Category Archives: News

Extractive Sector Transparency Measures Act (ESTMA): Canada’s response to EITI

Stephanie Zimmerling, MASc Mining Engineering // April 6, 2015

The Canadian Government has introduced the Extractive Sector Transparency Measure Act (ESTMA) into parliament. The Act will have companies, subject to Canadian Law, annually report any payments larger than $100,000 made to any level of government in Canada or abroad. In developing this framework, the regulations and standards of the US, the EU and the EITI were reviewed to ensure ESTMA somewhat aligned. While Prime Minister Stephen Harper committed to transparency and the implementation of EITI at the last G8 summit, the EITI framework does not align appropriately with Canada’ unique mining industry regime. ESTMA is Canada’s response to transparency in the extractive industry in Canada.

Last week I sat in on a presentation by Borden Ladner Gervais held by the Management & Economics Society of the Canadian Institute of Mining. As part of the event a presentation on Reporting for Mining Companies under the new Extractive Sector Transparency Measures Act was delivered. The presentation was effective in explaining what the Act entails and the who, what, when, why of the reporting framework. As described in the presentation, ESTMA will come into effect on June 30, 2015. Reports will be published annual by companies reporting on one full-year of payments. ESTMA applies to entities that are engaged in commercial development of oil, gas or minerals in Canada or elsewhere that are either listed on the Canadian stock exchange, hold assets in Canada and hold at least 2 of the following criteria: $20 million CAD in assets; at least $40 million CAD in revenue or; employ an average of 250 employees.

Who must report is somewhat complicated. The presentation highlighted that parent companies may report on behalf of their subsidiaries that are required to report. Additionally, reporting entities must report on payments made by non-reporting entities that they control, if the company is participating in the extractive sector. In simpler terms, it depends who is on top. If a Canadian company is operating in Australia, the Canadian company must report on its operations overseas. If a non-Canadian company is operating in Canada and satisfies the criteria mentioned above, the company only needs to report on their Canadian operations.

What payments must be reported includes payments made to government “payees”, with payments being broken down on a project basis. Payees include Canadian and foreign governments, including subnational and local levels. This also includes boards, commissions, corporations, trusts or other authoritative bodies that perform duties on behalf of a government. It is important to note as well that payees include aboriginal and indigenous governments.

Companies will need to make their reports publically accessible by posting them on their website. Should a company not have a website, the Minister will specify an alternative approach. The Minister also has jurisdiction to determine whether other legislated reports from the US or EU can be submitted to satisfy the reporting requirements under ESTMA. This could be applied if a Canadian company is operating in the US or the EU.

With the launch of ESTMA approaching, it will be interesting to see how the transition plays out and the response from the Canadian extractive industry.

An example of an ESTMA report can be found here: http://www.statoil.com/no/InvestorCentre/AnnualReport/AnnualReport2014/Documents/DownloadCentreFiles/01_KeyDownloads/2014%20Payments%20to%20governments.pdf

U.S. Launches Interactive EITI Portal

Stephanie Zimmerling, MASc Mining Engineering // April 6, 2015

The United Stated has only recently (2014) become a candidate country with the EITI. The Multi-Stakeholder Group is required to produce their first report for 2014 by July 1, 2015 (EITI, n.d.). In anticipation of this report, the U.S.’s Interior Department’s Office of Natural Resources Revenue has launched an open data website, which tracks the revenue received by government for coal, natural gas and oil extracted from public lands. The portal can be found here: https://useiti.doi.gov/. It is an example of easily accessible information distribution for the citizens of the United States. At the launch of the portal US Secretary of the Interior Sally Jewels said (EITI, 2014):

“This interactive data portal offers a wealth of information to the public in a comprehensive and accessible fashion and is another step in our efforts to reform and modernize royalty revenue management by the Department. This new tool provides clarity and transparency on the revenues generated by energy development on public lands and waters – a significant source of financial support for local communities, states, tribes and the nation – and the Department’s implementation of USEITI upholds President Obama’s commitment to the principles of open government.”

The portal will gather information on how revenue is generated from resources on federal lands and show where that revenue is distributed. While the portal provides a high level overview, filters can also be applied to many of the data sets to sort by timeframe, location, commodity, company and revenue type.

The Head of the EITI Secretariat, Jonas Moberg, has expressed he is very impressed by the portal (EITI, 2014):

“The information generated by the EITI is much more useful when it can be easily accessed and understood. A growing number of EITI countries are making their data available in online portals. The US data portal is one of the most impressive examples to date, and we hope it will inspire other countries to follow the US example.”

With many other EITI countries wanting to engage civil society and citizens with EITI and its benefits, the online portal is great idea. If operating in a country where a large part of society has access to the internet, a portal set-up is an effective means of distributing relevant information. The US portal is made available under and ‘open-source license’ as shown here: https://github.com/18F/doi-extractives-data. This allows opportunities to replicate and build on the existing work.

Make sure to check it out!

