Over the last decade the international oil and gas industry has witnessed considerable changes from the dynamic price and investment cycles to emergence of frontier countries announcing significant hydrocarbon discoveries. In addition, traditional oil producing countries have witnessed substantial increase in oil and gas related operations and activities. These latest developments require appropriate policy approach that will see Natural resource do not translate into resource curse.
Today, I will to look at information Asymmetry as potential pitfall in Extractive industry and how policy makers can use public geological survey as a policy tool in avoiding the resource curse phenomenal in especially the frontier countries. Information Asymmetry in simplistic terms refers to a situation where one party has insufficient or incomplete knowledge required to make decision about how to allocate resources.
Asymmetric Information leads to market failure, in other words marketing information works very badly, there is not an area where free markets works well. This is one aspect that requires government involvement. Just before governments think of discoveries in particular, its generic that they need to invest in what I call the Economics of Information, that’s why governments especially those in developed economies do so much investment in research and development.
In respect to extractive industries in the frontier countries there is bound to be an Asymmetry of information between extractive companies and governments. Resource extraction companies specialize in a particular resource for example Oil and Gas and thus there are more likely to know what’s underneath more than governments.
So how and why do you reduce this Asymmetry of information?
Recently I had a conversation with an expert of an extractive company that does, oil and Gas Exploration globally in Nairobi at a Summit that brought together policy makers and experts in Oil and Gas industries in East Africa. In our tete~ a~tete during a cocktail session, I put to him that government ought to invest in public geological information bureau and I thought that there was going to be somewhat a push back by him, like ‘leave us alone we are the experts, we know it better’, and what surprised me was the reaction he had, and what he said was….
“Of course, governments should invest in pubic geological information before they came to us, they get better deals “
He is the guy who is sitting right on the opposite of the negotiating table with the government. Investing in public geological information is imperative and simply encompasses getting the area geological information with an objective of having an Atlas or mapping out the minerals available in a country, and more so that it becomes easier for investors to locate their desired minerals
By investing in Public geological survey, governments will be trending on a right Policy path in managing discoveries process, it does set the right pace in negotiating of the prospecting rights with the extractive companies and in fact there are two things to learn here, that one it’s the single most important aspect in discovery process and two, why has so much less been discovered in Africa than anywhere else in the world? And the precise answer is that there has been less search (investment in geological survey) because today the process of managing that search hasn’t been done well in Africa.
As you invest in geological information you reduce one of the biggest impediments to investment in prospecting which is that resource Extraction Company don’t trust your promises and to avoid the speculative scenario as a result of too little prospecting that extractive companies often find themselves in.
The other pit fall you elude by of investing in public geological survey, is to evade a gold rush scenario which is usually a very bad idea, where extractive company buy prospecting rights and sit on them, so governments have to make sure that while companies buy the prospecting rights they don’t have the option of sitting on them for years. Together with the rights has to come requirements that a company has to invest in search for a reasonable time period say 3 years, ( you don’t invest in search or survey you lose the prospecting rights ) ,by doing this you avoid a scenario that is brought about by too little prospecting for many years then all over sudden too much prospects leading to gold rush scenario .
International Agency like the World Bank have since changed its approach in respect to Management of the Natural Resources, they have developed a matrix through which they use to fund Pubic Geological survey bureau which is what the frontier countries that have made significant discoveries on hydrocarbons should adopt .
Kenya is one country making remarkable strides on this front, in its 2016/17 fiscal year, the country set aside Kshs 3 billion for geological survey under the ministry of mining which will map out minerals and come up with an Atlas for natural resources so it’s easier both for the investors and governments