Efficient and effective management of a country’s extractives sector is dependent on having a good institutional framework. If there are insufficient government checks and balances, funds from a resource are likely to be directed to inappropriate or even illegal purposes, characteristic of the “resource curse”. In such cases, “the ground might just be the safest place for the asset”.
The importance of good institutions cannot be underplayed, especially in resource rich developing countries which are characterised by weak or non-existent institutions. It is for this reason that from as early as the 1980s, the World Bank Group increasingly withdrew from direct lending of investment projects to the financing of sector reform and institutional capacity building. The World Bank’s cumulative investment in development assistance in the extractives sector over the past 10 years currently stands at about USD 9 Billion.
For a country’s institutional framework to function properly, the roles and responsibilities of different government ministries and agencies need to be clearly defined and managed. This avoids overlapping or conflicting competencies and roles in policy and enforcement. It also prevents gaps in regulatory responsibility. It is important for institutions and agencies to work together to utilise extractives for wider economic development, and not have institutional actions that discourage development.
In the past, there were widespread cases of institutional overlap, especially with respect to having national oil companies (NOCs) and natural resource companies (NRCs) serving dual roles of both commercial and non-commercial functions, such as regulator functions. There have been reforms in the past, and these are still ongoing, and the common trend now is to have a “Norwegian” or “trinity” institutional setup that separates policy making (by the relevant government ministries) from corporate strategy (NOC) and sector regulation (independent regulatory body).
There are essentially 10 key institutions that share responsibilities in the management of an oil and gas sector. These are as follows:
Coordination among key institutions
Coordination among all of these, while difficult to achieve, is essential to effective extractives sector management, since their actions will have an impact on the economy, environment and society. Conflicts among the various roles can be damaging, both to the achievement of the state’s goals and to the scale and tempo of investment.
Coordination is even more challenging in states with federal or decentralised structures, where the central government has to coordinate with the regional governments. For instance, Nigeria has a federal system with three tiers of government: federal, state and local governments. The structure of the petroleum sector is such that oil and gas revenues and taxes are collected by the federal government, and there is a revenue sharing system where the federal government transfers some petroleum revenues to all the states and local government councils in the country. However, the sharing mechanism is not always clear, and this has at times led to revenue sharing controversy and tension in relation to petroleum exploitation in the Niger Delta region.
Another example is Kenya, an emerging oil & gas producer which hopes to achieve full commercial production in 2022, and which has a relatively new devolved (federal) system of government under its 2010 constitution. Although the constitution vests natural resources in the people, for management by the national government, there has been dissatisfaction among county governments calling for greater inclusion in licensing and revenue management. When it comes to petroleum, Kenya’s present federal split of licensing roles is that the national government is responsible for licensing petroleum and its derivatives (including the areas of importation, refining, exportation, transportation, storage and bulk sales and county governments will be responsible for managing their share of resource revenue to ensure local communities accrue the benefits from the revenues.
Why we need institutions
Addressing coordination challenges effectively requires the creation of a high level of capacity in the institutions charged with sector management and regulation.
Each of the ten institutions mentioned in this Topic Overview needs to have the necessary resources and staff to fulfil its mandate, commensurate with the technical complexities of oil, gas and mining sectors. In resource-rich developing countries, more often than not, requisite capacity is lacking. Technical assistance and the engagement of professional advisers can make an important contribution to capacity building. Capacity requirements will change if activity moves beyond exploration to development and production. A dynamic, evolving approach to the various tasks of government is therefore essential.
In more detail, the tasks of the ten key institutions are described in the next sections.