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Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April 2006 NOT AN OFFICIAL UNCTAD RECORD

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Page 1: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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

Page 2: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

Outline

• General framework for operating in complex environments in Africa

• Case studies: The challenges and opportunities

• Considerations for risk mitigation

Page 3: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

Outline

• General framework for operating in complex environments in Africa

• Case studies: The challenges and opportunities

• Considerations for risk mitigation

Page 4: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 5: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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

Page 6: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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

Page 7: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

No longer working in isolation

Consortium of international companies

Host government

International financial institutions

NGOs Oil & gas project

Page 8: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 9: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 10: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 11: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

Outline

• General framework for operating in complex environments in Africa

• Case studies: The challenges and opportunities

• Considerations for risk mitigation

Page 12: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 13: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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.

Page 14: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

Outline

• General framework for operating in complex environments in Africa

• Case studies: The challenges and opportunities

• Considerations for risk mitigation

Page 15: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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

Page 16: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

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?

Page 17: Managing Risk in Complex Operating Environments Sarah Meyers Senior Analyst, North Africa Control Risks 10 th Africa Oil & Gas Conference Algiers, April

ENDMerci pour votre attention

Sarah Meyers

Senior Analyst, North Africa

Control Risks

[email protected]