National Seminar for Suriname

Transcription

1 Energy, Environment, and Resources Department Workshop Summary National Seminar for Suriname The New Petroleum Producers Group 18 October 2017 The views expressed in this document are the sole responsibility of the speaker(s) and participants, and do not necessarily reflect the view of Chatham House, its staff, associates or Council. Chatham House is independent and owes no allegiance to any government or to any political body. It does not take institutional positions on policy issues. This document is issued on the understanding that if any extract is used, the author(s)/speaker(s) and Chatham House should be credited, preferably with the date of the publication or details of the event. Where this document refers to or reports statements made by speakers at an event, every effort has been made to provide a fair representation of their views and opinions. The published text of speeches and presentations may differ from delivery. The Royal Institute of International Affairs, St James s Square, London SW1Y 4LE T +44 (0) F +44 (0) Patron: Her Majesty The Queen Chairman: Stuart Popham QC Director: Dr Robin Niblett Charity Registration Number:

2 2 National Seminar for Suriname Background The National Seminar for Suriname was held in Paramaribo on 18 October 2017, during the annual meeting of the New Petroleum Producers Discussion Group (or the New Producers Group ). The seminar was co-hosted by Suriname s Ministry of Natural Resources, the country s national oil company (NOC), Staatsolie, and the New Producers Group, with financial support from the World Bank. The New Producers Group is a knowledge- and experience-sharing network of 34 countries. It provides a platform for new and emerging oil and gas producers to discuss challenges, strategies and governance frameworks for sustainable exploration and development of their oil and gas resources. The New Producers Group is an initiative of Chatham House, the Natural Resource Governance Institute (NRGI) and the Commonwealth Secretariat. Suriname has been a member of the group since its launch in 2012 and before that the country was an active participant in Chatham House s precursor initiative, Good Governance of the National Petroleum Sector. The National Seminar for Suriname brought together representatives from the ministries of natural resources, labour, finance, commerce and industry as well as the maritime authority, members of parliament, Suriname s business association, civil society leaders, and oil industry representatives. Discussions were enriched by participants from Ghana, Trinidad and Tobago, Colombia, Liberia and Guyana. Following the significant oil discoveries made offshore in neighbouring Guyana, there has been increased excitement regarding a potential offshore discovery in Suriname. This seminar was designed to help policymakers and national stakeholders understand the changes in laws and institutions that would be required in the event of a confirmed discovery. That said, no commercial discovery has been made and there is no guarantee that one may be found in the future. The discussions on discovery preparedness highlighted the risks related to the management of a country s expectations. More broadly there is value in anticipating how possible events will disrupt and transform the environment in which decisions are currently made. As Minister of Mineral Resources Regilio J. Dodson pointed out in his introductory remarks, Suriname needs a roadmap to meet the challenges of the next phase of the oil sector, We have to identify our gaps with regards to legislation, institutions and capacity, so we can address the potential that presents itself. Echoing this sentiment, Marny Daal-Vogelland of Suriname s NOC saw the national seminar as an effort to mobilize stakeholder efforts to prepare for a discovery, much like the Surinamese need to fix their roofs before the rains start.

