Comments on Liberia Petroleum Act and NOCAL Act Executive Summary December 12, 2013 Petroleum Advisory Group

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1 Comments on Liberia Petroleum Act and NOCAL Act Executive Summary December 12, 2013 Petroleum Advisory Group This paper sets out the comments of the Petroleum Advisory Group ( PAG, comprising the Revenue Watch Institute and the African Center for Economic Transformation) on the draft Petroleum Act and NOCAL Act before the Liberian legislature. 1 The most recent update we have received is that the two acts have been passed by the Senate and are now before the House of Representatives for action when it reconvenes. The PAG urges the government to use the recess for further consultation with the Liberian public and other interested stakeholders regarding these two important pieces of legislation. Executive Summary The draft legislation represents in many respects a significant improvement on Liberia s current system and, if implemented effectively, would put Liberia on more sound footing to manage the oil sector responsibly and effectively. We note the following positive developments in particular: Greater emphasis on accountability of state actors, including through the splitting of the policy, regulatory and commercial roles. This can potentially be a positive step for governance of Liberia s petroleum sector, where to date NOCAL has been responsible for all three roles, creating limited checks and the potential for conflicts of interest. Greater control over the flow of petroleum revenues and State entity finances by specifying in greater detail which revenue streams are to be transferred to the Consolidated Fund and which are to be made available to particular State entities. Adoption of further transparency commitments, including: financial reporting requirements, public comment on opening up of new areas of petroleum operations, publication of extensive bid materials and prompt publication of petroleum agreements, and public hearing / consultation on regulations and on environmental assessments and plans. Despite these positive steps, in order to fulfill the legislation s promise, we believe that a number of important improvements should still be made. We note the following areas for improvement: Revisit local ownership requirements. The new provisions reserving onshore licenses exclusively for Liberian-owned businesses and requiring relinquished areas to be considered for indigenouslization in keeping with Article 7 of the Constitution may be 1 Our initial review was based on the September 5, 2013 version of the Petroleum Act and the August 15, 2013 version of the NOCAL Act. We have been provided with revised versions distributed at the Legislature s public engagements. We have therefore updated our analysis to reflect these revised versions. We continue to urge the government to make public official versions of the legislation in order to facilitate consultation. 1

2 targeting laudable goals, but they could seriously impede equitable development and run counter to emerging lessons about good governance and using the petroleum sector to spur broad-based development. Such provisions risk becoming as in Nigeria and Angola a source of corruption resulting in concentration of benefits in the hands of an elite few at the expense of the general population. We recommend that the provisions be eliminated and that the focus be instead on strong provisions for local content in goods and services. If local ownership requirements are maintained, certain protections are imperative, namely (i) clearly defined prequalification criteria, (ii) publicized criteria for allocation, (iii) allocation exclusively by open competitive tender with a minimum number of participants, and (iv) public disclosure of beneficial ownership. Fixing the legislation s inconsistencies with the Liberia Revenue Code (LRC) such as leaving royalty rates subject to negotiation (whereas the LRC sets these at 10%) and allowing for stabilization clauses that go beyond the specified scope for such clauses set out in the LRC. Need for further strengthening of accountability measures over state actors. Divestment of the policy and regulatory functions from one entity and their attribution to others will not necessarily by itself result in greater accountability. The legislation should institute further accountability measures such as (i) clarifying that the management of NOCAL and the Petroleum Directorate should regularly report and be answerable to the Legislature, and (ii) requiring publication of annual reports and detailed budgets by these entities. Specifying that all petroleum revenues go first to the Consolidated Fund and are then allocated through the budgetary process, rather than allocating certain revenue streams upfront to particular entities. In order to allow sufficient government control over revenues and accountability of State entities, we recommend that the resource needs of State entities be met through the budgeting process and not through direct access to petroleum revenues. This is particularly important given the changing roles and the lack of present clarity on their funding needs and Liberia s petroleum revenues. Revisiting the approach to citizen participation. If the government is committed to some sort of direct citizen interest through a citizen fund, we recommend that contributions to the fund be based on a portion of the whole of government oil revenue rather than just a percentage of particular revenue streams under certain petroleum agreements. The current approach could create a controversial situation where government revenue flows have commenced and are relatively significant, while citizen flows have either not commenced or are relatively minor. Beneficial ownership. The bill commendably requires collection of beneficial ownership information and envisions its disclosure, but disclosure should be more clearly required. Implementation / transition issues. The laws could be improved with a clearer allocation of responsibilities and greater oversight over NOCAL during the transitional phase. Also, it may be preferable to wait until the transition to the Petroleum Commission is completed before moving forward with contracting. At a minimum, the legislation should make clear that the new rules (e.g. for contracting) and transparency mechanisms apply during the transition. Tables in the annex set out our recommendations along with references to the relevant provision(s). 2

