All risk is local

In today’s globally interconnected world, societies are the convergent point for the majority of risks that companies face. For multinational corporations operating in frontier markets, local populations have the ability to impact political risk, economic risk and even transfer risk. Companies attempt to influence or mitigate these risks by establishing bilateral investment treaties with host nations, sifting through macroeconomic data to identify trends, using statistical-based regression modeling to predict threats and hiring high profile individuals to advantage negotiations. These activities, although useful for traditional risks, provide little to no warning from threats that emanate from indigenous populations.

Local populations now have the ability to almost instantaneously aggregate and mobilize around an idea, ideology, or common cause. Communities, groups and even individuals use social media, litigation, protests, and violence to promote their ideas or achieve their objectives. They target companies in the mineral and oil extraction industries daily across the world. Reports of protest over fracking, litigation regarding environmental damage, and attacks against employees and infrastructure are common occurrences. These activities significantly impact all aspects of operations and have a cascading effect on costs throughout the company. An example from a 2009 Harvard Kennedy School study illustrates how “community conflicts shut down key power lines for a project and forced a company to suspend operations, at a cost of $750,000 per day.”

Security managers within oil and gas and mineral extraction industries are feeling the pinch. They seek solutions to counter an increased number of threats including cyber intrusion and supply chain disruptions caused by communities, while simultaneously attempting to maximize profits. Traditional approaches focus on increased physical and technical security measures are costly and ineffective. The January 2013 attack on the Tigantourine gas facility near In Amenas, Algeria provides a deadly example how traditional security measures failed to safeguard assets and personnel.

Security is merely a deterrent. However, security providers continue to introduce hi-tech, multi-million dollar technical solutions to safeguard operations from community-based threats. At IRN’s Oil & Gas Security Summit, Shell’s Nigerian security manager said he receives several proposals each week for high-end technical solutions. How can unmanned aerial vehicles, satellite change detection or unattended ground sensors safeguard operations in remote areas where company assets and personnel are unavailable? These “solutions” merely provide a snapshot in time, are reactive in nature and do not allow companies to forecast or mitigate threats. At best, they direct company assets to an ongoing situation.

“All politics is local” supports the idea that politicians must be attuned to their constituents’ concerns. The same idea holds true for extraction companies regarding risk: “all risk is local.” The majority of threats to extraction, production and distribution emanate from local communities in which companies operate. Unfortunately, security managers tend to view community engagement as a corporate social responsibility (CSR) or public relations (PR) function. Additionally, some fail to recognize the benefits that derive from community engagement or to incorporate community engagement activities into their overarching security plans. “The Canadian Centre for Social Performance and Ethics concluded that, even on a scale of profitability, corporations that rate highest on ethical conduct and CSR are most profitable in the long-term.”

Organizations and companies are starting to realize this concept. The World Bank mandates community impact assessments as part of their donor requirements. Larger oil companies have established entire divisions focused on community engagement and create Global Memorandums of Understanding (GMoU) for sustainable community development in host nations. Although generally understood, the benefits are not being realized in real terms. With so much attention and billions of dollars spent annually on these initiatives, why are companies experiencing continued community-based production threats? Because “they are largely seen as dysfunctional, out of tune with community people and grossly inadequate leading to intense struggle over such benefits by groups which fuels conflict.”

Companies sign formal agreements with host-nation governments expecting them to distribute revenue and deliver basic services to their citizens. In frontier markets, governments are at best ineffective and at worst corrupt. They focus on increasing and maintaining patronage networks to remain in power and fail to deliver basic services to rural communities. “Since the state is far removed from them, oil-bearing communities often vent their anger on the production facilities of oil Trans-National Companies, seen as both a symbol and cause of their woes.” A U.S. Department of State, Foreign Service Officer commented on a recent analysis of Colombian society stating “Any company that gives back to the local community and takes care of the locals better than the government can only enhance its ability to make a profit in the future.”

Tailored community engagement and development activities provide the most cost effective solution to mitigate production risk and maintain stable operating environments. Designing effective community engagement strategies and CSR activities requires a comprehensive understanding of local communities. Diverse cultures, ethnicities and religions reside within many local populations and influence their social structures, identities, narratives, traditions, customs and norms. Each community, village, tribe, or hamlet is a microcosm of the national or regional population with its own nuances that must be understood in order to effectively engage them and design CSR activities that create utility. With a comprehensive understanding of a target community, companies see the world through the community’s eyes which uncovers their true grievances and basic needs. With this understanding, companies are able to engage in meaningful dialogues to resolve conflict and create effective development programs that create utility without dependency.

Too often, companies fail to develop a comprehensive understanding of local dynamics before they design and implement engagement strategies or CSR initiatives. A recognized authority explains, “their existing frameworks do not support the process of inquiry that is needed to deepen understanding of the lived experience and do so within a reasonable timeframe that is still in line with business interests.” Therefore, companies often outsource development activities relying upon Non-Government Organizations (NGOs) or local nationals to provide this understanding of the lived experience and do so within a reasonable timeframe that is still in line with business interests.”

Unfortunately, NGOs take an American-orientated western development approach, which focuses on top-down implementation and technical solutions. And, local nationals are often times government representatives that do not represent the community’s interests. When combined, these factors increase existing social tensions and fuel conflict.

Compounding these issues, companies are sometimes viewed as proxies of the government which hampers or prevents engagement or dialogue. And just as “All Risk is Local,” successful negotiations are built on personal relationships. It is no coincidence that shortly after hiring Ali Khedery, the former adviser to five U.S. ambassadors in Iraq, Exxon Mobil was able to negotiate entry into the Kurdistan region for oil exploration and production. For the same reason, companies often require neutral third party actors to act as mediators. These parties assist companies to sign a social license to operate with the community.

The majority of investment over the next ten years will occur in frontier markets, primarily focused on natural resource extraction. Exploration and production are pushing into remote areas in close proximity to indigenous populations and their communities. These remote areas have minimal infrastructure to support operations. This provides companies the ability to sign a social license to operate and create enduring partnerships through mutually beneficial development projects. Signing a social license to operate with communities establishes the framework to align corporate and community goals and creates enduring relationships that promote stable operating environments throughout the lifecycle of the project. With the majority of threats emanating from communities, having a social license to operate is not only beneficial, but required.