29 January 2013

Liberia: Management of Liberia's Future Oil Revenue

Photo: Africa Undisguised
An oil rig.


The former President and Chief Executive Officer (CEO of the National Oil Company of Liberia (NOCAL) has crafted a document which accentuates the need to set up a prosper management mechanism for future oil revenue in Liberia.

Christopher Neyor, an esteemed personality in the energy sector, who once served as Energy Advisor to President Ellen Johnson-Sirleaf, presents what appears to be his memoir on the way forward regarding the oil sector and how his contribution would further enlighten Liberians on the ongoing oil sector debate.

There has been much debate about how Liberia manages its future oil and gas revenue. The debate has become more profound with confirmation of the "we have oil" bragging status in mid February 2012 on the find by African Petroleum. While appraisal is pending to determine the commercial quantity of this discovery, this find and the attractive geology of our basin shown through seismic data leave us confident that we will become an oil producing nation within this decade.

It is therefore prudent and patriotic that we not only continue to debate how we utilize future oil revenue but that all national stakeholders, those in government as well as civic society begin to structure how we would like to see oil and gas money managed and spent. We began this process during my brief tenure at NOCAL with support from the Norwegian and US governments.

NOCAL as currently structured puts too much power in the hands of the state oil company to manage oil revenue. The law says NOCAL receives all oil intakes on behalf of the people and can only transfer "excess" money after its budget to the Ministry of Finance. One could dare say fair enough, except that the same law states further that the board of directors of NOCAL can in essence forms all kinds of entities as part of its budget. In other words, NOCAL could form a bank, get into the real estate business and engage in other types of enterprises interpreting the law.

If NOCAL were to remain as structured and oil revenue begun to flow today, no one can be sure how the money would be spent. Moreover, NOCAL wears two other hats; besides being the revenue manager, it is an oil company as well as regulator of the oil and gas sector. These were the source of my statement made on my takeover at NOCAL in November 2010 (and repeated on several occasions) that my job at NOCAL was to diminish the power of the oil company (as well as mine as CEO) but in doing so, our country and people would be the beneficiary.

The Liberia National Energy Policy, (NEP), which I spearheaded in collaboration with Dr. Eugene Shannon and Albert Chie (then Minister and Assistant Minister of Energy respectively at the Ministry of Lands, Mines and Energy) and endorsed by the Cabinet in 2009 clearly pointed out the conflicts and non-transparency of the NOCAL Act. But because of the scope of work required, the NEP relegated the task of cleaning up the NOCAL Act to a future stakeholders action. Three key areas for reform were recommended in the NEP: 1) in-depth oil and gas policy development; 2) review and rewriting of the NOCAL Act (including Oil Revenue Management Act); and 3) integration of the upstream and downstream petroleum sector.

Nature of Oil Revenue Management

Oil Revenue Management solution does not mean changing the channel of oil payments from NOCAL to the Ministry of Finance. For some, the extent of oil revenue reform is just that, all revenues from oil production are deposited into the Ministry of Finance consolidated account -case closed. But true oil revenue management goes beyond that simplicity; it has to encompass utilization of the revenues and the framework of that utilization must be transparent and involve the prior and informed participation of all stakeholders.

Because of the potential huge amount of money involved from multiple successful oil or gas production fields, possibly in billions of dollars annually, our national concern must not only be where the money is deposited but more so how it is used to meet the development needs of our country and people. This is and should be the objective of a true oil revenue management framework, developed with the input of all.

Why an oil revenue management framework? Because history teaches us that when you assign spending of huge sum of monies to politicians through the normal government budget formulation process, it is a recipe for misuse of the funds. Immediate results will be seen in bloating of government payroll with over-employment, misguided public works projects (as was the case even in the United States of the "bridge to nowhere" in the state of Alaska) and massive corruption.

Comparative Analysis

The evolution of very good policy, law and regulation development in any society is not only transparent and requires active and informed participation of stakeholders but takes into account three vital criteria: 1) local reality; 2) regional experience; and 3) international best practice. No two countries have identical petroleum regime but because other countries have treaded where we are going, we can learn from them.

