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™

Cutting costs without losing the ‘license’

Lower prices have driven increased focus on capital discipline across the mining, oil and gas industries. Companies have been re-evaluating the economics of new projects and seeking to scale back or delay capital expenditure by putting development on hold. From the perspective of governments and host populations, this may translate into cuts and delays to anticipated benefits – whether royalties and taxes, employment and contracting opportunities, or community investment programs. This creates challenges for companies as they seek to maintain their relationships with their stakeholders, often in a context of high expectations, whilst ensuring shareholders’ interests are protected. How can responsible companies ensure that their projects do not lose critical stakeholder support during periods of uncertainty, cost-cutting and delay?

This note highlights just a few patterns to watch out for when dealing with a delay, and approaches that may be helpful. It draws from our experience advising clients using our database of 200+ projects. The list below is broad-brush, in contrast to the detailed strategies we develop for clients, and is intended simply to provide some food for thought.

 

Common issues*

  • Mishandling relations with governments, communities or employees when delaying or scaling back an investment can make it extremely hard, or impossible, to restart at a later date.
  • The underlying structure of support may change during a delay. For instance new officials may be elected, or an outside event might prompt opposition to resource extraction.
  • Without good communication and engagement, stakeholders are likely to form their own – often unduly critical – views of a company’s progress, resulting in opposition and protest.
  • Delays and perceptions of unfulfilled commitments around extractive projects can provide a shot in the arm for opponents of the industry, offering them effective political messages.

Examples

  • In the 2000s an extractive company’s relations with an African host government deteriorated seriously following a dispute over pace of development at its $multi-bn project. Alleging that progress had been too slow, the government threatened to expropriate the asset; getting it back on track involved over $500m of costs.
  • Soon after agreeing a resettlement plan with communities in the late 1990s, a major miner put development of a project in South Africa on hold due to low prices. Local people were left in limbo, allowing radical elements in the community to generate hostility and political opponents to criticise the company. 

 

Potential approaches*

  • During periods of delay and uncertainty, relatively low-cost stakeholder activities (e.g. government engagement; local content, training & hiring programs; community investment) can be used as a lever to protect an asset’s long-term value.
  • Close communication is key. Uncertainty, suspicion and misinformation can best be countered if a company provides regular, transparent information on its plans.
  • Companies need to explain – in layman’s terms – the reasons for a delay, and to emphasise that, despite the challenges, they genuinely want to move ahead with the investment. This is not inconsistent with transparency on the scale of the obstacles.
  • A delay, while posing challenges, may also provide a company with valuable additional time for key areas of work with long lead-times, such as local training or stakeholder mapping and engagement planning.
  • Stakeholders, including at the local level, do in some cases recognise the danger that a project may not be developed at all if it is uneconomic, and so may support a company through delays – though this is far from guaranteed.

Examples

  • Wafi-Golpu Joint Venture (WGJV – Harmony/Newcrest) in PNG has faced delays since late 2012 due to shareholder concerns around project economics. Local and political support has been maintained through engagement and strategic social spending – including on vocational training in preparation for future project requirements.
  • In 2012, Freeport McMoRan’s Climax mine in Colorado reopened after years of stop-start production and periodic lay-offs. The reopening was welcomed by stakeholders, in part due to consistent and transparent communication about the company’s intentions for the project, and a strong environmental approach during periods of closure.
  • Since Rio Tinto took over the La Granja project in Peru in 2006, it has enjoyed support despite delays to development. One measure Rio Tinto took was to lobby government to ensure existing social funds could be managed by the local municipality, and therefore had greater impact among communities.

 

*Please note these points are illustrative, synthesised and do not reflect the complexity of the situations or management approaches used