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New National Oil Companies: 5 things to think about

Following recent discoveries of significant oil and gas reserves in regions with no or limited existing upstream oil and gas activities, many countries have reorganised, or are in the process of reorganising, their oil and gas regulatory regime in preparation for a ramp up in activity – from Cyprus in the East Mediterranean to Kenya, Tanzania and Mozambique in East Africa.

Part of this process of regulatory reform is likely to include a ‘new’ national oil company (“NOC” –  an oil company fully, or majority, owned by a national government) – either a newly established NOC or an existing NOC with greatly expanded roles and responsibilities. In light of this, here are 5 key things for governments and new NOCs to think about.

State participation

Before considering the role of the NOC, the objectives of state participation in oil and gas assets must be clearly identified. These fall under two broad headings:

  • commercial and fiscal objectives, where the aim of the state is to maximise the Government ‘take’, i.e. revenues (almost always either through a production sharing regime or a tax and royalty regime); and
  • other predominantly non-commercial objectives, which can be both symbolic, i.e. the exercise of state control over the disposal of the hydrocarbon resource, and more practical, e.g. the development of local skills and expertise and the promotion of local content in upstream operations.

The approach taken in relation to state participation will significantly influence the roles and responsibilities given to the NOC.

Role of the NOC

The government will need to determine the role it expects the NOC to play in the upstream sector. For example:

  • will the NOC take an interest in all upstream licences / production sharing contracts (“PSCs”)? If so, on what basis (as operator, or as a minority equity investor)?
  • will the NOC be responsible for managing interactions with international oil companies (“IOCs”) on behalf of the government (e.g. evaluating applications for licences / PSCs)?
  • will the NOC act as regulator in respect of the upstream oil and gas sector, or will there be a separate, arm’s length regulator?
  • will the NOC own any infrastructure (e.g. offshore and onshore pipelines that fall outside the licence / PSC area)?
  • what reporting obligations will the NOC have to the government?
  • will the NOC be responsible for marketing the government’s share of production?
  • will the NOC be able to pursue investment opportunities overseas?

In particular, whether the NOC has a minority investor role or an operator role will have a significant impact on the requirements of the NOC in relation to staffing and financing. As a minority investor the NOC’s interests tend to converge with those of the state (i.e. to encourage its partner to actively explore, while ensuring costs are controlled and a high standard of operations is maintained), whereas as an operator, the NOC will be required to have the capability to propose a development plan, raise money and manage a large project.

In addition, political and legal clarity regarding the NOC’s mandate, its source of financing, the activities it can undertake and the revenues it can generate is essential. In many cases it may be advisable for these to be set out in primary legislation, to promote certainty for investors.

Financing

Governments need to ensure that their strategy for state participation in the upstream sector is affordable. This is a particular consideration with new or young NOCs – sources of finance will be limited at the outset because there are little, or no, upstream revenues from production until commercial discoveries are made and developed. The NOC will therefore rely on government funding, including emergency borrowing in times of trouble (e.g. low oil price scenarios).

NOCs need clear revenue streams to meet day-to-day running costs and investment requirements as well as the ability to raise finance, with access to the capital and debt markets. Revenue streams for the NOC are often varied and unreliable. In addition, securing finance at the pre-discovery stage can be difficult. Even if the NOC is carried for its costs by IOCs pre-production, it will still need funding for staffing etc.

Governance

Good governance, transparency and accountability are extremely important. The government must ensure that the NOC has accountability to the state for its performance and its funding by monitoring the NOC’s costs, processes and performances through accounting and financial disclosure and risk management.

Staffing and training

NOCs need the appropriate level of staffing. As well as technical employees, secondary commercial roles as a minority investor may include managing service providers. If the NOC is operator it will also need accountants, marketers, economists and other administrative staff.

Staff will need appropriate skills and training. If, for example, the NOC is required to take on a greater role in the upstream sector, the NOC may not currently have the appropriate level of staff, in terms of numbers and capability. Training and capacity-building is very expensive, especially without proven reserves, so if this is necessary it needs to be taken into account at an early stage.

