to protect different types of habitat from different

types of impact. The oil and gas industry is increasingly worried about this development, for

example Norway has a moratorium around certain islands which they keep renewing in order

to protect valuable Barents Sea cod spawning areas.

Regulatory framework for environmental financial risk management32

The extractive sector involves significant environmental costs and therefore it is necessary to

make sure that if resources are developed, all costs are accounted for and are not passed on to

society. There are some generally accepted principles on how to attribute costs in this area,

that is, how to reconcile resource exploitation with environmental protection. These include

32 Based on the presentation by Victor Katange, Adviser (Economic), ELS


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the precautionary principle and the polluter pays principle. This is hard to enforce where the

legal and regulatory frameworks are weak. Most countries have something in place, but often

it is insufficient.

Financial guarantees are a useful mechanism to ensure a society is protected if companies fail

to pay for their environmental obligations in the case of problems. EIAs and site surveys are

important and a key element is a comprehensive financial guarantee mechanism, whereby the

government seeks to ensure that the obligation for restoration of the environment is met by

companies.

Distinguishing between an EIA and an EMP – a view from Ghana

In environmental legislation it is important to define terminology. Generally speaking, the

term EIA (environmental impact assessment) refers to a project level scoping, undertaken in

advance, with no firm commitments to what a company is going to do in response. The project

is still at conceptual stage, the front-end engineering design is still to be done - this is when an

EIA is used. During this process, all of the project elements are considered in terms of how

they will impact in the receiving environment, including the social and institutional impacts.

In Ghana, social and environmental elements are integrated. Then, analysis of the project’s

impact is undertaken. This is a two-way process because there are environmental impacts on

the project as well. For example if there is no proper assessment of the seabed, installations

may collapse. All of this analysis is undertaken and all impacts are assessed. From that

position a company proposes mitigating measures on how the impacts are going to be

addressed. This is likely to be a mixture of engineering designs to avoid, minimise and

remediate the impacts.

The company also draws up a monitoring programme to ensure the programme is working.

This is all still at the conceptual stage. Once the plan is in place and the monitoring system

agreed the company draws up an EMP (environmental management plan). Within the

timeframe of the project some EMP elements will require adjustment, for example 18 months

from the commencement of the project. The plan is refined accordingly, with roles,

responsibilities and budget for each activity. The environmental authority will review and

agree the plan and every three years, for as long as the project is in operation, the company is

required to renew it.

There is a need to ensure that there are sufficient funds are available in case companies or

investors fail to meet the obligation. The full lifecycle of a project should be considered,

including post-closure maintenance. A number of instruments are available including a cash

deposit or a letter of credit. These can be used to secure financial obligations by companies

early on. A government can ask investors to provide these but there is a question over the

most appropriate instrument, to ensure that at any point in time there is money available for

a government to access when there is an environmental failure. All costs need to be provided

for, but it is a challenge to work them out.


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When selecting an instrument the government should consider the various strengths and

weaknesses of different options. If a cash deposit or lump sum is required, how much should

this be? If you are requiring the cash upfront some companies (especially smaller ones) may

not be able to afford it. This is particularly a problem for small miners. A trust fund and

escrow account involves money being put together for a specified period and this approach is

becoming popular, especially for post-closure maintenance. Insurance is good for unforeseen

risks (i.e. accidents), but usually not available for known risks. Bonds can be provided by

banks and insurance companies; the size depends on the credit rating of the company. Not

every company can provide a bond but larger companies have found these to be useful in

releasing capital.

Letters of credit can be bought from banks and they release working capital. These are similar

to a bond and can be costly but they are an option to consider especially if there are short-

term risks. A parent company guarantee is also possible, if the company has a good

reputation. There needs to be due diligence of the company involved, regarding whether they

can provide sufficient security, and these are always coupled with another instrument to

provide full security.

Self-insurance is another option: a company may have assets which the government can seize,

especially if the company goes bankrupt. Overdrafts are another option but depend on the

strength of banks being able to guarantee the debts, so these may not cover the full amount.

