News, Analysis, Views, Commentary and Strategic Reports
on Energy, Human Development & Corporate Affairs in Africa
The oil and gas industry is operating during a propitious moment. Analysts predict that there will be a boom in commodities prices for the next ten years or so. Demand is such that the International Energy Agency expects that $ 2.2 trillion dollars in new investments will be required over the next 30 years to meet increasing global demand. A range of factors is responsible for the upward trend, including exploding economic growth rates in developing countries such as China and India. Increased demand for petroleum and petroleum-related products will lead to the intensification of existing oil and gas operations, as well as the search for me supplies. The boom in demand is taking place within the context of a rapidly changing geopolitical landscape.
The raise in resource nationalism, as evidenced by the creation and strengthening of state owned oil companies across Africa and elsewhere, is apart of the move to make natural resources work for the good of the society from which they are extracted. Many NOCs have passed local content laws, which require that local people and materials are employed to provide goods and services to the oil and gas industry. Moreover, in recognition of the man social and environmental problems that have been associated with the industry—these goods and services are required to meet certain environmental, health and safety standards in order to create and strengthen local capabilities. Some areas of local content include: research and development; development of local infrastructure; using locally sourced raw materials; investing poor areas; adding value to at the local level to imported finished goods.
It is also the case that oil and gas deposits will be extracted in places that may not always be completely integrated within the nation-state. As a result, these are locales that are politically contested, where the local populations may be seeking autonomy or perhaps even outright independence. Very often, the populations in these resource-rich areas are vulnerable ethnic minorities, further complicating matters for the mining industry. A range of surveys clearly indicate that the overwhelming majority of new oil and gas supplies will be found in the emerging market economies in Africa, Asia, the Middle East and Latin America. West and Central Africa, which have been relatively underexplored, are of particular geostrategic importance.
Geopolitics is not restricted to what states do. Over the last 25 years or so, the world has witnessed the rise of advocacy-oriented civil society groups and non-governmental organizations (NGO) in different areas: human rights, the environment, anti-globalization, indigenous rights, etc. What these non-state actors lack in financial resources they make up for their ability to gain the public’s attention to their cause. Groups such as Friends of the Earth, Greenpeace, Amnesty International, Rainforest Action Network and others have been incredibly effective in changing the global conversation on how people think about social and environmental issues, and how governments and the private sector address them. Even international institutions such as the International Finance Corporation are taking notice.
NGOs and local communities in which oil and gas operations take place have become active, politically sophisticated, and transnationally connected. Their capacity to organize boycotts, plant negative media stories and extract concessions from actors in the oil and gas industry is not likely to disappear any time soon. These groups have been highly effective in raising the profile of environmental and social issues that arise in oil and gas exploration projects, forcing the industry to confront serious questions about how it carries out its operations.
Companies in this sector have generated significant protest and opposition by NGOs and local populations where their installations are located, usually in developing countries. There is the infamous case of Ogoni environmental activist, Ken Saro-Wiwa. He,along with members of the Movement for the Survival of the Ogoni People (MOSOP), mobilized hundreds of thousands of Ogoni, protesting against environmental damage and human right abuses linked to the oil industry. The campaign highlighted the practices of Shell and British Petroleum, among others. Shell pulled out of the area in response. The outcry was international led to a damaged reputation for the company. And in Ecuador, well organized indigenous and environmental groups mounted protests to stop oil exploration by multinational oil and gas companies. In May 2006, Ecuador’s Energy Minister, Ivan Rodriquez, announced that his government was canceling its contract with US-owned Occidental Petroleum, which has engaged in oil exploration. Similar confrontations between the oil and gas industry and local communities and NGOs repeat themselves in Africa, Latin America and elsewhere.
These changing realities pose challenges for Western International oil companies, independent oil companies, and energy service companies. Business as usual simply will not suffice. Oil and gas companies will need to develop a broader, more comprehensive approach to managing these challenges, which they often define as political risks.
What tools are available to assist the industry (private sector) in engaging these challenges in an integral way? The demands set up by NGOs as well as the international scrutiny can be tackled by using corporate social responsibility (CSR) within the context of supply chain development and strengthening.
