Connecting the bright spotsKey components of an oil and gasgovernance framework

2 | Connecting the bright spots

Many developing and emerging economies try to takeadvantage of the natural resources available in theircountries in order to boost development. National Oil Companies (NOCs) that pursue the extraction,development, and sale of oil and natural gas resourcesare a clear example of this. The role these NOCs play issignificant in many regions around the world. Regardlessof the type of NOC set-up, (entirely public, partnershipswith private companies, or other operating models),there is one element that is common and essential tothem all to ensure maximal returns are realized. Thiselement is that of establishing and implementing agovernance framework that can help overcome certainobstacles and yield many benefits.

Without proper governance, NOCs can face significantchallenges in many areas, both external and internal tothe organization. From an external point of view,sourcing funding and attracting investment will be verydifficult if those sources of funding and investment arenot convinced that there are adequate controls, checksand balances that a governance framework can providein place. Additionally, the view of earnings and balancesheet performance can be impaired by the lack of trustand confidence in the numbers that are being publishedwithout proper oversight. Internally, the lack ofgovernance can lead to inefficiencies in the system in allaspects such as capital deployment, organizationalperformance and operational issues. There are alsoadverse effects on sustainability and social responsibilitygiven the nature of NOCs’ responsibilities and theirimpact on society. However, with a thoughtfully plannedand successfully implemented governance framework,all of these problems can be reversed.

A governance framework that provides transparencyand evokes confidence in the controls instituted acrossthe NOC will provide benefits across the spectrum. Firstof all, funders and investors will be more confident thattheir capital will be employed to the best interests of theorganization, leading to lower risk and better returns forthem. Internal issues will also be addressed throughstringent standards enforced through properorganizational design, delineation of authorities, anddetailed 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 theircountries, they can be seen as the benchmarks forgovernance that all other entities and industries, bothpublic and private, aspire to achieve, thus providing a sound example of proper governance for them tofollow. Figure 1 below describes the characteristics of a good governance framework.

A governance framework that providestransparency and evokes confidence inthe controls instituted across the NOCwill provide benefits across the spectrum

Characteristics of a goodgovernance framework

• Crisp articulation of the mission, vision, corevalues, and principles by which the companyoperates• Outline of the organization structure, reportinglines, and responsibilities for functional andoperational elements of the organization• Clarity on ownership of governance, policies, and control activities• Expression of the core business processes and how they interface• The framework for assuring compliance

Figure 1: Characteristics of a good governanceframework

Connecting the bright spots | 3

A governance framework spans multiple areas across anorganization starting with defining the core purpose forthe organization and drilling down to details such assetting standards for policies and procedures.Additionally, it should also specify the supportmechanisms that should be arrayed around it to aid in achieving proper governance and control. Theseinclude areas such as a suggested organizationalstructure, reporting lines and definitions of roles andresponsibilities, a defined approach to risk management,and the ability to monitor and enforce compliance,among others. In short, to yield the previouslymentioned benefits, an effective governance frameworkshould provide clear answers to the following questions:• What is the mandate of the organization? What arethe roles and responsibilities of entities/departments?• What capabilities, processes and systems will berequired?• How should the risk governance be organized?• What information and reporting requirements supportthe proposed governance model?• What are the appropriate mechanisms and interfacesrequired to support the proposed governance model?

In Figure 2 below, we see that an effective governanceframework also includes the following four keyelements: values, operating model, managementsystem, and governing bodies. Values set the purpose of an organization and guide the rest of the governanceframework to those ends. As such, the values must beclear and understandable, forming the basis forbehaviors and principles for the organization as a whole.The operating model deals with the distinction betweenoperations and functional roles, provides detail ondelegations throughout the organization and providesthe mechanism for planning and measuring successagainst those plans.

A governance framework spansmultiple areas across an organizationstarting with defining the core purposefor the organization and drilling downto details such as setting standards forpolicies and procedures

Governance framework

Values Operating model Management system Governing bodies

A defined set of valuesthat resonate with thebusiness and are:• Clear;• Memorable;• Mission focused; and• Guide decision-making.

The values naturallyextend to the behaviorsexpected of individualemployees and becomeguiding principles for“doing things right”.

An explanation of: • The distinction betweenan operational role anda functional role;• Delegations; and • How the business plansits activities plusmeasures its successagainst that plan.

Documented:• Policies, procedures and guidance – orderedin a hierarchy;• Process of self-attestation; and• Summary of how thebusiness operates.

Roles and responsibilitiesat a ‘corporate’ level e.g.:• Charters of the Boardand its sub committees;• Non executive and toptier executive roles andresponsibilities;• The role of InternalAudit (IA), complianceand risk management;and• The role of bodies such as a FunctionalCouncil to control andmaintain policies andprocedures etc.

Figure 2: Key elements of a governance framework

The management system includes the set ofhierarchically structured policies and procedures for theorganization, including the process of self-attestation.Additionally, it entails a summary of how the businessoperates across the relevant areas. Governing bodiesprovides oversight for the whole governanceframework, from the top level board of directors’charter down to executive and non-executive roles

and responsibilities. The second large part of thegoverning bodies’ element is that of compliance,internal audit and risk management, which monitors thepolicies and procedures and ensures that they areadhered to. For more detail, the elements above can bebroken down into discrete work streams, along withdesignated owners and deliverables, to make thedevelopment of the governance framework easier ascan be seen in Figure 3.

