PREFACE
The scope of our CAR annual review which grows ever larger each year is an accurate barometer of the current burning issues in the energy and mining industries. The current period is no exception. It goes on line against a background in which the present record breaking boom in these industries shows no sign of abating. Indeed, particularly in the case of the energy industry, given the current insatiable demand for fuels to power the ever expanding economies of the developing world there is every prospect that this scenario will continue for some time to come.
As noted by the editor-in-chief in his accompanying review in this issue of CAR, it sees a quantum leap in the number of papers presented. It also reflects an ever increasing number of topical themes. As a result of this expansion the task of the editor-in-chief has grown to Herculean dimensions. In fact the job has become something of a marathon involving as it does endless patience, tact and stamina to guide his team of experts in the selection, orchestration and formatting of contributions across an ever widening range of disciplines. Emmanuel Aideloje has really excelled in this role. As noted by him the CAR review reflects a rather unique diversity in the spectrum of issues covered by our Centre making the views of our scholars available globally in an electronic format.
In the context of issues highlighted Commercial Contracts are reviewed. The seemingly irreconcilable issue of confidentiality versus disclosure is addressed. On the one hand NGO’s understandably press for disclosure while championing the cause of local parties as key players. On the other one can sympathise with the strategy of companies to limit disclosure to maintain their competitive edge where intense competition exists and also their desire to achieve an equitable compromise in relation to their ever increasing range of obligations.
Developments in natural gas as it evolves into a global market have become a key issue in the energy field with a rising demand for power and greater liberalisation of the market. Major players driving this market include China and the Asia Pacific region. The growth of spot markets and rising demand for LNG are all boosting consumption pointing to the emergence of a global market. Also highly topical are the take or pay contracts with their attendant obligations but the question arises ‘do they have the capability of driving the market’?
Also addressed is the evergreen theme of transnational disputes for which solution by international arbitration is favoured plus a unified framework for legal arbitration settlement.
In the energy field, challenges facing the EU emissions trading scheme are reviewed in terms of the progress made based on the legal framework. Another aspect in the energy policy context concerns issues related to security of supply on the part of the energy importers and safeguards to disruption in terms of improved storage facilities.
Attention in the energy field also focuses on the liberalisation of incentives in Kazakhstan which has seen substantial progress in terms of liberalisation of the industry and is probably the most successful state in the FSU in this area. However it had proved difficult to fine tune the demand-consumption balance leaving a problematical surplus as is so often the case. Nevertheless this excess however could buffer future demand thus proving to be a blessing in disguise. A range of other risks also need to be factored into the equation to produce a positive outcome.
Though power reforms in India have met with limited success to date, the viability of the Electricity Act of 2003 offers new hope.
The viability of Long Term gas contracts is viewed against a background of increasing liberalisation and the challenge of a greater choice of suppliers notably through the increasing influence of the spot market. Further options for trading gas are also examined.
Various environmental and social issues are examined in relation to energy projects. Increasing pressure is evident in terms of environmental virtuosity involving preferential funding for environmentally friendly projects. Moreover further extension of controls has been advocated to include all business activities to the extent of underwriting bonds for clients with poor business records. The critical issue is – will lending banks flout this trend and incur the wrath of NGO’s and local communities – which raises the question of social responsibility.
Other issues in the environmental category include wastage and contamination caused by gas flaring, a field in which Norway has pointed the way forward towards the reduction of this procedure that has enhanced the utilisation of the gas by-product.
The inevitable social and environmental impacts of giant dam construction also come under critical scrutiny. Unsurprisingly such factors feature in the difficulty encountered in obtaining the mega-loans needed for such enterprises, in addition to careful consideration of the questions of profitability and security in the light of the enormous costs involved.
Fiscal issues in the petroleum industry have attracted the attention of several authors who examine possible solutions to problematical issues. These include effective development of marginal oilfields in Nigeria, state participation versus an equitable excess profits tax in the case of Kazakhstan, and buy back versus production sharing of the oil output in Iran.