No longer are corporate shareholders the only stakeholders to be considered. NGOs, local communities, and an educated, engaged public have become meaningful voices in terms of how oil and gas companies function. The term stakeholder management became fashionable twenty years ago to describe the importance of non-financial groups in affecting and shaping corporate management. These new actors, however, required more than just “management”. Increasingly company managers realized that more was required. Stakeholder engagement – a strategy to dialogue and even partner with the range of non-shareholders became the new approach,which take account of the social and environmental effects of corporate action. Corporate social responsibility (CSR) is expected of the private sector, especially those industries that have major economic, environmental and social consequences.
For the oil and gas industry, this means a growing expectation that it conduct its activities in ways that are sensitive to economic, ecological and social concerns. It also means building relationships and real partnerships with stakeholders, such as communities and NGOs. Both the industry and stakeholders have a shared interest in addressing issues that invariably arise in oil and gas operations. Given the fact that in many cases oil and gas operations occur in failed or fragile states – especially in Africa – these partnerships take on particular urgency. Often, oil and gas companies serve de facto in a governance capacity, providing infrastructure and other public goods associated with government. In such settings, identifying opportunities for productive relationships with local, affected communities and NGOs is more than about CSR. It’s about risk management and enlightened self-interest.
CSR issues are serious and need to be addressed not only by company public relations and communications directors, but by CEOs, boards f directors, management and operations personnel. Whether the issues raised with respect to how these companies interact with local communities and the environment are defined as political risk or CSR, they clearly must be ADDRESSED. Oil and gas companies can adopt three stances. First, they can ignore these actors and hope that they stay out of the spotlight. Second, they can take a defensive stance and respond only when “attacked” by a local community or NGOs. Finally, they can look for opportunities to meaningfully engage these actors.
Brand Identity
Because of the challenges listed above the oil and gas industry is often presented in negative light. However, few companies have taken positive steps. Though criticized by some as a cynical ploy designed to divert attention away from its operations in Colombia, Alaska and elsewhere, British Petroleum took (at the time) bold step of breaking ranks with its peers and leaving the Global Climate Coalition in 1997. A corporate body, the GCC refused to acknowledge that global warming was a reality. BP CEO John Browne publicly opposed this view and said that action was necessary. No less an activist group than Greenpeace applauded Browne’s move. The company benefited from positive publicity and saw its stock prices and profits rise.
Social License to Operate
Angola, which is emerging from years of civil war, is heavily dependent on its huge oil and gas reserves. The government has made “Angolanization” (hiring locals to work throughout the oil and gas industries) a priority. To this end, it entered into a five-year, $50 million partnership with ChevronTexaco. The Angola Partnership Initiative (API) … aims to provide support for countrywide education, training and small business development activities. The API, which seemingly is one of the first of its kind in Angola, is a significant departure from the usual development approach by oil companies to focus solely on development projects located in the vicinity of their operations and to the uncoordinated go-it-alone strategy. The partnership involves ChevronTexaco, USAID and UNDP, and has included conversations with many of the key development players in Angola.
In this initiative, ChevronTexaco is scaling up its presence in Angola. When oil and gas companies consider such initiatives, they should bear in mind that throwing money into philanthropic fund is not going to be nearly as effective as seeking out real and substantive partnerships with NGOs and local communities. Real community participation and leadership in project design and implementation can have substantial benefits for both the community and the company.
Addressing the Governance Gap
Valuable natural resources such as oil and gas are often located in failed or fragile states, usually in developing countries. Failed states are those characterized by collapse and the inability to exercise control over major area within their territory. Fragile states are vulnerable to susceptible control over major area within their territory. Fragile states are susceptible to crisis in one or more of its sub-systems. A number of countries in sub-Saharan Africa and other places where oil and gas reserves are plentiful fit this description. In many instances, governments are unable to provide basic services and infrastructure. For oil and gas companies to carry out normal business, they are forced to step in and provide both services and infrastructure. Roads, bridges, health clinics and the like are built by companies and constitute a form of governance, since these institutions are usually government provided. In some places, companies provide more services and infrastructure than governments.
Because of the high levels of mistrust that exist between the oil and gas sector and many local communities and their NGO allies, it is understandable why there would be reluctance to undertake the risk to work with such groups. Not doing so, however, can pose even more risk on such companies. The issue then is understanding what NGOs have that oil and gas companies need in terms of implementing good CSR. First, NGOs can serve as managers of risk. Second, they provide brand endorsement. Third, they have crucial local knowledge, and can help mediate companies’ relationships to local communities.