In summary, the government can make available these options and select the right

combination of instruments. It is very hard to assess the cost of unforeseeable accidents such

as a leak from a storage tank but the government has to make sure the country is covered if it

happens. Most current schemes include obligations on companies to meet the cost of

environmental protection, but there are not always clear guidelines on what should be

covered and the process to define the level of cost of liability.

In order to quantify the amount that a company needs to set aside, the focus until now has

been on costing environmental management plans. It is also necessary to include a statistical

analysis of the likelihood of a range of given hazards. This is a probabilistic analysis and there

is a need for a model for business and government jointly to determine the required amount.

These are critical elements to be included in the regulatory framework to ensure that

governments are fully covered.

The timing of the investment is important, and governments should avoid charging companies

at the outset when the cost of capital is expensive to companies. Starting later has been

effective for very long life projects but there is a need to demonstrate that companies are

actually meeting the requirement of the instrument. There should also be flexibility to allow

for different eventualities. Investors need to know if they have met the requirements and

governments need to work out a way to decide whether, for example, post-closure

rehabilitation has been successful.


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Some countries have provided legislation, others have included provisions in the permitting

process, but some elements should be included in primary legislation. A government needs to

have flexibility to respond to changing circumstances.

The demand for an ‘environmental protection bond’ and implications for upstream petroleum

licensing33

In the wake of the BP Macondo spill there has been a lot of discussion on how to determine

the cost of environmental protection bonds, to be paid by the oil industry. BP has announced

that they have spent US$13bn to date on the clear-up, but if governments demanded a bond of

US$13bn from every company, the industry would collapse.

The government of Greenland demanded that companies pay a US$2bn bond before drilling in

the Arctic. There is a lack of clarity in this area, however, for example whether the Greenland

payment is per contract area, or some larger area. There are 18bn boe in Arctic waters,

though reserves are a matter of uncertainty. Shell, Statoil, Mersk and Cairn Energy are all

interested in Greenland. The deadline for licensing rounds has slipped recently because of the

demand for environmental protection bonds.

Unlimited liability is required, but boards of directors of companies would never agree to this.

Regarding the US$2bn bond, for example, the income tax considerations of home countries

are unknown. Should all IOCs have to share the risk of a blowout? It seems unfair to

responsible and safe companies to subsidise less careful companies.

There is a need to move from a prescriptive approach to regulation to an outcomes-based

approach. There are currently only five or six companies that are capable of drilling ultra-

deep water wells. In these areas, regulation should fall on the shoulders of companies because

it is hard for government to anticipate all the likely technological advances that are going to

take place. So far companies have found technological solutions to everything.

There is a need to identify the worst-case scenarios, not just blowouts but aeroplanes, tankers

or helicopters crashing into installations. Companies have set up a task force and are working

rapidly on hardware improvements. This hardware needs to be made available around the

world. Even though there have been no accidents involving LNG tankers to date they are

effectively ‘travelling bombs’ and this is a real risk to be managed.

Open discussion

At what stage of the life-cycle should a financial risk guarantee instrument take effect?

Outcome-based regulation means looking at risks from the outset of the project. The financial

assurance mechanism should be considered within the overall framework of environmental

management. Outcomes-based regulation may also be easier for a government with limited

capacity to oversee. There is also a need to work with responsible investors in order to come

up with the most effective solution.

33 Based on the presentation by Mike Bunter, B and R Co, Petroleum Consultants


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Comment from Ghana:

In Ghana, when oil was found the environmental processes needed streamlining. Companies

were applying standards from elsewhere, in places with a different operating context. Ghana

had assistance from Norway to manage this process.

Regarding environmental assessment, it is important for governments to look at the whole life

cycle of the oil and gas project, considering its economic, institutional, and social impacts.

Ghana is currently undertaking a full Strategic Environmental Assessment process which will

help with this.

Regarding industry self-regulation: if a company says how they are going to self-regulate

based on their technology, the government needs to make a judgement on whether or not it

sounds reasonable, so that if something goes wrong the company can reasonably be held

responsible.

