Institutional Design in Low-Capacity Oil Hotspots

From Ghana to Timor-Leste, many new or prospective oil producers are establishing or reforming national oil companies (NOCs). Their governments are looking at the experience of existing producers to choose an institutional design that can effectively manage their NOCs and foreign oil companies while minimizing governance risks. However, research on NOC governance has focused almost exclusively on large, well-established oil producers such as Saudi Arabia and Norway, which have geological prospects and institutional capacity levels that may make them difficult for the world’s new oil hotspots to emulate.

The context is substantially different in most new or prospective producers, where administrative, human and oil-sector capacity are generally low. These governments face daunting challenges in light of their capacity constraints. Which body do they task with licensing, regulatory and monitoring responsibilities: the NOC, the ministry of oil or a separate regulatory agency? In cases of weak capacity, governments face the dilemma of either concentrating responsibilities and resources in order to build capacity quickly within a single institution, or separating functions to build the foundations for good governance. We offer five research propositions on the connections between country capacity and effective oil-sector institutional design to allow governments to more effectively structure their decisions about how to manage petroleum resources.

When power over the oil sector is shifted from a single institution to a separation of powers, it is important to proceed sequentially and cautiously. See more slides from the presentation here (pdf).

Key Recommendations

• Low-capacity countries have a stronger history of technical and economic success when resources are concentrated in the NOC, rather than rigidly separated across distinct administrative bodies.
• Too much concentration of power can exacerbate accountability problems. Successful implementation of a separation-of-powers model can improve accountability, but many attempts to install such a model fail to take root.
• Surrogate administrative capacity may be needed to prop up a separation-of-powers model in low-capacity countries.
• Sequencing matters. Some countries may elect to concentrate powers initially and then separate them later. The likelihood of success of such an effort depends largely on whether other institutions have developed the strength to be an effective check on the NOC by the time the attempt is made to separate.
• Concentration of power within a ministry—as opposed to separation of powers or concentration within an NOC—represents the path of least resistance in many low-capacity countries, but its chances of success are poor when there is limited administrative capacity.

Download a brief presentation featuring key recommendations from this RWI analysis. (pdf)