Cost-effective compliance and enforcement

Norway did not introduce a specific supervision and enforcement mechanism for compliance with LC requirements. Generally, IOCs were allowed room to determine how they would fulfil their obligations through the submission of local content plans. In order to ensure coordination on compliance and enforcement, the Ministry of Petroleum established a special body known as the Goods and Services Office to appraise the statutory provision under the Royal Decree 1972.⁵¹⁵ Its primary objective was to ensure that during the process of licence allocation operators utilised Norwegian skills, goods and services. Having a designated office within the Ministry of Petroleum to oversee the implementation of LC requirements meant that any condition relating to the service and supply industry in Norway had to be evaluated by this office based on discretion. For instance, foreign companies would submit a list of preferred local Norwegian companies at the time of bidding, but the Ministry, in consultation with the Goods and Services Office, could, if it deemed it necessary, add to this list a local company that met the price and quality demands expected of an IOC.⁵¹⁶ It was later noted that regardless of their actual technical and financial ability, the Norwegian authorities frequently recommended local companies such as Statoil, also including private companies such as Hydro and Saga, to take on important tasks within the industry.⁵¹⁷ This allowed the Norwegian regulator to gain an effective understanding of the rule and apply it accordingly. This system was further extended with the introduction of the 1985 Petroleum Act.

513 Hunter, ‘The role of regulatory frameworks and state regulation in optimising the extraction of petroleum resources: A study of Australia and Norway’ (n 10), p. 49; Hunter, ‘Role of the Regulatory Framework in Encouraging the Sustainable Extraction of Petroleum Resources in Australia and Norway’

(n 10), p. 15; Hunter, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petro-leum Resources: A Critical Functional Analysis (n 2), p. 141; Hunter, ‘Law and Policy Frameworks for Local Content in the Development of Petroleum Resources’ (n 1), p. 118.

514 Hunter, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petroleum Resourc-es: A Critical Functional Analysis (n 2), p. 161.

515 Berryl Claire Asiago (n 43), p. 477; Hunter, Regulation of the Upstream Petroleum Sector (n 49), chapter,

‘Regulating the Norwegian Upstream Petroleum’.

516 Heum (n 6), p. 1.

517 Tonne (n 161), p. 728.

Arguably, by adopting a centred regulatory mechanism, the Norwegian government limited the costs of compliance. This allowed operators to understand their compliance status and hence target achievement of the ultimate objective rather having to address a detailed list of regulatory requirements in relation to that objective.

In effect, operators find the most suitable means to achieve the overriding objective, taking into account their financial and technical capabilities, rather than simply ticking boxes to show compliance. This is not to suggest that regulatory frameworks should not specify obligations, but that these obligations should not concern behaviour, procedures, or processes. Rather, regulatory frameworks that focus on performance targets are to be preferred.

Thus, in applying a principles-based approach to regulation, the Norwegian regulator was not necessarily denied the possibility of applying penalties (fines, revocation of licences and imprisonment) but rather was denied the option of reaching for these sanctions as a first and automatic step. For instance, the Goods and Services Office ensured that the objectives of local participation conditions were appropriate and were adhered to during the process of allocating licences and during operations in respect of oil and gas activities. This office did not have an enforcement mandate to penalise operators but was granted an implied mandate to deny operators the opportunity to participate in the sector in the future unless they promoted local participation.⁵¹⁸ Thus, the Norwegians were granted the opportunity to compete with established foreign suppliers. As a result, they gradually succeeded in building up the competitiveness of the sector to the extent that by 1985 the net share of contracts for local goods and services by Norwegian local companies for use on the Norwegian continental shelf had reached 28 % and as of the present day it stands at almost 75 %.

Furthermore, Norwegian companies contracted and supplied approximately 50 to 70 % of goods and services during this period.⁵¹⁹

6.6 CONCLUSION

In conclusion, a principles-based regulatory approach anchored on clear national objectives provides for a responsive regulatory approach that allows operators to achieve national LC obligations in a more effective and customised manner — as opposed to a ‘one-size-fits-all’ approach. Primarily, it operates by applying suitable elements of law, in the form either of rules or principles, without the constant need to revise existing laws or introduce new laws into the legal framework. For instance, this thesis finds that between the period from 1970 to 1994, Norway primarily utilised three statutory rules to secure LC obligations in the upstream petroleum sectors.