Has an environmental protection bond worked anywhere?

There is a need to understand clearly what risk the government is trying to manage. An

environmental monitoring fee payable by the company to the government may be within the

legislative framework. A bond, on the other hand, is very project-specific and can be matched

to the amount of damage being caused. In Ghana, the level of the bond has been reduced over

time to give some relief to companies.

The notion of an EPB seems to be new. Guarantees of some kind or other are part of normal

petroleum contractual practice, whereby the company pays the cost of the bank guarantee.

The cost is not recoverable. The parent company guarantee is often sought but rarely

achieved. There has only been one country in the world where an unlimited parent company

was sought. If there is an overlap between a bond and other forms of guarantee it may be

deemed excessive.

In areas where there has been considerable drilling already, what are the best options for

managing environmental risk?

A pragmatic approach is a good idea. The process of SEA and spatial planning help a country

to define areas where certain requirements apply and others don’t. If there is a degraded area

and know the environmental risks, and if the ongoing activity is similar to what has happened

in the past, a judgement can be made on whether a new assessment is required.


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Conclusions

The first section of the forum helped set the scene by underlining the importance of a good

legal framework, rooted in the country’s constitution. This was followed by a discussion on

licensing and bidding rounds where the question of timing arose. Trinidad & Tobago’s long

experience of bidding rounds was shared and the question of prospectivity explored – with a

comment from the floor about the fact that for ‘corruption prospectivity’ criteria could be

added.

The second section began with a discussion of negotiation issues, looking at what companies

say and what they really mean. This led well into the presentation from Pakistan on how to

prepare for negotiation - how a proposal is received from companies and how an agreement is

reached. This was followed by a ‘crash course’ in contract design and negotiation and the

session ended with a review of dispute resolution mechanisms even in situations where

governments and companies try to do everything in good faith.

The third section began by stressing the importance of progressivity in the fiscal regime and

considered the pros and cons of various tax instruments. The point was made that countries

have the right to revise fiscal terms if conditions change considerably, but these changes

should be kept to a minimum for the investors’ sake. It was shown that even a mature market

such as the UK may decide to amend fiscal terms from time to time. The experience of Belize

was shared where the whole regime was developed while industry boomed over a short

period. The country managed to adapt to the growing industry and the use of a revenue

management fund is being explored.

The fourth section began with the discussion of EITI, which is an extremely important

initiative. This was followed by an exploration of why natural resource revenues are different

from other sources of government revenue, and the implications of these differences. The

session closed with a presentation on the topical subject of transfer pricing, followed by a

review of the challenges faced in Tanzania in setting up an effective fiscal regime for the

extractive sector. The point was made that a lot of time may be spent developing a fiscal

regime, but if countries don’t have the potential to enforce tax determination and collection,

work on developing the regimes is wasted.

The fifth section, about the question of managing environmental risk, generated a lively

debate – particularly when the price tag of an environmental incident can be $US10bn or

more. The point was made that oil spills are not even the main risk - waste discharge might be

a bigger environmental risk in the long term. This session was followed by a review of the

different instruments available to governments who want to guard against environmental and

decommissioning risk, striking the balance between not passing environmental risks back to

host countries while allowing companies to remain in business.

This was the first natural resources forum that the Commonwealth Secretariat has organised.

There is scope for more conferences in the future, possibly focussing on fewer themes.

Appendix B sets out feedback from participants, highlighting potential future focus topics for

the Forum.


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List of acronyms

bcf – billion cubic feet, the standard measure for large volumes of gas.

boe – barrel of oil equivalent, the standard measure for volumes of oil.

DMO – domestic market obligation, a requirement placed on companies to sell a portion of

their production to the host country.

ECOWAS – the Economic Community of West African States, a regional economic body.

GAAP – generally agreed accounting principles, companies listed on a particular stock

exchange use the GAAPs relating to that country in their financial reporting.

ICSID – International Centre for Settlement of Investment Disputes, where an increasing

number of extractive sector-related disputes are heard.

