No magic bullet: operating in conflict-prone environments

With wars raging in many parts of the world, how can resource companies balance the risks and rewards, while operating responsibly?

By Saskia Marsh, Senior Associate

Muzzling the threat: operating in conflict-prone environments (c) Moyan Brenn

Conflict appears to be spreading across large swathes of the world map, as recent events in Iraq, Libya, Ukraine, Syria, Central African Republic, and Gaza/Israel demonstrate. One count places the number of countries involved in conflict at 64, and separatist groups/guerrilla movements at 571. [1] 

Many of these conflicts are located in regions abundant in natural resources. In such contexts, resource companies are faced with the challenge of how to unlock often significant commercial value, whilst avoiding fomenting further deterioration. As a starting point companies must implement basic risk management approaches and seek to minimise adverse impacts. Beyond this there are a number of innovative approaches companies can take, to make it more likely for natural resources to contribute to resolving political differences. Indeed, the international consensus has moved from tending to discourage investment in conflict-prone regions to recognising the stabilising role that responsible investment can have – the OECD has, for instance, developed guidelines on the responsible sourcing of minerals from conflict zones. [2]

This note highlights steps for companies to take when operating in conflict-prone environments. The list below is broad-brush, in contrast to the detailed strategies we develop for clients, and is intended simply to provide food for thought.

Common pitfalls companies face*

As well as basic challenges around security of staff and facilities, disruptions to transportation routes/supply chains and sometimes weakened host government capacity, the following should be borne in mind:

• At the local level, companies may be subject to attacks by rebel groups as a way of expressing grievances, extracting pay-offs or applying pressure for a greater share of wealth. This is particularly likely to occur where governments are perceived to mismanage revenues.
• At the national level there can often be significant government pressure to maintain the pace of development/production, in spite of local and operational pressures.
• There may be legal consequences should companies become implicated in human rights abuses by third parties, such as by state military protecting the project.
• There is also heightened risk of reputational damage. Companies may face NGO criticism and even diplomatic pressure. In such circumstances they may find it difficult to attract commercial partners or be forced to withdraw.
• The presence of companies may sometimes inadvertently fuel conflict, with resource revenues incentivising either corrupt governments, rebel groups or third countries to control access to mineral resources or deny such control to the other side.

Examples of firms facing tough operating environments

• Classic cases of the interplay between natural resource companies and conflict include: Shell in Nigeria, Rio Tinto in Bougainville and mining companies in DRC during the civil wars.
• Between 1998 and 2003, Talisman faced major challenges operating in Sudan. These included allegations (which Talisman denied) of legitimising a ‘rogue regime’ and complicity in human rights abuses by the government against rebels. The impact on the company’s reputation and share price was a factor behind Talisman’s decision to withdraw.
• Foreign oil companies in Iraqi Kurdistan have faced delays and uncertainty as a result of disagreements between the regional government and Baghdad over legality of contracts; in 2012 Chevron was ‘blacklisted’ by the Iraqi government. More recently, companies have had to re-examine their security arrangements in light of Islamic State advances in Iraqi territory.
• The 2013 attack on Statoil/BP in Algeria demonstrates not only the threat of international terrorism but also how companies can became a proxy target for local discontent. (In this case, opposition towards the Algerian regime, driven by perceptions of socioeconomic marginalisation, purportedly played a role in the recruitment of militants behind the attack).

Best practice approach

• Companies must ensure that the basics are in place to minimise conflict-related risks. These include: ensuring proper due diligence; putting in place good intelligence networks; and implementing proper security procedures with the appropriate resourcing.
• However companies should recognise that security ultimately rests on stakeholder support. In conflict-prone environments, companies will need to work even harder to build trust through: broad-based consultation, third party alliances (e.g. NGOs and international agencies/ governments), strategic social investment and capacity building.
• The industry, UN, and NGOs have sought to codify best practice on avoidance of harm: The Voluntary Principles on Security and Human Rights, the Guiding Principles on Business and Human Rights and International Alert’s Conflict Sensitive Business Practice handbook are key guides. Companies should ensure adherence through, inter alia, implementation of human rights and conflict impact assessments, and facilitating training for security contractors/military personnel.
• Companies can, in some cases, help lay the foundations for economic/political stability – and thereby secure the company’s long term presence. While companies must be careful not to play an overtly political role, there is scope for behind-the-scenes support:

– Desire to access resource revenues may bring parties together. Natural resource companies can thereby support dialogue, cooperation and confidence-building measures between opposed groups.

– Revenue sharing arrangements, if brokered in a manner perceived to be fair to all, can help create economic incentives for peace.

Examples of best practice – and results for the companies

• In 2005, Occidental (Oxy), operating in an area of Colombia with a concentration of military forces and guerrilla groups, used International Alert’s ‘Conflict Sensitive Business Practices’ manual to create a more systematic approach to risk management and stakeholder engagement. In doing so the company was able to inexpensively mitigate company-community tension.
• In West Papua, BP established a ‘community policing’ model in the late 1990s, whereby security forces established permanent communication channels with communities and NGOs. The emphasis on dialogue appears to have delivered results for BP, as it continues to operate with little trouble in an otherwise conflict-prone environment.
• In the Niger Delta (1997 – 2007) Statoil was able to build support in a volatile context where other companies have struggled to do so through broader regional development planning, developed at an early stage and via a highly participatory approach.
• While conflict minerals traceability/certification schemes have met with varying degrees of success, more recent schemes such as the World Gold Council’s Conflict-Free Gold Standard (launched 2012) build on lessons learnt. Key to success is a multi-stakeholder approach across the supply chain, and third party monitoring to ensure compliance.
• In terms of how natural resources may be able to contribute to peace-building, two examples provide indications of possible approaches. In Gaza (while progress has since ground to a halt) discussions over potential shared economic interest between Israel and the Palestinian Authority had, in earlier times, brought otherwise hostile parties to the negotiation table. In Aceh, Indonesia, central-regional arrangements for natural resource revenue-sharing have contributed to maintaining peace since the cessation of conflict between the government and separatist rebels.

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

[1] http://www.warsintheworld.com/?page=static1258254223

[2] OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, available at: http://www.oecd.org/investment/mne/GuidanceEdition2.pdf