3 Comments on Liberia Petroleum Act and NOCAL Act Detailed Comments December 12, 2013 Petroleum Advisory Group We set out below the comments of the Petroleum Advisory Group ( PAG, comprising the Revenue Watch Institute and the African Center for Economic Transformation) on the draft Petroleum Act and the draft NOCAL Act. We divide the comments into the following three sections: (A) background and consultation issues, (B) key substantive issues of concern with the draft Petroleum Act and NOCAL Act, and (C) implementation challenges and transition issues. We include at the end of this paper an annex with tables setting out our key recommendations (by category) along with references (where applicable) to the relevant provision(s) of the draft legislation. A. Background and Consultation Issues Revenue Watch and ACET (in partnership with Norad/Oil for Development) assisted the government with the development of Liberia s Petroleum Policy over the course of The Policy involved a substantial consultative process with Liberian citizens, governmental and non-governmental stakeholders and international oil companies. The Policy ultimately adopted by the Hydrocarbons Technical Committee also referenced the need for further consultations during the formulation of laws. The draft laws embody in many important respects the conclusions of the Policy, but other than the public hearings in the legislature itself, there was, as far as we are aware, no public consultation on the basis of the actual texts of the laws before their initial submission to the legislature. The legislative recess provides the government a chance to remedy this. Full review by all interested persons is particularly important given the potential significance of the sector for Liberia s economic future and the technical nature of the petroleum law. In order to be effective, the consultation should (i) be preceded by official public disclosure and dissemination of the draft legislation, and (ii) be conducted by officials armed with clear, concise messages that allow people to understand the content and impact of the legislation. Such a consultation can serve as a critical step in the ongoing process of educating Liberia s citizens about the country s petroleum prospects and the reform of the applicable legal framework. It could also permit initial public comment on the principles of the future revenue management law mandated in the draft petroleum legislation. B. Comments on elements of draft legislation As mentioned above, the draft legislation is a significant improvement and adopts several positive advances on Liberia s current legislative framework. As Liberia looks to agree a final form, we recommend consideration of the following recommendations. We divide our comments into three categories: (1) Local Ownership Requirements, (2) Fiscal Regime and Revenue Management, (3) Governance Framework, and (4) Licensing / contract-related issues. 3

4 1. Local Ownership Requirements The most recent version of the draft Petroleum Act contains additions requiring certain licenses to be reserved for Liberian-owned businesses. Section 14(5) reserves all onshore exploration and production licenses for Liberian-owned business, while Section 23(e) suggests that relinquished areas should be considered for indigenouslization, specifically referencing Article 7 of the Liberian Constitution. While these provisions may be targeting laudable goals of developing local content and c r e a t i n g positive economic spillovers, their inclusion could seriously hold back development of Liberia s petroleum sector and have untoward consequences for government take. Furthermore, such provisions risk becoming, as they have in Nigeria and Angola, a source of corruption resulting in the concentration of benefits in the hands of an elite few at the expense of the general population. One of the most important elements of Liberia s petroleum sector development is ensuring that contractors (Liberian or foreign) should have the financial and technical qualifications necessary to carry out costly and complex exploration and development activities. In the absence of a strong system for qualification of license holders, reserving licenses (or even a portion of licenses) for local companies could damage Liberia s efforts to pursue petroleum development in an efficient and environmentally safe manner. Consideration of this issue should therefore begin with a realistic assessment of whether Liberian companies can meet these qualifications or are likely to meet them in the near future. If the answer to that question is no, then the implication of the rules would be either that Liberia may wait for years before awarding access to these prospective areas or that it would award such access to unqualified actors. Even if some Liberian companies have (or could acquire) the necessary financial backing to properly develop licenses, limiting the number of companies competing would unproductively tie the government s hands in licensing and ultimately result in a worse deal for the country. Even more problematic, experience from places such as Nigeria and Angola suggests that elites would be able to leverage political connections to acquire licenses at below market prices which they could subsequently sell or subcontract to international companies at a significant premium. Shifting this premium from the government to privileged elites is a manner of privatizing public wealth and reducing the revenue available to the government for much needed development spending. In Nigeria, preference for local ownership (including the Local Content Vehicle (LCV) system which only required 10% Nigerian company equity, rather than exclusivity) resulted in companies controlled by political favorites receiving the most promising blocks, and then failing to develop the assigned blocks effectively. 2 Selected local companies often failed to pay agreed signature bonuses and pursued a strategy of looking for international companies to take over the license at a profit for the Nigerian seller. 3 Similarly in Angola the indigenous company requirement has resulted in oil rights being given to 2 See Global Witness, Rigged: The Scramble for Africa s Oil, Gas and Minerals, January Available at: 3 See Thuber, Emelife and Heller, NNPC and Nigeria s Oil Patronage Ecosystem, September Available at: 4

