cambodia: the global petroleum context: opportunities and challenges facing developing countries

8/14/2019 Cambodia: The Global Petroleum Context: Opportunities and Challenges facing developing countries

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Discussion Paper No. 62008

Insights or Action Initiative

The global petroleum context :Opportunities and challengesacing developing countries


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UNDP CAMBODIAINSIGHTS FOR ACTION INITIATIVE

Background:

UNDPs Insights or Action (IFA) initiative was developed and launched ollowing a2004 meeting between H.E. Prime Minister Hun Sen and UN Assistant Secretary Generaland UNDP Asia Pacifc Regional Bureau Director Dr. Hafz Pasha. H.E. Prime MinisterHun Sen delivered a challenge to UNDP, asking them to help identi y innovative policyresponses to key development challenges.

The IFA initiative was created to undertake critical and timely policy research and toacilitate policy dialogue among the Cambodian Government, Cambodian society andCambodias development partners.

Purpose:

The IFA initiative is aimed at generating innovative ideas and practical knowledge orthe e ective implementation o the Governments Rectangular Strategy. Special ocusis given to those aspects o the Rectangular Strategy with greatest scope or rapidlyadvancing progress towards Cambodias Millennium Development Goals (CMDGs). The project has three main components: Knowledge Generation, Knowledge Sharing,and Knowledge into Action.

1. Knowledge Generation:IFA generates valuable new knowledge and insights in several critical areas throughwell-targeted research in collaboration with various government ministries and the

Supreme National Economic Council (SNEC), a cross-ministerial advisory committeethat reports directly to the Prime Minister.

2. Knowledge Sharing:IFA has also been developing a range o knowledge sharing activities and modalities,including the annual Cambodia Economic Forum (CEF), media con erences, websitedevelopment, and a series o Insights or Action publications.

3. Knowledge into Action:In addition to the two main components, IFA also contributes to the urther develop-ment o national capacity, especially among researchers and policy makers, so thatthey will gain rom both learning by doing during the applied research process,as well as beneftting rom a trans er o valuable in ormation and knowledgegenerated by this initiative.

2009, UNDP CambodiaFuelling Poverty Reduction: Selected papers rom the International Oil and Gas Con erence

DISCLAIMERThe responsibility or opinions in this publication rests solely with the authors. Publication does not constitute an endorsement by the United Nations Development Programme or the institutions o the United Nations system.


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TITLE

Fuelling Poverty ReductionSelected papers rom theInternational Oil and Gas Con erence

March 2008, Phnom Penh, Cambodia

UNDP Funded Discussion Paper No. 6In cooperation with

Supreme National Economic CouncilCambodian National Petroleum Authority

NoradNorwegian Petroleum DirectoratePetrad


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TITLEUNDP Discussion Paper No. 6

The global petroleum context

i

TABLE OF CONTENTS

I. The global petroleum context ................................................................................3

Global petroleum context:Opportunities and challenges acing developing countries ...............................5Arne Walther

Optimal macroeconomic policy in a resource boom: Selected key issues .......11Robert Glo cheski

II. Pre-production challenges ...................................................................................17Reliably assessing the resource base ...................................................................19Gunnar Siland

Legal rameworks used to oster petroleum development ...............................25Dr. William T. Onorato

International petroleum fscal systems ...............................................................30Daniel Johnston

How to negotiate the right petroleum contract ..............................................48Jenik Radon

Establishing an e ective regulatory authority: A comparative analysis ..........56Ghazi Durrani

Progress in the development o a regulatory ramework or petroleumexploration and development and poverty eradication e orts in Uganda .....69Ernest N. T. Rubondo

Pre-production negotiations or rights and production/revenue sharing ......71Einar Risa

Overlapping claims ...............................................................................................80Genoveva Jose da Costa

III. Costs/benefts o oil refneries and other downstream industries ....................83Oil and gas development:Papua New Guineas experience with downstream processing ........................85Stanley Enn Alphonse

Costs and benefts o oil refneries and other downstream industries .............91Sverre Brydoy

Maximising national content/local content ......................................................100Willy H. Olsen

International experience in turning black gold into human gold ...................114Michael Hopkins

Appendix:So Tom and Prncipe Revenue Management Law ................................................137


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UNDP Discussion Paper No. 6iv

OGRA Oil and Gas Regulatory Authority (Pakistan)OPEC Organization o Petroleum Exporting CountriesORC Oil-rich countriesPEAP Poverty Eradication Action Plan (Uganda)

PNG Papua New GuineaPROMINP National industry mobilisation programme (Brazil)PSA Production sharing agreement PSC Production sharing contract R/T Royalty/tax SAMREF Saudi-Aramco Mobil Refning Company SIRESE Superintendencia General del Sistema de Regulacin Sectorial (Bolivia)SLD Straight line declineSME Small- and medium-sized enterprisesSPE Society o Petroleum Engineers

SPE-PRMS Petroleum Resources Management SystemTVET Technical-vocational-educational trainingUNCLOS United Nations Convention on the Law o the SeaWTO World Trade OrganisationWPC World Petroleum Council YPFB Yacimientos Petroli eros Fiscales Bolivianos (Bolivian State Petroleum Company)


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1

FOREWORD The frst international petroleum con erence o its kind was held in Phnom Penh,Cambodia, rom 26-28 March 2008. The con erence theme, Fuelling Poverty Reduction

with Oil and Gas Revenues: Comparative Country Experiences, attracted a wide-rangeo developing and developed country policy experts and practitioners who cametogether to share their valuable expertise and practical experience. The organizingpartners included the Cambodia National Petroleum Authority (CNPA), the SupremeNational Economic Council (SNEC), the Government o Norway and the United NationsDevelopment Programme (UNDP).

The main purpose o the con erence was to provide an open orum or participantsrom Cambodia and a wide range o petroleum producing countries in which to shareinternational best practices aimed at helping in orm participants about the e ective

development o Cambodias and other countries emerging petroleum sectors. Animmense amount o valuable knowledge and experience were shared in 14 key subjectareas critical to petroleum sector development and to the achievement o sustainablesocio-economic development with long-term stability. The con erence fndings andconclusions also had important implications or the development and managemento other non-renewable mineral resources in Cambodia.

Over 350 registered and more than 100 additional participants attended the con erence,including o cials rom the Royal Government o Cambodia, provincial governors, localuniversities, Non-Governmental Organizations (NGOs) and other development partners,

media and private sector companies rom Cambodia and throughout the world.

During the two-and-a-hal days o discussion, experts rom Europe, Asia and NorthAmerica, and made presentations, and seasoned policy makers and practitioners roma range o developing countries including Indonesia, Japan, Malaysia, Mongolia,Papua New Guinea, So Tom and Prncipe, Thailand, Timor-Leste and Uganda madepresentations. Each provided valuable insights into how their governments hadapproached petroleum development and management issues.

The con erence proved to be an important orum or the Cambodian Government

and concerned stakeholders in which to learn rom international experts and thepractical experiences o other countries. As resources belonging to all o a countryspeople, the e ective use o petroleum and minerals represents an incredibleopportunity to both dramatically improve the well being o citizens and to sustaineconomic growth. Moreover, as these are non-renewable natural resources, there isonly one chance to get things right.


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UNDP Discussion Paper No. 62

This series o papers presented at the con erence details the main fndings and keyconclusions o the speakers in a variety o areas. We hope that these valuable insightswill continue to in orm help ul policy debate, decision-making and related action to uelpoverty reduction and to achieve the Millennium Development Goals using oil and gas

revenues in the years ahead.

Please note that the con erence presentations, papers, speeches, proceedings, andother relevant in ormation can be downloaded at: http://www.un.org.kh/undp/i a.


