- Introduction to Extractive Industries
- 7 Steps of the EI Value Chain, Explained
- Legal framework
- Key considerations for oil and gas
- Key considerations for mining
- Key guidance and further information
- Key audit considerations
- Examples of audit reports
- Resource exploration
- Award of contracts and licenses
- Monitoring of operations
- Collection of revenue
- Revenue management
- Implementing sustainable policies
- Legal framework
Legal instruments such as international treaties, national laws, regulations, and contracts provide a framework for EI. Various institutions implement the framework, and understanding the roles and responsibilities of the government and nongovernmental actors involved in EI, may help SAIs assess the government’s institutional capacity to oversee the EI sector.
Figure: Examples of Legal Instruments
Key Considerations for Oil and Gas
According to the EI Source Book, there are three distinct approaches to the design of oil and gas legislation: (1) a comprehensive, highly detailed approach; (2) individual legal contracts or agreements; and (3) a hybrid approach, as shown below.
Table: Legal Framework: Key Considerations for Oil and Gas
|Legislative Approach||Characteristics||Examples of Advantages||Examples of Disadvantages|
|Comprehensive, highly detailed approach||Covers all or most provisions for oil and gas exploration and production.May mandate standard content for licenses and contracts.Laws and regulations include detailed guidelines that interpret key issues.||Promotes equal treatment.Focuses negotiations on a few key variables.Promotes full knowledge and transparency for licensing. Deters corruption.Mitigates disadvantage of asymmetric information and capacity between government and companies.Avoids government capacity being tied up in negotiations for individual projects.||Relatively inflexible and adjustments take more time.|
|Individually legislated contracts or agreements||Terms are covered by negotiated agreements between parties.Helpful in situations where existing law is too broad.Content may be standardized across agreements.||Negotiated agreements have the force of law and can reduce the chances of unilateral action by the government||May complicate EI sector management by creating a patchwork of legal regimes. May facilitate corruption.|
|Hybrid approach||Legislation covers key concepts at a high-level.Governmental authorities may define details in regulations or contracts.||Minimizes the need for amending underlying laws.Ensures areas requiring minimum standards are pre-determined.May be more responsive to emerging issues, because adjustments to regulations or model contracts can be made relatively quickly.||Negotiating discretion requires government capacity.|
Differences in development and transport costs as well as markets may necessitate specific legal provisions to encourage gas development. Examples of gas-specific provisions include:
- Allow for a longer appraisal and production period for gas and prohibit gas flaring.
- Define development incentives, pricing principles, and unconventional gas provisions.
- State priorities for domestic versus export uses and for gas re-injection into oil wells.
Key Considerations for Mining
The legal framework for mining often includes provisions covering technical, administrative, risk mitigation, and benefit distribution, according to the EI Source Book.
Figure: Legal Framework: Key Considerations for Mining
Attributes that investors look for in mining governance are:
- Ease of access to areas for exploration;
- Clear and transparent processes, such as an open registry of mining rights;
- Tenure security that guarantees the right to develop discovered resources;
- Ability to transfer rights at no cost;
- Simple financial maintenance requirements and minimal royalty obligations;
- Ability to operate and market their output commercially; and
- Complementary provisions in tax legislation that provide the ability to dispose of foreign exchange earnings on competitive terms under contracts.
The government can include specific provisions in contracts for community development and environmental considerations—both preventative and after mining is complete—into the mining law or as negotiated conditions of mining operations.
Key guidance and further information
The following resources provide additional information on the legal, policy, and regulatory framework governing extractive industries.
|EITI: The Extractive Industries Transparency Initiative is a global standard to promote the open and accountable management of oil, gas and mineral resources. EITI’s Legal Framework and Fiscal Regime (Requirement 2.1) provides additional information on EITI standards related to the licensing process.|
|NRGI: The Natural Resource Governance Institute helps people to realize the benefits of their countries’ endowments of oil, gas, and minerals and has a primer on the Legal Framework: Navigating the Web of Laws and Contracts Governing Extractive Industries. NRGI also provides an online tool with additional resources for members of parliament and their staff in crafting and amending EI legislation.|
|EI Source Book: The EI Source Book is intended as a guide to good-fit practice in the management of oil, gas, and mining sectors across the EI value chain. The Policy, Legal, and Contractual Framework provides additional information on the governance framework for extractive industries, including challenges, policy priorities, and differences across EI sectors. Additionally, the EI Source Book has a section specific to EI governance in Central and South America.|
|The African Mining Legislation Atlas (AMLA) is an online platform about Africa’s mining sector (mining codes, regulations, and related legislation) with interactive features to promote transparency, accessibility, and comparison of mining laws in Africa, among other objectives. AMLA is currently implemented in partnership with African Legal Support Facility of the African Development Bank and the African Union Commission, in coordination with several African universities.|
|The Institute for Essential Services Reform (IESR) is a research and advocacy institution on energy and environment policy in Indonesia. IESR developed a regional framework for extractive industry governance in SE Asia.|
Key audit considerations
According to NRGI, a well-designed legal architecture should provide rules for how government institutions are structured, how exploration and extraction rights are allocated, the fiscal governance for sharing economic benefits, and management of impacts, among other areas. When evaluating the legal framework for EI, key audit considerations include:
Figure: Legal Framework: Key Audit Considerations