New Producers Must Manage Great Expectations in a Time of Low Oil and Gas Prices

The steep drop in global oil and gas prices threatens to dramatically impact countries that have staked significant economic hopes on new projects as an engine for economic development. The commodities boom that began in 2004 spurred a wave of new investments in exploration and development, as the potential value of new discoveries rose and complex projects that would have previously been uneconomical became viable.

The boom led to announcements of major new projects in countries including Ghana, Tanzania and Uganda, and booms in exploration in theretofore “frontier” areas in parts of Africa, the Americas and Asia. With these announcements came a flood of citizen expectations about the transformative power of the hydrocarbon industry.

Managing these public expectations is one of the toughest challenges that governments in the boom’s hotspots face now that prices have declined by 45 percent. A gathering earlier this month in Tanzania brought together public officials from 15 emerging producers to discuss the implications of the price drop on their strategies.

Photograph courtesy of the Commonwealth Secretariat

The forum was the third meeting of the “New Petroleum Producers Discussion Group,” organized by Chatham House and co-hosted by the Tanzania Petroleum Development Corporation. NRGI is one of the founding sponsors of the discussion series, along with Chatham House and the Commonwealth Secretariat. The discussions at this roundtable—held under the Chatham House rule—took on a special urgency, both because of the shifts associated with the price fall and because of the location in Tanzania, which is in the process of making critical decisions about legislation and the institutional structures to manage its large offshore gas finds.

Participants in the New Producers Discussion Group

Country Status of oil and gas sector development
Afghanistan Development of a significant discovery has had several delays, additional exploration ongoing.
Belize Producing roughly 1,700 barrels per day, additional exploration ongoing.
Democratic Republic of Congo Producing roughly 20,000 barrels per day, additional exploration ongoing.
Ghana Producing roughly 100,000 barrels per day from the Jubilee field, which came online in 2011. Several other projects at various stages of development.
Guyana Recent offshore oil discovery, subject to significant uncertainty.
Jamaica Exploration, no commercial discovery yet.
Kenya Developing onshore oil discoveries in Lake Turkana region, not yet online.
Lebanon Exploration, no commercial discovery yet.
Liberia Exploration, no commercial discovery yet.
Madagascar Development phase for some onshore heavy oil fields. Offshore exploration, no commercial discovery yet.
Mauritius Exploration, no commercial discovery yet.
Seychelles Exploration, no commercial discovery yet.
Suriname Producing roughly 17,000 barrels per day, additional exploration ongoing.
Tanzania Developing large offshore gas discoveries, not yet online. Some gas production already from smaller offshore fields.
Uganda Development phase for sizable onshore oil finds, not yet online.

Participating officials expressed significant uncertainty about how the price downturn will affect their plans, raising several specific concerns:

  • Officials from countries still in the exploration phase shared concerns that the global decline in exploration budgets—some have projected them to fall by 30 percent in 2015—will have a particular impact on the “frontier” areas, with a decline in interest in new licensing rounds and/or underinvestment in the exploration work plans for already-signed contracts.
  • Oil and gas companies are approaching many of the participating governments with concerns that the fiscal terms agreed in the past may no longer be commercially viable. Some of the new producer participants find themselves in the delicate position of trying to balance investor concerns and keeping projects moving while avoiding a race to the bottom involving costly tax concessions with long-term impacts on the country’s revenue prospects.
  • In countries working with investors to develop large projects that have already been discovered, officials must contend with the prospects that these projects may be delayed or could even be rendered uneconomical if prices stay low for a long time. In the absence of consensus about how long low prices will last, the only constant is uncertainty, and governments must plan for contingencies.

In this challenging context, managing public expectations game may be the hardest. The challenge comes to technocrats both from citizens and from politicians, who sometimes curry populist favor by maintaining the illusion of plenty. “When prices are high, political leaders tend to think of them as being high forever,” said one workshop participant. “But when prices drop, the common refrain is that ‘it’s just a blip.’”

Participants indicated that the disconnect between expectations and the new reality can amplify pressures to prioritize short-term financial gains over a longer-term commitment to developing the sector effectively. It can contribute to mistrust and suspicions that damage relationships between citizens, governments and private companies. Perhaps most troublingly, it can contribute to a need for visible developmental benefits that belie more fundamental economics, in some cases contributing to the kind of excessive indebtedness that plagues many resource-rich countries.

So what can emerging producers do in order to effectively manage public expectations during this (possibly extended) downturn? The forum presented no catch-all solution, but a common element permeated many comments: the importance of being upfront with citizens about looming challenges. As one public official put it, “Honesty is critical in the wake of falling prices, even when the reality is bitter, because it helps manage expectations. A government can’t wait for people to ask you for the full picture, you have to give it to the public proactively.” Among the suggested communication priorities were frank discussions about price uncertainty and potential project delays, as well as what they may mean for projections of public revenues.

In the face of these challenges, some of the technocrats from new producers saw glimmers of opportunity. Several participants cited the need to cut development and production costs as an opportunity to promote efficiency improvements with potential long-term gains—as one national oil company (NOC) executive put it, “to go back to basics and cut down on some gold plating when it comes to costs,” both for private contractors and for NOCs. Another public official said, “This may be coming at a good moment for us. We haven’t always been very effective at explaining the limitations and risks of the oil sector to the public. The price fall may buy us some time, and give us a better mechanism for explaining what the oil industry can and cannot do for our country.”

After each meeting of the New Producers Discussion Group, the group updates the Guidelines for Good Governance in Emerging Oil and Gas Producers, which is designed to serve as a reference document for public officials and citizens from new producers worldwide.

Patrick Heller is the director of legal and economic programs at the Natural Resource Governance Institute (NRGI).