3 3 National Seminar for Suriname National vision The Guidelines for Good Governance in Emerging Oil and Gas Producers, 1 which were compiled as part of the work of New Producers Group, emphasize the importance of defining a national vision for the development of a country that has newly discovered oil and clarifying what role the oil and gas sector will play to support that vision. It is important for Suriname to have a clear view of its development agenda before any potential oil discoveries are made. It is often the case that discoveries disrupt other sectors and policy efforts in other areas. To avoid this, it is important for emerging producers to seriously consider two questions: What is the oil for? and How will it support our development agenda? A discussion around market and industry uncertainties set the stage for the discussions on Suriname s national vision. Beth Mitchell, an independent analyst, presented on the long-term risks facing the oil sector. While the timing and pace of decline in demand for oil is uncertain, the direction of the change is not and it is clear that demand for oil will peak. Climate policies, shareholder pressure on companies to use less energy, opportunities to invest in substitutes and energy efficiency, as well as changes in the transport sector all contribute to this trend. Petroleum fiscal expert Pedro Van Meurs bolstered this point by providing data on the declining costs of renewable electricity generation, which elicited significant interest from participants specifically that large-scale solar power was now supplied around the world for as little as cents per kwh (2.8 cents in Abu Dhabi, 3.3 cents in Peru and 4.5 cents in North Mexico), and in the US and Europe onshore wind power was delivered for 2.5 cents (3.5 cents without tax credits) and 5 cents per kwh, respectively, and the latest offshore wind contract in the UK offered 7 cents per kwh. 2 This means renewable energy will become a strong competitor of natural gas, heavy fuel oil and diesel for power generation, leading to the electrification of certain industrial processes that currently use fossil fuels. The ensuing discussion made it clear Suriname should not lock itself into a dependence on oil, a volatile commodity with an uncertain future. And indeed, the Speaker of the National Assembly of Suriname, Hon. Jennifer Geerling-Simmons, reiterated the government s commitment to solar and renewable generation regardless of possible oil discoveries. Dr K.K. Sarpong, CEO of Ghana s NOC, GNPC, felt that as emerging producers, We should not just box ourselves into oil, but rather we should invest significantly in renewables. He wanted GNPC to be a national energy company not just an NOC. Similarly, Hon. Raphael Trotman, minister of natural resources in Guyana, emphasized that his commitment to the country s green growth agenda and the development of renewables remained steady in spite of the massive oil discoveries made offshore. However, he conceded that specific targets set such as the country aiming to use 100 per cent renewable energy by 2025 were being revisited now that associated gas would be produced offshore Guyana. It is challenging to stay the course of the country s vision when the circumstances change so dramatically. Trinidadian petroleum expert, Tony Paul, described the changes in the vision of Trinidad and Tobago, which has a 105-year old oil industry. While the country has consistently sought to add value in-country rather than export raw materials, it has in recent years lost its focus on optimizing upstream development. Earlier transparency standards have also been eroded. 1 Marcel, V. (2016), Guidelines for Good Governance in Emerging Oil and Gas Producers 2016, Research Paper, London: Royal Institute of International Affairs, 2 The supply price requires the investor to incur all capital and operating expenditures for the facilities. These costs are expected to come down further in the future.

4 4 National Seminar for Suriname Discoveries can trigger national debates around the development agenda for a country. But they also lead to intense public scrutiny and political competition. This can make coordination between government agencies more difficult and impede development. Discoveries also bring a surge of interest from donors, consultants, and experts, according to Minister Trotman, There is constant noise from those saying what we should do and it s difficult to stay the course. You rethink yourself. Pace of development The optimal pace of development emerged as a key issue through these discussions. In some cases, government policy stretches out a project s timeline from discovery to production. Alexander Huurdeman, senior gas specialist at the World Bank, pointed out that governments often wish to leverage upstream oil and gas projects in return for other investments (e.g. infrastructure or power generation), which can cause significant delays. An excessively slow pace creates a disincentive for oil companies to invest (and to commit to a final investment decision). But it might also be legitimately slowed to allow the government to put in place the necessary capacity, institutions and regulations to oversee oil company operations and ensure responsible stewardship of the resources. Fast paced developments bring their own issues. The discussion focused on the Jubilee field, which was discovered offshore Ghana in The development of this field was fast-tracked, which had a positive effect on project cash flows. However, Dr Sarpong explained that it also meant there was insufficient appraisal work carried out to adequately evaluate the discoveries before development began. Field operational challenges currently experienced by those carrying out the work are partly attributable to the fast-track development. Interestingly, warnings issued by Beth Mitchell on the possibility of future stranded assets in the oil sector and the inevitable decline of the industry over time led the Speaker of the House, Hon. Jennifer Geerling- Simmons, to ask whether Suriname should consider developing its oil resources at a rapid pace to ensure Suriname s production finds a market before oil demand declines. The CEO of Staatsolie, Rudolf Elias, pointed out that globally investments in maintaining oil production capacity were needed to meet demand. In response to the looming uncertainties of the market, Staatsolie was focused on being among the lower cost producers and this guided their every decision. With low costs, Staatsolie will be the last man standing, he said. Managing expectations and building trust Though there is a common desire to be optimistic about the transformative potential of oil, it is important that companies and governments communicate risks and uncertainties to the public. Jacqueline Khoury illustrated the risks of not managing expectations of non-commercial discoveries with the experience of Liberia in Ms Khoury, who was a member of the board of directors of the Liberian NOC, NOCAL, during that period, demonstrated the challenges of communicating information regarding potential oil discoveries. Early communications from Liberia s partner, African Petroleum, and the government about Liberia s potential discovery were modest and nuanced. They announced a potentially large accumulation of oil deposits, indicating further evaluation would be necessary to determine whether the deposits were commercially viable. But as the government and company sought to take advantage of the find to help increase the value of the acreage, they also inadvertently raised public

