Problems with Oil and Gas Income the Resource Curse A link between abundance of natural resources (especially oil and gas) and poor economic growth

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1 Government Take, Direct State Participation and Wealth Management Professor dr. juris Ola Mestad Centre for European Law and Scandinavian Institute of Maritime Law JUS5411 Petroleum Law 18 March 2015 Problems with Oil and Gas Income the Resource Curse A link between abundance of natural resources (especially oil and gas) and poor economic growth Expression coined by Richard Auty 1993 (Wikipedia) Compare Dutch disease (The Economist 1977): Exploitation of natural resources (gas) and decline in the manufacturing sector Most developing oil producing states are hit (but not all) Page 1

2 Distributive Problems with Oil and Gas Income The value of the natural resources which belongs to the state, does not benefit the population at large Captured/weak states Example: Equatorial Guinea GDP per capita on line with Greece and Spain One of the poorest populations in Africa Petroleum Act 1-2 para 2 Resource management of petroleum resources shall be carried out in a long-term perspective for the benefit of the Norwegian society as a whole. In this regard the resource management shall provide revenues to the country and shall contribute to ensuring welfare, employment and an improved environment, as well as to the strengthening of Norwegian trade and industry and industrial development, and at the same time take due regard to regional and local policy considerations and other activities. Page 2

3 Economic Impact of Norwegian Oil and Gas Production (2013) 22 % of GDP 30 % of government income 50 % of total export volume Source: Ministry of Oil and Energy Norwegian Oil and Gas Taxation Four Main Features Ordinary corporate tax 27 per cent on net income Special tax 51 per cent on net income minus up lift (special deduction) Taxable income partly established by Norm Price Annual refund of exploration costs for companies not in tax position Petroleum Taxation Act 1975 No. 35 Page 3

4 Norm Price Administrative price setting with taxation effect See Petroleum Taxation Act 3a and 4 To avoid internal transfer pricing «the price petroleum could have been sold for between independent parties in the free market», ref 4 para 2 Individual prices for each field on a monthly basis A complaint process Annual Refund of Exploration Costs Purpose increase exploration activities Oil companies without taxable income lacked incentives The refund substitutes a tax deduction Has proved very effective Page 4

5 Direct State Participation (SDFI) SDFI (SDØE) Very important feature of the Norwegian petroleum sector The State may reserve for itself a part in all production licenses awarded, and normally does Ref Petroleum Act 11-1 SDFI managed by Petoro AS Ref Petroleum Act 11-2 Gross investments, gross income Norwegian Indirect State Involvement in Production Statoil ASA Formerly 100 per cent state owned Listed in 2001 State ownership 67 % (MOE) + 3,40 % (Government Pension Fund Folketrygdfondet) Activities in 37 countries Page 5

6 The Oil Fund The Government Pension Fund - Global Basis: Government Pension Fund Act 21 December 2005 No. 123 Fund income Net government cash flow from the oil and gas activities, e.g. including oil and gas taxes, net income from SDFI and dividends from Statoil Net financial transactions related to the oil and gas industry Earnings from the investments of the Fund Transfer from the Fund to the state budget based on yearly budget decision by the Parliament The fiscal spending rule ( Handlingsregelen ) App 4 % of the Fund per year Page 6

7 Government Pension Fund - Global Current value billion NOK (860 billion USD) (19 January 2015) Owns more than 1.3 % of all listed shares in the world (2.5 % per cent of all listed European shares) Invested in app 9000 listed companies (app 60 % of the Fund is in shares) A sovereign wealth fund (SWF) Other sovereign wealth funds Kuwait, Russia, Azerbaijan, The Fund s Three-track Ethical Strategy Exercise of ownership rights by the Bank To promote long-term financial returns To improve companies ethical conduct Exclusion based on product (negative screening) => To prevent inclusion of companies that produce weapons whose normal use is in violation of fundamental humanitarian principles Exclusion based on conduct of companies => Where there is an unacceptable risk of contribution to gross or systematic breaches of ethical norms Page 7

8 Ethical Guidelines 2 - Negative Screening for Products The Fund shall not be invested in companies producing weapons that through normal use may violate fundamental humanitarian principles. Nucelar weapons, cluster weapons etc. Tobacco producers Negative Screening Applies to Products Simple question of attribution to the investor Owning shares in companies that produce such weapons is banned Ownership and knowledge Attribution to the company in question is somewhat more difficult Subsidiaries Joint ventures Difficult to establish what parts that constitute the weapon - Key components test Page 8

9 Ethical Guidelines 3 Exclusion based on Conduct an unacceptable risk that the company contributes to or is responsible for - Serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other forms of child exploitation - Grave breeches of individual rights in situations of war or conflict - Severe environmental damages - Gross corruption - Other particularly serious violations of fundamental ethical norms Analysis of Future Acts Acts or omissions an unacceptable risk that the company contributes to Risk is a matter of probability Varying probabilities related to seriousness of violations The ethical level of risk? Serious, systematic, grave, severe, gross Future contribution Page 9