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3

I. The global petroleum context :Opportunities and challenges acing developingcountriesArne WaltherAmbassador/Senior Adviser Ministry o Foreign A airs o Norway Former Secretary General, International Energy Forum

Optimal macroeconomic policy in a resourceboom: Selected key issuesRobert Glo cheskiChie Resident Economist UNDP Cambodia, Lao PDR, Viet Nam


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5

Opportunities and challenges acing developing countries

Arne Walther Ambassador/Senior Adviser Ministry o Foreign A airs o Norway

Former Secretary General, International Energy Forum

The way that you choose to harvest your petroleum endowment or economic andsocial beneft today and or uture generations will also have an impact beyond yournational borders, contributing to the security o national and global energy suppliesin an increasingly interdependent and energy-hungry world at a time o heightenedenergy security concerns around the world.

Defning issueEnergy security concerns continue to top the international political agenda. Why? Notbecause energy is a goal in itsel , which it isnt, but because each and every countryneeds energy as a means to reach its economic and social objectives. This is true orenergy importing, as well as exporting countries, industrialized as well as developingcountries. Energy also a ects commercial and political relations between countries.It uels the world economy. Production and consumption o energy impact the globalenvironment. Energy in uences, and is in uenced by, international politics. Energy isa challenge or the industry set to harness it, and a challenge or the national andinternational leadership that would govern it. Energy goes to the very core o political,economic and environmental interests o individual countries as well as those o theglobal community.

It is not necessarily a blessing or a country to be endowed with petroleum resources.It is how governments arrange or their resources to be extracted and how revenuesearned are used that determine the success or ailure o being a petroleum-endowedstate. And notably or developing countries, the degree to which petroleum can uelthe economic development necessary to li t a population out o poverty.

Petroleum activity has certainly been a blessing or my own country, Norway, anindustrialized country. Not least because the Norwegian oil saga could take-o inthe 1970s on the basis o a democratic, well- unctioning society with establishedpolitical, legal and commercial institutions. The political desire was to go care ullyorward and not to let an oil bonanza overheat the economy or disrupt the traditionalpattern o Norwegian society. Claiming sovereignty and exercising national control,we chose to set up a state oil company. We invited the international companies tocome and compete, acknowledging our need or their technological know-how andventure capital. Imposing high taxes and tough conditions, Norway was also keen too er the international companies predictability in ramework conditions to ensurethe long-term presence and commitment o the best international companies. And,

successive governments have sought national political consensus in developing andadjusting coherent and transparent petroleum policies.


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Norway has attracted the very best o the international oil industry. Our productionand exports o the strategic oil and natural gas commodities were, and still are, welcomedby our petroleum-importing partners in the Organization or Economic Cooperationand Development (OECD) as a source o energy supply rom within this grouping o

the main industrialized countries, o setting ears o undue dependence on externalsources that could exacerbate energy insecurity. Norway prides itsel on being a reliablesupplier o substantial amounts o oil and natural gas contributing to regional and globalenergy security on a long-term basis.

Norway is now passing on its experience as an industrialized, petroleum-endowedcountry in a special programme Oil or Development as part o our co-operationwith developing countries.

Increasing energy demand

The increase in global energy demand oreseen in the years ahead is substantial. Theresources are there, but timely investments o some US$20 trillion, hal o this indeveloping countries, are needed to meet projected demand over the next quarter o a century. Energy scenarios to 2030 rom the International Energy Agency (IEA) in Parisand others project:

Energy demand increasing by more than hal over todays level, most o theincrease coming in developing countries as they industrialize and theireconomies grow.Fossil uels remaining the primary sources o energy and accounting or our-f ths o total demand today and as expected twenty years rom now.Oil accounting or 32 percent, natural gas or 22 percent and coal or 28 percento the energy mix, these ossil uels dwarfng the 5 percent share o nuclear, the4 percent share o hydro and other renewables as well as the 9 percent share o biomass and waste. Until recently, natural gas was seen to be the astest growingossil uel. Coal is now astest growing with enormous reserves not least in Chinaand India.Global energy-related CO2 emissions are expected to grow correspondingly,increasing by more than hal rom todays level. Over three quarters o thisincrease would come rom developing countries.

The latest World Energy Outlook rom the IEA expects the supply/demand balance inthe global oil market to remain tight. By 2015, the world would need 37.5 millionbarrels per day o gross capacity additions, o which 13.6 million barrels per day tomeet increasing demand and the rest to replace decline in present felds o oilproduction. The announced plans o the Organization o Petroleum ExportingCountries (OPEC) and non-OPEC producers amount to only two-thirds o that, 25 mil-lion barrels per day through to 2015. This means a substantial defcit to fll, an amountexceeding the present production capacity o Saudi Arabia. This also underlines theimportance that Carbon Capture and Storage will have in meeting the global climatechallenge.


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OPEC sees world oil demand rising this year to 87 million barrels per day rom 79.3 millionbarrels per day in 2003. The expected increase in developing countries in this period is4.1 million barrels per day to 24.7 million barrels per day, to which Chinas increase o 2.4 million barrels per day to 8 million barrels per day can be added. In comparison,

the increase in demand o the industrialized countries in the OECD will rise by a mere0.8 million barrels per day to 49.4 million barrels per day this year.

OPEC fgures show world oil supply has risen rom 79.7 million barrels per day in 2003to 84.8 million barrels per day at the start o this year. Non-OPEC developing countriesare expected to increase supply by 1.3 million barrels per day in relation to 2003 to 11.6and China increasing theirs by 0.5 million barrels per day to 3.9. In comparison, OECDsupply is projected to decrease by 1.7 million barrels per day in 2003 to 20 million barrelsper day by the end o this year.

Heightened energy consciousnessA eature o our day, not least amplifed by last years Nobel Peace Prize to Al Gore andthe Intergovernmental Panel on Climate Change as well as by the climate changenegotiations not ar rom here in Bali, is that energy and environmental uncertaintiesare prompting countries and groups o countries around the world to re-think undamental policies. The challenges o energy security and climate change areinterlinked. Policies and measures to meet the climate change challenge should not jeopardize energy security. And policies and measures or energy security shouldnot exacerbate climate change.

Add to that the political imperative o a developing country government to li t apopulation out o poverty through economic development uelled by increased use o energy, which might have adverse climate and environmental e ect both locally andglobally. Climate change a ects everyone. And we know that the poorest developingcountries will be earliest and hardest hit.

But the policy tuning o one country to meet new challenges and to reduce itsparticular energy uncertainties can also exacerbate uncertainties or create new ones orothers. International dialogue is needed both to avoid misunderstandings and to seizenew win-win opportunities.

Amid the uncertainties, there is a undamental certainty. The world will need moreand cleaner energy, used in a more e cient way, accessible and a ordable to a largershare o the worlds population. The political challenge lies in operationalising this energyimperative in a air and sustainable way, through national policies as well as in bilateral,regional and wider global co-operation.


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New energy era

Amid energy and environmental vulnerabilities and uncertainties, national policies willevolve against a complex backdrop. To mention some elements:

Increasing energy demand increases the need to improve energy e ciency, orenvironmentally benign energy and to develop cost-e cient technology.Fossil uels will remain paramount or quite some time, but with increasingattention paid to the development o alternatives.Environmental and climate change concern will grow, not least in the publicdomain.Substantial investments are needed and these can be acilitated by predictableand equitable economic, fscal and legal regulatory ramework conditions.We will see increasing energy trade due to the geographical mismatch betweencentres o oil and gas production and centres o consumption.

We must consider vulnerability o energy production and supply to politically motivated disruption, terrorist attack, technical mishap and orces o nature.Competition, i not scramble, or energy resources will increase, as will competitionamong energy resources.Nations and groups o nations opting or policies o energy interdependence orenergy independence or their energy security. Resource nationalism.Increasing bilateral and regional cooperation to address immediate concernswith longer-term economic and political implications.A new set o relationships between national and international oil companies isin the making, the ormer controlling 80 percent o global proven reserves.International and national calls or good governance and transparency.Demands or equitable access to energy or the quarter o the worlds populationwho do not have it today, but who want it or a better li e tomorrow. Energypoverty must be dealt with. The shi t to Asia o global economic gravity with geopolitical and energyimplications.