5 consortia that included companies owned at least in part by some of the most powerful individuals in the Angolan regime. 4 Notably, these processes have resulted in great personal benefit to the elites involved, but without the significant diffusion of broader benefits such as employment for citizens more generally. We would therefore recommend that instead of reserving areas for local ownership, Liberia should focus on strong provisions (in law and/or regulations) for local content for goods and services. Insofar as Liberia decides nevertheless to maintain a local ownership requirement, it is imperative that certain protections be put in place, namely: (i) there be clearly defined prequalification criteria, (ii) there be clearly publicized criteria for the allocation of the onshore or relinquished areas and that the allocation not be on a first come, first served basis (iii) the allocation be exclusively by open competitive tender and that at least 3 entities must express interest in an area under consideration, and (iv) that the beneficial ownership information of all companies is publicly disclosed. Finally, such a system would need to be rigorously supervised by an independent regulator. 2. Fiscal Regime and Revenue Management a. Consistency with the Revenue Code. One of the issues with Liberia s petroleum sector to date has been inconsistency between the various elements of the fiscal regime, including between the Revenue Code, the petroleum law and individual petroleum agreements. Consistency helps the State negotiate strong fiscal terms with companies and allows for more effective monitoring and enforcement of those terms. The Petroleum Act acknowledges the importance of consistency with the Revenue Code by providing (Section 37) that taxes, user fees and custom duties shall be in accordance with the Revenue Code. Unfortunately, the Petroleum Act contains two inconsistencies with the Revenue Code that should be addressed. First, the Petroleum Act provides (Section 38) that royalties will be calculated at the rate specified in petroleum agreements, whereas the Revenue Code (through Section 753 of the Consolidated Tax Amendment or CTA) fixes the royalty rate for petroleum production at 10%. The Petroleum Act approach leaves petroleum royalties, a potentially important revenue source, subject to open-ended negotiation. This risks creating confusion vis-à-vis the tax law and could subject Liberia to the same contract-by-contract variation that has been a problem for the sector to date. Second, the Petroleum Act s provisions on Stability of Conditions (Section 71) allow for stabilization clauses that go beyond the scope already set out in Section 17 of the CTA. While the CTA limits such stabilization to certain categories of fiscal terms and to a period not to exceed 15 years 5, the Petroleum Act includes no such limitation. The Petroleum Act (Section 71(2)) does limit stabilization by carving out changes in law which pertain to health, safety, security, labor and environment, but this carve out 4 See Financial Times, Spotlight Falls on Cobalt s Angola Partner, April 15, Available at: 5 We understand there may be an issue with the length of this period, namely that the maximum period may need to be 15 years from commercial operation rather than the agreement s effective date. Nevertheless, this issue should be dealt with through an amendment of the Revenue Code and the concept of limiting the duration of stabilization should be maintained. 5

6 should apply to all such changes that are applied on a non-discriminatory basis, not just to those that are consistent with international standards and best practices as is the case in the draft law. This additional international requirement is subject to subjective interpretation and unduly limits the ability of the State to modify laws pertaining to health, safety, security, labor and environment. The above inconsistencies should be addressed, particularly as they involve positions taken in the relatively recent review of the Revenue Code in 2011 which we understand was the result of a wellconsidered process involving significant research and consultation within the Liberian government. b. Flow of funds to the Consolidated Fund. As per previous PAG policy recommendations, we note the importance in Liberia s present context 6 of ensuring sufficient control over petroleum revenues. This control allows for revenue management in line with government priorities, including by allowing the government to retain sufficient control over the operations of State entities involved in the sector, such as NOCAL and the Petroleum Directorate. We have therefore previously recommended that all of Liberia s petroleum revenues be directed first to an appropriate sub-account of the Consolidated Fund (with relevant portions paid to the fund(s) to be established by the revenue management legislation) and then be allocated through the budgeting process, including potentially through multi-year budgeting for state entities active in the petroleum sector where necessary because of substantial future payment obligations (e.g. cash calls related to the State s participation in petroleum fields). 7 The draft Petroleum Act and NOCAL Act take some steps in this direction by (i) specifying that certain revenue streams such as royalties, surface rentals and bonuses are payable directly into the Consolidated Fund (Sections 38, 39 and 49) and (ii) establishing greater control over State entity finances by specifying in greater detail which revenue streams are to be made available to entities such as the Petroleum Directorate (Section 8(10) of the Petroleum Act) and NOCAL (Sections 8(c) and 14 of the NOCAL Act) 8. Nevertheless, the draft laws fall short of our recommendation that all petroleum revenue go to the Consolidated Fund. The draft laws should be revisited in this respect, particularly regarding the lack of clarity on exactly how each revenue streams is allocated and more generally whether upfront allocation of revenue streams directly to certain State entities is appropriate. 9 Furthermore, As Liberia is also in the 6 By context we are referring its early stage of petroleum development, limited present information about the potential magnitude of oil revenues, limited financial resources of the government, concerns about NOCAL accountability, etc. These all point towards a prioritizing sufficient accountability and sound economic management of oil revenues under government control. 7 In this respect, the rationale for the inclusion of multi-year budgeting for the Petroleum Directorate (Section 8(12) of the Petroleum Act) is unclear to us. Multi-year budgeting for NOCAL may be useful to sufficiently plan for committed future payment obligations as a commercial participant in petroleum projects. This rationale does not apply in the same manner to the Petroleum Directorate which is not envisioned as playing a commercial role of the sort typically justifying a multi-year budgeting commitment. 8 Of particular note are Section 14 s requirements, namely NOCAL expenditures being only in accordance with a budget approved by the Ministry of Finance, external audit of NOCAL s financial statements and publication of the same, as well as substantial public reporting requirements on revenues received, including detailed information on sales of oil production. 9 For more on this issue of allocations to State entities, see part b. of the Governance Framework section below. 6