10 The Work of the Council on Ethics Surveillance of companies Investigation by secretariat and employed consultants Contradiction Comments by investigated company Facts and subsumption under the guidelines Prediction of future acts Attribution Give a recommendation with reasons to the Bank of Norway Publication of the recommendation After the holding has been sold out Companies, States and Human Rights Only states can violate human rights directly. Total recommendation In line with the opinion of the Special Representative to the UN Secretary General on Business and Human Rights, John Ruggie This creates a difficult complicity/contribution issue The basic problem of the distance between the violations and the listed company where the Fund is invested Page 10

11 Special Relevance for Oil Companies Human rights Forced labour Indigenous peoples rights Environment Oil pollution in Nigeria War and conflict Sudan? Corruption? Oil sector ranked as the third most corrupt sector Total S.A in Burma Total not excluded Forced labour, forced relocation, torture etc. Recommendation 14 November 2005 (19 printed pages) Total had probably contributed to violations in the past Yadana gas pipeline Construction completed in 1998 The Unocal court case 2002 Alien Tort Claims Act Settlement The Council in future construction projects Total is hardly likely to put itself in a situation in which it is associated with the use of forced labour. Page 11

12 Repsol S.A in Peru In 2010 the Council on Ethics recommended exclusion of the oil company Repsol from the Fund The reason - oil exploration in the Peruvian Amazon in a block in an area which was thought to overlap territories of indigenous peoples living in voluntary isolation In April 2014 the Council revoked the recommendation because Repsol sold its its share in the joint venture and confirmed that there was currently no ongoing activity in the block Vedanta Resources Plc. Exclusion based on severe environmental damage as well as human rights violations of subsidiaries operations in India Recommendation dated 15 May printed pages Forced eviction of tribal peoples and others at two different sites Sources: Documents, reports, visits by the secretariat Page 12

13 Some Reflections To get the facts straight is difficult in these cases Assessment of future contribution to serious or systematic human rights violations is complex Analysis of unacceptable risk makes the overall evaluation more flexible Application of the ethical guidelines have had further effects than what was considered during the preparations The reason for the exclusion mechanism was that the Norwegian people should not profit from unethical production Some reflections (cont.) Long and thorough recommendations have effects on other investors, NGOs and companies Other ethical investors/fund managers do not give reasons for their exclusions Investors can follow the recommendations NGOs use them in their work A draft recommendation can give a basis for discussion with some companies Exclusion can influence conduct because companies want to be included again Page 13

14 Extractive Industries Transparency Initiative The core is to publish information about Payments from oil and mining companies to states And state income from oil and mining industry To increase democratic control, prevent corruption, create development and give better distribution of income from natural resources Background The Resource Curse Initiative from 2002 (Tony Blair in Johannesburg) EITI-principles (12) 2003 EITI-criteria (6) 2005 The EITI Association EITI-Association is a Norwegian association Article 2 First paragraph: The EITI Association is an international multi-stakeholder initiative with participation of representatives from governments and their agencies; oil, gas and mining companies; asset management companies and pension funds (hereinafter referred to as "Institutional Investors") and local civil society groups and international non-governmental organisations. Three member groups Member countries, companies and investors, and NGOs Page 14

15 EITI Member and Supporting Countries Compliant countries 31 Norway only OECD country Nigeria Kazakhstan Iraq Candidate countries 17 Supporting countries Including Australia, Canada, Germany, Norway, UK, Qatar, USA Supporting Companies, Investors and NGOs 90 companies Including BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Hess, Marathon, Pemex, Petrobras, Repsol, Shell, Statoil, Talisman, TOTAL More than 80 institional investors Including DNBNor, GoldmanSachs, JPMorgan, Statens pensjonsfond utland, Storebrand NGO members Including Publish What You Pay Coalition, Oxfam, Global Witness, Natural Resource Governance Institute, Transparency International, Page 15

16 EITI Requirements Requirements to rules and regulations - to organisation of the work with regulations - to implementation of the regulations Norwegian Regulations Regulations No. 856: «Forskrift om rapportering og avstemming av pengestrømmer fra petroleumsvirksomheten» (in force 1 July, 2009) Main content: Reporting of payments» By all oil companies, Petoro and Statoil Reporting of received payments» By tax authorities, the central Bank, the Petroleum Directorate etc Audit and publishing of reported sums, stake holder group control and validation of process Page 16

17 Reflections About EITI Was it sensible that Norway joined? Walk the walk Norwegian circumstances To make an impression on developing countries? Alternatives: Home states requiring companies to report on payments to all governments world wide Developing rules and initiatives Country or project reporting? Page 17