Global energy policy interrelationship

At their eleventh biennial meeting in Rome next month, Energy Ministers will discussthese and other issues in the International Energy Forum. Their in ormal global producer-

consumer dialogue transcends traditional political, economic and energy policy dividinglines. Gathering under one global political umbrella, ministers not only o the petroleum-exporting countries o OPEC and ministers o the industrialized, petroleum-importingcountries o the OECD/IEA, it also gathers ministers o countries outside these organiza-tions, such as energy, economic and political power-houses Russia, China, India, Brazil,South A rica and others, that will have increasing impact on the global scenario.

IEF ministers underscore that energy security is a shared global responsibility. Securityo demand o energy-exporting countries and security o energy supply or energy-importing countries are two sides o the same energy security coin. Reduced market

volatility and prices at reasonable levels or both consumers and producers is their mantraand shared interest.


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At their IEF Ministerial two years ago, ministers expressed concerned over e ects o highoil price levels on the world economy, and especially on developing countries. Theyattributed climbing oil prices to a number o actors, including increasing demand,tight up- and down-stream capacities, non-industrial interventions and geo-political

developments, which increase market anxieties. Today, prices are even higher, atin ation-adjusted historic highs, with increasing Middle East demand accompanyingthat o China and India and the decreased value o the US dollar in relation to othercurrencies.

IEF ministers call or a stepping up o investments across the energy chain to meetthe substantial increase in demand required or global economic growth and socialdevelopment. They urge accelerated development o cleaner ossil uel technologiesalong with alternative sources o energy and increased energy e ciency in a world thatwould continue to rely strongly on its ample supplies o ossil uels, oil, natural gas and

coal. They emphasize that improved access to markets, resources, technology andfnancial services, bolstered by air and transparent economic fscal and legal regulato-ry rameworks, and by good governance, are crucial or the long-term energy securityo both consumers and producers. They acknowledge the need to do somethingabout the shortage o skilled human resources throughout the industry.

They underscore, as did the G-8 Summit in St. Petersburg, the importance o transparency and exchange o energy data or market predictability and investments,rea rming their commitment to the Joint Oil Data Initiative managed by the IEFSecretariat with the support o the main international organizations dealing withenergy, in this part o the world the Asia Pacifc Economic Co-operation (APEC). Morethan 90 countries worldwide, accounting or more than 90 percent o global oilproduction and demand are taking part in this unique international transparencyinitiative.

Energy security in its more holistic, global and long-term perspective was the ocustheme o the United Nations Commission on Sustainable Development in 2006 and2007, underscoring the importance o energy in meeting the Millennium DevelopmentGoals. But the e orts o ministers to fnalize a consensus document with goals andtargets in May last year ailed, testi ying to the political, economic and environmentalcomplexity o energy issues.

Multi-polar energy world

As global ocus is being put on issues o energy security, we also see a surge in regionalenergy cooperation in Asia and elsewhere. Regional and interregional cooperation ina multi-polar energy world can provide stepping-stones to global approaches andcooperation.

Let me highlight the importance o a new Asian energy identity sparked by a processo Roundtables o Asian Energy Ministers launched by India in 2005. This process o

energy regionalism, under the IEF global umbrella, gathers ministers o the leadingAsian oil and natural gas importing countries in Asia and the West Asian oil and natural


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gas exporting countries in the Gul . The latest Roundtable o Asian Ministers took placein Riyadh in May last year hosted by the Energy Ministers o Saudi Arabia and Japan.Ministers representing hal o the worlds population, the bulk o the worlds remainingproven reserves o petroleum and the greater part o surging energy demand expected in

the decades ahead are getting together and will have global impact, not only on energydevelopments.

These Asian energy ministers recognize that with their global energy clout, the Asianpetroleum economy is integral to, and inseparable rom the global petroleumeconomy, while they also underscore their desire or market stability and that pricesbe sustained at levels that encourage Asian consumers to increase their purchases o Asian production on the one hand and which encourage Asian producers to invest inAsian petroleum consuming nations on the other. They advocate interlocking theinterests o Asian petroleum-endowed countries with those o Asian petroleum-

importing countries through cross-national investments in the petroleum sector o theother or win-win promotion o reciprocal energy security interests.

The intra-Asian petroleum link is already strong. Two-thirds o West Asias oil exportsare going eastwards in Asia and more than two-thirds o East Asian crude oil importscoming rom West Asian exporters. This interdependence is seen as a natural andlogical consequence o geography and economics.

West Asian ministers in the Gul assure ministers o Asian oil-importing countries tothe East that they can depend on West Asia or their uture security o supply. With Asiaalready accounting or 40 percent o global energy demand and 60 percent o theexpected increase in demand by 2030, ministers emphasize the importance o improving energy e ciency, in addition to stepping up investments in response toexpanding energy demand. Setting and implementing individual and voluntary energye ciency goals as well as developing new, environmentally benign energy technologiesto meet environmental concern are considered important.

Conclusion

Let me sum up with some main messages:Harvesting your petroleum resources can certainly, with the right policies, promote

domestic economic development, while also contributing to global energysecurity.Energy, environment and economic development are interlinked and call orholistic approaches.Energy is crucial or e orts to meet the Millennium Development Goals. Transparency, good governance and sustainability are key.As are win-win policies developed in international dialogue and co-operation.Energy is a defning issue o our age in national, regional and global contexts inan interdependent world, where developing countries have such importantrole to play.

Their voices should be heard and interests taken into account in global and regional discussions and e orts that determine our Common GlobalEnergy Future.


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Optimal macroeconomic policy in a resource boom:Selected key issues

Robert Glo cheskiChie Resident Economist

UNDP Cambodia, Lao PDR, Viet Nam

As a result o the global commodity price boom, economic growth in a rapidly growingnumber o developing countries is increasingly based on resource extraction typeindustries (oil and gas, other minerals, rare timber, etc.). For developing countries richin natural resources, this presents major opportunities, but also some major challengesand risks. At the macroeconomic level, this can present a special set o challenges orleaders and policy makers in the countries concerned.

Key macroeconomic issues in a resource revenue boom

Key macroeconomic variables include: growth (both quantity and quality), employmentand unemployment, income and income distribution, poverty and equity, in ation andexchange rate policy, oreign borrowing, and volatility/stability.

Growth

When reviewing the growth per ormance o any country, but especially in countriesreliant on resource extraction type activities, it is important to review both the quantityo growth generated, and the quality o such growth.

Gross domestic product (GDP) is the most commonly available quantitative measureo economic growth in developing countries. However, it has some major weaknesses asa measure o per ormance in economies that are largely based on extraction o non-renewable resources like petroleum and other minerals. Because extraction o naturalresources and their export are measured as production at market value, this showsup as part o GDP growth even i the largest part o the income generated accrues tointerests outside the country concerned. In such cases, a better measure o growth inincome benefting the developing country concerned would be national incomediscounted or extraction/depletion o non-renewable natural resources (similar todepreciation o other physical assets in national accounting) and ideally also adjustedor environmental costs.

Regarding quality, growth should also be assessed in terms o employment generatedand net income creation, poverty reduction, equity, environmental impact, and moregenerally, human development and wellbeing. A ter all, what is the point o extractingand exporting resources i it is not mainly benefting the people o the country.


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Paradox o plenty

As is now airly well known, a review o the growth per ormance o developingcountries over the past 50 years has led to a somewhat surprising fnding termed

the paradox o plenty. In this case, the paradox is that many low-income developingcountries that are rich in natural resources have generally per ormed poorly on a widerange o development criteria compared to developing countries that are relativelypoor in natural resources. Such resource-rich developing countries have per ormedmore poorly in terms o economic growth, fnancial management, social development,environmental preservation, poverty, equity and governance.

