«University of Oslo Faculty of Law Candidate number: 8010 Submission deadline: 1st December 2012 Supervisor: Ivar Alvik Word count: 17,993 06.09.2012 ...»
Should the Norwegian Model of Direct State
Participation in Petroleum Activities be used in
Resource Rich Developing Countries as part of the
Solution to the ‘Resource Curse’?
University of Oslo
Faculty of Law
Candidate number: 8010
Submission deadline: 1st December 2012
Supervisor: Ivar Alvik
Word count: 17,993
Table of Contents
CHAPTER 1 INTRODUCTION 1
1.1 Structure of the text 2
1.2 Legal sources 3
CHAPTER 2 BACKGROUND 4
2.1 The problem of the resource curse 4
2.2 Permanent Sovereignty over Natural Resources 5
2.3 The Natural Resource Charter 7
2.4 The Natural Resource Charter and direct state participation 8
CHAPTER 3 THE NORWEGIAN PETROLEUM SECTOR: DIRECT STATE
PARTICIPATION IN CONTEXT 10
3.1 Direct state participation in context: the Norwegian state’s objectives for the petroleum sector 10
3.2 Norwegian oil policy 11 3.2.1 Norwegian petroleum legislation 11
3.3 The licence system 12
3.4 State organised licence groups 13
3.5 State participation within the licence groups 13
3.6 The organisation of direct state participation in Norwegian petroleum law 14 3.6.1 Statoil: The national oil company 14 i 3.6.2 The responsible authorities 15 3.6.3 The Ministry of Petroleum and Energy and the Norwegian Petroleum Directorate 16
3.7 The contribution of direct state participation to Norwegian oil policy 17 3.7.1 State revenue 17 3.7.2 Government control 17 3.7.3 Know how 18 3.7.4 Norwegianisation 19 CHAPT
The discovery of petroleum resources represents a valuable opportunity to improve a country’s development. Sales of oil and gas can generate huge revenues and have the potential to raise living standards and improve economic growth. However, many countries fail to use the wealth that these resources represent. Living standards remain low and the nation is still poor in spite of their resource endowment. This is known as the ‘resource curse’. Research has repeatedly shown that resource wealth does not tend to create wealthy nations. On the contrary, there is often a decline in development1. This curse represents a missed opportunity to improve the country’s economic situation and social well-being.
The resource curse is not inevitable though. Norway used the discovery of petroleum to improve economic development and benefit the country as a whole. It was one of the poorest countries in Europe at the beginning of the 20th Century, but it is now one of the richest2. It is ranked as the world’s seventh largest oil exporter and the second largest gas exporter3. The petroleum sector represents a 26% share of state revenues and 21% of Norway’s total value creation4. Norway is often cited as one of the best examples of how natural resources can be managed for the benefit of the population5. It has succeeded in defying the resource curse.
This thesis will identify whether there are lessons that can be learnt from resource management in Norway and applied to help prevent the resource curse in developing countries. The core strategy in Norway was to channel the oil profits into an oil fund, but other methods were also important. The legal organisation of petroleum activities on the Norwegian continental shelf (NCS) played a fundamental role. Indeed, the extent to which any country succeeds in using its natural resources to improve development will depend on the application of an appropriate legal framework for exploiting them. It is the starting Auty (1993) p1 Duruigbo (2005) p9 Hansen and Rasen (2012) Norvik et al (2010) Figure 1.2, p14 Ryggvik (2010) p5 point of good resource management. The broad focus of this thesis is, therefore, to examine how petroleum law can be used to help prevent the resource curse.
The particular focus is Norway’s petroleum law in relation to direct state participation (DSP) in petroleum activities. This is the direct financial investment of the state in a national oil company to perform petroleum activities on the government’s behalf.
Norway’s legislative framework for DSP played a key role in enabling the country to overcome the resource curse. The government used DSP to benefit the population in a number of ways. As an example, it facilitated the integration of the petroleum sector into the wider economy, significantly improving the growth of related Norwegian industries.
Ultimately it is these economic benefits that will have a longer life than the petroleum industry itself. Moreover, the experience of directly participating in petroleum operations improved the government’s ability to manage the wider petroleum industry in a manner that furthered the national interest. The main objective of this thesis is to identify whether other countries can learn lessons from how DSP was structured in Norwegian petroleum law in order to realise the potential benefits natural resources represent.
1.1 The structure of the text
The structure of this thesis is designed to provide an understanding of the Norwegian system of DSP and whether it could be applied to address the resource curse elsewhere.
Thus, in Chapter Two the issues facing resource rich developing countries will be outlined.
This provides the background for analysis as it is the problem that DSP needs to address.
The legal principle of Permanent Sovereignty over Natural Resources will then be explained to show why it is that natural resources should be managed in a way that benefits the population. Following this is an outline of the solution proposed by the Natural Resource Charter. Chapter Three describes the system of DSP and its role within the Norwegian petroleum sector. The benefits it gave Norway and how the government structured the system to achieve these benefits will be explained in detail. Chapter Four identifies the features that enabled DSP to function effectively in Norway. This gives an indication as to whether the system has the potential to be applied in other countries.
Chapter Five provides an analysis of the lessons that can be learnt by developing countries from the Norwegian legislative structure of DSP. The overall objective is to assess whether this system could be applied to address the resource curse outside of the Norwegian context.
