sharing in governance of extractive industries
Contract renegotiations are in the news again. The Economist ran a feature recently on restive governments all across Africa imposing windfall taxes and seeking friendlier outcomes from a bunch of oil and mining contracts. And Africa's growing number of early stage oil producers, like Uganda, Ghana, Mozambique, Kenya, and maybe even Liberia raise the concern that there might be a whole new generation of one-sided, and therefore unstable, contracts.
It is 2012 and some things have changed since global conglomerates first drilled and dug across the global South. Norms of open competition and auctions are slowly growing, thanks to propagators like the Natural Resource Charter – there are fewer negotiations behind closed doors. And, perhaps because of concerns over energy security, zero-sum views of negotiations are being gently rolled back in some areas. The US State Department's new Energy Capacity and Governance Initiative is interesting in this regard. By building technical support in some 10 early stage producers, the project's very existence seems to acknowledge the government's interest in stable supply, which may or may not be identical to the interest of Big Oil, including American Big Oil, in maximising their take.
But progress is slow. The main question is: who is qualified to lend a hand to southern governments as they seek to negotiate fiendishly complicated commercial contracts who doesn't already have a hat in the ring?
The World Bank does a lot of technical assistance but is badly placed for such a role – its investment arm the IFC has a big and growing energy sector portfolio and its board is also populated by representatives of countries who host the major oil and mining companies of the world. There is an initiative of African lawyers, and another loose network which channels pro bono time from senior lawyers. But this doesn't add up to a systematic mechanism to address the problem of, on the side of a multinational company, dozens of world class professionals, who bill every six minutes, and on the other, officials and professionals who may do their best but simply lack the experience and exposure of the other side.
Digital media and the Internet could yet provide some ways to level the playing field a little.
Following RWI's survey of contract transparency, there has been talk of creating a public domain database of extractive industry contracts. Thinking is still at an early stage, and the question has to be as my colleague Lucy said, with only five or six jurisdictions openly releasing their contracts so far, could you even gather enough contracts to provide representative sampling, so that you could start to infer and conclude in a way which speaks to negotiations happening in other places?
There is also an interesting trend towards open sourcing geological data, which, if only host governments could be persuaded of it, is massively in their long-term interest. The Canadian province of Nova Scotia recently landed Shell, with an exploration commitment of nearly a billion dollars, in an offshore bid round where they open sourced the data to attract the widest possible interest – a cool return on something like $20 million of public funds devoted to improving and analysing the sum data set. The traditional model of selling data packages to prospective bidders to earn the government a million or two is stunningly short sighted. Put the information out there and create some system to align incentives and there are hundreds of hungry geo-interpretation companies out there, in Houston and Aberdeen alone, who would pounce on it and compete with other, and against Big Oil. It's interesting that there has been talk in both Canada and Brazil recently about open source data initiatives.
These could both be significant contributors to a fairer playing field. But they don't replace the value that having a seasoned, hungry bloodhound on your side could have. Technical assistance can only take you so far if it leaves you at the door of the negotiating room.
But what about creating bidding systems which allow benchmarking of negotiations in some way? Then a host government could get as far as it could, infer its own best result – then offer allcomers a straight percentage of any difference between their benchmark and any final deal. No win no fee, like all those personal injury lawyer ads that assault you any time you turn on the TV in a US hotel room.
Of course, you might think such a system, even if it could be worked out, could be gamed. The lawyers on both sides of the table know each other as often as not and who's to say an international company doesn't create an artificially low offer so that its “adversary” law firm can up the take for the government – to what the company was always prepared to accept anyway – and everyone goes home happy? No system is fulproof of course but there are two safeguards against this kind of approach in the modern world: first, fewer unilaterally negotiated deals means the degree of colusion would have to be much greater – all the interested companies would have to be in it together. Second, there's enough information flying about these days that egregious outlier contract terms can be seen for that.
Against that should be set the fabulous sums that could be earned even by modest commissions on percentage, such is the size of many oil contracts. Offshore oil, for example, rarely gets developed with less than 100 million barrels discovered - $12 billion of market value today. A law firm which increased, say, Liberia's take from 58% to 61% of that $12 billion would have generated $360 million of value. Ten per cent of that would be a tidy amount even for a leading law firm. Of course, the fee structure would have to be superimposed on the production profile of the asset, over many years – but surely that's nothing that a clever bunch of lawyers and accountants couldn't work out.
It can't be beyond the realm of human imagination these days to work up a negotiations framework which can get some hungry, brilliant lawyers in the room working night and day for the government of Somalia, say, or Yemen. If they can get rich by backing the underdog, all power to them.
Johnny West is founder of OpenOil, a Berlin-based transparency company.
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