2. Resource Exploration

According to the EI Source Book and the Natural Resource Governance Institute, in most countries, the law or constitution establishes that the government owns subsurface resources. In turn, the government gives private companies or others the right to explore and potentially extract resources so the country can benefit from the capital generated.

Ideally, the government will consider factors, such as environmental impacts or the effects on local communities, when determining whether an area should be explored for resource. Once the government decides to open an area for resource exploration, the process followed may depend on the resource sought, the amount of geological information available, and the legal framework for EI.

For example, if geological information on the potential resource is limited or not necessarily promising, the government may decide to adopt an open-door, first-come, first-served licensing process--or engage in direct negotiations with a small number of companies.

However, when there is a substantial amount of geological information available and interest is high, a competitive auction--where companies submit bids to the government in a competitive process--is typically the best option to maximize the government’s benefit.

An effective and transparent exploration licensing process is the first step toward effective capture of economic benefits—and may minimize the risks of corruption. Additionally, maintaining data generated by companies’ exploration activities may help the government better understand and manage its resources, according to the EI Source Book.

The figures below summarize the various systems for awarding exploration rights and exploration methods for discovering resources.

Key considerations for oil and gas

As explained in the figure below, exploration rights for oil and gas are generally granted to a company through a contract with provisions specific to that company and the area of exploration. Additionally, these contracts typically also grant the right to develop any identified deposits. Oil and gas deposits are typically found using seismic surveys.

Figure: Exploration Rights Systems and Methods for Oil and Gas

Figure sources: Exploration rights content summarized from the EI Source Book and the Natural Resource Governance Institute, Primer on the Legal Framework for EI. Seismic survey content summarized from Australian Petroleum Production & Exploration Association.

Figure: Bouger Gravity Anomaly map of South India

Key considerations for mining

Unlike oil and gas, mining exploration rights are generally granted through licenses or permits. Additionally, exploration rights and the right to develop any mineral discoveries are granted under separate licenses. There are a variety of methods to identify minerals, depending on their location and physical properties, as shown in the figure below.

Figure: Exploration Rights Systems and Methods for Mining

Figure sources: Exploration rights content summarized from the World Bank’s EI Source Book and the Natural Resource Governance Institute’s Primer on the Legal Framework for EI. Exploration methods content summarized from the New South Wales Minerals Industry Exploration Handbook, 2013 Edition.  

Key Guidance and Further Information

The following resources provide additional information on the process for resource exploration.

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 3.1) provides additional information on EITI standards related to exploration.
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 resource exploration
AFROSAI-E: The African Organization of Supreme Audit Institutions’ Audit Considerations for Extractive Industries report includes information on how to design audits during the resource exploration phase of development.
API: The American Petroleum Institute has an explanation of how seismic surveys are used to explore for offshore oil and gas resources.
APPEA: The Australian Petroleum Production & Exploration Association has some general information about how seismic surveys are used to explore for both onshore and offshore oil and gas resources.

Key audit considerations

From an SAI perspective, it is important to understand how the government determines who has the right to explore for resources, how potential environmental and social impacts from exploration are assessed and addressed, to what extent the government collects, stores, and uses the information generated by exploration activities, and whether the provision of exploration rights is open, fair, and transparent, among others. Below are some of the key questions that SAIs could consider when reviewing the exploration process in their country.

Figure: Resource Exploration: Key Audit Considerations

Figure sources: Summary of issues raised in the World Bank’s EI Source Book, AFROSAI-E’s Audit Considerations for Extractive Industries, and the Natural Resource Governance Institute’s primer on political and economic challenges of natural resource wealth.