1.2 Legal sources The starting point of this thesis is Norwegian petroleum law, which sets out the legislative framework for its petroleum sector. International law will also be used to underpin my analysis. This includes the principle of Permanent Sovereignty over Natural Resources, which formally places the benefit of natural resources in the hands of citizens. It also includes a ‘Natural Resource Charter’. This is a document compiled by world experts in politics and economics who have created an ideal legal framework for resource management. These are my primary sources.
In order to evaluate the Norwegian legal framework, I will use evidence from economic and political scientists as my secondary resources. This research provides evidence of the impact of the law and thus provides the critical perspective on Norwegian DSP. These researchers will be used to identify the advantages and disadvantages of using the Norwegian legal structure of DSP. Since laws governing resource management aim to address economic and political issues, indications of its success or otherwise must come from economic and political sources. These sources demonstrate the implications and actual outcomes of the law and are therefore the focus of my research.
Thus the particular methodology used is a literature review. I will use a combination of online resources, journals, books and statistical research. Evidence will be taken from scholars discussing a range of countries and legislative regimes. They include economists and political scientists such as Al Kasim, Nelsen and Noreng that provide an analysis of the Norwegian petroleum industry, and experts in other models of resource management, such as Victor, Hults and Thurber. Other research focuses on analysing the different methods of resource management, as opposed to specific country analysis. This includes an extensive research project into NOCs by The World Bank and a study on the effects of privatisation by Wolff and Pollitt. The literature will show the potential economic and political implications of transferring the Norwegian legal system of DSP beyond the Norwegian context.
Chapter 2 Background
2.1 The problem of ‘the resource curse’ The resource curse is a frequently occurring and contradictory economic situation where resource rich countries perform worse than less well-endowed countries. In order to understand whether DSP has the potential to overcome this issue, we must first understand the problem in greater detail.
The resource curse is essentially a failure to use natural resources in a manner that benefits the population. In some countries though, the detrimental effects go well beyond a lack of economic growth. The discovery of natural resources has been blamed for causing corruption, autocracy, high levels of inequality and even civil war6. This is most clearly visible in certain African countries: oil resources have contributed to civil strife in The Congo, The Sudan and Angola and endemic corruption and extreme poverty in Nigeria7.
These countries provide a stark illustration of the daunting problem that mismanagement of natural resources represents.
The causes of the resource curse are numerous and include economic, political and social problems8. The primary cause is that petroleum resources represent a huge source of income. This creates an incentive for those in power to engage in ‘rent-seeking’, corrupt, behaviour. This weakens democracy because rulers are not reliant on taxation for revenue and thus do not need the vote of their citizens to stay in power9. Rulers are also able to use petroleum revenue to keep themselves in power and repress their opponents. Put simply, high economic rent increases the probability of poor wealth management and oppressive Humphreys (2005), X. Sala-i-Martin and A Subramanian (2003), Tsui  Nigeria is amongst the fifteen poorest nations in the world and the poverty rate between 1970 and 2000, the share of the population subsisting on less than one dollar a day, increased from close to 30% to just under 70% Sala-i-Martin and A Subramanian (2003) pp 4 and 35 (Figure 1A) Duruigbo (2005) pp13-21 Humphreys et al (2007) p4 behaviour, which can undermine, rather than enhance, a country’s economic and political situation.
There is though great variation in the way countries have responded to the discovery of natural resources. A comparison between Nigeria and Indonesia illustrates this.
Approximately thirty years ago Indonesia and Nigeria had similar per capita incomes and both depended heavily on oil sales. Indonesia’s per capita income is now four times that of Nigeria10. The 2011 UN Human Development Index highlights more broadly how some oil and gas producing countries have performed much better than others. Norway is at the top of the Index and The Netherlands is third, while other petroleum producers such as The Democratic Republic of the Congo, Chad, Equatorial Guinea, The Sudan, Nigeria and Angola all rank at or close to the bottom of well-being statistics11. This indicates that developing countries in particular struggle to use natural resources in a manner that benefits, rather than harms, the population. However, it also shows that the resource curse is not inevitable since not all petroleum-producing countries suffer from it.
The focus of this thesis is addressing causes of the resource curse in the upstream sector;
capturing the value of the resource, as opposed to the downstream sector; how that value is used by government. Corruption, weak state institutions and information asymmetries between government and multinational oil companies have all been blamed for a failure of the state to capture the true value of sub-sea petroleum resources12. Any legal framework that could address the problems upstream has the potential to be part of the solution to the resource curse.
2.2 Permanent Sovereignty over Natural Resources
The principle of Permanent Sovereignty over Natural Resources explains why it is that government must seek to use natural resources for the good of its citizens and gives this argument legal grounding. Put simply, it means that natural resources belong to the people of the territory in which the resources are found. A logical consequence is that a government, acting on behalf of its people, has a duty to use those resources in a manner Humphreys et al (2007)p2, and Ross (2003) pp13-15 United Nations Development Programme (2011) pp 127-130 Humphreys et al (2007) pp xi and 4, Duruigbo (2005) pp18-21 that benefits the owners of that resource. Any solution to the resource curse must enable the state to uphold this principle.
Norway used DSP in a manner that benefited its population and thereby complied with the Principle of Permanent Sovereignty. Indeed, the state’s founding aim for the petroleum industry was to improve the development of Norwegian society. This is clear from Norway’s Petroleum Act 1996 s1-2, which states ‘Resource management of petroleum resources shall be carried out in a long-term perspective for the benefit of the Norwegian society as a whole’13. It was the opinion of the Norwegian government that its petroleum legislation should be designed with this principle at its core.