IFRS – International Financing Reporting Standards, the global body that develops accounting

standards, overseen by the IFRS Foundation.

NPV – net present value, or the sum of all current cash flows, used in capital budgeting.

PSC – production sharing contract (sometimes production sharing agreement), a joint

company-government oil or gas project (uncommon in the mining sector).

SADC – Southern African Development Community, a regional economic body.

SOE – state-owned enterprise, a company that is fully owned and managed by the

government. Most companies in the oil and gas sector are SOEs.

UNCED – United Nations Conference on Environment and Development, took place in Rio de

Janiero in 1992 and in Johannesburg in 2002.

UNCITRAL – United Nations Commission on International Trade Law, a dispute resolution

body.


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Appendices


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Appendix A - Participant feedback

General comments

Overall the comments received from all the participants who attended the Natural Resources Forum

were very positive. Their general view is that the Forum largely met expectations, and they found the

themes especially relevant to their work and specific country circumstances.

Only a few minor issues raised were concerning logistics. These included distributing the programme

to delegates at least 4-5 days prior to the commencement of the workshop. In addition, some

participants proposed modifying the discussion format to include questions at the end of each

presentation rather than after a round of presentations.

Specific comments

It is worthy to note that all of the substantive comments by the participants fall directly within the

scope of ELS’ current remit, with the exception of comments requesting subsequent Forums to include

coverage of other natural resources such as fisheries, water and agriculture. The specific comments

range from issues concerning fiscal matters to contract negotiation. They essentially centre on three

main themes, namely:

Policy and strategy issues;

Implementation and administration issues; and

Technical issues

Policy and strategy issues

A number of policy issues were identified for potential coverage in subsequent Forums, some

of which already form part of ELS’ suite of advisory services which have been provided over

the years to Commonwealth member governments in some form or another. These include

the following:

Policy and implementation measures for incorporating transparency and

accountability principles into regulatory frameworks for oil, gas, and mining;

More detailed coverage of practical measures to ensure sustainable linkages between

policy, legislative and regulatory frameworks in the management of natural resources;

and

Incorporation of direct gender policy measures and implementation strategies

pertaining to the natural resources sector.

Implementation and administration issues

A possible spin-off from the Forum as proposed by some of the participants is to incorporate

sessions dealing specifically with effectively implementing and administrating policy,

legislative and regulatory frameworks for natural resources management. In particular, the

following main issues were pointed out by the participants:

More focus on the petroleum and mining licensing process to cover such issues as

appraisal of license applications, general principles in drafting petroleum and mining

regulations, and the negotiation of petroleum and mining agreements; and

Stakeholder engagement in the environmental assessment process.


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Technical issues

Comments in this category were quite powerful, and are likely to play a key role in shaping

the future of the Natural Resources Forum in terms of thematic focus/delivery. There is

potential for each of the issues raised to be stand-alone themes for subsequent Forums, if

covered in significant depth. These include:

Specific country case studies and exercises to demonstrate good practice in mining and

petroleum fiscal regime design and implementation;

Further discussion on mineral development agreements and petroleum taxation issues

and their impact on legislative and regulatory frameworks;

Transfer pricing issues: appreciation of the concept, implications for fiscal regimes;

Policy, legislative and regulatory arrangements for developing countries with limited

oil, gas and mineral resources (net resource importers), and value addition through

secondary beneficiation;

Practical challenges in achieving a sustainable multi-agency approach to oil and gas

development regulation;

Climate Change issues;

Harmonising health, safety and environmental laws and defining the roles and

responsibilities of related regulatory agencies.


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Appendix B – About ELS

Natural Resources

We provide assistance to Governments to establish modern and effective legal, fiscal and

commercial regimes to govern mining and petroleum sectors. Our mission is two-fold: to help

the Governments secure investment in these sectors; and, to ensure that their countries

maximise economic and social benefits arising from such investment on a basis that will

deliver sustainable economic growth and help meet development targets.

ELS gives advice on the formulation of petroleum and mineral resource development

policies and strategies, taking into account general economic circumstances, economic

and social development objectives and environmental land-use issues.