One need only compare the growth and development per ormance since the early1960s o the relatively resource-poor Asian tiger economies (South Korea, Singapore, Taiwan, Hong Kong) with the more resource-rich economies o Asia, Latin America and

A rica over the same period. More generally, economic research comparing income percapita growth rates over long periods o time indicate that per capita income growthin low-income resource-rich developing countries has been on average 30-50 percentlower than in low-income resource-poor developing countries.

There are, o course, some exceptions like Botswana in A rica, or Malaysia in SoutheastAsia, but these are generally outnumbered by many ar less success ul experienceselsewhere (Nigeria, Angola, Liberia, Sierra Leone, Equatorial Guinea, Ecuador, Venezuela,Kazakhstan, the Philippines in the 1970s-80s, and many others). There are also, o course,a number o highly developed economies that have also done well including Norway,Alberta in Canada, and Alaska in the US, but their success is attributed to already havingwell-developed institutions at the time petroleum was discovered and subsequentlyextracted.

In addition, there are a ew hope ul newcomers like Timor-Leste, that seem to havedone well in incorporating many o the best practices in resource-rich developing anddeveloped countries, while so ar avoiding some o the worst practices.

It is also worth noting that among the weaker per ormers, there is also a great dealo variation. Take or example oil-rich Indonesia compared with oil-rich Nigeria. Thirtyyears ago Indonesia and Nigeria had similar per capita incomes, but today Indonesias

per capita income is our times that o Nigeria.

Indonesia managed to avoid some o the worst economic policy mistakes duringthe 1970s and 1980s by investing heavily in agricultural productivity and ruralin rastructure, which in turn helped avert a narrowing o the economic sectors wheremost Indonesians earned their livelihoods. As a result, poverty was also considerablyreduced rom 1970 to the mid-1990s. However, Indonesia experienced other negativeconsequences such as poor governance and corruption rom such easy money derivedrom oil and other sources o easy external fnance like o cial development assistanceand (ODA) and corrupted oreign direct investment (FDI). Nevertheless, Indonesia still

per ormed much better than a country like Nigeria that experienced Dutch diseasecombined with serious corruption.


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During this same period both countries, especially Nigeria, experienced considerablesocial and political instability, and neither can be considered success stories or modelsor others.

A similar comparison can be made between the diamond rich countries o Botswanaand Sierra Leone. Botswanas economy has grown at a airly steady rate over much o the past 30 years, and has averaged a relatively high 7 percent per annum over the past20 years. In contrast, the Sierra Leone economy contracted by over 40 percent between1971 and 2000 and has only begun the initial steps to recovery in recent years, althoughthe outlook remains tenuous.

One also observes considerable variation when comparing countries in terms o human development (education, health, li e expectancy and income per capita). Forexample, Norway a major oil exporter consistently ranks at the top o the list in terms o

the human development index. At the same time, among the lowest ranked countriesare Yemen, Gabon, Equatorial Guinea, Congo, Angola and Nigeria.

In Venezuela, arguably the Latin American country richest in oil and other naturalresources, nearly hal the population continues to live in poverty since the benefts o oilhave traditionally accrued to a minority elite.

In short, the shi t towards growth based on the extraction o valuable naturalresources, especially non-renewable resources, can have a dramatic impact on thequantity and quality o economic growth and other development results, althougha minority o countries seem to have defed the odds and managed to achieve muchbetter results than most others. In some o the worst cases, such natural resourceextraction based growth has dramatically impacted socio-economic stability.

Macroeconomic actors underlying the paradox o plenty

One o the main macroeconomic actors a ecting growth per ormance and econom-ic restructuring is the sudden oreign exchange revenue boom rom petroleum andother minerals i such revenues are spent on domestic goods and services, especiallyconsumption goods and services (or i such revenues are converted to domestic currency,fnancial assets without sterilization by the central bank). This results in an appreciation

o the real exchange rate, which in turn tends to reduce the price competitiveness o non-petroleum tradable goods and services, and eventually results in a contraction o thenon-petroleum tradable sectors (via reduced exports and increased import competition).

At the same time o course, the petroleum extraction sector expands, as do non-tradablegoods and services. This happens under various types o exchange rate regimes eithervia adjustments in the nominal exchange rate and/or in the domestic in ation rate. This is equally true or largely dollarized economies where the main adjustments wouldoccur via the domestic in ation rate.


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O course, the contraction o the non-petroleum tradable sectors only matters i suchsectors play an important role in the country concerned. In most low-income developingcountries, the non-petroleum tradable sectors typically include agriculture,manu acturing (such as garments), and tourism. Notably, these same sectors tend to

play a critical role in providing livelihoods, jobs and incomes or the vast majority o people in low-income developing countries.

At the same time, large-scale extraction type industries tend to be capital intensiveand typically are not generators o sustainable livelihoods and employment. There ore,the expansion o extraction type industries and the contraction o non-petroleumtradable sectors like agriculture, manu acturing and tourism can have seriousconsequences or livelihoods and employment, poverty, equity and human wellbeingmore generally, unless o course such economic restructuring caused by a shi t towardsextraction industries is o set by various types o compensatory measures.

This loss o competitiveness and eventual contraction o the non-petroleum tradablesectors has been termed Dutch disease because o the Dutch experience ollowing thediscovery o natural gas in the North Sea in the 1960s, which led to a surge in naturalgas revenues and a boom in consumption spending. As a result, manu acturing and jobsgrowth went into decline, a decline that was later reversed by policies that promotedbroader based investment and growth.

In addition to a gradual shrinking o the sectors that generate livelihoods andemployment, developing countries that become reliant on resource extraction also tendto ace greater macroeconomic volatility and instability. This increased volatility andinstability is typically generated by unpredictable swings in the international prices o commodities like oil, swings in the quantities extracted over time, and occasional swingsin the timing o payments made by petroleum and mining companies to governments.

Such volatility in fnance can be urther exacerbated i governments undertake oreignborrowing against petroleum reserves. International banks are quite enthusiastic aboutlending to oil-rich countries during an oil boom when it is least needed, but can suddenlyre use to refnance and can demand net repayments when the oil boom subsides ironically when oil-exporting developing countries may be in greater need o thefnance.

Notably, the six most indebted countries in A rica are oil and mineral exporters. Similarly,several oil-rich Latin American countries ound themselves in deep debt ollowing theoil price collapse o the mid 1980s. The resulting swings in petroleum and mineralrevenues in turn impact government budgets and aggregate demand in the macro-economy unless there are some stabilizing measures in place to moderate the volatility.

In a number o resource-rich developing countries, other sources o instability haveincluded rising inequalities exacerbated by growing corruption. I the non-petroleumtradable sectors that go into decline, like agriculture and manu acturing, are also sectors

where livelihoods, jobs and incomes are more broadly distributed, then inequalities willrise. Unless the benefts rom petroleum revenues are also invested or spent so as tosa eguard or improve equity, this can lead to social unrest and political instability.


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Minimising Dutch disease

There are several options or either avoiding or at least minimising this particulareconomic disease.

First, it is important to note that it is not the revenues per se that cause the contractiono the non-petroleum tradable sectors, but rather the spending o the revenues, andmore precisely, the pace and manner in which the revenues are spent. There ore, i adeveloping country is already enjoying high economic growth rates at the time o petroleum discovery and extraction, one option or sa eguarding such high growth ratesis to only spend that share o new petroleum revenues up to the economys absorptioncapacity when Dutch disease begins to take e ect, and save the remainder or the uture.

For example, in the case o Cambodia, preliminary modelling results suggest that the

Cambodian economy could absorb up to an additional US$300 million per annum o spending rom such revenues, but beyond that Dutch disease begins to develop.

A second option would be to try and o set the loss o competitiveness rom realexchange rate appreciation in agriculture, manu acturing and tourism by petroleumfnanced public investment spending that generates productivity gains in thesesame tradable sectors. For example, public investments can be made in humanresource development (e.g. education, vocational training, etc.) and in rastructure thatincreases productivity in the non-petroleum tradable sectors (e.g. investments in ruralelectrifcation, irrigation, improved rural roads, extension services, etc.).