7 process of considering an overall natural resource revenue management strategy for the future, it is important that decisions on allocation of petroleum revenues to government entities fit within the broader revenue management framework. The future revenue management legislation envisioned in the current legislation (Section 8(3)(i) of the draft Petroleum Act) may therefore be an appropriate opportunity to address this issue in a more comprehensive manner. At a minimum, the Petroleum Act should be clearer on how revenue streams from the various entitlements of the State (either directly or through NOCAL) are allocated. Part IX of the Petroleum Act addresses the allocation of certain revenue streams, but is silent on others, including production entitlements. Most importantly, the treatment of the State s entitlement to profit oil, likely to be a significant portion of State revenue 10, is unclear. The Petroleum Act includes no specific requirement for profit oil revenues to be deposited into the Consolidated Fund. A provision (Section 79(6)) under the Petroleum Act s Repeals and savings heading references deposit of such revenues into the Consolidated Fund where existing agreements and sales by the Contractor are involved, but this provision does not address future agreements or sales by NOCAL. Another provision (Section 7(3)(g)) states that the Petroleum Directorate is to ensure that all revenues to the State are deposited into the Consolidated Fund, except as otherwise permitted under the Act, but no specific provision in the Act specifies where State profit oil or revenues from State participation are to be deposited even though the NOCAL Act does specify (Section 8(c)(i)) that revenues from State participation are to be provided to NOCAL, rather than to the Consolidated Fund. The NOCAL Act also(section 14(h)) requires deposit of revenue from the sale of State entitlements of petroleum to be deposited in the Consolidated Fund after deduction of marketing fees and commission, but this language is not included in the Petroleum Act and is not clear in its scope (i.e. whether it applies to just the State contractual entitlement to profit oil or also includes revenues from the sale of petroleum from the State interest in contractor s right to cost oil and profit oil ). In order to address the lack of clarity and to be comprehensive, we recommend that language be added to the Petroleum Act and the NOCAL Act requiring deposit into the Consolidated Fund of revenues coming from both the State profit oil and from the sale of petroleum derived from the State participating interest held by NOCAL (i.e. NOCAL share of contractor s right to cost oil and profit oil ). c. Citizen Participation. The draft Petroleum Act includes a citizen participation element providing the State an option to take, on behalf of a citizen fund meant to make benefits widely available to citizens, a carried participating interest (managed by NOCAL) of up to 5% in the rights of the contractor under a petroleum agreement (Section 36). We welcome the decision in the draft legislation to choose a different route to citizen participation than the direct citizen equity approach set out, but never implemented, in the Petroleum Law of As we have previously mentioned, the direct citizen equity approach poses difficulties from both a policy and practical perspective. Despite the different citizen participation structure adopted in the Petroleum Law, we remain concerned that the adopted 10 For example, the 2011 EITI report for Cote d Ivoire indicates that over 90% of state petroleum revenues in 2011 were attributable to the state s profit oil entitlement. See: FR.pdf. Of course this depends on how other elements such as royalty and corporate income tax are structured. 7

8 approach may prove disappointing in the achievement of its commendable goal. We therefore recommend that the issue be revisited within the context of the broader natural resource revenue management strategic planning which we understand is being undertaken by the government. Under the Petroleum Law s current approach contributions to the citizen fund would come from revenues from a citizen participation defined as a 5% stake in the contractor s rights in a petroleum agreement. This revenue would involve a 5% share of the contractor s profit oil revenues under the petroleum agreement. This share of profit oil represents just a portion of overall State revenues, which also includes revenues from bonuses, State share of profit oil, corporate income tax, and royalties, none of which would be included in the citizen fund. In addition, the relevant citizen participation revenue will first be used to reimburse the exploration and development costs (plus interest) that were carried by the contractor (i.e. paid by the contractor on behalf of the citizen fund). This means that the revenues going to the citizen fund may be some of the latest to commence, potentially years after a commercial discovery is declared. This approach could therefore create a controversial situation where government revenue flows such as bonuses and royalties have commenced and are relatively significant, while citizen flows have either not commenced or are relatively minor. Also contributing to the risk of citizen disappointment with unmet expectations is the fact that except for the renegotiated Block 13, Liberia s other existing petroleum agreements contain no citizen participation element and would therefore provide no contribution to the citizen fund unless renegotiated. In order to avoid this scenario, we would recommend that if the government is committed to a citizen fund, that contributions to that fund should be based on a portion of the whole of government oil revenue rather than just a percentage of particular revenue streams under certain petroleum agreements. 11 This which would result in money going into the citizen fund from the onset of any government revenue flows and would be regardless of whether the revenues come from existing or new contracts. Such an approach would need to be incorporated into the broader revenue management strategy and any future revenue management law in order to ensure consistency in approach. It may be appropriate to have a placeholder in the Petroleum Act that refers to contributions to the citizen fund on the basis of a percentage of overall revenues, but with the percentage to be specified and details to be worked out in the revenue management law. 12 The process for deciding on the revenue management law should incorporate sufficient citizen and stakeholder input on key issues such as distribution/use of the funds and determining how/by which entity the structure would be managed. d. Reinvestment of 10% of Profits. The most recent version of the draft Petroleum Act includes a requirement (Section 42(2)) that at least 10% of profits earned in operations in Liberia by a contract 11 For example, the Alaska Permanent Fund takes a more comprehensive approach to revenue streams by basing deposits on 50% of all mineral lease rentals, royalties, royalty sale proceeds, net profit shares, federal mineral revenue sharing payments and bonuses. See: 12 Because the percentage would be applying to a broader pool of revenues than just a 5% share in Contractor s rights in a petroleum agreement, the actual percentage will most likely need to be set at a different level. 8