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New National Oil Companies: 5 things to think about

Extractives companies’ human rights records ranked in Benchmark study

Developments continue apace in human rights responsibilities for businesses. We are seeing persistent implementation of new reporting requirements across EU jurisdictions and beyond, judgments of national courts and international tribunals holding corporations to ever stricter account for their responsibilities in this area and UN negotiations continuing for a global treaty imposing binding international law obligations on businesses.  Staying ahead of the field in this area is crucial.

While the responsibilities imposed by the UN Guiding Principles on Business and Human Rights (the UNGPs) are not in themselves legally binding, governments’ expectations that companies will step up in this area have been made clear through National Action Plans, parliamentary enquiries and the introduction of “hard” legal requirements, such as under the Modern Slavery Act in the UK.

Now, the Corporate Human Rights Benchmark (CHRB) has ranked 98 of the largest publicly traded companies globally on 100 human rights indicators, focusing on the Extractives, Agricultural and Apparel industries.  These areas were specifically selected because of the high human rights risks they carry, the extent of previous work on the issue, and global economic significance.  41 Extractives companies featured.

The CHRB is a collaboration between investors and a number of business and human rights NGOs. It has emphasised this is a pilot assessment and welcomes input on the methodology used.  The study was compiled from publicly available information, with the selected companies also having the opportunity to submit information to the CHRB.  Companies were given scores for the measures they are taking across six themes, grounded in the framework of the UNGPs:

  • Governance and policy commitments.
  • Embedding respect and human rights due diligence.
  • Remedies and grievance mechanisms.
  • Performance: Company human rights practices.
  • Performance: Responses to serious allegations.
  • Transparency.

The selected companies were then banded according to their overall percentage score.  The performance-related criteria carried greater weight than the policy-based heads, with “Embedding respect and human rights due diligence” and “Company human rights practices” counting for 25% and 20% respectively.

Results skew significantly to the lower bands

There was a wide spread in the participants’ performance, with a small number of clear leaders emerging. No company scored above the 60-69% band, with only three companies falling within that band.  A further three scored 50-59% and 12 scored 40-49%.  48 companies fell within the 20-29% band.

Of the companies in the top band, two were in the Extractives sector; a further six Extractives companies fell within the 40-49% band; 19 scored 20-29% and five were found to trail at less than 19%.

The generally low scores across the three industries may be explained by the fact that the impact of some businesses’ human rights processes may still be filtering through. We should expect that in future years the authors of the survey will adopt a more stringent approach and subject low-scoring businesses to greater criticism.

Gap between policies and performance

On the whole, companies tended to perform more strongly on policy commitments, high-level governance arrangements and the early stages of due diligence. They performed less well on actions such as tracking responses to risks, assessing the effectiveness of their actions, remedying harms and undertaking specific practices linked to key industry risks.  There is often a mismatch between board level measures and their granular implementation, as well as between public responses to serious allegations and taking appropriate action.

Of the Extractives companies surveyed, only six companies scored were given a zero score for their policy commitments, whereas this was the case for 17 companies for “Embedding respect and human rights due diligence” and nine for “Company human rights practices”.

On the policy side, some Extractives companies scored points for emerging practices such as regular discussion at board level of the company’s human rights commitments, linking at least one board member’s incentives to aspects of the human rights policy, and committing not to interfere with activities of human rights defenders, even where their campaigns target the company.

In terms of implementation, some participants explained how human rights risks are integrated into their broader risk management systems, how they monitored their commitments across their global operations and business relationships, and how they had systems in place for identifying and engaging with those potentially affected by their operations.

Companies were also scored for their practices in relation to selected human rights specific to each industry. Those in which the Extractives participants featured included freedom of association and collective bargaining, health and safety, land acquisition, water and sanitation and the rights of indigenous people.