In the case o Cambodia, preliminary modelling results suggest that additional publicinvestments o up to US$300 million per annum aimed at increasing productivity inagriculture via human resource development and enabling rural in rastructure wouldseem to generate the highest returns largely because o the low capital intensity inrural areas. Any additional spending above this amount would need to be on importso investment goods and services to o set upward pressure on the real exchangerate. Such an investment strategy would seem to also minimise the likelihood o a urthernarrowing o Cambodias already narrow economic base.

Notably, such investments would also be very much in line with Cambodias National

Strategic Development Plan (NSDP).

Yet another important and cost e ective option that could be combined with theoption o care ully selected investments would be to also implement compensatoryadjustments to policies, laws, regulations and institutional e ectiveness that increasesthe productivity o the non-petroleum tradable sectors (agriculture, manu acturing,tourism). Viet Nams experience with the Enterprise Law and the resulting private sectorbusiness and employment boom provides a prime example o such possibilities.

The International Finance Corporations (IFC) Cost o Doing Business Survey provides

developing countries with valuable guidance on where e orts could generate thehighest returns in terms o increased productivity in the non-petroleum tradablesectors. Notably, there seems to be airly broad consensus based on a wide range o country


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experiences rom Azerbaijan to Trinidad and Tobago that spending too much o therevenues on domestic consumption goods increases the likelihood o real exchangerate appreciation and acute Dutch disease e ects. Spending on poorly chosen publicin rastructure projects would have the same impact. This latter might be considered

even worse than spending on consumption since no one would enjoy the benefts o higher consumption and it could leave the economy with longer-term structuralimbalances. So part o the challenge would be selecting quality public investmentsthat increase productivity in the non-petroleum tradable sectors in order to sa eguardand increase employment, incomes, poverty reduction gains, equity and social stability.

Also worth noting, developing country experience over the past 50 years indicatesthat virtually all developing country success stories, whether resource-rich or resource-poor, were based on a oundation o broad based literacy and education. There ore,or developing countries with weak human resource capacities, a frst priority should

be trans orming natural resource wealth into human resource wealth. Such qualityinvestments can sustain a countrys socio-economic development to increasingly higherlevels well a ter the natural resource is depleted or a ter commodity prices eventuallycollapse.

Spending on care ully selected domestic investment goods o course depends verymuch on the capacity o the public sector to invest e ectively. So in order to avoidoverwhelming such capacity, a strong case could be made or at least temporarilysaving or holding in reserve a share o the unds so that public sector investmentscan be paced more in line with the public sectors capacity to invest e ectively, andminimise waste and leakages. In many developing countries, this may well be one o the strongest arguments or setting up a well-designed and transparent petroleumund or natural resource und, especially in developing countries where institutionalcapacities and public fnance systems are still very weak. Such well-designed naturalresource unds can serve as at least a temporary partial fx while also undertakingmore comprehensive re orm and development o the public fnance system. Needlessto say, the a orementioned policy and investment options would also greatly supportthe achievement o the Millennium Development Goals (MDGs).


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17

II. Pre-production challengesReliably assessing the resource baseGunnar SilandDirector, International CooperationNorwegian Petroleum Directorate

Legal frameworks used to foster petroleum developmentDr. William T. OnoratoFormer Legal Adviser, Energy and MiningWorld Bank

International petroleum fscal systemsDaniel JohnstonInternational Petroleum Fiscal Expert Managing Director, Daniel Johnston & Co., Inc.

How to negotiate the right petroleum contractJenik RadonInternational Petroleum Contract Advisor

Pro essor, Columbia University

Establishing an e ective regulatory authority:A comparative analysisGhazi DurraniDirector, SVS Strategic Value Services Alberta, Canada


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Progress in the development o a regulatory ramework orpetroleum exploration and development and povertyeradication e orts in UgandaErnest N. T. Rubondo Assistant Commissioner, Petroleum Exploration and Production De- partment Uganda

Assessing Cambodias reservesDavid Mo atManager, Exploration and New VenturesChevron Asia South Ltd.

Pre-production negotiations or rights and production/rev-enue sharingEinar RisaInternational Petroleum Associates AS (IPAN)

Overlapping claimsGenoveva Jose da Costa Advisor on Joint Development Zone to the Minister o Natural Resources and Environment Ministry o Natural Resources and Environment, So Tom and Prncipe


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19

Reliably assessing the resource base

Gunnar V. SilandDirector, International CooperationNorwegian Petroleum Directorate

Introduction

The basic challenge or any country with hydrocarbon potential must be to beneftrom the petroleum resources in a way that both generates economic growth andwel are or the population in general, and is environmentally sustainable.

Petroleum plays and will continue to play an important role in a number o developing

countries. The oil and gas sector holds the promise o becoming a vital resource oreconomic and social development. It has, however, in many cases proven di cult totranslate petroleum resources into improved wel are. The combination o large andsudden in ows o revenues and the lack o relevant institutions and governance systemsincreases the risk o corruption, rent-seeking, con ict, dependence and crowding outo existing industries. As a result, many developing countries score conspicuously lowon the current generation o international development per ormance indices.

The Norwegian Oil or Development initiative assists countries with hydrocarbonpotential in their e orts to overcome these challenges. Several decades o oil and gasexperience have given Norway broad competence across the ull cycle o petroleumsector management processes. National control, strong institutions and well-educatedpublic servants have been important eatures o this process, but the involvement o the international oil and gas industry has also been undamental.

Drawing on this experience, Norway has provided assistance to the oil sector indeveloping countries since the early 1980s. Norway cooperates with more than 15countries, covering areas such as resource assessment, data management, licensingand tendering processes, legal rameworks, administration and supervision mechanisms,organisation o public/private inter aces on petroleum governance, local content andindustrial development, environmental challenges and revenue management issues,including taxation and petroleum unds.

Resource management to maximise value

In order or e cient exploration and exploitation processes to maximise the socialvalue or the country, the countrys involvement and interest in all phases o theseactivities must be structured to address the ollowing areas:

Pre-license phaseProspecting phaseExploration phase

Field development planning phase


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Development and construction phaseOperational and production phase TransportationFinal phase and clean-up

The goal is to maximise the economic value within each single phase and assurethat long-term value creation along the whole chain is satis actory. In order to achievethis, it is necessary to have a good understanding o the resource base and the costsand benefts throughout the di erent phases o the petroleum sector.

In order to per orm an analysis to evaluate the impact o di erent strategies and topursue uture planning, a particular structure or petroleum resource managementmust be developed. This structure must take into consideration the di erent elementsa ecting the value o a particular petroleum province or several provinces seen in relation

to each other. The main point is to maximise the total value o the petroleum assets. The ollowing issues and challenges are part o the total resource management e ort:

Resource databases or optimal planning and extraction o petroleum resourcesStrategies or the licensing and tendering processes, evaluation, awarding, etc.Development/assessment o legal ramework to govern petroleum explorationand productionFramework or exploration and production o petroleumApproaches to e ective administration and supervisory mechanismsApproaches towards transparent regimes or licenses and contractsSystems or fscal metering and tax re erence pricingFramework conditions or, and e ective management o , state oil companies and/or alternative management modelsFramework conditions to attract international oil companiesPolicies to stimulate technology development and the involvement o localindustry

Resource assessment studies

A good understanding o the resource base is necessary to defne policies and strategiesthat will ensure optimal management o petroleum resources. The government should

be in control o the speed and extent o exploration drilling, feld development, andproduction level, and take measures necessary to protect the environment. Thesedecisions can only be made based upon some knowledge o the resource potential andestimates or uture production. In a feld development situation a more sophisticatedapproach to resource assessment is required to satis y banks and investors.

It is important or the government to classi y the resources. When resource volumesare quoted, both governmental decision-makers and the industry should knowwhat is meant by di erent terms. There are several systems or petroleum resourceclassifcation; the most widely used being the SPE/AAPG/WPC (Society o Petroleum

Engineers/American Association o Petroleum Engineers/World Petroleum Council).