5 5 National Seminar for Suriname expectations about the sector. The government s internal communications to Liberians was cautious about the news, but its international message targeted at investors was more bullish. Managing two levels of communication proved difficult, especially when the second well was drilled and African Petroleum estimated its prospective resources. The Liberian press became enthusiastic and erroneous headlines dominated the front pages. The government s counter message was too complex and the public thought the government was being dishonest. The response from the press was accusatory with headlines such as, Government Lies! Ms Khoury encouraged emerging producers such as Suriname to brief their press on oil sector jargon and build its capacity, to help them explain to the public the difference between commercial and noncommercial discoveries (or between proved reserves and prospective resources) and all the subtleties in between. Clear messaging and management of expectations are all the more important when one considers the risks of disappointment during the exploration phase. Tullow Oil s Suriname country manager, John McKenna, presented data on industry commercial success rates for exploration between , which was 31 per cent overall and 7 per cent for frontier provinces (such as Suriname). Where exploration is successful, it is also important to clarify to the public that revenues to the state do not flow immediately. The discovery will need to be appraised, to better understand its size, the reservoir characteristics and its productivity. If the discovery is deemed commercial, the operators then prepare a detailed field development plan in collaboration with partners and the government (Staatsolie in the case of Suriname), which clarifies the pace of development, methods for recovery of hydrocarbons, environmental impacts and more. The time required to get from discovery to full field development may be as short as 1.5 years (in the case of the first phase of Ghana s Jubilee field), but is more commonly 3 years. An additional 2 4 years (or more) are required for the execution of the project, taking the field to first oil, when production begins. If these timelines are not explained to the public, it might question the delay. The seminar s discussions underscored the importance of transparency and disclosure during the production phase. As Dr K. K. Sarpong, CEO of GNPC, explained this is particularly important when it comes to petroleum revenues. As an example, Ghana introduced a Petroleum Revenue Management Act, which clarifies what happens to petroleum revenues going to the state. This was a key measure to increase public trust. With this system, all revenues go into a centralized account at the Central Bank, which distributes a proportion to the public budget, the NOC, and the heritage and stabilization funds. The Public Interest and Accountability Committee is an independent body that oversees activities in the sector and the NOC s budget is approved by Parliament. There are also a host of civil society organizations that may or may not understand the sector, which scrutinize organizations involved in the sector. Rayah Bhattacharji from Stichting Projekta, the Surinamese coalition of citizens and NGOs, explained that Suriname s civil society base realizes the importance of transparency initiatives, of civil society involvement and of capturing value for the country from extractives. Projekta has lobbied for some time in favour of Suriname s participation in the Extractive Industries Transparency Initiative (EITI) process. The EITI Standard requires countries and companies to disclose information on the key steps in the governance of oil, gas and mining revenue. Suriname became a candidate country on 24 May 2017 and its progress toward meeting the EITI Standard will be assessed over time. The Ministry of Finance SEITI-MSG representative emphasized that by participating in the Suriname Extractive Industries Transparency Initiative (SEITI), the government of Suriname was committed to improving extractive industry revenue collection and spending, preventing corruption, gaining citizens