Norway is known worldwide as the best manager of its natural resources especially oil and gas for the optimum benefits of its people and we can learn from them. As a matter of fact, Norway as one of the world's best citizen countries, shares it efficient natural resource management experience with other countries through its Oil for Development program, of which Liberia and NOCAL is a beneficiary. Let me also note here that Norway's efficiency of natural resource management extends beyond its enviable revenue management regime to the vital protection of the environment.

The Gulf States of the Middle East are known for utilization of their huge oil income for vast infrastructure development and I believe we too can tap into how they do it. From our regional neighbors in the lower and upper Gulf of Guinea (except for Ghana that is new to the field), we can definitely learn how not to manage oil revenue.

The Way Forward

From a review of oil revenue management structure of Norway, sub-Sahara Africa and other oil producing nations, we in Liberia can carve a path that addresses our national priority need for infrastructure and indigenous entrepreneur development, what I refer to as critical investments.

What is being proposed is an enacted act by the National Legislature (or perhaps through a national referendum to further ensure no future government changes it over night for short term gains) setting up of two oil revenue accounts at the Central Bank of Liberia, one for ring-fenced critical investments-roads, bridges, power systems, water supply, schools, hospitals, entrepreneur development; and the other, a sovereign account for future generation that can double as a stabilization fund for oil price volatility. These two accounts will be managed by a 15-person National Oil Revenue Management Commission (NOREMCO), one from each county assisted by a Secretariat staffed by the best technical experts.

The process for selection of the 15 NOREMCO commissioners and guideline for designation of its leadership can be determined by stakeholders.

Working of NOREMCO

For the first few years of oil production, revenue is usually smaller (though significant depending on size of oil field) for two reasons. First, the production normally starts at lower volume of output and gradually increases. Secondly, most of the initial revenues go to what is called "cost recovery" or paying back all of the investment the PSC (Petroleum Sharing Contract) contractor made in exploration and development activities. So in the first few years of production while cost is being recovered, a percent of production goes to the recovery and the remaining percentage is "shared" between the government and the contractor according to percentages in the PSC.

Because the government portion of revenue is relatively smaller in the first few years and the development challenges vast, it is proposed in the Oil Revenue Management Act that for the first 5 years of oil revenue, 90% of the money be ring-fenced for above listed national investment in critical infrastructure and entrepreneur development and 10% goes to the Sovereign Fund.

For the next 5 years (years 6 to 10) when revenue begins to rise from both escalation of production from first oil field and coming into production of other discoveries, 80% of revenue goes to investments and 20% to the Sovereign and Stabilization Fund (SSF). For the next 5 years beyond this (years 11 to 15), 70% is set aside for infrastructure and 30% for the SSF. For years 16 to 20, it is 60-40%; years 21 to 25, it would be 50-50 investment and sovereign fund.

If the proposed NOREMCO manages this process well with discipline and patriotism, within 25 years of oil production, Liberia would have become a very modern country, the Switzerland, the China or the Dubai of West Africa. The coastal highway from Cape Mount to Cape Palmas would have been completed along with north-south connecting highways and interconnecting feeder roads; The St Paul and the Cavalla Rivers hydropower development would have electricity flowing throughout the entire country; Primary and secondary schools around the country are modern, well equipped and staffed; community colleges would be flourishing in each county; hospitals and clinics are easily accessible and affordable to all Liberians; RIA would be a world class airport and county airports around the country are modernized and air transport through Liberia is efficient with new and safe aircrafts and crew.

Moreover, Liberians would have been fully empowered to run their own economy through the Entrepreneur Development Program of NOREMCO that made possible high level business training and access to capital. Liberia would be prosperous and at peace and its citizens are happy and fired up to make their country and the world a better place for all.

This is the vision many of us have of the future of our country. It is an achievable dream. It begins with a leadership that is patriotic and convicted at its core to run a country that is transparent and provides equal opportunity to all Liberians. This dream of a modern Liberian society from oil wealth cannot be achieved with leaders whose public pronouncements is a world apart from their private utterances and action, who have agendas diametrically opposed to the public interest.

As Liberians, this is the challenge we face but also the opportunity we have as we design public policy, laws and regulations to govern the emerging upstream oil and gas sector in our country. The job is not NOCAL's alone; all stakeholders, the government and civic society must work together to ensure that this emerging oil wealth does not bring greed, corruption and conflict but that it becomes a blessing to be enjoyed by all Liberians, those living now as well as future generations.

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