Petroleum Industry Overview


5. Key considerations for policy makers

This section provides an overview of some of the key challenges facing policy makers today, including:

  • Dutch disease

  • Climate change concerns and low-carbon technologies

  • Revenue volatility

  • Resource exhaustion

  • Public support

Dutch disease

Dutch disease is used to describe a situation where, due to the rapid increase in welfare in a country after discovery of natural resources, and a heavy inflow of foreign currency to the country, other non-extractive sectors becomes too expensive in the export markets and hence fail to compete with internationally traded goods. For example, in the 2000s, Indonesia was heading towards competitive industrial diversification of its economy. However, the commodity boom which began in 2004 eroded its manufacturing competitiveness, and caused further increased unemployment.

The possible creation of a national sovereign wealth or emergency fund, as was undertaken in Norway, has been the traditional cure for the Dutch disease. Chad’s sovereign wealth fund experiment, discussed in the resource listed below is also a useful case study of the failure of this kind of instrument, in addition to the more hopeful initiative now being undertaken in Timor-Leste.

 

See the African Development Bank Group working paper no 142: Africa’s Quest for Development: Can Sovereign Wealth Funds help? Thouraya Triki and Issa Fay.

This resource is available in the topic library

Climate change concerns and low-carbon technologies

The Paris Agreement on Climate Change, was signed by 195 countries and the EU in December 2015, and ratified by 115 countries in October 2016. Member countries have committed to the goals of keeping global temperature rise at below 2 degrees Celsius above pre-industrial levels, and to pursuing efforts to limit increases even further to 1.5 degrees Celsius above pre-industrial levels. This will be achieved through an ambitious reduction of greenhouse gas (GHG) emissions.

Countries commit to have a more robust transparency networks, encourage new technology and improve capacity building and support for developing countries. Countries are required to put forward nationally determined contributions (NDCs) and to have a stock-take every five years, the first one being in 2023. Emission reduction commitments have led governments to make ambitious country-specific regulatory and policy changes. For instance, the UK has committed to a 57% emission reduction from 1990 levels by 2030 (the EU has committed a 40% reduction), and Scotland aims to have 100% renewable energy by 2030. This is likely to lead to a reduction in new oil & gas discoveries and an increase in stranded assets.

Energy efficiency and carbon capture and storage

Largely due to climate change concerns and the need for greater energy efficiency, there has been a surge in:

1. Renewable energy (such as wind and solar), buoyed by subsidies by governments; and

2. Electric cars, and low carbon technology, causing a reduction in oil demand.

Energy security of supply in the future is likely to still require deployment of coal and oil energy sources, due to the intermittency of renewable energy sources like wind and solar. There is potential for coal and oil power projects to continue to be deployed in the Paris Agreement era, utilising carbon capture and storage (CCS) technology. Some countries, such as the UK, are developing robust CCS strategies within their energy policies. However, more research and development is required for efficiency and cost management.

All the above factors would need to be carefully considered by policy makers.

Revenue volatility

The price of oil has fluctuated greatly in the last decade, and together with the unpredictability of oil price and discovery of unexpected reserves caused volatility in revenues for the states.

Europe Brent Spot Price FOB (Source: US Energy Information Administration (EIA))

Resource exhaustion

Due to the exhaustible nature of oil, gas and minerals, host governments are required to develop a long-term strategy with a ‘resource horizon’ to extract maximum value from development of the sector, otherwise it may experience destabilised economy.

Public support

Due to its very nature, the extractives sector has in the past faced, and will continue to face public scrutiny and tension related to:

1. Environmental Concerns: Examples of past public and NGO action include the public protests and 2002 class action suit against BHP Billiton in Papua New Guinea concerning the annual dumping of 90 million tonnes of mine tailings and waste rock into a local river system. BHP withdrew its stake in the mine in 2002 and converted it into a fund to support local development. More recently, public protests against shale technology in the UK, Germany, Poland, France and Bulgaria have led to the halting of projects, bans, moratoria and the revocation of permits;

2. Human Rights: Human rights in the extractives sector have gained even more prominence with the development of the UN Guiding Principles for Business and Human Rights, commonly known as the Ruggie Principles, in 2008. The Ruggie Principles are based on three pillars: the state’s duty to protect against human rights abuses by third parties including business; the social responsibility of business to respect human rights; and the need for greater access by victims to effective remedies against human rights abuses, both judicial and non-judicial.

Other elements of public support

3. Labour, local content and local community participation: most extractives sector projects are large scale, technically complex and capital intensive, and require foreign investment. However, a balance needs to be struck between foreign resources and local content, as this can sometimes lead to protests, as noted in countries like: Ghana - where tension between artisanal miners and AngloGold Ashanti were a contributing factor to latter’s closure of the Obuasi mine in 2016; and South Africa, where labour union riots calling for increased wages in the Marikana platinum mine operated by UK listed Lonmin, led to the death of 34 miners, and major losses for the world’s third largest platinum producer;  and

4. Revenue transparency and corruption: greater public participation and NGO engagement is likely to be seen with transparency initiatives like Publish What You Pay (PWYP) and with more countries becoming members of the Extractive Industries Transparency Initiative (EITI). Aside from states’ “peer pressure”, public protests have led to some states joining transparency initiatives. For instance, Tunisia joined the EITI in February 2016, after having had a history of protests calling for greater transparency, and most notably, violent protests in 2013. The US’ Dodd-Frank Legislation, which requires extractives resources issuers listed in the US stock exchanges to disclose payments made to governments, is also likely to encourage public engagement. 
There is an increasing realisation of the importance of the “social licence to operate”, especially in the present digital information age where information is widely disseminated and accessible. Policy makers will need to consider more transparent and inclusive public participation through stakeholder groups and NGOs.

Extractives Sector Development: Curse or Blessing?

Non-governmental organisations and other sector stakeholders have warned that oil, gas and mining projects in developing countries may have adverse effects on a country’s development process and that newly producing countries tend to experience high rates of corruption, civil war and/or undemocratic governments.

However, there are also several countries that have avoided the resource curse. In the academic literature, the resource curse is not perceived as inevitable. Paul Steven’s recent literature review on this, for example, supported the perspective that recent literature does not accept the resource curse phenomenon as an “iron law”.

See the Chatham House paper:

Paul Stevens, The Resource Curse Revisited, Appendix: A Literature Review, Research Paper Appendix, Energy, Environment and Resources, August 2015.

This paper can be viewed in the topic library

An earlier study by Paul Stevens found that some countries such as Botswana, Chile, Indonesia, Malaysia and Norway had not suffered from the resource curse at all and others, namely Colombia, Suriname, Trinidad and Tobago, and Tunisia had suffered less from it.

Resource curse

It is important for the literature to identify the measures needed to be adopted to avoid the resource curse. There are various international voluntary mechanisms and frameworks, as well as examples of mandatory regulations that promote inclusiveness’ in decision-making by governments, so that the government involves stakeholders from civil societies, NGOs and companies, decisions are transparent, and government is accountable.

One way of mitigating the adverse effects of the resource curse is to link foreign extractive industry investments to domestic non-oil sectors of the economy to build capacity, enhance skills, and ensure long-term diversification. These development linkages may take many forms – forward, horizontal and backward linkages.

 

Developmental linkages are well explained in Columbia Center on Sustainable Investment (CCSI)’s report Linkages to the Resource Sector: The Role of Companies, Government and International Development Cooperation.

The report is contained in the topic library