Petroleum Contract Compliance and Inspection

2.    Regulation and regulatory bodies

Oil and gas sector compliance is judged on the basis of company performance. Modern approaches to regulation often provide for a flexible approach that focuses on outcomes, rather than command-and-control approaches that focus on the detail of regulation and require significant public sector resources to implement.

As most oil and gas companies work in a range of countries, under different regulations and with their final products sold in different markets, governments need to make it clear to operators what outcomes are sought and how these will be monitored. They also need to appoint sufficient well-trained staff to monitor the actions of operators on an ongoing basis.

Alongside regulation, petroleum contracts often make reference to ‘good oil field practice’. This is a widely recognised term which essentially implies the use of sound international practices with due attention to conservation of the resource, safety and protection of the environment. Contracts normally require host government approvals of exploration and appraisal programmes and budgets, development and production plans and annual work programmes and budgets.  

Laws should specify the authority and responsibility of different institutions regarding environmental and social protection in the oil and gas sector. Laws and regulations should also clearly articulate the procedures for companies to follow in preparing and submitting environmental and social performance data and the procedures for undertakings provided in the Environmental and Social Management Plans (ESMPs) and closure plans.

The relevant sector ministry in coordination with the environmental ministry should be responsible for establishing policy, laws and regulations for monitoring and auditing activities. The requirements in the legal regime could be supplemented by placing more responsibility on the operator to work with codes of conduct developed by the operator and agreed by the authorities.

The investor is typically required to submit – on a timely basis – all information and data generated by, prepared for, or obtained in the conduct of operations. This is critical for supervision of the investor’s contractual obligations. Equally, government needs to ensure it has the expertise in its staff to analyse and interpret this information and data.   

Law and regulations should clearly present the penalties for violations of environmental requirements and compliance standards. These should range from fines for minor violations to suspension of permits and licenses for the most serious violations. In the most extreme case, licenses would be subject to termination. Companies should pay penalties in keeping with the violation, and where other parties are harmed, should be required to provide compensation on a scale that reflects the harm caused.

Source: Adapted from MetricStream - Governance, Risk and Compliance (GRC) Framework (2017)

Regulatory bodies

An inspectorate with a strong presence at site level is imperative for good governance of the oil and gas sector. Where possible, inspectorate staff should be maintained at operations on a permanent basis and be responsible for inspections relating to compliance with licensing conditions and health, safety and environment (HSE) regulations as well as for undertaking production and technical audits. Often governments also establish an environmental and social unit, which collaborates with, and provides support to, the environmental and social authorities overseeing the sector.

Operators of oil and gas wells are responsible for their safe development and operation, workover, intervention, well plugging and abandonment. Governments usually create specific agencies for well plugging and abandonment bonds to ensure that depleted wells in mature fields are properly plugged and abandoned at the end of production. Specific technical agencies may be created to control emissions, discharges and waste handling or inspections may also be carried out by National Oil Companies (NOCs).

Enforcement of laws and regulations should be carried out by the relevant national agency in cooperation with local government authorities.  The environmental authority should be informed and be able to put into place the institutional arrangements and capacity needed to respond to serious environmental incidents or accidents, so that they can be controlled rapidly and investigated, with results disseminated to communities with a note of actions taken to prevent any reoccurrence of the problem.

Effective management capacity and monitoring is critical to ensuring compliance with the requirements set out in regulations and contracts. Without the appropriate institutional capacity to monitor compliance with the laws and standards, they will have little chance of success.