Conclusion

The significant interest in the CHRB since it began its work is unsurprising given it provides an opportunity to demonstrate commitment and progress in this area vis-à-vis competitors. The pilot methodology will be refined and ultimately the CHRB will be produced on an annual basis for the top 500 companies globally.  We expect it to contribute to the continued drive of companies across all sectors to proactively manage human rights risks in their own operations and through their expectations of their business partners.

Extractives companies’ human rights records ranked in Benchmark study

Aviation emissions – new global deal looks likely

Government officials are negotiating a market-based mechanism to reduce emissions in the international aviation industry. Ministers from over 190 countries have gathered at the International Civil Aviation Organization’s General Assembly in Montreal to discuss and vote on a draft resolution. If passed, it will be the first industry-specific global market-based measure for CO2 emissions.
The prospects of achieving resolution are good. So far, 55 countries, including the US, China and EU member states have indicated their support for the proposal and agreed to sign-up for the initial voluntary stage. However, some states with large aviation emissions have yet to confirm their agreement and the EU has questioned how effective the measure will be in combatting climate change. A deal is expected by the end of the Assembly on 7 October.
The proposal aims to prevent the growth of aviation emissions beyond 2020 levels by requiring airlines to offset emissions with carbon credits. The mechanism would take effect on a voluntary basis from 2021, and become mandatory in 2027 with exceptions for some states which are less developed or have low aviation emissions. The offsetting obligations will be based on the sector average emission growth, and later move to incorporate the actual emission growth of individual airlines.

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Aviation emissions – new global deal looks likely

IPP procurement programme framework in South Africa

In 1998 the Government of South Africa indicated that it is an objective of the State to encourage the entry of multiple players into the generation market. This would ensure both diversification and security of electricity supply.

In 2003, a White Paper on Renewable Energy was approved in South Africa in terms of which it was stated that a target of 10,000GWh of energy is to be produced from renewable energy sources such as biomass, wind, solar and small-scale projects by 2013. Since 2011, independent power producer (“IPP”) procurement programmes have been conducted with great success in South Africa, and it is likely that the Department of Energy will continue relying on these programmes to procure electricity from IPPs. This has attracted many international and local private project developers and investors to South Africa.

In this blog post we provide an overview of the IPP procurement programme framework in South Africa.

Background

Eskom, a state-owned utility company, currently generates about 95% of electricity used in South Africa.

In line with the objectives of creating efficient, effective, sustainable and orderly development and operation of electricity supply infrastructure in South Africa, the Electricity Regulation Act 4 of 2006 (“Electricity Regulation Act”) was enacted. The Electricity Regulation Act provides that the Minister of Energy may publish determinations for new generation capacity.  In these determinations, the Minister can specify the amount of new generation capacity required to ensure the continued uninterrupted supply of electricity, the types of energy sources from which this electricity must be generated and the procurement procedure for such new generation capacity.

The Electricity Regulations on New Generation Capacity GNR.399 of 4 May 2011 (GG: 34262), published under the Electricity Regulation Act (“Regulations”), further provide that the  abovementioned determinations must set out whether the new generation capacity will be established by an IPP and who will be responsible for the procurement of the new generation capacity. These Regulations do not apply to the purchase of new electricity generation capacity and electricity by persons other than organs of state.

These Regulations also specify that the Minister of Energy must develop an Integrated Resource Plan (“IRP”) together with the National Energy Regulator of South Africa to determine long and medium-term plans for the provision of clean, reliable and cost-effective electricity. The Integrated Resource Plan was launched in 2010 and updated in 2013 (see http://www.doe-irp.co.za/content/IRP2010_updatea.pdf). This provides for a twenty year projection of electricity supply in South Africa and stipulates that 40% of South Africa’s electricity must be generated from renewable sources. The Minister of Energy issues determinations based on the new power generation requirements in the IRP.