Sources

EITI. (2014, December 12). US EITI launches natural resource revenues portal. Retrieved from EITI: https://eiti.org/news/us-eiti-launches-natural-resource-revenues-portal

EITI. (n.d.). United States of America. Retrieved from Extractive Industry Transparency Initiative: https://eiti.org/united-states-america

How CIVIL SOCIETY ENGAGEMENT helps cope with corruption IN KAZAKSTAN

Lotus Ruan, MAAPPS // Feb 8, 2015

Kazakhstan is the 9^th largest national territory in the world. Its oil reserves are ranked 12th in the world and its natural gas reserves are 19th. It is a global leader in the production of coal, copper, zinc, bauxite, uranium and chrome ore. The extractive industries contributed 33.4% to Kazakhstan’s GDP and because of its substantial amount of natural resources and a relatively open approach to economic reform and foreign investment, Kazakhstan has been enjoying more than two decades of impressive economic growth.

The annual volume of FDI has been increasing year by year since 1998 and the share of investments in the oil and gas industry in total volume of FDI remains high. But over the last several years, state participation in the oil and gas industry has increased. The vertically integrated National KMG controls 20% of total oil and gas proved reserves of Kazakhstan and produces 27% of total oil and gas condensate and 14% of gas.

Under the leadership of President Nursultan Nazarbayev, Kazakhstan has been experiencing an impressive economic growth for the past two decades. With a GDP of US$ 201.7 billion and a population of less than 17 million, Kazakhstan aims to join the world’s top 30 economies by 2050.

However, Kazakhstan’s heavy reliance on natural resources has also made it more susceptible to external pressure. As I mentioned in my previous blog post, the slumping oil prices has taken its toll on the economic growth of this oil-rich country. At the same time, rising social problems such as shrinking job markets in some ageing oilfields and domestic security concerns, potential political instability because the successor of the 73-year-old President Nursultan Nazarbayev remains unknown, worrying Russia-Ukraine and other geopolitical crisis, as well as the global economic recession have all contributed to the slowdown of Kazakhstan’s economic growth.

Another issue facing Kazakhstan’s healthy development of its extractive industries and the country as a whole is corruption and a lack of public supervision in government spending. The level of corruption remains sufficiently high, especially in the spending of public funds. Kazakhstan ranked at the 126th out of 175 countries in the 2014 Corruption Perception Index. The International Crisis Group estimated that more than 50% of Kazakhstan’s GDP is controlled by a single sovereign-wealth fund, Samruk-Kazyna, which was once led by President Nazarbayev’s son-in-law.

Perhaps that’s why the EITI introduced new rules and requirements on the issue of sub-national reporting on resource revenues in July 2011. The rationale behind such is that a more accurate disclosure of corporate payments and government revenues at the local level in the extractive industries would help curtail corruption and other forms of mismanagement of funds.

Kazakhstan, despite its corruption problems and unlimited presidential authority, is worth studying and learning from in terms of civil society participation in the EITI process.

Sergey Gulyayev, General Director of Decenta Public Foundation (DPF) in Kazakhstan, introduced in my exchange of emails with him that local non-governmental organizations (NGOs) as well as civil society organizations (CSOs) initiated the discussion of sub-national reporting earlier than the EITI’s new standard was introduced.

When it comes to civil society engagement, NGOs and CSOs in Kazakhstan have been working hard to push forward public participation. According to a report by DPF, there were a few attempts to develop communication strategy on EITI in Kazakhstan to help better engage the public. These attempts have been made by: Coalition of NGOs “Oil Revenues – Under Public Control”, Dialogue Platform of NGOs, National Stakeholders Council, Working Group of the National Stakeholders’ Council, and Ministry of Information and Culture with Ministry of Industry and New Technologies.

Despite the good progress in civil society engagement and all stakeholders’ awareness of sub-national reporting, Sergey Gulyayev remarked that few specific steps or plans have been taken so far to develop strategy of sub-national development for EITI reporting.

Still, civil society was still the most interested party to promote EITI in Kazakhstan. The experience and progress in EITI Kazakhstan can served as a learning model for other countries such as Mongolia. Advancements in transparency have been seen in Kazakhstan now but additional efforts will be needed to strengthen the accountability side of the equation.

Oil price drop, the potential impact on Republic of Congo and implications for Mongolia

Harry Li, MAAPPS // Feb 8, 2015

In 2014, Republic of Congo received $10.7 billion revenue from petroleum alone, equivalent to 74% of its total GDP. Petroleum export is the biggest resource export of the country, accounting for over 90% of all exports. With such heavy reliance on petro, the global oil price drop recently would potentially play a destructive force toward the national development of ROC.

Currently, ROC has $4.225 billion of growth external debt. Amadou Sy, the director of Africa Growth Initiative, argues that it will be more difficult to service debt as their oil revenues fall and the depreciation of their currencies makes U.S. dollar denominated debt more expensive.