9 must be reinvested in the productive sector of the economy. 13 It is unclear what is meant by reinvestment or by the productive sector but contractors could view this provision (as written) as an additional 10% tax on profits. Given the impact that such a significant change could have on the attractiveness of Liberia s petroleum sector as an investment destination, it would need to be considered within the context of Liberia s overall fiscal regime and in light of the fiscal decisions that were made as part of the 2011 review of the Revenue Code. 3. Governance Framework: the Ministry of Petroleum, the Petroleum Directorate and NOCAL The draft Petroleum Act seeks to separate the policy function, the regulatory function and the commercial function between a new Ministry of Petroleum, a new Petroleum Directorate and the National Oil Company of Liberia (NOCAL) respectively. This delineation of roles and particularly the allocation to NOCAL of a limited commercial function can be a positive step for governance of Liberia s petroleum sector, where to date one institution (NOCAL) has been responsible for all three roles, creating limited checks and the potential for conflicts of interest. This potential governance benefit can only be fulfilled however if the accompanying challenges are recognized and necessary complementary steps are taken. a. Allocation of roles. As we have previously noted, including in the PAG Options Analysis Note of April 2012, there are challenges associated with quickly separating out the various core petroleum sector roles of the State between different institutions in a capacity constrained environment such as Liberia s. Given the decision to proceed with the separation of various roles, it is important to consider the impact of limited financial and human resources and the need to ensure that each body, and particularly the new Petroleum Directorate, has the critical mass to capably carry out its mandate. The organization of the new bodies also needs to take into account the costs and potential inefficiencies, particularly given the lack of certainty about Liberia s future oil production. 14 Accordingly, the proper coordination of roles and allocation of resources between bodies becomes particularly important in this context. While Part III of the draft Petroleum Act generally does a commendable job of specifying the overall allocation of roles, the practical application of this allocation to existing petroleum agreements (drafted with NOCAL exercising all roles) may prove more challenging than envisioned by the general framework set out in the Petroleum Act (Section 79(3), (4) and (5)). It is therefore worth reviewing the existing production sharing agreements (or at least the main model agreement types) and specifying, directly in 13 We have heard that this provision may be interpreted as requiring contractors to keep a certain percentage of their work program budget in Liberian banks for a limited period. While this would in theory provide banks with greater liquidity to lend (assuming that companies accept such a requirement), its impact would be limited if the period of deposit is short. In any event the requirement may prove unworkable, and difficult to monitor and enforce, especially if budget implementation and the cash flows associated with implementation are not uniform throughout the year. 14 We note in particular the decision to create a new Petroleum Ministry. Establishing a separate ministry (rather than using the Ministry of Lands, Mines and Energy for example) reduces the risk of insufficient attention being paid to the petroleum sector by a ministry with other priorities. At the same time the structure and staffing of the new ministry needs to be done in a way that avoids excessive cost and inefficiency. 9