ELS provides assistance to Government officials in reviewing existing legal, fiscal and

other regulatory arrangements based on its knowledge of and wide exposure to

international practice, as well as specialist skills in devising licensing and fiscal

regimes that are fair to investors and respect national interests.

We provide assistance in drafting new laws, subsidiary legislation, and model

agreements based on the resulting recommendations from the review of existing ones.

We provide assistance in designing appropriate fiscal regimes using economic

computer modelling methods and benchmarking a particular country’s fiscal regime

against other countries’ fiscal regimes.

We provide advice on promotion efforts to attract investment in the natural resources

sector. This typically entails discussion of promotion strategies, assistance with the

preparation of promotional documents and help in conducting promotional activities

and events.

ELS provides assistance in analysing bids and proposals received from potential

investors, as well as in preparing responses to proposals.

Where the analysis of investor proposals is followed by negotiations, we are able to

provide direct assistance in the preparation for and conduct of face-to-face

negotiations.

ELS provides advice on the resolution of problems or issues that arise during the

implementation by the investors of their mineral and petroleum projects.

Our assistance, through its mode of operation, results in capacity building through on-

the-job transfer of knowledge and skills to government officials with whom we work.

Moreover, whenever appropriate, additional capacity building measures are

incorporated into the assistance through training workshops.

Many of the requests for assistance from ELS require a full review of general mineral

or petroleum sector policies and regulatory arrangements. However, some

Governments make requests for specific advice with respect to certain niche areas of

expertise for which ELS is well known. These include the management of petroleum

revenues; policy options for crude refining and pipeline regulation; commercial terms

for natural gas projects; regulatory frameworks for extraction of coal-bed methane;

regulatory frameworks for uranium mining; policy frameworks for offshore deep-sea

mining; and legislative frameworks for mine site rehabilitation and closure.


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Maritime Boundaries

The objective of our work in this area is to assist coastal states to enact appropriate legislation

governing their maritime areas and to delimit their maritime boundaries in accordance with

international law. Authoritative determination of the extent of the maritime space of a coastal

state is an important pre-condition to the exploitation of the natural resources of that space.

This activity thus complements that on the development of petroleum and mineral resources.

While maritime boundary delimitation has important national security, political and

sovereignty functions, it also forms part of the process for effective economic management.

ELS provides policy advice on the delimitation and regulation of the maritime areas of

coastal states by preparing relevant policy papers.

Assistance also typically involves giving advice on, and preparation of, appropriate

legislation.

Assistance is provided to Governments on preparation for maritime boundary

delimitation negotiations. Such preparations involve

o Commissioning hydrographic reports;

o Reviewing maps and charts;

o Obtaining legal and advisory opinions; and

o Discussing the negotiating brief with Government officials.

If so requested, ELS participates in maritime boundary negotiations. This involves:

Giving strategic and tactical advice on negotiations with neighbouring States;

Actual participation at the negotiating table;

The drafting of maritime boundary delimitation agreements; and

Agreeing geographical coordinates of boundaries.

Like in the case of ELS’ work in the natural resources sector, the assistance on

maritime boundaries results in capacity building through on-the-job transfer of

knowledge and skills to Government officials with whom we work. Again, whenever

appropriate, additional capacity building measures are incorporated into the

assistance through training workshops.

Our Mode of Operation

ELS operates as an in-house consultancy, with a team of dedicated experts, capable of

responding quickly to member Governments’ requests for assistance. We adopt a multi-

disciplinary team approach in executing our projects. ELS employs professional economists

and lawyers with specialised knowledge in the areas of activity under ELS’ mandate, practical

hands-on experience of policy-making and regulatory reform in developing countries, and

experience of conducting investment negotiations with transnational corporations. External

consultants are added to ELS advisory teams from time to time, to contribute highly

specialised complementary skills, but not to substitute for in-house capabilities. Such

consultants operate as an integrated part of the ELS team under the supervision of ELS.