In 2012, the Minister made determinations for the procurement of electricity from:

On 18 August 2015, the Minister of Energy published a determination for the Department of Energy to procure electricity from renewable resources.  This specified that the electricity will be procured from IPPs through one or more IPP procurement programmes, tendering processes, direct negotiations with one or more project developers or other procurement procedures.  In December 2015, a determination in respect of nuclear energy was made (see http://www.gov.za/sites/www.gov.za/files/39541_gon1268.pdf)

The REIPPP Programme is generally regarded as being one of the most successful public-private partnership initiatives in Africa and the Department of Energy refers to it as its flagship programme.

According to the “Overview of the IPP Procurement Programme” published by the IPP Office on 31 March 2015, the REIPPP Programme has resulted in the investment of approximately $14 billion in South Africa’s renewable energy sector, of which approximately 28% constitutes foreign direct investment.

Overview of IPP Procurement Programmes

Under IPP procurement programmes a competitive tender process is followed. This is structured in rolling bid-windows which allows for continued participation.

The exact bid rules for each IPP procurement programme depends on the request for proposals issued in respect of that programme.  However, generally the bid rules relate to (i) commercial, legal, financial and technical requirements, and (ii) socio-economic development criteria.

The socio-economic development criteria aim to broaden the positive impact that the IPP procurement programme will have, particularly in the area where projects will be undertaken by successful bidders.

The socio-economic development criteria include the following.

  • Local Ownership – Generally, a certain percentage of the project must be owned by South Africans. Under the REIPPP Programme of 2012, 40% of each project was required to be owned by South Africans and 2.5% of each project was required to be owned by the local communities. Local communities would normally hold their ownership through community trusts or Communal Property Associations. Under the Coal Baseload IPP Procurement Programme of 2012, 51% of each project was required to be owned by South Africans.
  • Socio-Economic Development – Bidders may be required to propose socio-economic development projects that it will contribute to if the bid is successful. Under the REIPPP Programme of 2012, the proposed socio-economic development projects varied from education, social and welfare, health care, enterprise development and infrastructure projects. Successful bidders are required to contribute a minimum of 1% of their revenue to the Socio-Economic Development projects and to submit quarterly reports to the Department of Energy on the initiatives they have engaged in.
  • Local Content – Successful bidders are required to spend a certain percentage of the project value in South Africa.

The 2015 Determinations

As indicated above, the Minister of Energy published a number of determinations on 18 August 2015.  The table below provides a summary of the amount of electricity to be procured and from which sources such electricity can be generated under each of these IPP procurement programmes.

  Gas IPP Procurement Programme 2015 Cogeneration IPP Procurement Programme 2015 Renewable Energy IPP Procurement Programme 2015
Generation capacity needed 3,126 MW 1,800 MW 6,300 MW
Source types
  • Natural gas
  • LNG
  • Coal bed methane
  • Synthesis gas
  • Shale gas
  • Any other gas type or source
  • Waste heat or furnace off gas
  • Simultaneous generation of electricity and useful thermal energy from a common fuel source
  • An energy source which is a co-product, by-product, waste product or residual product of an industrial process and/or sustainable agricultural or forestry activity
  • Concentrated solar power
  • Wind
  • Solar photovoltaic
  • Biogas
  • Biomass
  • Landfill gas
  • Small hydro (<40MW)
  • Small projects (<5MW)

The IPP office postponed the bid submission date for bids pursuant to the 2015 Cogeneration IPP Procurement Programme pertaining to its 1,800MW generation capacity from 1 October 2015 to 11 November 2015. The successful bidders of this programme have not yet been announced.

Conclusion

South Africa has an energy shortage and is required to substantially increase its generation capacity in an environmentally sustainable manner. The REIPPP Programme has been able to provide for additional energy to be fed into the grid within a reasonably short period of time. Following the success of the REIPPP Programme, the Minister of Energy has published determinations for electricity from other sources to be procured by IPP procurement programmes and has published a determination for further electricity to be procured from renewable sources.

In addition to ensuring additional generation capacity, the IPP procurement programmes will also increase the entry of multiple players in the generation market.

IPP procurement programme framework in South Africa