The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

‘Storm warning’

By Daniel Litvin and Carola Kantz

The government froze this project

Resource firms can make or lose billions of dollars depending on how well they understand stakeholder pressures facing projects.

For decades managing big resource projects has required a good understanding of social and political pressures. But never more so than now. In addition to responding to mounting community demands and scrutiny from international campaign groups, firms often need to contend with host governments which are increasingly nationalistic. Whether seeking to win access to resources in the first place, or to hold on to them over the long term, companies’ ability to strategically and responsibly manage multiple stakeholder pressures is often as important to their long-term financial success as, for example, their capital-raising or technological capabilities.

In its Bulletin in May 2007, Critical Resource highlighted two particular projects where stakeholder pressures had recently had big financial impacts: a $22 billion oil and gas project on Russia’s Sakhalin island (Shell lost control of this in December 2006 when, under pressure from the Russian government, it sold half its 55% stake to the Russian firm, Gazprom); and a major proposed coal mine in Bangladesh (the shares of this project’s developer, Global Coal Management, plunged in 2006 following community protests and reports of growing government opposition to the mine). (For more details, see article “Much at Stake”). Equally, there are scores of other recent examples, from Venezuela to the Democratic Republic of Congo to Australia, of projects either being blocked because of opposition from governments or communities – or being accelerated because companies have effectively and responsibly responded to stakeholders’ concerns.

All sorts of tools, analyses and metrics are already available to help companies in this area. Also clearly there are no easy solutions for firms when faced by hostile social or political currents beyond their control. But one critical missing element in the armoury of companies – and also of investors in resource projects – is a simple way to capture and assess the full range of stakeholder pressure facing individual projects. Companies cannot manage what they cannot measure, as the business dictum goes. Tools such as political risk analyses, social and environmental impact assessments, and SRI indices can be useful and indeed important for different purposes. But they are either too focused on a particular subset of stakeholder issues, too focused on company-wide rather than local issues, or simply too unwieldy, to produce the succinct overview that companies and investors need to assess the range of pressures at the project level.

A model approach

This is why since early 2007, Critical Resource has been researching and developing a system for rating resource projects in this way. The Stakeholder Opportunity and Risk Model, or STORM™, aims to provide management and investors with a uniquely-powerful snapshot of stakeholder pressures facing projects. This is a proprietary model and is still under development. But a core methodology is now in place, and initial trials have shown its potential utility – both for companies and investors – in providing early warning of stakeholder shifts which might fundamentally alter project viability or economics.

STORM™ works by providing a consistent way to assess the level of support or hostility on the part of different stakeholders towards projects, bringing together all available intelligence from within the company and from the external environment. The rating system is being designed partly by analysing stakeholder shifts and crises faced by oil & mining projects in the past, and thus builds in early warning signals and other patterns which have already proved themselves to have been relevant. The stakeholders surveyed for each project iinternational bodies such as project include lenders andglobal activist groups, national actors such as host governments and state companies, and also local stakeholders such as local governments and communities.

The initial version of the model is designed to assess potential stakeholder impacts on the ability of projects to generate value (“value under pressure”). As part of this, each stakeholder is also analysed from the perspective of how much they have thcapacity to affect profitability. A separateversion of STORM™ is being developed for project sustainability and reputation risks.

To illustrate Critical Resource’s inital trials of the model, below are preliminary STORM™ “value under pressure” ratings for two big oil projects. Both have recently faced such intense pressure from stakeholders that their commercial terms have been, or look athey are about to be, re-written. For both, Critical Resource analysed the years leading to this crunch point by feeding into the model information which was externally available at various key dates.

The first project is the Sakhalin development already mentioned, in which Shell lost its controlling stake in December 2006. The second is the Kashagan project in Kazakhstan, one of the world’s biggest oilfields, which is operated by the Italian energy giant ENI. At the time of writing this Bulletin, ENI and othfirms with stakes in this project, are reported to be negotiating with the Kazakh government about a potentially bigger role in the project fKazMunaiGas, a state-owned energy firm, and also about a potential multi-billion dollar fine relating to costs overruns.

These trials of STORM™ are based on externally available data. Also the focus of analysis has been on selected stakeholder groups. Even so in the rating has risen well before the actual commercial crunch point. In other words, model looks able to signal in advance the risk of a serious stakeholder-induced disruption to a project. Local business units should thereforebe able to use the rating system to prepare better for brewing crises, if not to avert thementirely (given that the social or political factordriving crises may be outside their control). Corporate headquarters, meanwhile, should bable use it to help judge how to allocate capital across different projects based on a clearer view of their risks. As for external investorsthey may be able to capture significant extra value by choosing to exit, or alternatively ramup, their investment in a project at different times, depending on what STORM™ signals.

Critical Resource plans to continue developing the model, and expanding an underlying database of past projects analysed, during 2008. More information will also be available for resource firms or investors who may be interested in potential pilot assessments.

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