managing risk in complex operating environments sarah meyers senior analyst, north africa control...
TRANSCRIPT
Managing Risk in Complex Operating Environments
Sarah Meyers
Senior Analyst, North Africa
Control Risks
10th Africa Oil & Gas Conference
Algiers, April 2006
NOT AN OFFICIAL UNCTAD RECORD
Outline
• General framework for operating in complex environments in Africa
• Case studies: The challenges and opportunities
• Considerations for risk mitigation
Outline
• General framework for operating in complex environments in Africa
• Case studies: The challenges and opportunities
• Considerations for risk mitigation
The ‘curse of oil’
• Natural resources are often seen as a curse rather than a blessing, associated with conflict, corruption and environmental damage.
– Successionist rebellions are more likely if a country has valuable natural resources, especially oil.
– Little incentive to tax citizens means that there is no outlet to hold leaders accountable.
– ‘Dutch disease’ – sudden inflow of dollars leads to appreciation of local currency, making non-oil sectors less competitive on the world market.
General framework for increasing risk
• Governments and oil companies disagree over the ‘curse of oil’ – how it should be addressed or even if it exists at all.
• It is undeniable that oil companies work in some of the most complex, and sometimes even hostile, environments.
• Becoming more acute because of the push for more reserves and exploration continues.
Risk
Exposure
Time
The Above-Ground Risk Landscape
Politics and Governance
•Political Instability
•Unclear Legislation / Security of Tenure
•Corruption / Poor Governance
•Changing Royalty / Tax Regimes
Security
•Civil unrest / ethnic conflict
•Kidnap
•Insurgency and terrorism
•Labour unrest
•Theft and pilferage
Reputation and Social
•Community opposition / social licence to operate
•Partner reputation
•Human rights
Infrastructure and Health
•HIV / AIDS
•Disease
•Lack of transport, communications infrastructure
No longer working in isolation
Consortium of international companies
Host government
International financial institutions
NGOs Oil & gas project
Reputational risk
• Greater involvement by a number of players with different objectives.
• The development of natural resources almost inevitably involves complex trade-offs between conflicting objectives.
• Greater attention and easier distribution of media and the Internet.
• Growing influence of NGO activism and direct action campaigns in the US and northern Europe – and to a lesser extent southern Europe.
Result: Oil companies are now more likely to take reputational issues into account when investing in new countries.
Different comfort levels
‘Majors’
• Considerable influence when deciding whether or not to invest in a country
• Although they maintain influence, some of their power wanes once they have decided to enter a country.
• Massive investment in country means that it will be difficult to just walk away or to sell up
• Size makes them more vulnerable to NGO pressure.
‘Juniors’
• Corporate strategy based on high risk – high return.
• Focus on exploration in different environments – little long-term commitment.
• Competitive advantage because of their willingness to operate in high risk environments that the majors won’t touch.
• Can’t ignore entirely because won’t be able to sell out or form partnerships if their projects are tainted.
Determinants of commercial impact
• Nationality – Pressure groups are most influential in Northern Europe and the US. Less effective in Southern Europe and still less in south and south-east Asia. Least concerned by reputational risk are China and Russia.
• Upstream/downstream – Companies with downstream operations are potentially exposed to a boycott at the pump. Companies solely engaged in exploration and production face no such risk.
• Stock market listing – Publicly-listed companies are more exposed to pressure from pension funds and other shareholders.
• State-ownership – Companies that are wholly or partly state-owned are more vulnerable to pressure from politicians in their home countries.
Outline
• General framework for operating in complex environments in Africa
• Case studies: The challenges and opportunities
• Considerations for risk mitigation
Case study: Western Sahara
• Dispute over the territory has not been resolved; legality of operations is unclear.
• Both Morocco and the Saharawi Arab Democratic Republic (SADR) have issued exploration licenses for the same areas.
– An American company is conducting exploration under contract from Morocco
– Number of companies were recently awarded contracts by SADR
• NGOs are particularly active and have forced several companies operating under Moroccan contracts to withdraw.
Bottom line:
• Companies operating under Moroccan licenses face serious censure for their activities, including divestment campaigns.
• Companies operating under SADR licenses are unable to conduct activities because territory in which the concessions are located is currently held by Morocco.
Case study: Sudan
• Comprehensive Peace Agreement (CPA) ended the civil war but has failed to resolve issues over wealth-sharing and control of natural resources.
• National government and southern regional government have issued conflicting licenses for the same concession.
• US sanctions against Sudan remain in place.
• NGOs and direct action groups have waged successful divestment campaigns against several companies.
Bottom line:
• Reputational risks have shifted, but not disappeared. Divestment and direct action campaigns are gaining momentum, particularly in the US.
• The operating environment under the CPA remains uncertain.
Outline
• General framework for operating in complex environments in Africa
• Case studies: The challenges and opportunities
• Considerations for risk mitigation
Risk Mitigation
Operations in complex and hostile environments are possible if you:
Understand the operating environment on all levels
• International
• National
• Regional• Local
Engage with the local community
• Understand that perception is reality. • Community ownership of projects
Achieve the appropriate levels of security
• Make security part of the whole system
• Balance security and the ability to operate
Some Key Questions for investors
• Where in the country is the project?
• Who are the partners?
• What is the political risk strategy?
• What is the anti-corruption strategy?
• What are the project’s legacy issues?
• What is the community engagement strategy?
ENDMerci pour votre attention
Sarah Meyers
Senior Analyst, North Africa
Control Risks