News and blog posts

Extractives transparency in the era of energy transition

What the energy transition may mean for resource-rich countries – and why transparency, data and dialogue are needed to progress this agenda

In the wake of the COVID-19 pandemic, the speed and future trajectory of the energy transition appears less certain. While consumption of fossil fuels has subsequently dropped since the outbreak, oil and gas are likely to remain important ingredients in the global energy mix for some time. Although there is an increased focus on the urgency of climate action, obtaining the financing, technology and policy framework needed to support the transition may be more challenging, as governments allocate resources to pressing economic, social and health priorities.

What is certain is that the shift to a low-carbon economy will reshape the governance of the extractive industries. To quote the IEA’s Executive Director Dr Fatih Birol, “doing nothing is simply not an option” for energy companies, and the same applies for resource-rich countries. There will be profound implications for the kinds of data, disclosures and dialogue that are needed, both to ensure accountability through the transition and to optimise the management of finite resources.

For example, expectations of future revenues may need readjusting as commodity prices fluctuate, the timing of planned projects and investments may change, the timeframe for economic diversification may shorten and pressure on decarbonising value chains may increase. Making sure the right people have the right data at the right time will be key for informed decision making.

Based on experiences from EITI countries, here are three examples of how data can be used to support decision-making in the era of energy transition.

1. How will the energy transition affect revenues and major projects?

This is the million-dollar question for many resource-rich countries. Tax policies play an important role in maximising revenues from the industry and will be critical as demand for fossil fuels reduces and demand for strategic minerals evolves. EITI reporting can help inform policy and can underpin government assumptions on projected extractive revenue and how it may change as the energy mix evolves over time.

The disclosure of oil, gas and mineral contracts, stipulated by the EITI Standard, provides an overview of the terms and timing of the state’s share of revenues. Combined with disclosures on revenues and production, this data can be modelled to estimate anticipated revenues and help set expectations for governments and citizens alike. Countries like Ghana and Iraq are already using EITI and other data to model projected revenues and to support government assumptions that inform revenue projections.

Stakeholders are also likely to be interested in how the energy transition might affect a country’s investment profile in the sector. Transparency of production costs is key to understanding how vulnerable revenue streams may be. If the price of fossil fuels declines, projects with high production costs may no longer be considered commercially viable. Project-level revenue and production data disclosed in accordance with the EITI Standard can support analysis of project viability. Countries like Ghana, Tanzania and the Republic of Congo have already started providing disclosures on production costs through EITI reporting.

2. How will state investments be affected by the energy transition?

EITI reporting shows how much the state and state-owned enterprises (SOEs) spend to participate in the industry. It also reveals how much revenue they should receive and how much they actually receive. This information is key to understand how much of a country’s public funds are invested in the extractive industry. This can also indicate the level of preparedness of governments and SOEs to diversify their investments.

In many countries, SOEs provide fuel subsidies on behalf of the state and national debt servicing, which are not recorded in the national budget. In these cases, EITI data can help stakeholders understand whether the state is providing off-budget subsidies for fossil fuel consumption through its SOEs.

For example, Nigeria EITI has for several years highlighted how fuel subsidies provided by Nigeria’s national oil company (NNPC) on behalf of the state have not been recorded in the national budget. While NNPC previously deducted these subsidies from the state’s share of oil revenues, the Nigerian government recently decided to end its fuel subsidy regime. This enables the government to potentially save USD 2 billion a year at a time where government revenues are much needed to respond to COVID-19.

3. How will the energy transition impact communities?

Communities that are dependent on revenues and jobs generated by fossil fuel production are among the most vulnerable to shifts related to the energy transition. Many of these communities receive payments from companies or transfers from government. These funds are in recognition of the potential disproportionate negative impact of extractive activities on local communities and contribute to local social and economic development.

In Colombia, Latin America’s largest coal producer, regional and local governments are entitled to royalty transfers from the state’s share of extractive revenues. According to EITI reporting on planned and actual subnational transfers, these amounted to almost 40% of total extractive revenues between 2014 and 2018. Should demand for fossil fuels decline as the country diversifies its energy mix, a downturn in coal revenues could have a significant and long-lasting impact on communities.  

In the context of the energy transition, the EITI can support analysis and dialogue on how to manage the sector in a way that is sustainable. This could include analysis of how subnational income may be affected in the medium to long term, and how such income could be used to build resilience for local communities. In Colombia, reforms to the royalty law have been introduced to support diversification of the local economy and environmental conservation.

What next?

EITI reporting can supply key information that is needed as governments, companies and communities prepare for the energy transition. Yet it does not offer a complete picture. The EITI will work in partnership with data users such as national and local governments, SOEs and EITI multi-stakeholder groups, as well as other disclosure initiatives such as the CDP, the Global Registry of Fossil Fuels and the IISD Global Subsidies Initiative on four areas of work to support the analysis and use of data. We look forward to sharing the results of this work in future.

 

Further reading

Authors: 
Ines Schjolberg Marques

Inês Schjølberg Marques

Policy Director

Ines is the EITI’s Policy Director, overseeing the development, revisions and implementation of the EITI Standard and developing guidance material for practitioners.