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Key components of an oil and gas governance framework

Connecting the bright spots


Many developing and emerging economies try to take advantage of the natural resources available in their countries in order to boost development. National Oil Companies (NOCs) that pursue the extraction, development, and sale of oil and natural gas resources are a clear example of this. The role these NOCs play is significant in many regions around the world. Regardless of the type of NOC set-up, (entirely public, partnerships with private companies, or other operating models), there is one element that is common and essential to them all to ensure maximal returns are realized. This element is that of establishing and implementing a governance framework that can help overcome certain obstacles and yield many benefits.

Without proper governance, NOCs can face significant challenges in many areas, both external and internal to the organization. From an external point of view, sourcing funding and attracting investment will be very difficult if those sources of funding and investment are not convinced that there are adequate controls, checks and balances that a governance framework can provide in place. Additionally, the view of earnings and balance sheet performance can be impaired by the lack of trust and confidence in the numbers that are being published without proper oversight. Internally, the lack of governance can lead to inefficiencies in the system in all aspects such as capital deployment, organizational performance and operational issues. 

There are also adverse effects on sustainability and social responsibility given the nature of NOCs’ responsibilities and their impact on society. However, with a thoughtfully planned and successfully implemented governance framework, all of these problems can be reversed. A governance framework that provides transparency and evokes confidence in the controls instituted across the NOC will provide benefits across the spectrum. First of all, funders and investors will be more confident that their capital will be employed to the best interests of the organization, leading to lower risk and better returns for them. Internal issues will also be addressed through stringent standards enforced through proper organizational design, delineation of authorities, and detailed policies and procedures that safeguard the well-being of the NOC as a whole. In some instances, due to the high profile many NOCs hold in their countries, they can be seen as the benchmarks for governance that all other entities and industries, both public and private, aspire to achieve, thus providing a sound example of proper governance for them to follow.

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