Introduction to Energy & Development

Energy is a critical catalyst that supports economic growth and development – we all demand energy in our daily lives whether for transportation, technological advancement, communication, manufacturing, heating and cooling, or for energy’s many other uses in our modern lives. Energy is also a critical input for eliminating poverty and improving the lives of people around the globe.

The energy industry contributes to employment, skills development, capacity building, and national wealth. Many countries depend on resource wealth as their primary source of revenue and are thus exposed to both the benefits and challenges associated with changes in revenue due to fluctuating commodity prices.1

Why is it that some countries have been able to provide broad growth to their national and local economies by developing energy resources while others have not been able to translate their energy wealth into improved conditions for citizens? Does energy use always require social tradeoffs? For instance, are people with greater access to energy, and therefore better able to enjoy social benefits (such as improved ease of transportation), also saddled with harmful effects (such as higher levels of air pollution)? What issues related to the way energy is supplied and the way it is used influence economic and social development?

These are some of the issues we explore in the following sections.

Partnerships for Developing Energy Supplies

In order to develop and sell their oil, gas or coal, the governments of countries with resources either:

• allow private companies to develop the resources;
• create state-owned companies;
• form partnerships with foreign companies, or;
• take an approach which combines some or all of the above.

A country must decide what arrangement is best for managing its natural resources.

A country with the resources – the "host" government – and the companies seeking to develop these resources face risks and rewards.2 When entering into a public-private partnership, the two sides negotiate up-front how these risks and rewards are to be allocated.

• Typically, governments or national oil company partners manage risk by granting a selected company or group of companies (known collectively as the "contractor") with the right to explore and develop a natural resource based on its overall competence, technology, and development know-how. Poor management or significant cost overruns can delay or jeopardize substantial wealth generation for the host country. This is why international oil companies (IOCs) with long histories and significant competencies are often chosen.
• The contractor typically assumes the risk – which is substantial - of upfront investment costs in order to secure resource exploration and development rights and to fund exploration and development activities (which can extend up to 15 years). During this time, the government (or state owned company) often has its costs "carried" by the contractor. Once production commences, costs are shared according to agreed formulas.
• All parties face risks since it is unknown how much it will cost to extract the resource, whether future oil or gas prices will justify that cost, how much oil or gas there is, or what unforeseen costs may be incurred.3 While the primary objective of the partnership is to maximize returns (taxes and royalties for the host government and profits for the foreign and national oil companies), both sides have a role to play in making sure the partnership meets its related objective of benefiting the citizens of the host country.

Given current and projected levels of demand, energy companies, investors and governments are also working together in some countries to create energy supplies from unconventional sources such as oil sands, and from renewables, including wind and hydroelectric energy.

All energy partnerships have implications for a country’s economic and social well being; they provide the energy and the revenue that is necessary for growth and development but can also involve a range of different environmental and social impacts which influence development.

1. 1 http://www.earthinstitute.columbia.edu/cgsd/events/resource_curse_agenda.html
2. 2 Covering Oil; The ABCs of Petroleum Contracts: License-Concession Agreements, Joint Ventures, and Production-sharing Agreements", Jenik Radon, Open Society Institute, pps.61-62. http://www.soros.org/initiatives/cep/articles_publications/publications/covering_20050803
3. 3 Ibid.