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1. New Producer Contract Terms and Uncertainty: Lessons From the Recent Past

Author:
Patrick Heller, Perrine Toledano, Tehtena Mebratu-Tsegaye, and David Mihalyi
Publication Date:
03-2022
Content Type:
Special Report
Institution:
Columbia Center on Sustainable Investment
Abstract:
The petroleum industry is volatile, and governments in “new producer” countries have operated at a significant information disadvantage when negotiating with international oil companies. This challenge is growing today; new producer countries face intensifying questions around whether to offer fiscal incentives to maintain investment in the face of 1) the pandemic-induced volatility in oil prices and 2) long-term questions about the future of the industry in the face of the climate crisis and the global energy transition. This confluence of short-term and long-term uncertainty is prompting a reexamination of the narrative that once took hold in many new producer countries. The traditional story was one of linear progression from being non-producers to small levels of production to ultimately having oil and gas become a major economic contributor over the long term. This notion of progression was associated with a commonly held theory: After a country’s first major discovery, the geological risk that wells will be dry was expected to decrease. Countries could therefore shift from a position of having to grant tax breaks (and other concessions) to international investors, to taking a tougher stance in laws and negotiations for new projects going forward. In this paper we examine whether this theory has been borne out in practice and make recommendations to support new producers in their navigation of the uncertainty associated with the energy transition. Among the eight “new producer” countries, for which we analyzed a total of 26 contracts signed before and 25 contracts signed after discovery events (all occurring between 2001 and 2014), the evidence is mixed. Only three of the eight countries in our sample—Ghana, Mozambique and Uganda—demonstrated a clear pattern in the direction of more stringent terms in post-discovery contracts. They featured definitive steps to increase some of the obligations of contractors to the state, and no significant terms that became less stringent. Five out of eight countries did not meaningfully alter their approach to gain greater concessions from their company partners.
Topic:
Energy Policy, Oil, Governance, Gas, and Private Sector
Political Geography:
Uganda, Africa, Mozambique, and Ghana

2. Opportunities and Challenges for Senegal in Oil and Gas Production: Lessons Learned from Other New Producers

Author:
William Davis and David Mihalyi
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Natural Resource Governance Institute
Abstract:
Senegal, with significant reserves of natural gas, appears to be on the verge of becoming a significant hydrocarbon producer. This resource wealth presents the country with opportunities, but also risks. NRGI's new paper reviews the recent experience of other “new producers”, mainly in Africa, and attempts to draw lessons for Senegal on how to make the most of its hydrocarbon resources, taking into account both the changing context due to the coronavirus pandemic and the ongoing transition to renewable energy. Countries face a number of challenges in managing revenues from natural resources. This brief focuses on some of the challenges affecting countries as they prepare for production from oil and gas finds. First, international experience has shown that a number of countries have succumbed to the “presource curse, where overoptimism regarding the future benefits from the sector undermines government policies and ultimately leads to disappointing outcomes. As such, it is important to manage public expectations around what the finds will mean for the economy, and resist pressure to embark on unsustainable borrowing, public spending or investment plans based on overly-optimistic forecasts of the revenues that will flow from these resources. There are also challenges around putting in place an appropriate governance framework to prevent revenues from being lost to tax avoidance/evasion and mismanagement. In the context of the coronavirus pandemic, these challenges are particularly difficult, as countries grapple with fears of losing out on investment, and weigh whether to use resource wealth to finance temporary spending needs to stabilize the economy.
Topic:
Oil, Natural Resources, Gas, Renewable Energy, COVID-19, and Revenue Management
Political Geography:
Senegal and Africa

