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Oil and Uncertainty: A Chatham House Discussion on Challenges for "New Producer" Nations

Today the United Kingdom’s Chatham House hosted a discussion on so-called “new producers”, countries with significant petroleum exploration but little or no operational experience. Led by the institute’s Energy, Environment and Resources department and sponsored by the Revenue Watch Institute – Natural Resource Charter (RWI-NRC) and the Commonwealth Secretariat, the event drew government officials, companies, international organizations and a smattering of academics to stare down challenges faced by new producers in Africa and beyond.

After the first day's discussion, a story is emerging—although one that must be told under the constraints of the Chatham House Rule. For many countries, this story is one of significant uncertainty over the size of reserves and the lack of experience in both government and society at large to manage the extractive industry. The plot thickens when one adds the need to communicate with the public and make lasting contractual agreements with companies—a tough pill for new producers to swallow.

Perhaps the solution lies in managing expectations, which can run dangerously wild if not checked by leaders. Even before an oil field opens, local communities may demand to know how petroleum extraction will impact their lives, while the public may want to know how much it will enrich them. Both answers depend in part on the value of the oil itself, which in turn depends on uncertain estimates and volatile market pricing. To counter this uncertainty, governments must communicate an understanding of the issues, but they need strong networks in society for a constructive dialogue to occur. An inexperienced producer country may lack civil society, media or even a president who can lead this conversation.

Second, governments need to write contracts with companies to start the process of exploration and production. Because of geological uncertainty, some governments consider attracting investors with accommodating contractual terms, but—as participants pointed out today—the risk for investors often dramatically decreases after the first discoveries are made, seemingly spoiling the deal for countries. What should governments do—keep their promises or renegotiate in light of reduced risks? One suggestion from the Chatham House discussion was to implement renegotiation clauses and responsive rate-of-return fiscal instruments—advanced mechanisms that might mitigate the need to renegotiate or at least ease the process. But without experience at the outset, governments may struggle to employ these tools.

It’s an unenviable concoction for new producers, but the story is far from over. Tomorrow as the discussion continues, RWI-NRC will share more ways to counter uncertainty, using the Natural Resource Charter as a blueprint.

David Manley is an economic analyst for RWI-NRC. Patrick Heller leads the organization’s legal and economic team.