Benefit sharing in the Arctic energy sector: Perspectives on corporate policies and practices in Northern Russia and Alaska

Energy Research & Social Science 39 (2018) 29–34

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Energy Research & Social Science journal homepage: www.elsevier.com/locate/erss

Perspectives

Benefit sharing in the Arctic energy sector: Perspectives on corporate policies and practices in Northern Russia and Alaska

MARK

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Maria S. Tysiachniouka,b, , Andrey N. Petrovc a b c

Environmental Policy Group, Wageningen University, Hollandsweg 1, Wageningen, The Netherlands Centre for Independent Social Research, Ligovsky 87, St. Petersburg, 197022, Russia ARCTICenter and Department of Geography, University of Northern Iowa, Cedar Falls, IA 50614-0406, United States

A R T I C L E I N F O

A B S T R A C T

Keywords: Benefit sharing Indigenous peoples Energy sector Oil and gas Arctic

Many transnational energy companies are engaged in the exploration and development of oil reserves in the Arctic, and are facing policy challenges in respect to benefit sharing with the local communities. Benefit sharing arrangements between oil and natural gas companies and indigenous communities were investigated in Nenets and Khanty-Mansi Autonomous Districts, Irkutsk and Sakhalin regions in Russia and the North Slope of Alaska. We argue that Indigenous communities are not equally benefitting from oil and gas extraction, and no one benefit sharing policy model seems to ensure a sustainable local development. This may stem from the mismatch between benefit sharing policies and local institutional frameworks. Thus, as a part of benefit sharing obligations, companies and the state must work with Indigenous peoples and other affected communities to build local capacities and human capital. There is an urgent need to improve our knowledge base about benefit sharing in the Arctic energy sector, and we urge the Arctic Council Sustainable Development Working Group and/or the Arctic Economic Council to conduct a synthesis study aiming at finding best practices, identifying lessons learned, and initiating an inclusive, multi-stakeholder process of developing guidelines for companies on benefitsharing in the Arctic.

1. Introduction Since the last century, the Arctic has become an important arena for energy resource extraction, and this activity is expected to grow in the decades to come [1,2]. Many transnational energy companies (TNC) are actively engaged in the exploration and development of oil and natural gas reserves in the high latitudes, and are facing serious policy challenges in respect to dealing with the local communities and state actors. Oil and natural gas extraction in remote regions, including the Arctic, brings opportunities for development, but also inflicts costs to local communities and Indigenous peoples. It affects the subsistence economy and removes land from traditional resource use. The costs of resource extraction to local communities may outweigh the benefits, which, in turn, affect the social and environmental security in the Arctic [3]. The majority of oil and gas companies in the Arctic have declared their commitment to benefit-sharing arrangements that assist local and Indigenous communities and protect local and Indigenous rights to land and traditional resources [4]. Benefit sharing generally refers to an exchange between actors granting access to a particular resource and

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actors providing compensation or reward for its use [5], as well as the distribution of the monetary and non-monetary benefits produced by a resource-based project [6]. The implementation of these commitments varies considerably among the regions, companies, and communities. Large surveys of literature have been undertaken in respect to benefit sharing in mining industry (see [7–9]), including remote regions [10–13], but only recently the discussion has evolved to focus on the energy extractive sector in the Arctic and sub-Arctic regions [14–18]. The analysis and systematization of Arctic experiences is still in its beginning stages, although there is enough empirical material and case studies to present a classification and initial assessment of the benefit sharing modes and policy models, as we attempt below. The review of benefit sharing arrangements in different Arctic countries and regions is based on our field case studies in Russia and Alaska, as well as, on literature review. Field work took place 2014–2017 in Nenets Autonomous District, Khanti-Mansi Autonomous District, Sakhalin Island, Irkutsk Region, and the North Slope of Alaska. Qualitative methodology using semi-structured interviews, participant observations, and document analysis has been used. In addition,

Corresponding author at: Environmental Policy Group, Wageningen University, Hollandsweg 1, Wageningen, The Netherlands. E-mail addresses: [email protected] (M.S. Tysiachniouk), [email protected] (A.N. Petrov).

http://dx.doi.org/10.1016/j.erss.2017.10.014 Received 10 July 2017; Received in revised form 13 October 2017; Accepted 13 October 2017 2214-6296/ © 2017 Elsevier Ltd. All rights reserved.

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ability to meet community needs and foster sustainable development, and (2) potential characteristics of and impediments to a successful benefit sharing policy model for the Arctic.

literature on the topic of benefit sharing has been analysed. Research indicates that there is seemingly no ideal blueprint, or a single set of best practices leading to benefit sharing conditions satisfactory to local and Indigenous-nomadic communities. By examining the typology of benefit sharing governance modes and corresponding company policy models, we argue that some modes are more advantageous for meeting community needs and fostering sustainable development in remote regions. Concurrently, we explain why, despite company-communitystate cooperation dating back to at least the 1970s, we have not seen the emergence of a successful benefit sharing model. We analyse what elements of Alaskan and Russian experiences could be used to build more locally-responsive and sustainable Arctic benefit sharing frameworks. Finally, we present our policy perspective and suggest new research directions to fill existing knowledge and policy gaps.

