It is a major decision for a company to expand its business into a new country or global region whatever business sector they happen to be in. However, arguably for companies that operate within the natural resources sector, the risks are often more complex, more involved and certainly more numerous. And of the natural resources to be exploited, oil and gas tends to attract the most attention. That is not because it is any more invasive than large scale forestry or hard rock mining, it is almost certainly not. It is perhaps down to the fact that oil and gas reserves are generally viewed by many states as part of their patrimony, the wealth of the people and of the nation and should not be shared with foreigners any more than is absolutely necessary. This approach generally manifests itself in detailed regulatory controls, state participation and profit sharing, obligations to meet local content on material and supplies and in local employment quotas. More extreme cases can even restrict the repatriation of profits. It could therefore be very costly to any E&P business not to invest adequate time, money and resources into performing the right level of due diligence before a new country entry. The question for any business in such situations is, what should be covered and what is the 'right level' of due diligence?
New country due diligence can be broadly divided into three areas: political; regulatory and social, but recognising that within each of these, will be sub-categories. However, as a good due diligence programme should be dynamic and developed to scrutinise the areas of risk associated with the business of the new entrant, many enquiries will be universal. For example, any serious level of due diligence should cover what a foreign company must do in order to be regulatory compliant, report on the tax laws and on the judicial process. The constitutional make-up of the political environment and identifying where power resides would also be key in such exercise. Others will be more industry specific. By way of example, within the onshore oil & gas industry it would be important to have an awareness of local land rights and of indigenous communities in the areas of expected operations, and for offshore an understanding of fishing rights that might be extant.
A company may work with its professional advisers in helping to determine the areas in which the due diligence should cover, but it is unlikely the company will source the data themselves. If performing due diligence investigations is not the company's core business then it would be prudent to outsource this exercise. However, this is not to say that the company, once having retained its consultants should then completely step back from the process, only to re-emerge to receive the final report. By working closely with their consultants, either directly or through their professional advisers who may be managing the process, the company can make informed decisions about delving into certain areas where enquiries have thrown up a red flag for instance or for closing off other avenues of enquiries where the company is satisfied no further enquiry is required. By having a level of input in the process, the company can expect the end product to be a more finely honed report.
As part of the due diligence process, it is important for a company to have sufficient time to fully consider the report's contents and management time to review the findings and to make an informed decision whether or not to proceed. It might be the case that the timetable is driven by external factors, such as a deadline to submit an application in a hydrocarbon licence bid round, or responding to an invitation to tender by a host government. But whatever is driving the process, sufficient time should be built into the timetable to consider the findings and implement any steps that management have identified to mitigate risks such as devising prudent in-country operational and/or management processes, developing a suitable corporate structure to take advantage of the host country tax regime or the protection of investment treaties.
In the final analysis, it will be for the company to determine whether or not the identified risks have been or can be mitigated sufficiently to overcome any doubts the company may have in expanding business into the target country. But having a structured process of due diligence, managed properly from the outset, will at least place the company in a position where it has the confidence that it is in possession of all the information it requires to make an informed decision in a timely manner.
Fieldfisher is experienced in acting for companies entering new countries and has worked extensively with senior management in devising due diligence programmes suitable for their business sector, including Energy and Natural Resources in which it has over 50 years' experience and would be happy to meet and discuss any points raised in this publication.