3. Award of Contracts and Licenses

According to the Natural Resource Governance Institute, licenses and contracts are legal documents that govern the rights and responsibilities of the government and extractive companies during resource extraction.

Licenses are typically standardized documents with generally-applicable terms across extractive projects, as established in law or regulation. In contrast, contracts are negotiated agreements that only apply to a specific location and the actors that are party to it, and may vary substantially across projects. Because a country’s ability to fully benefit from resource extraction depends upon a fair process—transparency in allocating rights and negotiating agreements is a key part of the Extractive Industries Transparency Initiative.

Figure: The Process for Allocating Extraction Rights

Figure sources: Summary of steps in EITI’s License Allocation and Contract Transparency  guidance notes, the World Bank’s WEI Sourcebook, and the Natural Resource Governance Institute’s primer on Granting Rights to Natural Resources.

Key considerations for oil and gas

According to the EI Source Book, there are two primary methods for awarding rights to oil and gas: the non-competitive “open door” process and competitive awards.

Generally, the award method should be consistent with government policies, encourage participation, favor a merit-based selection of applicants, deter collusion, and provide some protection against pressure to distort the award process. It should also reflect the available technical, legal, and administrative capacity of the government authority responsible for awarding contracts and licenses.

Additionally, a fair and transparent award system may minimize the risks of corruption.

Table: Award Systems for Oil and Gas

Open Door Awards  Competitive Awards  
Rights are conveyed noncompetitively on a first-come, first-served basis.Typically used when geologic information on the potential resource is limited or extraction is particularly risky.Technical, professional, legal, and commercial capacity is necessary for the government to properly assess proposals.A schedule-based work program requirement for license renewal helps limit speculation.Due to limited information and greater discretionary power, the risk of judgment errors and corruption is greater.Transparency can be improved by defining clear award criteria in advance, publicizing negotiation results, and the presence of external oversight bodies.Rights are conveyed on the basis of set criteria established in administrative procedures or the highest bid according to bid criteria.Typically used when information on the potential resource is available and investor interest is high.For fairness, criteria and their relative weight should be publicly available and shared with investors.Prequalifying potential bidders' financial and technical capacity and a schedule-based work program may help reduce speculation.Bidding parameters may include bonus payments, work schedule or activities, royalties, profit-sharing, or infrastructure investment.Technical, professional, legal and other capacity is necessary for assessing bids, but competition improves the likelihood of receiving a fair value.Provides information to the government about how valuable bidders believe the resource to be.

Table sources: Summary of steps in the World Bank’s EI Source Book, and the Natural Resource Governance Institute’s primer on Granting Rights to Natural Resources.

Key considerations for mining

According to the EI Source Book, there are two primary methods for awarding rights to mining deposits: the non-competitive “free entry” process and competitive awards.

Similar to oil and gas, the award method should be consistent with government policies, encourage participation, favor a merit-based selection of applicants, deter collusion, and provide some protection against pressures to distort the award process. It should also be fair, transparent, and reflect the available technical, legal, and administrative capacity of the responsible government authority.

Unlike oil and gas, the upfront costs, risks, and value of minerals varies more across projects.

Table: Award Systems for Mining

Non-competitive Awards  Competitive Awards  
Rights are conveyed on a first-come, first-served basis provided applicants meet administrative requirements.Typically used when geologic information on the potential resource is limited, the area is unexplored, or the government wants to incentivize mineral development.Relatively simple to administer and could be performed online.A schedule-based work program or minimum expenditure requirement for renewal helps limit speculation.Due to limited information and greater discretionary power, the risk of judgment errors and corruption is greater.Transparency can be improved by defining clear award criteria in advance, publicizing results, and the presence of external oversight bodies.  Rights are conveyed based on administrative discretion using criteria established in administrative procedures or the highest bid.Typically used when information on the potential resource is available and investor interest is high. Can be used in post-conflict situations where deposits and mines are no longer held by their prior owner. Prequalifying potential bidders' financial and technical capacity and a schedule-based work program may help reduce speculation.If the government authority has broad discretionary power without transparency in awards, it may limit investor interest.Bid evaluation considerations may include bonus payments (rare), work schedule or activities, bidders' interest in other areas for mineral development, and bidders' relative financial and technical capacity.Competition improves the likelihood of receiving fair market value.
Table sources: Summary of steps in the  World Bank’s EI Source Book  and the Natural Resource Governance Institute’s primer on Granting Rights to Natural Resources.

Key guidance and further information

The following resources provide additional information on the process for awarding contracts and licenses for resource extraction.

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 License Allocations (Guidance note 4 –Requirement 2.2) and Contract Transparency (Guidance note 7 - Requirement 2.4) guidance notes provide additional information on EITI standards related to the award 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 Granting Rights to Natural Resources. NRGI also published Twelve Red Flags: Corruption Risks in the Award of Extractive Sector Licenses and Contracts.
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 Award of Contracts and Licenses provides additional information on the award process for oil and gas as well as mining.
OpenOil: OpenOil’s mission is to create an open data framework for managing natural resources at a supranational level. It maintains an open-source data repository of over 2 million corporate filings related to the oil, gas, and mining industries. It also includes guidance documents such as Oil Contracts: How to Read and Understand Them
ResourceContracts.org: ResourceContracts.org is supported in part by NRGI and the World Bank. ResourceContracts.org is a repository of publicly available investment contracts for oil, gas, and mining projects. It features plain language summaries of key provisions and provides tools for searching and comparing contracts. It also includes links to several guidance documents for understanding oil, gas, and mining contracts

Key Audit Considerations

From an SAI perspective, it is important to understand how the government determines who has the right to extract resources, how the economic benefits of extraction are shared between the government and companies, how the potential environmental and social impacts from extraction are assessed, and whether the award process is open, fair, and transparent, among others. Below are some of the key questions that SAIs could consider when reviewing the award process.

Figure: Award of Contracts and Licenses: 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 granting exploration rights