6 6 National Seminar for Suriname trust, promoting social equity, and attracting quality investments. SEITI s disclosures clarify the types of revenue stream going to the budget and payments made by individual mining companies. As a minerals producer and modest oil producer, Suriname already has extractives revenues that would benefit from the EITI process. The Ministry of Finance is also establishing the Suriname Savings and Stability Fund (SSSF). The fund will introduce tough fiscal rules to protect the budget from volatile commodity prices. When projected revenues exceed 4.4 per cent all of the excess will go to the SSSF. When extractives revenues are down, the government may take up to 50 per cent of the shortfall from the SSSF but may only do so after 5 years. If a growth in extractives revenue is projected, the budget can grow, but only to 4.4 per cent of the budget. If a decline in revenues is projected a spending increase is allowed, but it is capped at 2 per cent. Roadmap for institutional change Countries need capable and well-governed institutions to extract maximum value from the development of their petroleum resources. Capable bodies can manage oil company operations and hold companies to account to ensure best practices are adhered to. And those bodies overseeing the sector and managing the revenues generated must, in turn, be held accountable to ensure they act in the public interest. The stakes are high when significant oil production begins because of the large revenues generated. Currently, Staatsolie is the agency with responsibility for licensing acreage and monitoring oil operations in Suriname. It carries out its role effectively, having developed strong corporate governance and invested in its managerial capabilities. 3 It is likely for this reason that the comments made by the seminar s participants indicated high public and government trust in the company and some reluctance to transfer the NOC s oversight responsibilities to a new or existing government agency. But Staatsolie raised the problem of its conflict of interest namely that as the agency responsible for awarding and monitoring oil licences it could not have commercial interests in the upstream, such as equity stakes in licences. Minister Dodson also highlighted the importance of clarifying responsibilities for regulations and oversight of the sector and expressed the government s intention to separate the regulatory and commercial roles of Staatsolie. Staatsolie CEO Rudolf Elias indicated that the company intended to pursue a partial listing on international markets in the event of a major discovery, in order to raise capital. Capital will indeed be needed for Staatsolie to pay its share of project costs set by the existing production sharing contracts. Mr Elias explained that the company could not maintain its regulatory role in the event of a listing, as the markets would not tolerate the mixing of state and commercial interests. It will be a sad day because now we are one [as regulator and company]. We have the regulatory and commercial knowledge that makes us attractive as partners for oil companies. Indeed, without the regulatory responsibilities, Staatsolie will lose some of its influence in Suriname s petroleum sector. Should the regulatory role be transferred to a new state agency, its technical capacity will need to be firmly established. At the meeting, the former CEO of the Ghanaian Petroleum Commission, Theophilius Ahwireng shared some lessons from Ghana, which made a major offshore discovery 10 years ago. He 3 Hout, W. (2014), Confidence in our own Abilities : Suriname s State Oil Company as a Pocket of Effectiveness, in Roll, M. (Ed) (2014), The Politics of Public Sector Performance: Pockets of Effectiveness in Developing Countries, Routledge, pp

7 7 National Seminar for Suriname explained how the Petroleum Commission established itself with a focus on finding the right talent. The commission recruited both expatriates and technical staff from GNPC, which like Staatsolie had hitherto assumed regulatory functions. Tomas de la Calle shared similar lessons learned in Colombia, where the NOC Ecopetrol lost its regulatory function in favour of the new agency, ANH. There, as in Ghana, government recognized the necessity to pay the staff of the agency competitive salaries. This required the agency to be established separately from the Ministry of Energy, where salaries are regulated. When new regulatory agencies are established to replace an NOC in its oversight role of the sector, the regulator becomes the boss, as Mr de la Calle put it, and this often leads to a rift with the NOC. The leadership of the NOC must be committed to the establishment of the regulatory agency. But, as both the cases of Colombia and Ghana illustrated, resistance is often felt in the rank and file of the organizations for instance when an NOC manager balks at being told by a junior staff member in the regulatory agency that the NOC is infringing regulations. And yet, as Mr Ahwireng explained, the state benefits more when the regulator and the NOC are aligned and the regulator can benefit from the NOC s operational knowledge and participation in joint operating committee meetings to provide a window into the industry. The focus on the upstream regulator can also leave some other state agencies in the shadows. Tomas de la Calle explained that the ministries of land, environment and communities had an important role to play in Colombia, but faced capacity constraints. To overcome this, the ANH funded their capacity development. In light of the challenges of successfully carrying out such reforms and the high trust placed in Staatsolie as an institution, there was interest among Surinamese participants in the Malaysian model, where Petronas has retained its dual role as a commercial entity and regulator. Petronas has been a performing NOC and this is partly attributable to the clarity of government oversight of the company. 4 Mr Elias felt that Staatsolie could pursue this model but only until major discoveries were made. In Suriname, the state institutions will need to step up to take a more active role in overseeing the sector in the event of a major discovery. Valerie Marcel, an expert on NOCs at Chatham House, highlighted the risk that the state remains a passive actor in the governance of the national petroleum sector. Staatsolie would have access to significant revenues and grow in capacity and influence domestically. Without an institutional counterweight ensuring some oversight and accountability, the NOC risks losing its focus on the national interest. It would be of critical importance for state institutions to grow at least concomitantly, to offer a check on the NOC s power and hold it to account. As Mr Elias put it, Suriname needs to start these discussions today, We need to plant the seed and water it. Indeed, Staatsolie will not be able to transfer its responsibilities if there is no capacity in government developed at that time. For Minister Dodson, it was important for the Ministry of Natural Resources and Staatsolie to have common goals and to work together to achieve them. Building institutional capacity and developing transparency are priorities for his ministry. The steps required to be compliant with the EITI standards would help the Suriname Ministry of Natural Resources develop its capacity and increase its effectiveness. 4 Victor, D. G., Hults, D. R. and Thurber, M. C. (2011), Oil and Governance: State-Owned Enterprises and the World Energy Supply, Cambridge University Press.

