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™

‘An unfunny Gag in Indonesia’ – published by Ethical Corporation

By Rob Foulkes and Daniel Litvin – A version of this article was originally published in Ethical Corporation.

A controversial multi-billion dollar project on the tropical island of Gag poses complex issues for BHP Billiton, the world’s largest mining company.

Will the local fish gag on Gag?

As prices soar across commodities markets, mining and oil companies are adopting a new maxim: who dares wins. Many of these firms are racing to keep up with global demand for oil, gas, metals and minerals at the same time as their reserves in stable or low-risk parts of the world are in decline. As a result they are now taking on projects laden with environmental and socio-political risks that they might in the past have regarded as no-go ventures. Are these companies doing enough to minimise the potential negative impacts from these projects? Or will their reputation and profits be damaged by backlash from angry stakeholders?

This article, the first of a short series on such ‘risky resource projects’, looks at BHP Billiton’s nickel-mining interest on Gag, a tropical island off West Papua, Indonesia. After being stalled for years, this potential investment now appears to be moving ahead through a joint venture with Indonesian state company Antam (the JV covers projects both in Gag and also nearby North Maluku island, investments which together could amount to over $4.5 billion ). Details of the planned operation on Gag remain vague but BHP’s board is expected to review, and potentially approve, the project shortly.

Several mining projects in the region have had unhappy, if not disastrous, histories. In Bougainville, an island off neighbouring Papua New Guinea, Rio Tinto was forced to shut a big copper mine in 1989 following a local violent insurrection against the government. This was partly triggered by disputes over the sharing of revenues from the project. Freeport McMoRan’s huge Grasberg mine, located in West Papua itself, has been at the centre of local ethnic tensions in the past as well as a focus of ongoing secessionist disputes between some islanders and the Indonesian state; alleged damage to the surrounding river system has also raised the hackles of many environmental groups. BHP itself has seen trouble in the region: the Ok Tedi mine in Papua New Guinea, in which it had a majority stake, agreed to pay out hundreds of millions of dollars in pollution compensation claims to local landowners before BHP divested its shareholding in the project in 2002.

The project on Gag shares many broad risks, some on an even greater scale, with these ill-fated predecessors: environmental sensitivity, socio-political tensions and conflict, and a government with unpredictable attitudes towards foreign investors. Amid environmental opposition and regulatory confusion, BHP’s operations on Gag have progressed little since it first won a contract to explore the island in 1998. There is much BHP can do, and is starting to do, to mitigate the risks surrounding the project. But it will need to tread carefully if it is to avoid the pitfalls this time around.

The greatest challenge is the relatively-untouched island’s ecological sensitivity, which in some senses is more pronounced than at Grasberg or Ok Tedi. The seas in the region contain some of the world’s richest marine life, and have attracted UNESCO’s attention as a possible World Heritage site (with potential boundaries as yet undefined), as well as the interest of numerous environmental NGOs. Gag’s forests, along with others across Indonesia, were granted protected status in 1999 (after BHP’s arrival), temporarily stalling all mining on the island. These legal restrictions facing BHP and other mining companies in a similar situation have since been lifted (which some attribute, correctly or not, to Australian government pressure on Indonesia).

Gag also faces socio-political risks which potentially parallel those of Grasberg. For example, as a major source of revenues for the Indonesian state, it could become, like Grasberg, a potential focus for West Papua’s independence movement. Non-militant locals may also come to resent the wealth flowing from their land to government coffers in Jakarta.

Another risk is security: in Grasberg, Freeport was in the past accused – fairly or not – of complicity in human rights abuses by Indonesian security forces protecting its facilities; BHP clearly needs to guard against the same problem. The simmering sectarian conflict on the nearby Maluku islands may also threaten BHP’s operations.

Around Gag itself, the company needs to manage carefully relations between indigenous groups, such as the Beteuw who claim traditional land rights to the island, and settlers attracted by the honey-pot effect of foreign investment and job opportunities. Meanwhile, at the national level, the Indonesian government has recently signalled its desire to benefit more from the country’s natural resources, for example by pressuring foreign oil companies to share more of their profits.

Scale of risks

But what do these risks add up to? Based on LicenseSecure™, a methodology we have developed to rate the health of the “socio-political license to operate” of resource projects on a scale from AAA (indicating the licence is secure) to D (indicating the license is at great risk), our provisional analysis of Gag suggests a rating of between B and D. The methodology synthesises data on a range of factors including potential risks surrounding the project, the views of stakeholders, and also the way in which the company itself manages these issues (see diagram below). A full rating has yet to be calculated for Gag, but this provisional indicator, based on publicly-available information, suggests a high risk of disruptive or costly opposition to the development of the mine.

Given its challenging context, the project is unlikely to achieve a secure A-grade rating in the near future, but whether it turns out merely risky or downright dangerous depends in large part on BHP. As a minimum, the full suite of CSR approaches now accepted as best practice by major extractive firms need to be put in place. These include building strong relationships with stakeholders through wide-ranging, ongoing and responsive consultations; developing environmental monitoring systems commensurate with the region’s ecological sensitivities; and implementing initiatives such as the Voluntary Principles on Security and Human Rights.

Certainly, BHP is well positioned to take such steps: its Health, Safety, Environment and Community (HSEC) systems are generally state-of-the-art. BHP has also ruled out dumping waste in the sea, one of the principal concerns of environmentalist critics. It may also be able to reduce its environmental impacts on Gag by building the smelting and refining operations associated with the mine on North Maluku instead. At the same time the company has yet to specify publicly how it will dispose of the waste, and other impacts on marine life seem likely (for example if BHP plans to build a port). Meanwhile frictions with some stakeholders, including some NGOs and indigenous groups, are already apparent.

But it may be that even established CSR best practices are inadequate for managing such an exceptionally sensitive project. LicenseSecure™ suggests that to effectively avoid environmental controversy or socio-political strife or both, BHP may need to develop even more cutting-edge tactics, and in particular to try to shape the overall context in which the project operates. For this context, not just the project’s localised impacts, is what will determine the long-term security of the investment.

On the environmental front, for example, one approach may be to complement best-practice safeguards at the mine itself – which are likely to prevent some but not all environmental damage – with efforts to protect endangered ecosystems elsewhere in the area. Such a tactic could help defuse the potential environmental controversy.

Likewise, in terms of socio-economic impacts, it could make sense for BHP to work with the government and international agencies to tie the project to a broader regional development plan so as to ensure benefits from its investment will trickle down to local people. Long-term strategic planning conducted jointly with local and national authorities may also be important as a way of reducing the risk of ethnic conflict and also pre-empting frictions that may arise from population influx to the region. Such tactics also involve striking a delicate balance: BHP clearly needs to avoid adopting an overtly political role, and also recognise the limits of its own capacity (it cannot simply supplant the role of state). The aim instead should be to diplomatically chivvy and work alongside government and other agencies.

These types of approach, exceeding the normal expectations of a company’s responsibility, have already been pioneered in a handful of other mining projects around the world. Rio Tinto’s big mineral sands mine in Madagascar is one example: Rio worked alongside the World Bank and the Malagasy government to support a regional development plan for the surrounding area; it also committed to protect sizeable biodiversity-rich tracts of land around the zone it will actually mine. Such tactics are challenging and often time-consuming. But in a setting as risky as Gag, they may not be optional.

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© istockphoto.com/Martin Strmko