A recent upsurge in national sentiment is evident in the mining industry which is not necessarily confined to developing countries alone. Predictably this has been a cause of concern to foreign investors. The fiscal regime in Papua New Guinea entails some negative factors which detract from a good mineral endowment and a stable political regime in terms of strong competition and attractive legislation amongst their rivals.
In the context of foreign investment the applicability of foreign models which work well in their own country are sometimes tested as an alternative to national regimes. Such was the case of the Canadian flow through shares in the Australian context. However the outcome in this case proved negative on several counts.
The ongoing attraction of Peru for overseas mining interests was reviewed in terms of changes in economic circumstances as well as the political climate. Social protests against mining are increasing, as is the call for more public participation. This trend is sending contradictory market signals constraining one to ask the question ‘Is Peru still as attractive as it was for mining ventures’
In the context of international relations in the energy field one author spells out the conundrum many of us have undoubtedly pondered and goes on to review the pros and cons of this thorny issue. Equally prickly is another issue which currently overshadows both the energy crisis and the global political scene which forms the theme of another author’s contribution, namely perceived inconsistencies between the US energy and foreign policies, which moreover, are deemed incompatible with the ethos of globalisation that the lone super-power has so enthusiastically championed!
Lenders risks are analysed in the light of international trade in LNG and Project Finance. Strategies for mitigating the large risks incurred are touched upon in the case of the former, while global trends are analysed and solutions suggested for the latter.
Mine closure procedures which still comprise an ongoing problem in many countries are analysed in the context of best practice in relation to problems of permanent damage, displacement of indigenous communities, pollution, rehabilitation, regulatory supervision and best strategy for sustainable development.
Several papers explore the problem of funding power projects which are unique in terms of their dependence on turn-key construction contracts. Moreover as project finance is based on the revenue stream generated after completion, stringent deadlines are necessary. Also examined is the structure for financing power derived from renewable energy sources to ensure their bankability. Although there are various benefits in terms of environmental acceptability they may be regarded as high risk ventures from the viewpoint of profitability and have suffered from past failures. Mitigation of responsibility through a matrix approach (involving sharing the risks with other parties) is used to achieve successful outcomes.
Power sharing (PS) in which fiscal regimes allow operators and contractors to recover a proportion of overhead and administrative expenses can also be employed towards achieving an acceptable successful outcome.
Also included in the power project context are contributions on refining capacity in the US which is stretched to the limit because no new refineries were built since 1976 on account of punishing environmental regulations that would have triggered a price hike. The second paper views the industry as a low profit enterprise with slender margins and high excess capacity over a 30 year period in the past, despite which the industry has grown due to strategic and investment impetus. It was only in the 1990’s that demand increased and post 2001 the highest profits for the last 25 years were achieved.
Turning to regulatory powers in mining, challenges addressed include a review of the role of government in Direct Foreign Investment in Australia. It accounts for 39% of the FDI flow into the country. Also discussed are the voluntary initiatives of mining companies in a socio-economic context within the domains of their operations in Peru. This paper then goes on to examine the case for government regulation of such voluntary initiatives. A further paper on the theme of government resource control considers the applicability of the Brazilian model to defuse agitation over resource control within Nigeria’s producing states.
Global restructuring of the energy industry since the 1980’s and the growth of competition following privatisation in the developed countries is another theme examined in the current CAR. Aspects of this transition provide valuable criteria for the developing world as they undergo a similar change. Likewise the electricity industry follows this pattern. The trials and errors encountered by the older economies map the pitfalls to be avoided during the transition for the developing countries such as Uganda which follow suit.
Sustainability continues to attract attention in the context of the Dutch disease. Prudent use of windfall profits and greater transparency are advocated as a solution for avoiding this trap in the case of Kazakhstan.
In the area of husbandry of water resources attention is drawn to gaps in the legislation covering the conservation and usage of groundwater. The unitisation approach used in petroleum is advocated as an example of a more advanced system applicable also to a pooled resource such as water.
With a record breaking diversity of topics in the present edition of CAR the writer is confident that everyone visiting our website will find something of interest from the foregoing menu.
Dr Arthur J. Warden
Co-ordinator