These were principle four of the Ten Oil Commandments, the 1972 Royal Decree, and the 1985 Petroleum Act. In view of the fact that these statutes were not LC-specific, Norway utilised additional contractual (non-regulatory) systems to increase local participation. These included the licensing schemes of 1974, 1979, 1981, 1988, and 1991 along with additional agreements; i.e. the Standard Petroleum Exploration &

Production Agreement, the Frame Agreement for Offshore Petroleum Technology

518 Heum (n 6), p. 1.

519 Hunter, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petroleum Resourc-es: A Critical Functional Analysis (n 2), p. 161.

Research & Development Activities, and the Model Training Agreement Concerning Petroleum Activities, etc. Ultimately, limited revisions to legal frameworks enhanced the prospects of achieving the desired regulatory results while simultanously bolstering revenue and cash flow for the Norwegian government.

Therefore, based on the regulatory choices made, policymakers will develop the ability and capacity to continuously review suitable regulations as commonly debated in the context of regulatory theory, reform and policy The arguments presented in favour of principles-based regulation cohere around the general point that if it is ever to operate efficiently, core elements of trust must exist. For trust to develop, productive dialogue that allows a regulator to gain the ability to be more adaptable and flexible is imperative. Such dialogue leads to better understanding between the parties and enables the regulator to make informed decisions as to when to punish and when to persuade.

PART III:

FINDINGS AND CONCLUSIONS

7 FINDINGS

7.1 THE VIABILITY OF PRINCIPLES-BASED REGULATION IN NIGERIA AND ANGOLA

Having determined that rules-based regulation is incompatible with regulating LC requirements at least in Nigeria and Angola, and that principles-based regulation has not only been appropriate for but also successful in regulating LC requirements in Norway, this section discusses and advocates the potential of principles-based regulation for developing countries. The plea to endorse principles-based regulation aims for striking of a balance between effective markets and effective government in Angola and Nigeria. This work, however, concludes that attaining such a balance may be challenging because the evidence tends to indicate that the principles-based model of regulation is more suitable for developed economies whose institutional frameworks are robust enough to check the behaviour of the economic and regulatory actors involved. Thus, developing countries such as Nigeria and Angola, which frequently find that they have limited regulatory capacity to monitory economic actors, may find principles-based regulation tedious, unjustified or even unsatisfactory.

The section, however, contends that because of the imminent regulatory challenges in these developing countries, it is necessary to utilise the potential offered by a flexible and responsive regulatory approach. The reason for this is that this form of regulation adopts strategies that mobilise cheaper forms of social control than state command and control and does not therefore, limit the potential for revenue flow for governments. In recommending principles-based regulation, this section considers and applies the four basic criteria discussed under the section titled A coherent scheme of Dworkinian principles that enhance the legality and legal validity of principles-based regulation.

The first criterion requires that regulations foster the support of legislative enactments in order to be effective. Legislation-based regulation suggests a sound basis in the debates of rule of law because the law is deemed to have been adopted through a clear, concise and democratic process. Thus, regardless of the type of regulation involved (whether principles or rules-based), as long as it enjoys parliamentary support, it has the potential to achieve its objectives. By way of illustration, consider the indigenisation policy, promulgated by the Nigerian parliament in 1989, to promote and advance the participation of local people in the upstream petroleum sectors was of even greater importance. The policy was based on four basic principles: (i) local contracts were allocated based on existing seismic data; (ii) ownership of local companies was to be held by Nigerians as beneficial owners and not as nominees of foreign companies; (iii) local companies were regarded as the operators and needed to have Nigerian managing directors; and (iv) local companies could carry out farm-outs with or without the existence of technical agreements. The policy allowed local companies to establish joint ventures with foreign technical partners and gave rise to the growth of local companies that has occurred to date. Notably, the general principles safeguarded under international law also show great support for legislative action and frequently demand legislative enactments. For instance, section 12(1) of the Nigerian Constitution states that no treaty shall have force in Nigeria unless it has been enacted into national law by the National Assembly. Thus, conventions such as the

1974 UN Charter of Economic Rights and Duties of States; and OPEC Resolution XVI

‘Declaratory Statement of Petroleum Policy in Member Countries’ have been adopted and apply in Nigeria. However, the principles of ownership under the Indigenous and Tribal People’s Convention 1989, which are critical to the enhancement of local participation debates in the Niger Delta region, are not applicable because this convention has not yet been transposed into Nigerian law.

