Working through the downturn

Creating local jobs is good for companies’ ‘license to operate’ – but what approach should extractive firms take in a commodity price downturn? A snapshot from a recent client assignment.

By Sebastian Sahla, Associate

But how bright is the future?

During the current crisis facing many resource-driven economies, jobs related to the extractive sectors are more precious than ever. At the same time they are often under threat as investors scale back their activities and workforce. This article highlights a number of steps extractive firms can take to generate jobs that are insulated, as much as possible, from commodity price volatility.

The findings are informed by research conducted as part of broader support by Critical Resource to the German Agency for International Cooperation’s (GIZ) ‘Skills for Oil and Gas in Africa’ (SOGA) initiative. SOGA – jointly commissioned by the German Ministry for Economic Cooperation and Development (BMZ) and the UK’s Department for International Development (DFID) – was launched in early 2015 to improve the quantity and quality of jobs available to local people in East Africa’s emerging hydrocarbons sectors through cooperation with the private sector.

Job creation in the extractive sectors is a growing priority for governments, companies and development actors alike. A significant proportion of the value created by oil, gas and mining projects goes directly to company employees or to indirect jobs in the supply chain, while spending effects from wages and government expenditures funded by the industry sustain employment in the broader economy. Where these effects are kept within host countries, they can help to address the extractive sectors’ poor historical record in creating linkages to host economies – while allowing companies to reduce operating costs, mitigate supply chain risks and strengthen the ‘social license to operate’.

However, the fate of extractive projects – and associated employment opportunities – is closely tied to global commodity prices. Even in a high price context, job creation is challenging and expectations for lasting employment often go unmet. The capital-intensive nature of the sectors – particularly oil and gas – means jobs tend to be limited to a small set of highly skilled workers, while large-scale non-specialised employment exists primarily in short-lived construction phases. In the current low price environment, job creation has become even more difficult.

Around the world, planned developments are being put on hold, existing operations scaled back, and jobs cut. Leading oil services firm Schlumberger for instance has reduced its global workforce by 15% since mid-2014. Low prices are particularly problematic for many African economies where infrastructure constraints and perceptions of higher political risk are already increasing project costs.

Job potential in the extractive sectors varies greatly by commodity, project phase and country of operation, but across the industry there are a number of steps that companies (in collaboration with host governments and development actors) should consider to promote lasting employment generation:

Foster transferable skills in the labour force

Vocational and technical training is key to generating direct local employment. However, if this training is to have an impact beyond the life of a particular project it needs to include an emphasis on transferable skills. Soft skills and basic education (e.g. literacy, numeracy and foreign languages) in particular improve general employability. This can open up a range of technical, administrative and managerial roles within the sector and the broader economy once peak employment in the construction phase has passed, or if a project winds down.

ExxonMobil’s US$19bn LNG project in Papua New Guinea employed more than 9,000 local workers during construction. When the company’s labour needs drastically dropped as it moved into production, it faced a major challenge in easing the transition. As well as implementing a strategy to maximise local employment in the production phase, ExxonMobil has been providing workers with ‘personal viability training’ to help them recognise and market their skills in other sectors of the economy.

Build competitive enterprises

Opportunities for local firms in the sectors’ value chains can be opened up by increasing access to finance, capacity building (including on certifications needed to supply multi-nationals) and pro-local procurement processes. The ultimate goal should be to get local firms to a point of being able to compete on equal footing in competitive tenders, rather than simply giving preferential treatment in procurement. Support should be based on strict selection criteria and any guaranteed preference phased out over time in order to open up opportunities in other sectors and help to ensure the fate of local firms is not tied to a single project.

Anglo American’s Zimele programme is a leading example in this area. Zimele combines equity and loan financing with technical assistance to foster competitive local enterprises that can survive independently of Anglo American and pursue opportunities with other mining companies or other sectors. Over the past seven years, Zimele has supported over 1,800 South African businesses which together employ over 38,000 workers, most of them outside of mining.

Strengthen educational institutions for the long-term

Extractive firms should facilitate knowledge transfers and strengthen local educational institutions to make a lasting contribution to educational capacity while also serving immediate training needs. This may involve partnering with existing education providers, supporting local education-oriented NGOs or academic bodies, or gradually transitioning purpose-built training facilities to local ownership. Leveraging the expertise of home institutions and development actors can be a particularly effective means of ensuring educational capacity is strengthened beyond the life of an extractive project.

Norway’s Statoil for instance has partnered with the Norwegian University of Science and Technology and the Norwegian Ministry of Foreign Affairs to establish a Bachelor of Business Administration degree at Pomor University in Russia. Statoil’s focus has been on building the university’s capacity to run and manage the degree without external assistance, thereby making a lasting contribution to higher education.

Develop shared infrastructure

The employment impacts of infrastructure go far beyond direct jobs created in construction. Though not always feasible, designing transport infrastructure (e.g. roads, railways or ports) for shared private and public use can facilitate access to markets, strengthen other economic sectors and reduce infrastructure costs for host governments. Shared utilities (e.g. power and water) can generate direct jobs and help to meet the electricity and water needs of local businesses. Again sustainability is key: infrastructure must remain functional beyond the life of an extractive project.

Rio Tinto’s shared use port at Port d’Ehoala in Madagascar (built with support from the World Bank and the government of Madagascar) is facilitating the export of locally produced commodities and the import of essential goods (e.g. foodstuffs, fuel and vehicles) in a remote region of the island. The port is also generating income through tourism and improved access for humanitarian workers. Over time, Rio Tinto will transition ownership and management of the port to the government.