- Introduction to Extractive Industries
- 7 Steps of the EI Value Chain, Explained
- Legal framework
- Resource exploration
- Award of contracts and licenses
- Monitoring of operations
- Key considerations for oil and gas
- Key considerations for mining
- Key guidance and further information
- Key audit reports
- Examples of audit reports
- Collection of revenue
- Revenue management
- Implementing sustainable policies
According to AFROSAI-E, effective monitoring practices involve clearly-defined roles and responsibilities of each party in the regulatory framework, particularly as it relates to providing or reviewing information related to production volumes, environmental impacts, and social impacts.
Monitoring of production volumes and related activities may take different forms, but usually entails regular submission of documentation, such as reports and supporting information by companies and their contractors, as well as physical inspections.
Governments may also monitor social and environmental impacts of projects. When monitoring these impacts, separation of roles and duties amongst government organizations is important. For more information on these impacts, see EI Value Chain step 7: Implementing Sustainable Policies
Figure: Aspects of Operations Monitoring
Figure: Monitoring Natural Gas Production
According to AFROSAI-E, when auditing the monitoring process, auditors should obtain documentation of monitoring activities. Auditors should not assume that oversight agencies reviewed documents or cross-checked reports to supporting documents. Auditors should identify how reviews were documented and look for notes by the reviewer about queries and corrections which may have been made.
Key considerations for oil and gas
Systems of accountability and verification are essential to monitor extraction companies’ performance, in terms of production volumes as well as monitoring environmental and social impacts.
Monitoring production volumes usually entails reviewing and cross-checking documentation regularly, such as project reports and supporting information, as well as physical inspections of extraction operations and production measuring equipment accuracy.
Although some uncertainty is inherent in any measurement, it is important to avoid bias—systematic error that consistently over-or under-measures volumes. According to the U.S. Government Accountability Office, key controls against bias include using the appropriate meter and processing equipment for the resource; observing meter calibrations; observing sales; and verifying volume calculations accuracy.
Environmental and Social Impacts
According the EI Source Book the two common monitoring tools are environmental and social impact assessments (ESIAs) and environmental and social management plans (ESMPs). For ESIAs, companies analyze short- and long-term impacts of the project, and identify potential mitigation measures and monitoring methods. ESMPs are based on the ESIA, but provide more detail on how the company will manage impacts, such as its operating policies, procedures, and practices for compliance and reducing negative impacts. Governments may use these tools to monitor company performance.
Key considerations for mining
Similar to oil and gas, systems of accountability and verification—such as accounting procedures and regular independent audits—are essential to monitor mining companies’ performance, in terms of production volumes as well as minimizing environmental and social impacts, according to the EI Source Book.
Monitoring production volumes or the value of material extracted usually entails auditing producer information regulatory, such as project reports and supporting data, as well as physical inspections of extraction operations and production measuring equipment to ensure its accuracy.
However, the process for measuring production volume or material value can vary greatly depending the mineral being produced, the mineral processing methods being employed, and the type of royalty being assessed. For example, some minerals such as stone, sand, and gravel—where processing is usually limited to washing and separation—are generally measured in volume or weight directly at the mine site.
In contrast, metal minerals such as copper may be sold as ore concentrate or refined for use in various applications. As a result, royalties for copper may be assessed either on the volume of ore extracted or the value of product.
Figure: The Various Production Phases in Mining
Measuring volumes or determining the value of minerals extracted can be further complicated by royalty systems that allow the mine operator to deduct costs associated with, refining, or smelting. Because of these complexities, a mine producing multiple minerals from the same ore body that are subject to different types of royalties, may need to use different methods for recording production volumes or determining market value at different stages in the mineral production process.
Environmental and Social Impacts
According to the EI Source Book, when compared with oil, mining operations generally have a larger footprint and thus have greater potential to cause adverse social and environmental impacts. A well designed system of environmental and social impact mitigation and monitoring involves early consultation and participatory monitoring practices at the local community level.
Similar to oil and gas, two common monitoring tools are environmental and social impact assessments (ESIAs) and environmental and social management plans (ESMPs). For ESIAs, companies analyze short- and long-term impacts through all stages of the project, and identify potential mitigation measures and monitoring methods. ESMPs are based on the ESIA, but provide more detail on how the company will manage impacts and comply with the conditions required as part of the project approval process.
See EI Value Chain Step 7: Implementing Sustainable Policies: Key Considerations for Mining for more information on mitigating environmental and social impacts.
Key guidance and further information
The following resources provide additional information on monitoring of operations 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 has guidance specific to companies’ social expenditures (Requirement 6.1), quasi-fiscal expenditures (Requirement 6.2) and economic contribution (Requirement 6.3).|
|IFC: The International Finance Corporation-- member of the World Bank Group— has developed performance standards which define its clients’ responsibilities for managing their environmental and social risk. Topics include risk management, labor, resource efficiency, community, land resettlement, biodiversity, indigenous peoples, and cultural heritage.|
|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. Sustainable Development provides additional information specific to extractive industries, including challenges, reform priorities, environmental and social impacts.|
|World Bank: The World Bank has a paper titled “Extractive Industries Value Chain: A Comprehensive Integrated Approach to Developing Extractive Industries,” which addresses regulating and monitoring of operations in Link 2.|
|ISO: The International Organization for Standardization is an independent, non-governmental international organization with a membership of 164 national standards bodies. It has standards for managing sustainable development, environmental impacts, and anti-corruption practices.|
|WGEA: INTOSAI’s Working Group on Environmental Auditing (WGEA)developed guidance for auditing the environmental and other impacts of mining operations in 2010.|
Key audit considerations
According to AFROSAI-E, auditors provide oversight of government agencies and supervisory bodies, to ensure that the laws and agreements regulating the exploration, development and production of oil and gas are adhered to. Additionally, according to the Natural Resource Governance Institute, it is important for government agencies to monitor operations through the full project life cycle. Specifically, auditors should assess whether:
Figure: Monitoring of Operations: Key Audit Considerations