New Producer Contract Terms and Uncertainty: Lessons From the Recent Past
Key messages
- The discoveries of major deposits of oil and gas have historically generated significant hope for economic development in countries not previously known as petroleum- rich—sometimes called “new producers.” One source of optimism has been the theory that the discovery would reduce investors’ perception of geological risk and enable governments of producing countries to negotiate more favorable future contracts.
- A review of publicly available contracts across eight new producer countries shows that evidence in support of this theory in the recent past is mixed. Three of the eight secured more favorable terms in the contracts they signed after a discovery than in contracts they signed before the discovery. The other five countries studied demonstrated no such pattern.
- In some cases, governments did not take advantage of newfound post-discovery leverage. In others, such leverage did not materialize.
- The climate crisis and the global energy transition pose a further challenge to assumptions about government leverage in new producer countries, with the prospects of lower investor interest and lower value for production. Long-term global investment in the sector must decline dramatically to meet global climate goals, and many investors have begun to shift away from new projects. Governments in new producer countries should undertake sober analysis of market scenarios when deciding whether and how to pursue new projects, and should internally align their petroleum, finance, energy and climate objectives.
The petroleum industry is volatile, and governments in “new producer” countries have operated at a significant information disadvantage when negotiating with international oil companies. This challenge is growing today; new producer countries face intensifying questions around whether to offer fiscal incentives to maintain investment in the face of 1) the pandemic-induced volatility in oil prices and 2) long-term questions about the future of the industry in the face of the climate crisis and the global energy transition.
This confluence of short-term and long-term uncertainty is prompting a reexamination of the narrative that once took hold in many new producer countries. The traditional story was one of linear progression from being non-producers to small levels of production to ultimately having oil and gas become a major economic contributor over the long term.
This notion of progression was associated with a commonly held theory: After a country’s first major discovery, the geological risk that wells will be dry was expected to decrease. Countries could therefore shift from a position of having to grant tax breaks (and other concessions) to international investors, to taking a tougher stance in laws and negotiations for new projects going forward.
In this paper we examine whether this theory has been borne out in practice and make recommendations to support new producers in their navigation of the uncertainty associated with the energy transition.
Among the eight “new producer” countries, for which we analyzed a total of 26 contracts signed before and 25 contracts signed after discovery events (all occurring between 2001 and 2014), the evidence is mixed.