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21

This system was updated in 2007 and is now re erred to as the SPE-PRMS (PetroleumResources Management System) system. In this system, resources are split intoReserves, Contingent Resources and Prospective Resources and urther subdividedaccording to project maturity.

All available data should go into the resource evaluation, which will give an indicationo the hydrocarbon potential o the respective basins and a ranking o the areas in termso prospectivity. Where data is scarce, statistical methods and analogy studies shouldbe used to estimate a range o probable volumes like Petroleum Systems Analyses orplay modelling 1. In previously unexplored areas, the host country is well advised to dogeophysical and geological reconnaissance surveys prior to licensing. In areas whereexploration has been going on or some time, the assessment must be based on existingdata and methods like Discovery Process modelling may be used.

The authorities resource administration depends on access to in ormation anddocumentation rom companies. In Norway the petroleum legislation has a largenumber o special rules, which demand the licensee/operator to submit in ormation.In addition, the Petroleum Act contains a general rule stipulating that all material andin ormation that the licensee possesses, and that is related to activities according to theAct, shall be available in Norway and may be requested rom the Ministry ree o charge.Furthermore representatives rom the Ministry and Norwegian Petroleum Directoratehave the right to be present as observers in the liaison committees established inconnection with the activities.

An active attitude towards petroleum data management is a prerequisite or e cientdecisions in the petroleum sector. It is important to organise all types o petroleumdata in a petroleum province in an e cient manner. The data, as such, represents anasset in itsel . I am here re erring to the raw data related to:

Seismic dataDrilling dataCoresCuttingsOil samples, etc.

These data should be stored and accumulated over time and made e ciently and

easily available to the petroleum industry. The government entity assessing the nations petroleum resources should have thenecessary hardware and so tware tools, methodologies and the necessary training inusing them. Data compilation, interpretation, basin modelling and resource inventorygeneration are work-intensive and assistance rom consultants and cooperatinginstitutions are o ten required.

1 A play is a amily o geologically related felds, prospects and leads, all o similar geological origin and charged rom a commonpetroleum source.


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Countries are advised to continue active promotion to attract risk capital or a responsibleand technically up-to-date exploration o the yet unlicensed parts and in uturerelinquished areas. I and when a discovery is made, the exploration and licensingpolicy needs to be adjusted. One would then consider competitive licensing rounds,

revised block defnitions and revised work programme requirements.

Based on good resource assessment, the government can de ine an exploration,licensing and promotion strategy and prepare e cient promotion or their acreage.

Such preparations include:Model agreementListing and price schedule o available data Technical evaluation reportDefnition o areas o ered or licensing

In ormation on in rastructure and contact point or oil companies Time schedule or licensingRequirements o applicants, including fnancial and technical requirementsDefnition o evaluation criteria

Area consideration

An integrated resource strategy in a province needs the correct balance betweenexploring or new resources, developing an increasing port olio o smaller felds andimproving the recovery rom well established felds. It is important to identi y whichresources are time critical and as such can only be developed within a given time rame.Such time critical projects on marginal resources in a province will have to competewith the industrys global port olio o projects.

Many large existing feld installations in an area will, a ter a while, have greater capacitiesthan are required. The economic beneft o using this capacity to the phasing in o smaller felds is substantial. In many cases the most economic strategy or increasedoil production will be to regard an area o larger felds, smaller discoveries and possibleuture prospects as one unit and try to use the existing in rastructure in the productiono minor reserves within this unit. This strategy has a large e ciency potential, as itwill ensure an enhanced exploitation o the petroleum resources in the area, and also

lead to reduction in the total cost during the li etime o the area. The government o tenhas to play an active coordinating role in order or several license groups to cooperate. This is particularly challenging in a PSA-regime with strong ring encing mechanisms.Sometimes it may be necessary to make adjustments in the fscal ramework in orderto ensure optimal use o existing in rastructure by several interest groups.

O ten, the same general type o reservoirs will exist over a greater area, and it will bepossible to draw on the experience gained by production rom the frst feld in the areaand possibly refne the understanding and develop this urther or the beneft o otherfelds. In this way smaller, otherwise non-economical felds can be put into production on

a stand-alone basis.


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23

Improving the recovery rom an area can be enhanced by active cooperation amongthe operators and the licensees in the area with respect to common use o data, commondevelopment planning and sharing available processing and transportation capacity.

The specifc challenge is to bring the smaller felds into production at a suitable time. The timing can be very critical, not just with regard to the existing production acilities,but also with regard to the in uence on the production profle o the main felds andpossible extension o the li etime and, there ore, increased recovery o these felds. The plans or phasing in o smaller felds must urther be made exible enough so thatthe uncertainties in the main felds uture production can be taken into account.

In some areas there might be challenging tradeo s between production o gas or oil.Should we use the gas to be exported to the market or should it frst be used to increasethe oil production, either as gas-injection, gas-recirculation or as water alternating

gas projects? Adapting an integrated resource management strategy can, thus,enhance total recovery in an area. The government needs to take an active role inpromoting sound investments towards enhanced recovery.

Level o activity and production

Results rom comprehensive resource assessment studies orm the basis or developingcumulative production profles or oil and gas or a given feld, a given area, or or thewhole nation. The distribution o remaining discovered resources over time is importantto consider when discussing the level and timing o new exploration activities.

The implementation o available and new technologies in existing and uture feldoperations can enhance production rates and improve recovery. These opportunitiesshould be promoted through active involvement by the responsible governmentagencies.

Dialogue and cooperation

It is very benefcial to include an open dialogue with the petroleum industry at an earlystage in order to obtain nomination or new concession areas (nomination process).In this manner one obtains valuable in ormation rom several alternative geological

environments.

Just as the resource evaluation must orm the basis or the governments strategicplanning, it will also constitute the basis or the oil companys analysis o possibleinvestment. Openness with data serves the purpose o promotion.

The petroleum resources in any petroleum province normally exist in both well known,already producing areas, in less explored areas and in almost unknown, rontier areas. The important question in a resource management context is how do we hunt orthese resources in the most e cient manner? We may have to develop di erent

strategies depending on the maturity and the prospectivity o the di erent provinces andbasins.


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In well-known areas with existing or planned in rastructure, it is important to exploreor time critical resources. These are resources that can easily be produced withexisting in rastructure. In such areas, private oil companies may contribute signifcantlywith new ideas. Improved recovery o existing felds is obviously part o this consideration.

In less known areas, where no in rastructure is planned, the blocks awarded orexploration should be ranked according to prospectivity and in ormation value. Forthe authorities, new and vital in ormation may be just as valuable as a discovery in anestablished area, because it may be essential or the evaluation and promotion o otherareas.

In Norway, several initiatives have been taken to improve development e ciencyand increase the total value o petroleum assets though extensive cooperation betweenauthorities and oil companies. The initiatives relate systems or more cost-e cient

exploration and development, as well as methodology and administrative structures.It is critical to create policy stability in the petroleum sector. This means that it isnecessary to have broad political consensus with respect to crucial petroleum policyissues. Each industrial commitment will outlast a normal government term. Predictabilityand reliability reduces risk and, thus, the cost o engaging the international petroleumindustry. Policy stability has to build on appropriate legislation, which regulates thelicensing, exploration, development, production and abandonment.

Closing remarks

Oil has been, still is, and will continue to be big business and involve large amountso money. It is also a strategic asset. There will always be a struggle or access to equitybetween the di erent actors in the petroleum sector. One has to fnd the correctbalance between the national interest o the host country and the multinationalcompanies. It is important to create win-win situations between the country and thecompanies. One should create an environment or cooperation and dialogue betweenthe government and oreign companies. It is extremely important in this process orthe host country to establish an e cient and competent public administration bothon the political and policy levels, as well as the technical and business levels. Both thecountry and the multi-national companies will gain rom this in the long run.

Petroleum is a key sector in many developing countries. However, given weak institutionalstructures and lack o local competence to manage petroleum resources, it is a challengeor many o these countries to avoid the resource curse and translate petroleumresources and revenues into improved living conditions and sustainable economicgrowth.


