By Rob Foulkes and Daniel Litvin (December 2008) – A version of this article first appeared in Ethical Corporation.
Oil & mining firms are slashing investment as commodity prices drop. For their own sake, the socio-political fall out will need sensitive management.
After several years of headlong expansion, big oil and mining companies are pulling up abruptly. Soaring commodity prices, which during the past year have broken records in markets from crude oil to copper, have slumped across the board since July 2008. Together with the impact of the credit crunch on project finance, this drop has forced scores of extractive companies to cut back on new investments and scale down production at many existing operations. Shell, for example, recently deferred indefinitely a multi-billion dollar expansion of its Canadian oil sands project, while major mining companies are reviewing billions of dollars more of planned investment for next year.
Companies focused intently on cutting costs may be tempted to treat management of socio-political and sustainability issues as a luxury which they can live without while projects are on hold. Clearly, legal requirements in this area need to be met: complying with environmental regulations for mothballed facilities, for example. But is there any sense in going beyond this – for example investing in community projects or stakeholder engagement programmes – while other investment is frozen? In fact, while waste should be cut back in this area as elsewhere, strategically protecting key relationships during this period actually may be more important to companies’ long term success than any short term cash savings.
A feeling among host communities and governments that they have been cast aside by multinationals in the past has bred suspicion and resentment of foreign business in resource-rich developing countries. These feelings have underpinned successive waves of resource nationalism at great cost to the companies involved. Research based on Critical Resource’s LicenseSecure™ methodology, which rates the health of the ‘socio-political license to operate’ of resource projects, suggests that frequently it is a foreign company’s handling of social and political concerns during a delay to a project that shapes the way the business is seen and treated by its hosts in the future.
At such times, well-focused sustainable development programmes and other relationship-building activities – which typically cost a small fraction of overall capital expenditure for a project – may be a worthwhile investment. Doing the right stakeholder engagement work is equivalent to buying an option to reopen projects, or at least lower the risk of future backlash.
When it comes to their treatment by foreign extractive companies, governments and populations in resource-rich countries tend to have long memories, and in many parts of the world feel that the multinationals have historically paid scant attention to their needs. The oil and mining nationalisations that swept the developing world in the 1960s and 1970s were in part a response to decades of perceived exploitation, a belief – fair or not – that foreign companies had treated host countries as cash-cows to be milked or discarded as required without sufficient consideration for the human consequences.
In the oil sector, the result of this episode of backlash is that some 80% of the world’s proven oil reserves are now in the hands of state oil firms, making them largely off-limits to private companies such as ExxonMobil and Shell – a colossal ongoing constraint for the industry. While economic conditions (and international financial institutions) in the 1980s and 1990s encouraged some countries to re-open their industries to foreign investment, particularly in the mining sector, this rarely meant that resentment had disappeared. As prices rose from 2002-8, resource nationalism again emerged as countries took advantage of their renewed wealth and bargaining power to extract better terms from investors.
Companies may see current conditions as welcome relief from such pressures. Host governments are today not in a position to demand higher taxes and royalties; indeed, for many the priority now is simply to persuade foreign firms to stay. But at some point markets will recover and prices will pick up, and the way companies treat their hosts in the interim will not be forgotten. National governments in particular may view sceptically offers from ‘those that deserted us in our time of need’ (as President Mwanawasa of Zambia said of Anglo American, which pulled out of a big copper project there in 2002). Moreover, if western firms are now seen in a poor light in this respect, increasingly confident companies from China, India and elsewhere will be happy to fill the gap.
The financial value of trust
In terms of the management of individual projects during investment delays, our research suggests that the way socio-political issues are handled can significantly affect the support a company enjoys from its hosts when conditions improve and it seeks to re-launch. Allowing relationships with key stakeholders to deteriorate, for example, or failing to pursue valued community projects, can undermine local and national support that may have taken years to build up, and will increase the risk of delays or backlash when prices pick up.
The case of Jabiluka, an Australian uranium project acquired by the mining company North in 1991, illustrates at least an aspect of this. Stalled at that point by a national policy limiting uranium mine development, the project did at least have the formal consent of the local Aboriginal community. Yet by 1996, when a new government revoked the policy, community opposition had intensified. Hundreds of people were arrested during protests over the next two years and the mine became a national controversy. Perceptions of social and environmental problems around its nearby Ranger mine (whether these were fair or not), and Aboriginal concerns that re-launching Jabiluka would mean more of the same meant that any local support the company had once enjoyed was severely eroded. Rio Tinto, which acquired North in 2000, has since agreed to mothball the project until the local community reaffirms its consent, which some of its leaders insist it will never do.
Delays need not result in such problems. In fact, at the best-managed projects, companies have used periods of slow technical progress to actively build community and broader support. BP, for example, had an arguably much tougher challenge in the late 1990s as it sought to hold back development of its Tangguh liquefied natural gas project, which the Indonesian government was anxious to see operational. A firm but flexible negotiating position that took some of Indonesia’s priorities into account, and a pre-emptive approach to tackling sensitive local issues including potential human rights concerns and unmanaged migration into the area helped persuade the government to accept the delay. ExxonMobil, by contrast, has faced difficulty holding on to a similar project in Indonesia, having taken a seemingly less adaptive stance towards its stakeholders in the period prior to the full-scale development of its resource.
In this way, a sensitive but strategically designed approach to stakeholder relations can help extractive companies soften the impact of project delays on the way they are viewed in resource-rich countries. Maintaining sufficient levels of contact with host governments and communities, and responding wherever possible to their needs during periods of project delay (including through continued, even if pared back, sustainability programmes) is a critical element of this.
By the same token, when renegotiating the commercial terms of projects with governments in the light of commodity price falls, companies may do well to pay at least some attention to public and political perceptions of what constitutes a ‘fair deal’ for the host country. Firms that focus solely on extracting short-term concessions may end up with agreements that prove politically unstable over the long term. Put another way, a little strategic effort on their part to demonstrate consideration for stakeholders’ interests may pay off when the tables again turn, as they surely will.