Our Competitive Advantage

Governments look to ELS for assistance because of the advantages of our mode of delivery of

services compared with other sources. These advantages include:

The impartial and confidential basis on which advice is given;


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The interactive hands-on style of working with Government officials which results in

relevant and practical advice;

The “honest broker” role we provide, through our understanding of the respective

interests and concerns of the Governments we advise and those of other parties

involved;

Access to our “institutional memory” of past assistance and outcomes retained by ELS;

Access to our international knowledge-base, developed by advising numerous

Commonwealth countries

In the case of our work on maritime boundaries, an important comparative advantage arises

from the fact that ELS is the only multilateral public agency which provides this advisory

service to countries. There being no major public sector international competitor to ELS in

this area, we have a significant comparative advantage in that the alternative to it is high-cost

law firms and private consultancies.

Our Clients and our Terms of Reference

ELS’ clients are exclusively Commonwealth member Governments. Technical assistance

programmes are initiated at the specific request of the Governments. When a request is made,

an ELS team may first carry out a needs assessment mission to agree a programme of

assistance.


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Team biographies

Daniel Dumas, Adviser and Head

Daniel grew up in one of the world’s most prosperous mining regions, in Abitibi, up-North

Quebec and has now been working in the energy and natural resources sector for more than

20 years. He began his career in one of the world’s largest utility working on a myriad of

matters, first on strategic planning issues, independent power producers (IPP) as well as

energy markets and trading. He then was appointed Director working on project development

and project financing internationally.

In 1999, he became Director at the World Energy Council (WEC) in London. Daniel was in

charge of WEC’s work program which comprised a dozen projects on various topics such as

global and regional energy issues related to oil & gas, energy markets liberalization,

investments and privatization, energy regulation as well as pricing energy in developing

countries.

He then moved back to Canada where he went to work within the Energy Division of SNC-

Lavalin, one of Canada’s largest Engineering and consulting firm. Among his tasks, he was

leading projects related to Institutional Reforms in the Energy Sector. Since 2005, he is with

the Commonwealth Secretariat’s and now Head of the Economic & Legal Section. Daniel has a

graduate degree in Applied Economics and holds an M.B.A.

Victor Kitange, Adviser (Economic)

Victor Kitange is an Economist. Since 2000 he has been working as Economic Adviser in the

Economic and Legal Section of the Special Advisory Services Division, Commonwealth

Secretariat in London. Victor has a wealth of over twenty (20) years experience in the energy

sector and his work has involved the provision of economic and technical advice to

Governments on policy formulation in the oil, gas, and minerals sectors. He leads numerous

projects and designs economic and fiscal legislative and contractual terms, and negotiation

strategies for Governments has been involved conducting training on economic computer

modelling and evaluation of oil and gas, and mining investment policies and commercial

arrangements.

Between 1990 and 1997 he worked as an Energy Economist for the Government of the United

Republic of Tanzania and between 1994 and 1995 he worked as a Research Analyst on

natural gas marketing and regulatory policy for the Government of Alberta, Canada.

Joshua Brien, Adviser (Legal)

Joshua Brien is a senior Legal Adviser with the Economic and Legal Section, Special Advisory

Services Division, Commonwealth Secretariat in London. Mr. Brien joined the Secretariat in

2005 and he provides legal advice to Commonwealth member countries and manages a range

of extractive industry projects including offshore petroleum and deep seabed mining. As a

public international law specialist, Joshua has particular expertise concerning offshore joint

management and the settlement of disputes and he also leads the Secretariat's very successful

maritime boundaries program. Prior to joining the Secretariat, Joshua was Legal Counsel with


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the Australian Attorney-General's Department, Office of International Law, where he

appeared before the International Court of Justice and International Tribunal for the Law of

the Sea in a spectrum of international law cases involving Australia. Joshua is a graduate of

Trinity Hall at the University of Cambridge and currently a member of the International Bar

Association Mining Law Committee and the International Law Association's Maritime

Boundaries Law Committee.