According to the Financial Times, South Sudan is receiving the lowest oil price in the world at $20-$25 a barrel because of the combination of falling prices and unfavorable pipeline contracts. ROC’s government could face similar unpopularity. ROC’s government is currently running as an authoritarian regime controlling nation’s resources, suppressing the activeness of civil societies, such as Observatoire congolais des droits de l’Homme(OCDH). OCDH is the biggest Human Rights group in ROC and it constantly criticizes the government. However, ROC’s decreasing ranking in the Democracy Index, Human Development Index, Corruption Percentage Index and Economic Freedom Index would make its petroleum market less attractive for international investors, since more options are available. All of the impact above would result in national-budget cutting, thus negatively impacting the domestic economy.

In the aspect of export resources, Mongolia is similar to ROC. Although Mongolia is not oil major exporter, but mining export accounts for a large percentage of national’s GDP. Thus the price-drop scenario would apply if prices of coal, copper and gold (Mongolia’s top 3 major resource exports) drop significantly. Resource-export oriented countries like Mongolia is fragile to the fluctuation of global prices. That is why it is very important to find effective ways for sub-national reporting and engage civil society in the policy-making on the mining industries in Mongolia. If appropriate policies on mining are implemented, not only will Mongolia be better protected when the prices of coal, copper and gold suddenly decreases but also increase popularity among global investors.

Reference

Sy,Amadou. “Falling oil prices and the consequences for sub-haharan Africa.” The Brooking Institute, Dec.23, 2014.http://www.brookings.edu/blogs/africa-in-focus/posts/2014/12/23-oil-prices-exports-africa-sy

When plunging oil prices hit Kazakhstan

Lotus Ruan, MAAPPS // Feb 5, 2015

International news headlines have been hooked by a volatile energy market for the past weeks. In fact, global economies have ben gripped by the unpredictable oil prices since last year. In the past two days alone, we saw crude oil prices going up and abruptly falling below $50—again. WTI oil prices, often used as a grade of crude oil used as a benchmark in oil pricing, dipped 9.6% to $47.95 a barrel whereas Brent crude prices tumbled 6.37% to $54.22.

While we, as common people, might cheer for the falling oil prices when we fill up our car with cheaper gas, most energy-abundant countries which rely their national economy on extractive industries just hate it. The reason is simple: oil deflation or failing prices are most frequently accompanied by economic stagnation or at the very least a loss of revenues. In our local Canada context, Suncor Energy Inc., Canada’s biggest crude-oil producer, reported an 81% drop in fourth-quarter profits yesterday as a result of plunging global crude prices. Kazakstan, my case study country in this year’s Asia Pacific Policy Project, might suffer worse.

To understand the possible impact of plugging oil prices on Kazakhstan, it is necessary to have an idea how important oil and gas industry is to this upper-middle income level country.

Kazakhstan is one of the world’s major oil producers. Its giant Tengiz, Karachaganak, and Kashagan oil fields produced petroleum and other liquids at 1.70 million barrels per day (bbl/d) in 2014. It is estimated that Kazakhstan had proved crude oil reserves of 30 billion barrels as of January 2014—the second largest endowment in Eurasia after Russia, and the 12th largest in the world, just behind the United States.

To Kazakhstan, the oil and gas industry is one of the main drivers of its GDP growth and it is a large tax source to its national budget revenue. The Ministry of Economy and Budget Planning of Kazakhstan announced in 2013 that its average annual growth from 2014 to 2018 will be 6.5%; of its GDP, the oil and gas industry shared 25.2% in 2012 and the figure is still on the rise. The state’s involvement and interests in the oil and gas industry are also reflected in its oil and gas industry structure. The vertically integrated national company KazMunayGas controls 20 percent of total oil and gas known reserves of the country.

The abundant natural resources now turn out to be both a blessing and a curse for Kazakhstan.

Due to its heavy reliance on the extractive industries—the oil and gas in particular, its national economy is more susceptible to external challenges. Analysts point out that the slumping oil prices might lead to the falling prices for other commodities such as gold, which is also one of the main extractive resources to Kazakhstan. Because of such, Kazakhstan’s government recently revised its budget for the period 2015-2017. The current budget is based on the price of oil average $80 per barrel. According to its Ministry of National Economy official, the new budget would be calculated on oil pricing on the level of $50 per barrel.

But challengers are still awaiting.

For Kazakhstan, as some has pointed out, the continuous fall of oil prices will result in serous negative macroeconomic consequences. Employment and the prospect for manufacturing industry might be the first to suffer. While Kazakstan has succeeded in creating job positions and keeping its unemployment rate roughly around 5%, 60% of the manufacturing contracts are for the oil industry. Exports will decrease as well, which leads to the slowdown of its GDP growth. According to the IMF, the oil price at which Kazakhstan can balance its budget is $65.5, but a price below $90.6 means the balance of payments dipping into the red. If the price of crude continues to plummet, Kazakhstan might face zero growth.

There is no doubt that EITI’s goals are important to the healthy and transparent development to a country’s extractive industries. But in face with the challenges brought by a volatile global energy market, Kazakhstan or any other resource-intensive countries might also want to consider how to effectively and reasonably structure their economy structure to make them less susceptible to external crisis.