10 the law or through subsequent regulations, exactly which decisions are to be made by which body. 15 From a quick review of portions of the recent Block 13 production sharing contract, examples of areas where there may be eventual confusion over which body exercises contractual rights include: measurement of Total Production (Article 15.8(a)), valuation of petroleum Market Price (Article 18.7), decisions regarding natural gas development (Article 21.3), and audit rights regarding petroleum costs and production revenues (Article 25.5).Lack of clarity on who makes these and other decisions can lead to conflict between the various State bodies and create a frustrating operating environment for all parties. b. Allocation of resources to NOCAL and Petroleum Directorate. The allocation of resources to different State entities needs to take into account the roles envisioned for each State entity in the draft Petroleum Act. In the case of NOCAL for example, the legislation sets out a rather limited commercial role of managing the State participation, lifting and marketing State production entitlements taken in kind under petroleum agreements and conducting technical studies for the Petroleum Directorate. Accordingly, NOCAL is not intended to become, nor should it become, a traditional upstream oil entity (i.e. competing for operatorship of exploration and production blocs). Given that any State participation is to be carried (i.e. State only pays share of production costs, with its share of pre-production costs recovered by the contractor from production) and that NOCAL will not have an operating exploration and production role, NOCAL s investment needs may very well be limited for the foreseeable future. In light of this more limited role envisioned for NOCAL and the need to ensure sufficient accountability and control over NOCAL, we recommend that for the time being NOCAL s resource needs (and those of other state entities in the sector) be met through the State s budgeting process and not through direct access to petroleum revenue streams. NOCAL should not continue to exist as a non-budget entity with direct access to potentially significant revenue streams. This is particularly the case when there is little clarity on NOCAL s funding needs in the future and on how much revenue is going to be generated. With respect to the Petroleum Directorate, the draft legislation (Section 8(10) of the Petroleum Act) does provide for funding to be appropriated by the Legislature and we would assume this would be per the regular budget process. Given this budgetary process it is unclear why the legislation also provides for independent sources of revenue for the Petroleum Directorate by allocating to it revenue from the sale of petroleum data as well as processing and participation fees from the tendering process. c. Separation is not enough: the need for strengthened accountability. The divestment of the policy and regulatory functions from one entity (NOCAL) and their attribution to other entities (the Ministry of Petroleum and the Petroleum Directorate) does not, on its own, necessarily result in greater 15 The Petroleum Act does address specific decisions in a few places, but even these raise questions. For example, Section 31(1) provides that the decision under a petroleum agreement whether to receive the State share of production in kind or in cash shall be made by the Minister of Petroleum and the Minister of Finance, upon recommendation of the Petroleum Directorate. It is unclear however if this provision covers decisions regarding just State profit oil or also cost oil and profit oil received as a result of the State and citizen equity participations in the Contractor s rights. Also, a relevant provision in the NOCAL Act (Section 7(b)) gives the impression that NOCAL would continue to make these decisions for petroleum agreements entered into under the 2002 Petroleum Law, which would undermine the application of Section 31(1) of the Petroleum Act. 10

11 accountability. In Indonesia for example, the national oil company, Pertamina, was divested of its regulatory powers in 2001 in favor of an independent regulatory body, but recent corruption scandals there involving the regulatory body show that divestment is not necessarily equivalent to greater accountability. 16 While the allocation of roles is an important governance move in the Liberian context, it is just as important to ensure that strong accountability mechanisms are also included both at NOCAL and at the new Petroleum Directorate. The draft legislation makes commendable moves in this direction, including: Requiring financial reporting by the Petroleum Directorate and NOCAL per the Public Financial Management Act (Section 8(14) of the Petroleum Act and Section 14(a) of the NOCAL Act). Requiring an external audit of NOCAL s financial statements (NOCAL Act Section 14(d)-(e)). Providing that NOCAL may only use funds per a budget approved by the Minister of Finance (NOCAL Act Section 14(f)). Requiring quarterly publication of amounts received by NOCAL, with detailed reporting of information associated with each sale of State share of petroleum production (NOCAL Act Section 14(i) and (j)) though this provision should be modified to clarify that sales of any citizen participation production should also be covered. Requiring public hearing / consultation prior to issuance of new regulations (Section 77). Notwithstanding these important steps, the legislation would be improved by the addition of several additional pro-accountability measures, including: Greater clarity that both the management of NOCAL and the Petroleum Directorate shall regularly report and be answerable to the Legislature. A requirement, as per the Policy, that both NOCAL and the Petroleum Directorate publish public annual reports setting out costs, revenues, reserves, activities and policies, with future projections where appropriate. Clarity that detailed budgets of both NOCAL and the Petroleum Directorate will be made public. Clarity in who is covered by Section 75 on conflict of interest (e.g. NOCAL personnel?). The current reference to an officer in the public sector engaged in the implementation of this Act is not clear, nor is it clear whether the directly or indirectly language is sufficient to cover interests obtained by family members. It may be worth specifying directly or indirectly, through a third party or otherwise. Modify the current provision that allows the board of directors of NOCAL to set its own stipends and per diems without any external approval (NOCAL Act Section 10(g)). 16 For more on the scandals involving Indonesia s independent regulator, see: : 11

