Petroleum Licensing and Contracting


The successful discovery of natural resources requires significant effort at the exploration stage. It also requires the application of sophisticated exploration and exploitation technology.

Many developing states often lack the geosciences information (geodata) necessary to undertake detailed land-use planning. Faced with budget constraints and pressures to provide critical services to their citizens, many governments find it difficult to justify the collection of geodata when the payoffs are generally long-term in comparison with the country’s immediate spending needs.

Geoscience information can be collected on an ad hoc basis, resulting from a ‘lucky’ discovery by artisanal miners to more systematic, complex, and large-scale efforts. The quantity of this information (whether it is produced by a state or private investor) depends ultimately on the benefits and costs perceived by either party.

If all the benefits are not internalised, or alternatively, if the returns associated with the collection of geoscientific data are prohibitively difficult to calculate (due to high perceived levels of political, technical, or security risks), a sub-optimal amount of geoscientific information may be produced. Therefore, the primary aim should be to identify the policies required to ensure that sufficient geoscientific information is produced and that governments can limit information uncertainties (gaps in knowledge) and asymmetries (where one party has more information than any others).

Geoscience information and geological data

A minimum quantity and quality of geosciences information will be a prerequisite for ensuring that a host state earns an equitable portion of its natural resource wealth and so that private investors can assess the geological prospects of a license area. In these situations, the state does not need expertise in assessing the value of the license area, since the competitive tension created by a properly managed auction process should ensure that the license is fairly valued.  For example, the government of Papua New Guinea has been skilled at utilizing such data collection to promote investment in its extractives sector.

In petroleum contract awards, the work programme for collecting geological data is generally considered to be controlling and must be performed even if resultant expenditures exceed the minimum. In most petroleum licensing procedures, the work programme and expenditure commitments are combined with financial and fiscal variables (such as bonuses, royalties, or production shares).

Sometimes a third variable may be added, but where awards are based on more than one variable, applicants or bidders need to be told the relative weights the authorities have assigned to each variable for selection purposes. Ideally, the variables selected should be capable of relatively easy assessment, not only by the authorities but also by observers of the award process.