4 | Connecting the bright spots

Work stream Owner Objectives/Deliverables

Governance Board • Develop a “Governance guide” – i.e. a single document thatprovides a clear and concise overview of the governance andoperating system• Updated and approved corporate policies, standards, andprocedures• Updated and approved terms of reference for all BoardCommittees• Codes of Conduct and Ethics for all company members

Risk management Risk • An updated group “Top 10” risk assessment supported by arobust risk identification and mitigation process

Internal control Finance • An agreed set of core control objectives and a self-certificationprocess to support an annual control assessment

Compliance Compliance • A clear remit and operational plan for compliance, grounded incore policies and regulatory requirements

Internal Audit Internal Audit • A clear remit and operational plan for internal audit

Staff manual HR • A common staff manual updated to reflect all updated policiesand procedures

Program management Governance and risk • Establish (and deliver) a clear plan for the development andimplementation of the governance framework• Effective engagement and involvement of all stakeholders tosupport the delivery of the above

Figure 3: Work streams for delivering a governance framework

Connecting the bright spots | 5

Using the work streams in Figure 3, we can extrapolatean indicative roadmap for the activities and tie theminto a timeline for the development and implantation ofa governance framework that spans six months. As seenin Figure 4 below, the roadmap breaks down stepswithin work streams that run in parallel and then inseries to deliver an implemented final governanceframework. At the end of the roadmap, the processcontinues with periodic reviews or updates as neededby changing business requirements. Over the course of the implementation, there are several importantsegments to include in the planning to ensure that thedeveloped governance framework is both implementablebut also takes root within the organization to ensure itsbenefits are realized.

There are several important segments toinclude in the planning to ensure thatthe developed governance framework isboth implementable but also takes rootwithin the organization to ensure itsbenefits are realized

Starting status Month +1 Month +2 Month +3 Month +4 Month +5 Month +6 Future

Governance

Governance guideconcept agreed

Core policies,standards andprocedures identified

Board andcommittee termsof reference drafted

Risk policy drafted

Start central activity

Functional remitnot yet defined

IA effectivenessreview commissioned

Separate documentsby asset

Initial stakeholderdiscussions

Periodic (annual)updates to reflectchanges

Review and issuance asrequired

Year and review(annual exercise)

Update on abiannual basis

Update for financial year-end sign-offs

2015 plan andresource profileto be approved by board

AC to approve 2015 plan

Periodic updatesto reflect issue ofnew documents

Committee feedback to beincorporated inwork streams

Risk management

Internal controls

Compliance

Internal Audit

Staff manual

Programmanagement

Governance guide drafted

Review and update existing draft documents

Establish governance steering committeecomprising all relevant stakeholders

Develop group staff manual

2014 Compliance program and 2015 planning

2014 IA Compliance program and 2015 IA planning

Control self-assessment exercise

Review and update draft documents

IA effectivenessreview

Quaterly updateCollate “Top 10” risks

and mitigation plans

Compliance strategyand remit

Develop key control set and test with principal operating divisions

Develop group whistleblowing policy and identify3P provider for proposal to Audit committee

IA strategy and remit

Review and updateReview and update

Divisional/asset risk workshops

Issue guide Reissue guide

Issue Manual

Board approval

Board approval

Board review

Board approval

Audit committee approval

Update Update Update Update Update Update

Board review

Key controls list

CSA

Figure 4: Indicative roadmap for governance framework development and implementation

6 | Connecting the bright spots

Once the governance framework is developed, there aresix critical success factors for effective implementation.These six elements also rely heavily on the involvementand engagement of stakeholders who understand andsupport the values of the organization. These are mostlyfocused around creating a compelling case through a thorough understanding of what motivates thestakeholders. Secondly, by interacting with thestakeholders, you will be aware of where pushback will come from and on which issues, leading to bettermitigation strategies. Thirdly, a strong, united leadershipwill create a unified front for all stakeholders to getbehind, to accomplish the task at hand. Next, providing

enough time for all the changes to embed across theorganization will ease the transition from the previousstate to one with more controls and governance. Allalong, ensuring that there is proper two-waycommunication between the stakeholder groups willprovide both with a means to deliver the messagesacross the organization, as well as relay feedback andconcerns from the stakeholders back up to theleadership team. Lastly, having a well-articulated anddetailed plan, along with review points and targets, willhelp with establishing the transition to an organizationwith proper governance at all levels of the organization.

An enduring governance framework

Involvement and engagementof stakeholders to develop the

governance framework’sstructure and content

A compelling case – preparing, agreeing and

communicating the benefits for the business,the individual, employeesand other stakeholders

Awareness of thekey challenges –

where will pushbackcome from, wherewill apathy exist

A strong and consistent message

from all levels ofleadership andmanagement

Time – forawareness and

understanding toembed across the business

Two way communication –

process ofcommunication

and engagement

A plan – definitionsof success, priorities,

review points toassess progress and

transition to ongoingbusiness environment

Figure 5: Critical success factors for effective governance framework implementation

Connecting the bright spots | 7

Getting the forensic data collectionright ensures a firm foundation forsubsequent review, findings and legal action

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