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25

Legal rameworks used to oster petroleum development

Dr. William T. OnoratoInternational Energy Consultant/Arbitrator

Former Legal Adviser, Energy and Mining, World Bank

The goal in each country has always been to create socio-economic conditions thatwill alleviate poverty through the wise and prudent use o its new ound petroleumwealth, once it comes on stream. This is a very critical goal that can prove central toa states continued sustainable growth and development. At the same time, we wish toensure that a host countrys new ound petroleum wealth proves to be a beneft to itsentire people, a true resource blessing.

In moving orward with the development o its petroleum sector, all host countries haveseveral key objectives. These always include:1. Full and prompt exploration o prospective areas:2. Fair sharing o the fscal pie between the state and the contractor;3. Protection o the environment;4. Proper treatment o residents and communities a ected by petroleum

development operations;5. Training and education o the states citizens;6. Purchase o local goods and services; and7. Reasonable controls over development activity.

Foreign direct investors, such as international oil companies (IOCs) seek, or their part,to explore and produce under a stable, predictable petroleum regime which allowsthem the rights both to monetize their profts and to arbitrate their disputes, i any,with the host country in a neutral, international orum. In considering whether to investnaked risk capital (risk capital that is not covered in any manner; it is exposed to therisk directly) in new greenfeld (areas where there is little or no previous explorationand not yet any developed petroleum deposits) exploration and production (E&P)ventures, IOCs take a global view. Each company decides on its annual explorationbudget and then assesses available prospects worldwide. So Cambodia is not justcompeting against its Southeast Asian neighbours, it is also competing against all o the worlds prospective petroleum provinces. The frst consideration is, o course, geology. Does the host country under considerationhave an attractive hydrocarbon potential? Once a rmatively past that critical question,the next key question is what is the nature o the countrys legal, fscal and contractualramework under which petroleum operations would be conducted? Is it stable,

predictable and air? Does it have an investor- riendly legislative ramework or thepetroleum sector and a track record o honouring its contractual obligations?


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Thus, in every new petroleum province there is, frst and oremost, a undamentalneed or a well designed petroleum law to govern the development o the sector. The petroleum law is always the cornerstone o a success ul legal, contractual and fscalramework. It represents the legislative expression o the states petroleum policy and

it provides the legislative context or, and the rules governing, petroleum operationsin the host country. It is meant to regulate such operations, as they are carried bydomestic, oreign and international enterprises, and to defne the principal administrative,economic and fscal guidelines or investment activities in the sector.

Experience shows that the cornerstone o e ective petroleum legislative rameworksor E&P operations is a short, but thorough, broad, generic petroleum law, whichencapsulates a petroleum policy designed to meet the unique needs o the host country.Arriving at the terms o such a sector policy, to be enunciated in the law, shouldentail broad consultation with the countrys Parliamentarians, as well as with the leaders

o its civil society. Enabling regulations and one or several variants o a model contract,then, complement the law. Such rameworks provide both the host government andIOC investors with a clear legal and contractual context within which to negotiate E&Parrangements that are both mutually advantageous and developmental o the petroleumresources o the host country.

In addition to the petroleum law, regulations and model contracts, the fscal and taxaspects o a complete petroleum legislative ramework may either be detailed in thepetroleum law itsel , separately set out in a companion petroleum revenue code, oraddressed as a separate chapter on petroleum revenue taxation in the general tax law any one o which would complete the legislative package.

The core rationale behind the pre erence or a brie , but thorough petroleum law isthat it is meant to cover all essential concepts necessarily required in a modern, enablingpetroleum law while not setting them in concrete through unnecessary over-detail.In this legislative scheme, such detail is reserved or subsidiary instruments such as theregulations and model contract, which should not be required to be submitted to thelegislature or amendment or change.

In addition, in my view, the best approach, whenever possible, is to package the legal,contractual and fscal regime or petroleum operations into a sel -contained, coherent,

sector-specifc legislative ramework, or carve out regime consistent, however, withboth the overall legal system o the host country and with any applicable principles o international law. This is a great incentive to attracting signifcant oreign investmentinto the sector. Where an IOC is studying potential E&P investments in candidatecountries, given relatively equal petroleum-prospectivity, it will normally opt or the statethat has such a coherent regime in place or petroleum operations. This, in pre erenceto piecing together the legislative ramework rom provisions in both the petroleumlaw and other necessarily related and relevant laws, such as those on oreign investment,taxation, land use, environment and the like.

What, then, are the essential provisions o such a modern, broad, generic, enablingpetroleum law?


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in which regulations may be proposed and promulgated by the CA should be welldefned. In some cases it may be desirable to limit the authority o the CA to thepromulgation o only technical regulations, requiring that those which may touch oneither policy or revenue matters be subject frst to an expedited inter-ministerial review

and approval process. However, within these parameters, a grant o broad authorityto the CA should also be included to enable it to make all other necessary regulations,consistent with the petroleum law.

Sixth, the petroleum law should clearly set out the qualifcations, rights and duties o contractors who will conduct petroleum operations. Applicants must have the requisitefnancial resources, technical competence and pro essional skills. In turn, i chosen, theyare to be guaranteed, inter alia, security o tenure, exclusivity in their license area, theabsolute right to proceed rom exploration/commercial discovery to production anddevelopment without urther government consents and the right to monetize their

profts owing rom such development. Correlatively, contractors must report alldiscoveries to the CA, present a suitable development plan and always use bestinternational petroleum industry practices in conducting petroleum operations.

Seventh, the law, or a separate petroleum revenue code re erenced in the petroleumlaw, should address key fscal terms, such as the taxation o profts. The fscal packagemust be competitive with other similar worldwide investment opportunities. Much canbe said about the most desirable tax regime, but as broad objectives in the law, it shouldstrive to:

Reduce uncertainty;Present a clear picture o the applicable regime;Limit negotiations on tax issues;Provide air and equitable tax treatment or all investors;Avoid double taxation and assure home country oreign tax credits; and provideor a reasonable period o tax stability; andBe a regime easily applied to any orm o petroleum agreement selected.

Taxes should apply only to net profts, not to gross revenues. Best practice would beto enumerate the applicable taxes in the law and to exclude all other taxes that are notexpressly included.

Countries with especially attractive tax/fscal regimes include Spain, Argentina, thePhilippines, the UK, Australia and Peru. Countries with less attractive regimes includeEgypt, Malaysia, Yemen, Nigeria, Colombia, Venezuela, Kazakhstan and Azerbaijan. The obvious conclusion is that the more attractive is the resource base, the tougher arethe fscal terms. But this is quite normal in a competitive ramework.

As part o the fscal regime, the host country government may also wish to provide ora percentage participation by the state, directly, or through locally owned entities,carried through exploration.

Eighth, the petroleum law should address other key fscal and operational provisionssuch as ree importation and permitting o goods used in petroleum operations,


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guaranteed convertibility and overseas remittances o contractors unds at non-discriminatory exchange rates, access to local capital markets and banking acilities,split payrolls or expatriates and oreign sub-contractors, the right to retain profts abroadrom export sales o production, and the right to repatriate profts or the purposes o

paying dividends and interest on operational debt.

Ninth, there should be clear and positive provisions in the law to guarantee fscalstability. This is aimed at airly mitigating the e ects o new laws passed subsequentto contracts that increase the economic burden on, or reduce the original rights andduties o , contractors. Nothing may in ringe on a states sovereign right to enact newlaws imposing sa ety, conservation or environmental standards to protect public sa ety,but their economic consequences should be considered and adjusted through good-aith mutual negotiations to restore the original beneft o the bargain.