12 Accountability measures in respect of the Petroleum Directorate are particularly important given the significant roles allocated to the institution under the Petroleum Act. A potential issue is ensuring sufficient checks on the Director General position. In a previous version of the Petroleum Act, the position was responsible to the Minister of Petroleum (i.e. no Board of Directors as with NOCAL) but also served as the Minister of Petroleum until one is named (per the drafting of the definition of Minister ). The most recent version of the Petroleum Act has the Minister responsible for Petroleum activities of Lands, Mines and Energy 17 as the Minister for the purposes of the Act until such time as a Ministry of Petroleum is created. While this would help clarify who the Director General is responsible to (Section 8(7)) until the appointment of the Minister of Petroleum, we query whether the intent is to in fact provide the Ministry of Lands, Mines and Energy with all the functions of the Minister under the Act during this interim period (until 60 days after an exclusive exploitation authorization per Section 80). This may be an issue given the numerous existing responsibilities of the Ministry of Lands, Mines and Energy and the concerns over sufficient capacity for further responsibilities. If this concern remains, the issue could potentially be dealt with by having Section 8(7) specify that the Director General is responsible to the Ministry of Lands, Mines and Energy (or whichever minister or individual) until the appointment of the Minister of Petroleum, but without necessarily providing such minister or individual with all the powers and functions of the Minister of Petroleum per Section Licensing / contract-related issues The draft legislation takes important steps in establishing a transparent and competitive process for bidding and contracting in line with the positions adopted in the Petroleum Policy. Positive steps of note in the Petroleum Act include: Requiring public comment on opening up of new areas for petroleum operations and publication of relevant materials / decisions (Section 13). Limiting direct negotiation to exceptional circumstances as decided by the President and requiring publication of (i) the Presidential decision and rationale in such a case (Section 14(3)), and (ii) the Petroleum Directorate s direct negotiation recommendation report including rationale for material variations from model petroleum agreement (Section 17(3)). Publication of bid materials: tender protocol (Section 16(6)), pre-qualification guidelines, list of qualified applicants (Section 66(2)(g)), and the winning bidder / bid assessment report (Section 16(13)). Requiring an LEITI representative to be part of the bid evaluation panel (Sec 16(8)). Publication of all petroleum agreements (including annexes and amendments) within 10 days from effective date (Section 18(6)). 18 Requiring petroleum agreements to be consistent with the petroleum law while also requiring Legislative approval of petroleum agreements, but specifying that such approval does not give the contract the force of law (Section 18(4)) It is unclear if this is referring to the Minister or a Deputy Minister responsible for petroleum activities. 18 Though note that this is contrary to Section 66(2) which provides for 20 days. 12

13 Public hearings and consultations on Environmental and Social Impact Assessments (ESIAs) and Environmental and Social Management Plans (ESMPs), publication of ESIAs and ESMPs (including amendments); requiring external environmental audits (Section 57). Notwithstanding the important pro-transparency and accountability steps mentioned above, the draft legislation s treatment of contracting issues could be improved in the following ways: a. Beneficial ownership disclosure. The draft legislation s treatment of contracting issues could be improved by clarifying that the ownership of the companies involved in Liberia s petroleum sector will be publicly disclosed. Disclosure of beneficial ownership information is an important anti-corruption tool reflected as international best practice per the new EITI Standard of 2013 (Section 3(11)) 20. The Petroleum Policy supports this approach and states that full disclosure shall be made of all persons having beneficial interests in licenses or production sharing contracts (Section 5). The draft Petroleum Act provides for the collection of beneficial ownership information (Sections 11(2) and 15(2)) and the updating of this information in certain cases (Section 15.6). The draft Act also requires (Section 15.8) all pre-qualification information to be publicly available. We assume this means that beneficial ownership would be publicly available and we commend the legislation s important steps in this regard. The legislation would be improved by clarifying that beneficial ownership information would be disclosed as part of the registry referenced in Section b. Pre-qualification criteria. The Petroleum Act sets out sensible criteria for pre-qualification including the company s petroleum experience and its record on health, safety and environmental matters (Section 15(3)). The legislation also specifies that pre-qualification guidelines will specify the requirements and supporting documentation for economic and financial qualification (Section 15(2)). It is therefore unclear why the legislation also contains a specific proviso in Section 15(3) that states no applicant should be excluded from the prequalification process on account of its size. The application of this language could be problematic. As the legislation acknowledges, the economic and financial characteristics of a company are an important element in judging its ability to deliver on commitments and hence an appropriate factor in the pre-qualification process. This financial capacity of a company is often related to size and while size should not be a basis for automatic qualification, it may in many cases be an important element to consider. 19 The intent of the drafters here seems to be to preserve the legislative check while trying to avoid situations where future contracts containing provisions contrary to the law would supersede the law due to their ratification by the Parliament. The importance of this provision is that it should constrain the government in its negotiation of agreements and push all parties to seek consistency of the contract with the law. Too often, both in Liberia and elsewhere, companies rely on the ratification of a contract by the legislature to legally justify contradictions between the contract and the law and to argue that the contract supersedes the law. We note that the most recent version of the draft Petroleum Act that we have seen includes a note that this Section 18(4) can be deleted as it is repetitive. We would note that the provision is not repetitive and that it is in fact important to maintain per the analysis in this paragraph. 20 We understand that Liberia (through LEITI) is currently considering participating as a pilot country for the implementation of the beneficial ownership provision of the new EITI Standards. We welcome this leadership on the beneficial ownership front and encourage Liberia to incorporate disclosure of beneficial ownership in this revision of the petroleum legal framework. 13