8 8 National Seminar for Suriname Local content National expectations regarding the potential for an offshore oil discovery to create jobs are commonly too high. Theophilius Ahwireng explained that following the oil discovery in Ghana many young people trained in geological fields but found no jobs were available when they qualified and this led to frustration. Minister Trotman saw the same trend emerging in Guyana, We have a plethora of people who want to study petroleum engineering, but there are only a few jobs there. So we need to support them responsibly and focus on other skills. Ekpen Omonbude, economic adviser at the Commonwealth Secretariat, advised against the singular focus on direct job creation, as this accounts for less than 1 per cent of employment in Nigeria, about 1 per cent in Namibia (including mining), and 3.3 per cent in Trinidad and Tobago. However, the potential for supply chain creation is significantly more interesting. A first step for Suriname, which Staatsolie has taken, is to make a baseline assessment of the potential for the country to supply the skills, goods and services required by the petroleum sector. In Ghana, the Petroleum Commission undertook a similar study in view of identifying where the real opportunities might lie. They segmented the areas of potential local content into low hanging fruit (e.g. car rental or catering), middle and high end. Some areas presented potential, but needed guidelines to raise their standards (e.g. insurance). The discussion around local content underscored Surinamese expectations that oil companies would fund the development of national capabilities. Oil companies do invest in training programmes (e.g. schools, vocational programmes, secondments in the company), but public funds and programmes are necessary for greater impact. John McKenna from Tullow Oil highlighted the importance of being strategic about directing an oil company s training support. For instance, governments may consider the relative value of sending one person for a graduate degree abroad versus using that same budget for training more people in-country. There is also great merit in primarily developing skills that are transferable from the oil sector to other sectors. For instance, a welder or an electrician trained for the oil sector will also find work in other sectors of the economy and the base of available highly trained craftspeople in the economy will bring broader benefits.

9 9 National Seminar for Suriname Conclusion The national seminar discussions highlighted how Suriname can extract the greatest benefit from its emerging oil sector. As was noted, to capture value from the sector itself, good governance and capacity are critical. Suriname will need a capable regulator to determine the optimal pace of development and to oversee operational, social and environmental standards. It will need institutional checks and balances to ensure good governance, especially if significant oil production revenues begin to flow. The necessity to protect the economy from volatile commodity prices was also highlighted. But significantly, when set against a backdrop of industry uncertainties and climate change impacts, the discussions repeatedly stressed the importance of creating value beyond the oil sector. Growth outside the oil sector can be won through local content by focusing on indirect linkages such as supply chains and through the development of skills that are transferable. Value beyond the oil sector can also be supported by revenue management. The Ministry of Finance is establishing a sovereign wealth fund for investments to reduce dependence on oil revenues. Through its public spending the government can support the efficiency of non-oil sectors, such as agriculture and renewable energy generation. Communication was a key theme throughout the seminar. In the event of a discovery, but also of a dry well or a potential discovery, government, NOC and companies must coordinate their communication strategies in order to manage expectations and educate national stakeholders about the industry.