Tenth, the petroleum law should have clear and unequivocal provisions mandatingbest practice environmental protection measures. Contractors must take all necessarysteps to ensure conservation, sa ety o li e and property, avoidance o waste, spoilageand pollution, and protection o public health and sa ety. Best practice also requiresan environmental impact assessment be ore petroleum operations can commence.Contractors, in turn, may wish to conduct their own environmental baseline studiesto limit their liability or any pre-existing negative conditions. Today, the World BanksEnvironmental Guidelines applicable to the petroleum sector set the worlds standardand are highly recommended or adoption by states and contractors.

Eleventh, to round out a modern, broad, generic, enabling petroleum law, variousother key matters should be brie y but expressly addressed. These include, inter alia:international arbitration in a neutral orum, the absence o which can be a disincentivedeal-breaker; access to land to conduct petroleum operations; local content andpre erences; technology trans er; training and employment o nationals; local marketsupply; unitization o overlapping deposits; special incentives or natural gasdevelopment; and relationships to other, con icting laws the petroleum law alwaystakes precedence on all matters concerning petroleum operations. A well dra tedpetroleum law also has an extensive defnitions section at its beginning or clarity andease o ready re erence.

In brie , then, these are the essential elements o a modern and success ul petroleumlaw. To succeed in attaining each host countrys own unique goals in its petroleumsector, a good petroleum law is the frst necessity. Just last year, together with a long-time pro essional colleague and riend, I assisted in writing such a new petroleum lawor an emerging petroleum province in East A rica that has many similar issues andconcerns to those o Cambodia. We are confdent that time will test this law and proveit, once again, to be the most success ul ormat to attract serious and sustained FDIinto the petroleum sector. With a similar such petroleum law, regulations and modelcontract, variants to complement its already attractive hydrocarbon potential, it shouldbe certain that Cambodia will also enjoy similar success. I certainly hope so, as there is

still much to be done here to alleviate poverty and promote sustainable developmentthrough the wise and prudent use o revenues rom Cambodias new ound petroleumwealth.


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International petroleum fscal systems

Daniel JohnstonInternational Petroleum Fiscal Expert

Managing Director, Daniel Johnston & Co., Inc.

Overview

Di erent governments have di erent needs. They have di erent boundary condi-tions, concerns and objectives. However they are almost all interested in enhancinghydrocarbon exploration activity. And they are all interested in getting the bestpossible deal or the exploration and exploitation o their natural resources.

There are two key steps in the development o a nations hydrocarbon resources:

1. Allocation Strategy the design and execution o the process o attractingexploration and exploitation investment, and

2. Fiscal System Design design o the petroleum fscal systems that will maximizethe value a nation expects rom their natural resources, and o er a stable and airreturn to investors.

There are undamental di erences when it comes to exploration acreage or projectson one hand and non-exploration projects (development or enhanced oil recoveryprojects EOR). When it comes to exploration, the division o profts (Take) is a centralocus. With development or EOR projects, the ocus is more on internal rate o return(IRR). The ormer, generally riskier or the investor, must provide a chance or theinvestor to beneft rom the up side in the event o a discovery. The latter, with lessrisk, should provide a air return on investment.

Many countries have a variety o acreage opportunities onshore, o shore, anddeepwater with varying risks. They also o ten have a number o projects with varyingdegrees o opportunity and risk. The allocation strategy and fscal system design mustadequately ft a projects potential benefts and risks or the host government and theinvestor.

Allocation strategies

A theme developed a ew years ago stated that acreage has begun to take on moreo the characteristics o a commodity. There is much more acreage available todaythan there was 25 years ago. In the past two decades, the Soviet Union became theormer Soviet Union (FSU) and much o A rica and the Eastern-block countries haveopened up. Furthermore, with more aggressive and specifc relinquishment provisionsin contracts, the market or acreage or projects is more dynamic and robust. It isappropriate to think o acreage as a commodity, and a global commodity at that.

Countries are competing with more than just their neighbours or capital andtechnology, as well as or available equipment and personnel.


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31

Governments have no control over what God has chosen to bequeath to them.

However, they do have some control over the industrys perception regarding thosegi ts. This becomes especially important i the government believes the industry has an

un air view o the countrys potential.

The methods used by governments to award licenses are extremely varied. Mostgovernments, about 100 in 2006, have o cial block o erings or license roundswhere blocks are awarded on the basis o competitive bids. Other countries negotiateexploration rights one-on-one with companies. While companies typically pre ernegotiated deals, these situations can be just as competitive as an o cial tender. Itdepends on the prospectivity o a block or area. With less-than-exciting acreage, agovernment may have no choice negotiated deals may be the only option.

While allocation strategy is not as important as, or example, fscal terms, it can addan important dynamic or governments competing or capital and technology. WhenVenezuela launched its exploration round in 1996, it put 10 blocks up or bid. However,or all practical purposes, Venezuela had 10 separate license rounds, block-by-block.

The licenses were awarded on the basis o a single-parameter bid a profts-basedtax known as the PEG. Royalty and other fscal elements were fxed (i.e. neither biddablenor negotiable). Ties were to be broken by subsequent bonus bid rounds on thefrst block, La Ceiba. Eleven companies bid and nine tied. The tie was broken with abonus o US$103,999,999 rom the Mobil/Veba/Nippon consortium. That a ternoon,the next license (Paria West) was awarded to Conoco under the same rules. Thisapproach magnifed the already intense competition by awarding licenses individually. The pool o bidders would potentially be reduced by only one group, i any, in eachround. This approach greatly reduced the chance that less-prospective blocks wouldreceive no bid. There were however, two blocks that did not receive a bid. The resultinggovernment Takes were around 92 percent.

On the other end o the spectrum, in the United States Gul o Mexico, licenses areawarded solely on the basis o a bonus bid. In act, ew countries worldwide extractsuch a large portion o rent through bonuses.

Allocation considerations

Consideration in allocation include:Negotiated terms, fxed terms, or bid termsBlock size and confgurations Timing/duration/relinquishment provisionsWork programmesRing encingProactive marketing (road shows)Data availability (data ees, data rooms)Permitting requirements

Signal theory (the image a country portrays)


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Di erent situations di erent considerations

Enhanced OilRecovery

DevelopmentProjects

ExplorationAcreage

FrontierAcreage

Degree o Risk Medium-High Low High HighestBlock Size

Acres(km2)

Field4,000 or so

(16)

Smaller3,000-5,000

(12-20)

Large1-2 million +

(8,000)

Very Large3-4 million +

(16,000)Work Programme(s) 1) Feasibility

Study2) Pilot Program3) Development

1) Appraisal2) Development

ExplorationProgram

ExplorationProgram

Focus o Negotiations/Analysis

IRR IRR Take Take

Most CommonAllocation Strategy Negotiated deals Negotiated deals CompetitiveBidding and othermeans

CompetitiveBidding and othermeans

Negotiated terms, fxed terms, or bid terms

This issue is o huge concern to most governments. Many governments, through theirnational oil company (NOC) or oil ministry, will fx the key fscal terms (such as royalties,proft oil share, and taxes). There is no bidding or negotiation o fxed terms.

There is considerable pressure these days rom Non-Government Organizations (NGOs)and the Extractive Industry Transparency Initiative (EITI) or oil companies andgovernments to be more transparent. With these initiatives there is a strong push orgovernments to allocate acreage on the basis o public auctions similar to the highlypublicized EPSA IV rounds in Libya in 2005.

The problem is that unless the acreage is particularly interesting, the industry hasbeen relatively unwilling to ace the kind o magnifed head-on competition thata sealed bid type license round (like Libya) provokes. We believe that in many instancesit is nave and unrealistic to expect all governments to allocate acreage and projects onthe basis o sealed bids.

Allocating licenses through negotiated deals can be e cient too. Government o cials(Energy Ministry or NOC) become aware o what the market can bear as they entertainvarious proposals and o ers. Likewise the lack o interest provides in ormation too. There is nothing worse than a ailed license round or NOC o cials.

Elements that become part o a contract or fscal system are usually either:1. Negotiated2. Statutory or fxed terms3. Bid item

8/14/201

cambodia: the global petroleum context: opportunities and challenges facing developing countries

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