Petroleum Institutions

12. Key considerations for petroleum sector institutional framework

A strong and effective sector ministry

Effective performance in the sector ministry is likely to be enhanced by attention to three areas:

  • Avoidance of discretionary or arbitrary power, so that investors will be given confidence that any issues arising will be addressed in a predictable, transparent and orderly manner;

  • Securing adequate and competent specialist capacity required for monitoring, oversight and enforcement of regulatory requirements and licence and/or contract conditions;

  • Securing highly competent, professional and non-corrupt staff to oversee large hydrocarbons or mining projects, with the capacity to deal with the management of international companies and large investors

Separation of government’s commercial and regulatory functions (The Norwegian Model)

Much of the effort at reform in the hydrocarbons sector has been influenced by the Norwegian ‘separation of functions’ approach, whereby the commercial, regulatory and policy functions of government are kept institutionally separate. Specialist institutions are created for each of these functions, and given a limited mandate, so that intra-governmental roles are clear. Such an approach appears to have had much success in Norway in its resource management but this relative success provides no guarantee that it can be replicated in countries with very different political systems.

A major constraint is often a lack of human capital, but so is a lack of institutional development such as one might expect to find in a post-conflict society. For example, in a study of several oil producing countries and their oil governance regimes, a Stanford University research team noted that efforts at the establishment of independent regulatory agencies in Algeria and Nigeria had not only failed but also had done no good at all in promoting the idea that regulatory reform could bring valuable benefits. If the wider environment is not conducive to reform, or the political will is lacking, or both, the chances of such a structure being successfully transplanted and leading to greater accountability are very small. Sao Tome e Principe is another example of a country in which the establishment of a tripartite structure has failed to generate significant improvements in accountability.

Harmonisation among different institutions

If the sector ministry is to work effectively with other ministries and agencies, there will have to be an alignment of shared objectives, knowledge sharing, clarification of mandates, competences and responsibilities, and a willingness to use memoranda of understanding or similar mechanisms to formalise working relationships and to clarify potentially overlapping mandates, competences and responsibilities.

Regulator independence

Under the Norwegian model, the sector regulator should ideally be truly independent from the government (sector ministry) and the NOC. However, this requires frameworks that may not exist in some countries, such as strong governance principles, regulatory freedom from political intervention, and strong training and human resources policies. With time, and with capacity building assistance from initiatives such as by the World Bank, this is achievable.

Capacity, efficiency and experience

‘Savvy’ investors can put government officials at a disadvantage when negotiating private participation in a state’s petroleum sector. It may well be necessary, therefore, to adjust employment and other policies, so that the petroleum sector agencies can attract and retain competent, non-corrupt, well-qualified, and experienced professional staff in sufficient numbers to administer the petroleum sector effectively so as to adequately represent the state interest. It may also be necessary to ensure that the petroleum sector ministries and agencies, and their counterparts in the tax and finance ministries, have adequate budgets and technical capacity given the high financial stakes involved for a state with large-scale petroleum sector operations.

Appropriate institutional capacity at each stage in the EI value chain is critical to overall petroleum sector management success. Targeted skills, training, adequate resources and compensation, and insulation from political interference are essential. Technical assistance and the engagement of professional advisers can contribute importantly to capacity building.