14 c. Creditworthy guarantees. The Petroleum Act provides (e.g. Sections 22(1) and 34(2)) that companies need to provide security in the form of bank guarantees or otherwise. It is also worth specifying that these guarantees should be from creditworthy entities (e.g. banks with certain asset value or entities having a certain credit grade). d. Liability for pollution damage. The draft Petroleum Act provides (Section 61(1)) for contractor liability for pollution damage without regard to fault. A subsequent section (Section 61(4)), however, provides that the liability may be reduced in cases of force majeure. The provision does not go into detail on how such a reduction in liability would be calculated. While we are not environmental law experts, we would encourage drafters to ensure that this provision is in line with existing Liberian environmental law (e.g. Environment Protection and Management Act of 2002) and international best practice, particularly given the requirement for companies to comply with such laws (Section 55(1)). We also note that the language of Section 61(4) regarding reduction of liability is not included in the parallel provision of Section 62. e. Suspension of termination during arbitration. The draft Petroleum Act provides (Section 67(1)) that Liberia s termination of a petroleum right in case of material default by a company is suspended during any arbitration with respect to the material default / termination. This could create a situation where a clear termination right becomes hostage to the initiation of a lengthy arbitration process. Liberia s termination would in any event be subject to review during arbitration and unlawful termination would result in liability, but having the ability to terminate and then arbitrate may allow Liberia to move forward more quickly and decisively in certain cases. Accordingly, we would recommend that drafters consider at least building in some exceptions to the suspension rule, perhaps in cases of material default resulting from gross negligence, repeated breach or failure to pay amounts due. C. Implementation challenges / Transition issues The draft Petroleum Act sets out an ambitious program for institutional reform that will require the empowerment of significant new institutions. Its ultimate success will depend on addressing practical challenges in implementation and dealing with issues of transition to the new regime. The draft Petroleum Act sets out a 12-month transitional period for the transition of the regulatory role to the Petroleum Directorate. This transition is to be on the basis of a transfer plan to be agreed by a transfer committee appointed by the Director-General of the Petroleum Director and the President / CEO of NOCAL. The fact that a transitional period and process is envisioned is generally commendable. The legislation could however be clearer on certain elements in the transition process, namely: Clear allocation of responsibilities during transitional phase. The legislation should clearly specify which entity is responsible for various functions until the completion of the transfer. The legislation gives the impression in certain provisions (Sections 79(3) and 80(1) of the Petroleum Act and Section 15 of the NOCAL Act) that regulatory functions remain with NOCAL until completion, but other sections are less clear (Sections 7, 8, 9 and 10). The law to should be clear in this respect given the possibility that very relevant actions (including bid rounds, negotiations, granting petroleum rights, etc.) could be taken by NOCAL during a transitional phase. There is 14

15 also always the risk that the transition is not completed within the designated timeframe, and the law should therefore be clear on which entity exercises the relevant functions in the interim. Oversight over NOCAL during transitional phase. Insofar as NOCAL maintains its current role during the transitional period, it is important that particularly strong oversight be established during this period. Transitional phases can be particularly sensitive given the incentives that are created when an entity knows that it only has control over certain processes for a limited period of time. While we understand there is great interest in moving forward with the contracting / licensing process, it may even be preferable to postpone this until the transfer is completed and the allocation of responsibility is clear. At a minimum, the legislation should make clear that the new rules and accountability mechanisms (e.g. with respect to the contracting / licensing process, associated transparency, etc.) apply during the transitional phase and the government should consider some sort of special oversight during this transitional period. Oversight over Director General. The Petroleum Law places a great amount of responsibility in the Director General position, particularly for implementation of the transition. In this context oversight of that position will be important and will likely need to largely come from the President or, as noted above, from another Minister. Practical elements of transition process. o Budget. It is unclear in the legislation how the transfer process is to be funded, including the costs of the transfer committee, and whether this has been budgeted for. o Employees. Identifying which NOCAL employees transfer to the Petroleum Directorate and the terms of such transfer will be an important element of the transfer process. We note the reference in Section 8(9) to having terms of employment sufficient to attract qualified professionals from the petroleum industry and the ability to exceed terms otherwise permitted under civil service laws. This is indeed important but needs to be subject to appropriate budgetary control and transparency, as per our recommendation above that detailed budgets of the Petroleum Directorate be made public. o Cooperation. Achieving the transition and even the agreement of a transfer plan (within 180 days of passage of the law), will require a cooperative and efficient effort. The interaction between the Director General of the Petroleum Directorate and the NOCAL CEO/President, as well as the composition of the transfer committee will be critical in this respect. Conclusion The draft petroleum legislation currently being considered in Liberia can play an important role in improving governance of the country s oil sector. The government should ensure that appropriate consultation is conducted with the Liberian public and other interested stakeholders regarding this important legislation. As an element of this consultation and in order to help fulfill the legislation s promise, the PAG has set out here recommendations on a number of important improvements to the legislation. As Liberia moves to finalize the legislation and then proceed with its implementation, the PAG looks forward to further opportunities to comment on and assist with issues of importance to Liberia s oil sector governance. 15