The second criterion concerns accountability, especially for regulators with imprecise mandates. While principles do not frequently detail the processes of accountability, government of developing countries and subjects to a regulation can nonetheless utilise existing strategies to ensure that public officers are accountable.

In Nigeria, for example, the government has developed several policy strategies to robustly monitor the accountability of public officers. These range from constitutional provisions to specific legislative enactments that are directly associated with the sector.

In Nigeria, the discretionary powers of public officers are subject to judicial review by virtue of Article 46(1) of The Nigerian Constitution, which requires that ‘any person who alleges that any of the provisions of this Chapter has been, is being or is likely to be contravened in any State in relation to him may apply to a High Court in that State for redress’. Therefore, public officers are subject to administrative fairness and their decision can be reversed if held void by the courts. Additionally, citizens can also use their constitutional rights such as the right to receive information to demand more accountability of public officers. Article 22 of the 1999 Constitution states that

‘the press, radio, television and other agencies of the mass media shall at all times be free to uphold the fundamental objectives contained in this Chapter and uphold the responsibility and accountability of the Government to the people’. Article 9(2) of the African Charter on Human and Peoples Rights (Ratification and Enforcement) Act which provides that ‘[e]very individual shall have the right to receive information’, is also noteworthy in this context. Furthermore, the discretionary powers that emanate from delegated legislation are subject to the tenets of administrative law through committee oversight. However, as observed above, several legislative enactments have been plagued by issues of accountability and transparency, especially as regards the allocation of local petroleum contracts. In particular, the system by which members of the oversight committee are appointed frequently encounters problems in two contexts:

(i) where the parliament or bodies associated with parliament are not themselves in charge of such oversight, the supervising bodies can be deemed unrepresentative;

and (ii) where oversight committee have been appointed to satisfy political influence.

Nonetheless, there is no doubt that a regulatory agency needs to have some sort of oversight to ensure that it does not abuse its mandates – or rather an oversight body that ensures the regulator’s actions are acceptable.

The third criterion concerns the observation of due process by the regulatory authorities. This criterion is just as testing for principles-based regulation in developing countries as the second criterion, especially in relation to the allocation of oil contracts to local companies. As observed, early policy-based actions in Nigeria and Angola were not subject to robust due process, especially when allocating petroleum contracts. As a result, and despite their potential, these strategies have not enjoyed tremendous public support. This was the case for the Nigerianisation policy of 1989, which involved the objective application of four basic principles. Thus, the challenge involved in determining suitable due process lies in the need to develop detailed procedures to be followed, at least from a developing country’s perspective. This stands in contrast to principles-based regulation. Consequently, disputes about biased

treatment as between the parties involved sometimes arise. Therefore, the application of a process in a different manner as between the various parties concerned may lead to the stagnation of the regulation and the regulatory system as a whole. However, developing countries can mitigate this challenge by means of the constitutional rights that exist. For instance, section 36 of the Nigerian Constitution provides for the right to fair hearing in determination of a person’s civil rights and obligations in any matter for or against the government or authority and such a person is entitled to a fair hearing within a reasonable time by the courts (or any other tribunal).

In Angola, due processes continue as a matter of concern. Under the section entitled Transparency as to the allocation of local contracts, Sonangol retained veto powers in respect of allocating local contracts to Sonangol officials. However, the passing of the Presidential Decree (no.49/19) on 6 February 2019 establishing the National Agency for Oil, Gas and Biofuels (Agência Nacional de Petróleo, Gás e Biocombustíveis) (ANPG), effective 18^th April 2019, shows that the government is making efforts to curb Sonangol’s disproportionate participation and ultimately its excessive powers in the sector. This is a good step towards resolving issues concerning transparency, accountability and due process but a more viable route would have been to vest the Angolan parliament with both de facto and de jure supervisory powers over the sector’s activities including oversight in respect of Sonangol and ANPG.