Ekpen Omonbude, Economic Adviser

Ekpen Omonbude is an Economic Adviser with the Economic and Legal Section. He provides

support to the ELS Advisory Team on programmes of assistance to member governments

concerning policy, fiscal and commercial issues in the oil, gas and mining sectors. In

particular, Dr Omonbude has led a number of projects involving the provision of assistance to

member governments, particularly on mineral sector reform. Prior to joining the Secretariat,

he was a Senior Research Analyst at FACTS Global Energy, an international oil and gas

research and consulting firm, in which he was responsible for the medium-long term energy

and oil advisory service. Ekpen holds a PhD in Petroleum Policy and Economics from the

University of Dundee, and is a member of the International Association for Energy Economics.

Ibibia Worika, Legal Adviser

Dr. Ibibia Lucky Worika joined the Economic and Legal Section (ELS), Special Advisory

Services Division, Commonwealth Secretariat, London in February, 2011 as Legal Adviser,

Natural Resources. From 2004 to 2011, Dr. Worika was the General Legal Counsel of the

Organization of Petroleum Exporting Countries (OPEC) in Vienna, Austria where he provided

legal expertise to the Secretary General of OPEC, Senior Management and other OPEC’s

Governing bodies. Prior to his OPEC appointment, he was Managing Solicitor of the Port

Harcourt Branch of Anga & Emuwa (now AELEX), a firm of Legal Practitioners and Arbitrators

and members of MERITAS, an established global alliance of independent, full-service law

firms distinguished by their quality standards. Simultaneously and contemporaneously with

his management of AELEX, Dr. Worika was a Senior Lecturer and Ag. Head of Department,

Department of Private and Property Law, at the Faculty of Law of the Rivers State University

of Science and Technology, Port Harcourt, Nigeria. Dr. Worika holds a Ph.D. from the

University of Dundee in International Environmental and Comparative Petroleum Law and

Policy in a doctoral thesis titled, “Managing the Environmental Aspects of Upstream

Petroleum Investments: Strategies and Mechanisms for Sustainable Management in Africa”.

Dr. Worika is currently a member of several international professional associations, including

the Energy Law and Climate Change Specialist Group of the Commission on Environmental

Law (CEL), International Union for the Conservation of Nature (IUCN); International Bar

Association (IBA); European Society of International Law (ESIL), British International Studies

Association (BISA) and the Nigerian Bar Association (NBA). Dr. Worika has several published

and other productive works in reputable national and international journals world-wide,

including a book, ‘Environmental Law and Policy of Petroleum Development’ published in

2001 by ANPEZ Environmental Law Centre in Port Harcourt, Nigeria.

Arlette Daniel, Legal Adviser


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Arlette Daniel is an Attorney-at-Law with over 12 years’ experience. She is a Legal Adviser

advising on natural resources matters in the Economic and Legal Section, SASD of the

Commonwealth Secretariat. Arlette has worked as Senior State Counsel in the Ministry of

Energy and Energy Affairs, Trinidad and Tobago for five years. Prior thereto she worked for

over five years in private practice with a multifaceted portfolio including civil litigation,

corporate commercial, probate and family law. She is a graduate of the University of the West

Indies, Cave Hill, Barbados and holds an LLM in Energy, Natural Resources and the

Environment from the University of Houston Law Center, Texas, USA.

Julian Roberts, Adviser, Ocean Governance

Julian is a Chartered Marine Scientist with a PhD in International Maritime Policy from the

University of Wollongong (NSW) and an MSc in Marine Resource Management from Heriot

Watt University. Over the last ten years, he has worked extensively in the oil and gas sector in

a number of different capacities. Prior to joining the Austrian Oil Company, OMV, as their

Environmental Manager in 2008, he worked with IUCN as Project Manager of a conservation

project focussed on exploration and production activities on the Sakhalin Shelf (Russia).

