Sector Reform

Legal, Regulatory, Contractual, and Institutional Aspects

Sector reform is a cornerstone of the Bank Group's involvement in the oil and gas sector. In essence, reforms start by a redefinition of the role of the state, recognizing that private companies and market forces are more efficient in supplying the economy with cleaner and cheaper fuels.

The strategy underlying sector reforms emphasizes the need for government policies which maximize the positive impact that the oil and gas sector can have on overall economic development, as well as on poverty reduction. Reform concepts are translated into petroleum laws, regulations, contracts and institutions that promote foreign and domestic direct investment and competition.

Our Department is actively engaged in oil and gas sector reform that has been linked to investment lending operations and/or technical assistance loans or grants in a wide range of Bank client countries including Russia, Ukraine, Bolivia, Peru, Argentina, Ghana, Chad, Cote d'Ivoire, China, Viet Nam, Ecuador, Nigeria, Indonesia, Pakistan and Bangladesh. Our involvement includes assistance in the preparation of new laws, regulations and model contracts, and the development of new institutions to implement sector reforms.

Downstream Deregulation, Pricing and Taxation Policies

Of key importance to the success of the reforms is the deregulation of prices, the adoption of appropriate taxes and the elimination of across the board subsidies. The identification of those segments of the industry that could be open to market competition and those segments that are natural or de facto monopolies is essential in the design of the appropriate prices and tariffs. Assistance includes:

• Designing of pricing and taxation policies to stimulate E&P and to facilitate the deregulation of prices and the elimination of cross subsidies
• The development of appropriate tariffs of the services of, and access conditions for, monopoly elements of the oil and gas supply chain, in particular pipelines.
• Tax reform to provide investment incentives while safeguarding reasonable government revenue shares
• Designing of direct subsidy schemes, and of social safety net support for lower income domestic consumers faced with rising energy bills as the result of sector reforms.

Competition and Privatization Initiatives

To proceed, reforms require the privatization of competitive segments of the industry, and the development of transparent regulatory systems for the oversight of natural monopolies. In the effort to open up domestic markets to external competition, involving the promotion of competition horizontally and the unbundling of vertically integrated monopolies, careful consideration is given to investment by privatization operations.

The creation of a domestic capacity to design and implement reforms in the government institutions is a common and critical component of our sector reform programs.

Improving Access of the Poor to Clean and Affordable Fuels

An important objective of the sector reform is the improvement of the access of the poor to clean and affordable fuels. The analysis of the economic impact of reform packages includes considerations at the macroeconomic level as well as the microeconomic level. The elimination of subsidies is evaluated together with various options for improving the supply of better quality energy at affordable prices to the poorer segments of the population. In this respect, promotion of LPG for household, commercial and industrial uses with appropriate pricing and taxation policies offers opportunities for developing a local private sector

Case Study

Bolivia Hydrocarbon Sector Reform and Capitalization

In 1995, the Bank made an US$11 million credit to Bolivia, one of the poorest countries in Latin America, to help in the design and implementation of its novel "capitalization" scheme that has privatized the management of the oil and gas industry. The country also reformed its regulatory environment and fiscal terms and around $5 billion of new private investment has been committed to Bolivia's oil and gas sector. Gas reserves have been substantially increased, and exports of gas to Brazil have begun, generating vital revenues. Further, the capitalization involved the establishment of Bolivian pension funds to take 50% ownership of the newly capitalized oil and gas corporations, so the benefits of the investments will flow to more than 3.5 million Bolivian citizens, many of them poor and elderly.

An area of concern shared by NGOs and the Bank involved potential negative environmental and social consequences of increased exploration activities. To address this, the Bank has assisted in the preparation of regulations for operations in indigenous peoples' lands. A new Learning and Innovation Loan is helping to develop capacity among government agencies, industry and local community stakeholders for implementing a participatory approach in the execution of oil and gas projects.

Relevant Publications

• Changing Patterns of Household Expenditures on Energy: A Case Study of Indonesia and Pakistan by Robert Bacon, Soma Bhattacharya, and Masami Kojima, Extractive Industries for Development #6, July 2009
• Extractive Industries Value Chain: A Comprehensive Integrated Approach to Developing Extractive Industries by Eleodoro Mayorga Alba, Extractive Industries for Development #3, July 2009
• Changes in End-User Petroleum Product Prices: A Comparison of 48 Countries by Masami Kojima. Extractive Industries for Development #2, June 2009
• Phasing Out Subsidies: Recent Experiences with Fuel in Developing Countries, Masami Kojima and Robert Bacon, Public Policy for the Private Sector, ViewPoint Note No. 310
• Republic of Lebanon Hydrocarbon Sector Strategy Study, 2004.
• Pakistan: Oil and Gas Sector Review, 2003.
• LAC Regional -Latin America and the Caribbean Refinery Sector Development Project, Volume 1, Volume 2, and Volume 3 (pdf 500 kb). 2003.
• Petroleum Taxes – Trends in Fuel Taxes (and Subsidies) and the Implications, Viewpoint #240, 2001.
• Abuses in Fuel Markets – How to Protect Consumers and Public Health, Viewpoint #237, 2001.
• Vietnam: Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam, ESMAP Report No. 236/01, 2001.(pdf 7.56 MB)
• Workshop Summary: China Oil & Gas Sector Regulatory Reform, Beijing, December 14-15, 2000, The Institute of Economic System and Management, The World Bank, Public-Private Infrastructure Advisory Facility, 2001.(pdf 7.56 MB)
• Modernizing China’s Oil & Gas Sector Structure Reform & Regulation, Consolidated Joint Report of the World Bank and the Institute of Economic System and Management, SCORES, 2001.
• Peru – Reform and Privatization in the Hydrocarbon Sector, ESMAP Report No. 216/99, 1999.(7.28 MB )
• Global Energy Sector Reform in Developing Countries: A Scorecard, ESMAP Report No. 219/00, 1999. (pdf 6.86 MB)
• Private Participation in the Transmission and Distribution of Natural Gas – Recent Trends, Viewpoint, 1999. (pdf 0.56 MB)