Apr 03, 2018 News
A sustainable oil and gas sector must be underpinned by a system which ensures that there is hardly any room for manipulation or collusion for personal gains.
This is according to the Natural Resource Governance Institute (NRGI). This is an international body which provides expert advice to administrations around the world as it relates to getting the best deals and arrangements out of extractive sectors.
The Institute notes that there are several characteristics of a strong, fiscal regime governing an oil and gas sector.
In listing some of these, the Institute said that Members of Parliamentarian (MPs) should set fiscal instruments through laws rather than individual contracts.
It said that negotiated, rather than standardized fiscal regimes, are prevalent in the extractive sector. In this regard, it noted that setting fiscal regimes through laws increases transparency and accountability, because contracts are more likely to be kept secret. Also, the Institute said that negotiations bring additional opportunities for corruption or manipulation.
Additionally, if the applicable fiscal regime varies from contract to contract, NRGI said it can make monitoring onerous and frustrate the efforts of policymakers to carry out policy reforms.
The international group stated, too, that fiscal regimes should divide risk appropriately between the investor and the state. Uncertainty, it articulated, is inherent in the extractive sector. It said that oil, gas and mineral projects may encounter technical challenges or be affected by unexpected price increases or contractions. As such, the Institute stressed that the fiscal regime should ensure that the state does not end up bearing a share of risk disproportionate to its expected return.
It said, too, that the state should be compensated for the loss of resources, regardless of the profitability of a given operation. NRGI said that this is because oil, gas and mineral resources are finite. It stressed that fiscal instruments such as baseline royalties provide a guaranteed return for the state even if a project runs losses.
The Institute also noted that transparency and consistency can help strengthen the state’s position. In this regard, the body noted, “The extractive industries are characterized by significant asymmetries between states and private actors. States own the resources and thus have real bargaining power. However, companies often have more information about the specific parameters of extractive projects and are more sophisticated in tax planning, which can give them the upper hand in negotiations.”
Furthermore, NRGI stressed that fiscal regimes should be progressive. In this regard, it noted that extractive projects can generate substantial rents. It pointed out that rents (sometimes called “windfall tax”) are the financial returns above those a company requires to make the investment profitable.
NRGI stressed that mechanisms to measure and tax a share of windfalls can enhance state returns in times of high profits and adjust to allow for adequate company returns during times of low profits.
The Natural Resource Governance Institute also believes that parliamentarians must ensure strict oversight of the oil and gas sector. The independent nonprofit organization stressed in a parliamentary briefing that parliamentarians should also exercise their oversight role to ensure that good deals are made in the extractive sector.
NRGI said, “Through their oversight role, parliamentarians should ensure that all legislation affecting the fiscal elements of oil, gas and mining projects are coherent.
“Some countries have wrestled with inconsistencies between pieces of legislation. For example, mining laws and investment promotion laws might each spell out distinct incentives, which together may give away far too much or result in a lack of clarity as to which incentives apply.”
In the interest of transparency and accountability, the Organization noted that opposition parliamentarians should ask the government to provide revenue projections over the life of any major project— particularly when special fiscal exemptions or incentives are granted.
It also said that the Opposition MPs should request a detailed listing of all assumptions (prices, costs, etc.) upon which these projections are based.
The Institute asserted, “Over time, legislators should request regular reporting of revenues the state receives and compare them against these projections.”
NRGI stated, too, that there should also be a request for disclosure of all contracts with companies. It said that this is pertinent so that parliamentarians can access information about deals, including all the exemptions and incentives offered to companies that may deviate from those contained in generally applicable law.
It stressed that contract disclosure is essential for effective parliamentary oversight.
In another note to opposition parliamentarians, NRGI said that they should ask Government officials to explain the actions they take to ensure compliance with the fiscal regime, including conducting independent tax audits.
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