Simon Thompson discusses the oil-price collapse and new market and social realities for extractive companies and African governments, and Tullow’s approach to stakeholder challenges in East Africa.
The oil price collapse does not spell the end for exploration in Africa
“The dramatic fall in oil prices has demonstrated that the oil industry is at an inflection point. If global growth continues to be sluggish, and if Saudi Arabia and other low-cost producers remain determined to maintain their market share, then this period of extreme volatility will continue. We should expect to see a supply side response, in which high cost production in the US will be driven out of the market. It is anybody’s guess where the oil price will establish a new equilibrium once that happens and what kind of price will be needed to reincentivise production in America.
Current uncertainty will not spell the end for exploration in Africa. The Atlantic margins and East Africa have some of the most exciting geology for conventional oil and gas discoveries in the world today. But major investment decisions may be deferred as the state of the market makes high-risk, high-cost projects unviable. Even before the crash in prices, the cost of deepwater exploration was unsustainably high. This led Tullow to slash deepwater exploration budgets over a year ago. We are fortunate in that today most of our exploration and development projects are onshore in relatively low-cost environments.”
There is a new imperative for governments to improve investment climates
“Changing market realities are creating a new imperative for developing country governments to create the right investment climate. Oil companies will be more selective about which opportunities to pursue and are in a stronger position to demand competitive and predictable legal and fiscal regimes.
There will inevitably be a lag between the current shift in investor attitudes and new realities sinking in with governments. However, it is crucial for political leaders to understand that they are competing for capital. If they don’t, some promising resources will remain undeveloped.”
Stakeholder engagement should focus on causes of grievances not the symptoms
“In terms of local stakeholder management, I think companies often fall into the trap of tackling the symptoms of grievances rather than their causes. It is important to be responsive as issues arise and to communicate with as many stakeholders as possible to understand what lies at the root of problems. Some might for instance view the challenges Tullow has faced in Kenya as a security issue. This is too simplistic – we are actually dealing with a community relations issue.
Turkana County – where our latest discovery was made – is one of the poorest and most remote parts of Kenya. The local population is comprised mostly of nomadic pastoralists. 80 percent of the population have received no formal education whatsoever. The area is marked by recurring drought and a history of intertribal conflict over scarce resources – and there are a lot of guns.
This is a very challenging context to work in. Whereas in the past the region was more or less uniformly poor, Tullow’s presence is inevitably creating inequalities. Conflicts are erupting over jobs and exacerbating pre-existing tensions. Managing security is inherently linked to managing livelihoods and our impact on land and water. Even if we wanted to, it would be impossible to protect our facilities with hard security. The best solution is to build community support.”
Smaller companies need not be at a disadvantage in managing societal issues
“Tullow cannot resolve Turkana’s problems alone, nor do we want to become a proxy for the government. We have worked hard to build partnerships with the county and federal governments, civil society, development agencies, and local communities to try and manage Turkana’s complex challenges.
A company like Tullow obviously does not have the same resources to hand as the likes of Shell or ExxonMobil but that does not mean we are less able to manage stakeholder issues. We have the advantage that our investments are focused on a limited number of countries. That means the challenges we face receive more senior management attention. On the ground, the calibre of our community relations and external affairs teams are equal to, if not better, than those of the supermajors.”
Transparency is only the first step – what counts is converting resource wealth into development
“Transparency helps to demystify the oil industry, particularly in countries which have only recently made discoveries and have little understanding of oil’s potential economic impacts. Openness about our contributions is key to managing expectations and building trust with governments, civil society and communities. Without those relationships we wouldn’t be able to proceed with our projects in Kenya and Uganda for instance. This realisation prompted us to break ranks with the industry in 2013 and become the first private sector oil and gas company to disclose payments to host governments on a project by project basis.
The Extractive Industries Transparency Initiative is a useful mechanism for validating payments. But transparency by oil companies is only the first step. Communities and civil society are not interested in payments per se but want to know how those payments are converted into investments that make a real difference to their daily lives.”
Tackling climate change is vital but fossil fuels will continue to play a role in our energy mix
“There is no question that the world needs to reduce greenhouse gas emissions – that has to be the starting point for any discussion on climate change. Legislation will become an increasingly important factor in determining the price of fossil fuels, potentially making some resources uneconomic over time. Lord Browne’s comments on the extractive industry’s role in tackling climate change at a recent Critical Resource seminar were thoughtful and provocative. But the fact remains that even if governments took concerted action tomorrow it would take decades to replace all assets reliant on fossil fuels. In the meantime, energy demand will continue to grow, so under any scenario there is a place for the oil and gas industry for many years to come. Tullow’s immediate priority is to reduce GHG emissions at its operations, particularly from flaring.
Even if oil and gas has a diminishing role in the world’s future energy mix, the industry provides unique opportunities to translate resource wealth into socio-economic growth. Governments in emerging markets will continue to want to develop their fossil fuel assets. We should do so, but – given their finite nature – must play our part in trying to ensure that resource revenues are used to make investments which underpin sustainable and inclusive economic development.”