Petroleum Policy

8. Industry view

In order to foster petroleum development within a resource rich developing country, the boundaries of sovereign resource ownership and nationalist sentiments need to be safeguarded. This needs to take into account how much the host state is willing to open the sector for private and foreign investor participation, otherwise too much host state protection may act as a deterrent for investors.

Investors can also be wary of long-term investment security and a track record of nationalisation and unilateral changes to contracts by the host state or it’s NOC. The various roles of the NOCs is a key consideration for the private sector. The clearer the national vision, NOC capacity and capabilities and priorities, the more likely that the petroleum sector would be willing to invest in the host country.

There is also the risk that host government policy will change once a large-scale investment is made in the host state with largely immovable assets. This is a well-known risk, often referred as the 'obsolescing bargain'. It is typically performed by the host state via different acts such as unilateral changes to the terms of the investment regarding shareholder agreements, taxes and tax rates, and may even result in de-facto expropriation of the project (‘creeping expropriation’). The most effective way to decrease this risk, for a host state wishing to attract foreign investment into the sector is by increasing transparency and accountability related to a combination of national legislation and contracts that are binding under international law and arbitration.

Separation of sector policy, management and supervision functions

One available approach is that of the separation of sector policy, management and supervision functions: overall sector policy is best set at the Ministerial level while awards, contract negotiation, management and supervision is best handled by an independent Competent Authority (CA). Equally, an efficient NOC, if one exists, should be made to compete for awards along with IOC investors. Ideally, the NOC should not fulfil the roles of an independent CA. It often creates an inefficient, monopolistic monolith that can discourage desired foreign direct investment.

Explore Petroleum Institutions topic overview for more detailed explanation of different functions of petroleum institutions.