The fourth criterion concerns the adequacy of regulators’ expertise. A regulator requires sufficient knowledge in order to reach a balanced judgement, often by reviewing several competing factors. This criterion can be argued to be challenging for developing countries since expertise is relative, depending on who appoints the regulator. Most developing countries tend to favour the appointment of regulators based on political affinity. Thus, this section argues that if principles-based regulation is ever to work in developing countries, there is a need to separate political input from technical knowledge – and discard the former. This stems from the observation that a lack of expertise in a sector such as petroleum may be compounded by regulatory challenges that serve private interests rather than the public good (this is further discussed in the section entitled Potential for regulatory capture). More importantly, developing countries and governments need to understand that technical expertise does not necessarily require local input. Public institutions must engage different stakeholders in the acquisition of useful knowledge in order to stand a good chance of offering suitable and viable responses to regulatory objectives and challenges.

Finally, where developing countries make changes in their regulatory systems to accommodate the four criteria discussed above the potential arises to create an efficient regime based on efficiency benchmarks. This stems from the observation that, while individually each of the criteria entails a form of challenge that can lead to regulatory challenges, when applied together they constitute a set of benchmarks that can be utilised to facilitate good regulatory design. ⁵²⁰ The absence of these coherent values suggests that principles-based regulation is somewhat associated with regulatory challenges analysed below.

520 Baldwin, Cave and Lodge (n 58).

7.2 POTENTIAL CHALLENGES OF PRINCIPLES-BASED REGULATION

This section points out the general (potential) complexities involved in the application of this regulatory approach. The work summarises the two common shortcomings often associated with principles-based regulation. These shortcomings are not linked or associated with the LC model developed in the Norwegian upstream petroleum sector. Instead, the shortcomings identified are generally associated with the debates over principles-based regulation.⁵²¹ They mainly concern regulatory creep in terms of its impact on the regulated (subjects) and regulatory capture in terms of its impact on the regulator (state authority). Overall, these challenges mostly concern and relate to the broad discretionary powers granted to the regulator that often give rise to an uncertain, unpredictable, and costly environment, particularly as regards the interpretation of regulatory conduct.

7.2.1 Potential for regulatory creep

First, principles-based regulation is deemed vulnerable in many respects, including the potential for regulatory creep which often arises because the regulation appears to lack a juridical perspective, therefore giving the impression that it constitutes lax regulation.⁵²² Regulatory creep is said to occur when a rule or principle is unclear.

This is observed when the subjects of the regulation do not know what is expected of them and what constitutes compliance with the law.⁵²³ As observed, principles are generally formulated to focus on the object or purpose of a legal question and as result do not function as rules but operate differently. Thus, due to the quality of generality inherent in the drafting style that characterises principles-based regulation, they do not prescribe how an action should be undertaken. Consequently, they give the impression that the subjects have not been not sufficiently informed as to their rights and duties under the regulation.⁵²⁴ However, the impacts of regulatory creep are clear on the consequences of not fulfilling a requirement: hence the term ‘hidden menace’. Hidden menaces lurk within the contention that the principles, in terms of their formulation, use, and meaning are not sufficiently certain or clear in order for operators to comply consistently with the relevant provisions.⁵²⁵ This stands in contrast to rules-based regulation, which provide the regulated entity with information on what is legally permissible and what is not.⁵²⁶

521 Black, Hopper and Band (n 40), pp. 196 and 198; Black (n 40), p. 28; Black (n 132), p. 2.

522 Ford, ‘Flexible Regulation Scholarship, 1980-2012’ (n 168), p. 6; Ford, ‘Principles-Based Securities Reg-ulation in the Wake of the Global Financial Crisis’ (n 159), p. 258.

523 Jones, Clive ‘Regulatory Creep: Myths and Misunderstandings’, Risk & Regulation (2004), 8, p. 6, avail-able at http://www.lse.ac.uk/accounting/assets/CARR/documents/R-R/2004-Winter.pdf (last accessed on 6 July 2019); Black, ‘Principles Based Regulation’ (n 42), p.16

524 Pečarič (n 30), p. 466; Braithwaite, ‘Rules and Principles’ (n 29), p. 48.

525 Diver (n 29), p. 66.

526 Black (n 40), p. 29; Black (n 132), p. 14.

This notion has been debunked in the section entitled A coherent scheme of Dworkinian principles). The issue of uncertain rules may be resolved by reference to the Dworkinian principles as to coherent schemes especially as regards the

This notion has been debunked in the section entitled A coherent scheme of Dworkinian principles). The issue of uncertain rules may be resolved by reference to the Dworkinian principles as to coherent schemes especially as regards the