3. Stuck in the Past: Lessons on Emissions for Developing Oil Producers

Author:
David Manley and David Mihalyi
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Natural Resource Governance Institute
Abstract:
As much of the world slowly moves into a low-carbon future, a group of countries are firmly stuck in a fossil-fuel past. These are mainly countries rich in fossil fuel resources. This is not only a problem for the global target to limit the emissions of greenhouse gases, but it puts these countries under a “carbon curse”. Under this curse, people pay more for energy, might be locked out of trading opportunities with countries with carbon taxes, and breath dirtier air. These fossil fuel-rich countries provide a lessons for developing countries with fossil fuels that are still to industrialize. These are countries that still have time to change direction to avoid being stuck in the past, and move into a more prosperous and cleaner future. Key messages Most economies are slowly decarbonizing, but the economies of high-income, fossil fuel-rich countries are not. This is the case whether examining production- or consumption-based emissions. Low-income, fossil fuel-rich countries can learn from the experience of wealthier fossil fuel-rich countries. Remaining on their current path could mean that low-income, fossil fuel-rich countries could face high energy costs, exclusion from export markets, and failure to meet future climate commitments.
Topic:
Climate Change, Energy Policy, Oil, Carbon Tax, and Carbon Emissions
Political Geography:
Global Focus

4. A Race to the Bottom and Back to the Top: Taxing Oil and Gas During and After the Pandemic

Author:
David Manley, David Mihalyi, and Colin Fleming
Publication Date:
10-2020
Content Type:
Policy Brief
Institution:
Natural Resource Governance Institute
Abstract:
Earlier this year as people around the world responded to the coronavirus pandemic, their demand for oil tumbled. At the same time, OPEC and Russia initially failed to agree to coordinate supply cuts. Consequently, the price of a barrel of Brent crude oil fell from $60 in December 2019 to $20 in April 2020. As of this publication, the price is $43. If the price stays low, and if oil executives expect the price to remain low, companies may lobby governments to reduce taxes and other costly regulations. Payments to governments are often larger than costs for a company, so there is pressure on governments to reduce taxes to keep projects viable. This briefing considers the following key questions: Where will the oil price go next? What is the impact on currently operating projects, undeveloped projects, and those that are yet to be discovered? How should governments respond in changing oil and gas taxes? Will governments try to “race to the bottom,” but then lose a race back to the top? Key messages: There’s no certainty over future prices. Some rise is likely in the next few years, even if an energy transition results in a structural decline in the oil price in the longer-term. Governments must consider this uncertainty and probable rise when taxing oil and gas. Tax breaks on most currently operating projects are likely a waste of public money. Some governments may be pressured into reducing tax on projects awaiting development. But they must identify which projects would become viable with lower taxes, and which do not need a tax break. If in doubt, governments should consider whether a project that needs a tax incentive really will provide value for the country. For most countries, relative to total oil and gas produced, the production from projects that could be delayed or cancelled is small. But not so for the “new producer” countries like Senegal and Guyana. Changing taxes to make a country more attractive has the most impact before companies have invested – e.g., in attracting investment in licensing rounds. But setting low taxes now could force a government to raise taxes later if prices rise again. If a tax break is unavoidable, governments could use a “sunset clause” to limit the duration of the tax break. Ideally, governments should set progressive tax regimes that respond to changes in profit. But as many taxing authorities struggle to measure profit, governments could set simpler tax regimes based on sales revenue or prices – but must prepare to change tax rates in the future, and be prepared for the repercussion for a government’s credibility with investors. Governments should disclose contract terms detailing tax changes, tax exemptions, incentives and estimated break-even prices of projects to help government auditors, local think tanks, and the public check and support tax policy decisions.
Topic:
Oil, Natural Resources, Gas, Tax Systems, Commodities, Coronavirus, and Revenue Management
Political Geography:
Global Focus

5. Forecasting Ghana's Oil Revenues for the 2015 Budget Using a Fiscal Model of the Jubilee Field

Author:
David Mihalyi
Publication Date:
12-2014
Content Type:
Policy Brief
Institution:
Natural Resource Governance Institute
Abstract:
In order to help Ghanaian MPs and the general public understand the potential impact of volatile petroleum prices on the implementation of the 2015 budget, we have built an oil revenue forecasting model. The tool uses only publicly available data and information. It is provided in Microsoft Excel (.xlsx), and released under an open licence so that it can be used by anyone. It can also be edited ,refined, and updated as events in Ghana and the world evolve. This modeling was only made possible due to the advanced state of oil sector disclosures in Ghana: contracts for the most important producing oil field (the Jubilee oil field) are published, the country is EITI compliant, national laws require transparency and regular reporting, and international oil companies such as Tullow and Kosmos disclose further key information.
Topic:
Oil, Natural Resources, Budget, and Revenue Management
Political Geography:
Africa and Ghana