Julian is originally from the UK, however for 11 years he worked in New Zealand and as the environmental advisor to the New Zealand National Maritime Administration he worked on a broad range of marine issues including, coastal zone management, pollution control, dredging and disposal of waste at sea, regulation of ship sourced pollution and vessel routeing, offshore exploration and production, oil spill planning & response and marine spatial planning. He has represented both New Zealand and IUCN at meetings of the IMO’s Marine Environment Protection Committee over a period of seven years and was a member of the Officials Group established for the development of New Zealand’s national Oceans Policy. Julian is currently a member of the IUCN World Commission on Protected Areas (WCPA-Marine) and he is a Visiting Fellow of the Australian National Centre for Ocean Resources and Security, through which he continues to publish on the subject of international maritime policy and regulation of shipping.

Professor Handley Mpoki Mafwenga Ph.D Handley is a Macro-Fiscal Policy analyst at the Treasury-Policy Analysis Department in Tanzania for more than ten (10) years and he is regularly and actively engaged in international negotiation forums pertaining to tax and fiscal policy matters, financial programming and revenue forecasting modeling. He has an extensive academic and professional experience in teaching as Associate Professor of Finance and Taxation in the Department of Business and Economics at the Tumaini University, Teofilo Kisanji University, the Graduate Studies Department of the Institute of Finance Management (IFM), and Azania College of Management in Tanzania. Being a renowned Budget advocacy expert of the Government of the United Republic of Tanzania, He has also been a member of SADC Sub-committee on Tax matters, SADC Trade Negotiating Forum (TNF) on trade services under UNCTAD, Curriculum Validation Committee of the National Council for Technical Education (NACTE), and Association of Customs Professionals for Africa (ACPA). He is a mentor to professionals through National Board of Accountants and Auditors (NBAA) and Commonwealth Secretariat (COMSEC) as Consultant.

Handley is one of the founders responsible for the implementation of the Value Added Tax, and tax auditing in mineral sector at the Tanzania Revenue Authority and Gold Audit Program (now Tanzania Minerals Audit Agency) respectively. He has also a wealth of


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experience in Extractive Industry especially in large, medium, and small scale mining companies dealing with exploration, and mining operations under the Ministry of Energy and Minerals. He has been actively involved in the formulation of the National Strategy for Growth and Reduction of Poverty (NSGRP-MKUKUTA), Public Financial Management Reform Programs (PFMRP-Phase I&II), New Income Tax Act, 2004, New Environmental Management Act, 2004, New Mineral Policy, 2009, New Mining Act, 2010, the SADC Protocol on the Exchange of Information in Mineral sector, the SADC Memorandum of Understanding on the Exchange of Information on Tax Matters and Mineral Development Agreements in Tanzania.

He has published variety of articles in professional journals, co-authored a book with Professor Sijbren Cnossen of the University of South Africa-Pretoria “The Excise Tax Policy “Administration in the Southern African Countries”, and authored a book Titled “Mineral Tax Clinic-The Reflection of Old and New Fiscal Regimes for Effective Tax Auditing in Tanzania”. He is the Associate Editor of the East Africa Journal of Research at the Tumaini University, peer reviewer of the NBAA Accountant Journal and research associate of ESRF and ESRC

He has pursued for the Ph.D in Finance from COU-Faculty of Business and Economics (UK) , MSc in Finance from Strathclyde University-Scotland (UK)-Department of Accounting and Finance, MBA in Managerial economics and Policy formulation(Consulting Process) from Maastricht School of Management (the Netherlands)/ESAMI-Business School, Postgraduate Diploma in Tax Management and Advanced Diploma in Tax Management both from the Institute of Finance Management (IFM). He is now writing another Thesis for the Ph.D in Business Management at the UDSM Business School and finalizing the LLB at Tumaini University.


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Appendix C - About this report

This report was compiled by Dave Prescott, a freelance writer and researcher specialising in

cross-sector partnerships for sustainable development. It was prepared in consultation with

the team at ELS, including Daniel Dumas, Ekpen Omonbude, Arlette Daniel, Victor Katange,

Julian Roberts and Luisa Sala.

While every effort has made to ensure the accuracy of the information in the report, it has not

been formally cleared by the presenters. Errors and omissions are therefore the responsibility

of the compiler of this report.

the commonwealth natural resources forum

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