3. Evaluating modes of benefit sharing in the Arctic Below we describe four modes of benefit sharing. This classification emphasizes governance and distribution mechanisms and divides all benefit sharing arrangements into paternalistic, company centered social responsibility (CCSR), partnership, and shareholder modes [17,18]. Although we introduce these “ideal” types and provide their stylized descriptions using examples from the field, we must note that in all case studies we see a mix of several modes. Most regions of interest have two co-existing modes, with Alaska bolstering three. To reflect this complexity we created a mixed mode category for Alaska. Another cautionary note is that in some instances it is challenging to clearly identify the mode as benefit sharing arrangements as it may incorporate features from two modalities. We attempted to distill the examples we are using here to illustrate our point most vividly. Finally, we discuss not only features and pitfalls of each mode, but try to connect them with policy models and sustainability process and outcomes. The latter is done using the notions of procedural and distributional equity of benefit sharing [26].

2. Background The concept of “fair and equitable benefit sharing” represents a legal phenomenon, which originates from several international conventions, e.g. the biodiversity, international human rights, law of the sea and human right to science ([19];). It became a normative concept in connection with natural resources. Despite the International Labor Organization (ILO) Convention 169, which specifies Indigenous peoples’ rights, is not directly using benefit sharing terminology, experts are widely exploring it [20] to frame benefit sharing principles that would close the gap between extractive industries, global beneficiaries and local residents ([21–23]). Benefit sharing is defined as the distribution of monetary and nonmonetary benefits generated through a resource extraction activity (e.g., [6,9]). Benefit sharing is understood to be a part of the ‘social license’ to operate, i.e. of a societal acceptance of company’s activities in addition to and in concert with fulfilling obligatory licensing and permit requirements for resource extraction [24]. Differences in benefit sharing arrangements depend on international expectations imposed on the companies by investors, existing legislation, prevalent practices, regional contexts, and the level of empowerment of Indigenous and local communities [18]. Benefits from oil and natural gas extraction can be shared by energy companies with local communities in a number of ways: taxes, community investment, infrastructure development, jobs creation, sponsorship, compensation for damage, dividends, socioeconomic agreements, etc. [25,9]. For example, compensation payments may take a form of cash transfers, subsidies, purchases, and in-kind support directed at the local individual or collective beneficiaries. Community investment may include grants to local businesses and organizations, support for schools, and social services, etc. Dividends may be paid to local beneficiaries from investment funds created as a result of the extractive activity. Ideally, the concept of benefit sharing has to incorporate fairness, equitability (procedural, i.e. an ability to participate in benefit-related decision making, and distributive, i.e. ability to receive equitable benefits) and justice, which extends beyond compensations for loss [26,19,20] and increase well-being and fate control of local communities [27]. Recent literature on benefit sharing, including our past research, has focused on the energy companies and local communities in the Russian North and the North Slope of Alaska [17,18,28–31]. Multiple field studies showed mixed types of benefit sharing arrangements in these regions, resulting in different outcomes for local communities and Indigenous peoples. Several Arctic and sub-Arctic benefit sharing governance modes have been identified (e.g., [17,18]). In this paper, we identify, describe, and compare benefit sharing modes and corresponding benefit sharing policy models found in the energy sector in the Russian and U.S. Arctic. In this context, a mode refers to a general manner or approach in which benefit sharing is executed, while a policy model represents a specific institutional arrangement that supports a given mode. We discuss their advantages and shortcomings in respect to the two key points of this paper: (1) the (in)

3.1. Paternalistic mode The state usually dominates in this mode: it defines, monitors, and intervenes in companies’ policies and practices. In some cases in Russia it represents both sides of stakeholders: a state-run company and a regional government. The company either (partially) takes a role of the state or contributes significantly to some elements of state support to local communities and Indigenous peoples. The latter parties have a very limited ability to control the nature, types, and delivery of benefits. In Russia, the paternalistic mode is rooted in the Soviet legacy and often results in the Indigenous people’s dependency on energy companies, which sometimes de facto represents the state. Since the 1990s, the Russian Arctic has been undergoing a transition from state paternalism to corporate paternalism [28]. In Alaska, paternalism is perceived by scholars and Indigenous people as rooted in colonialism, but it also is embedded in some distributional practices by municipal and tribal governments. For example, the paternalistic mode of benefit sharing arrangements can be exemplified using communities in the Nenets Autonomous District [30]. As a part of the socio-economic agreements between oil companies and the regional government, the oil-generated funds were distributed to Indigenous communities without control by Indigenous people. Non-transparent negotiation and top-down execution of the programs resulted in substandard services, such as inadequate housing provided to Indigenous reindeer herders. In addition to the regional-level agreements, prior to 2013 the direct socio-economic agreements were also concluded between energy companies and Nenets reindeer herding enterprises. The amount and nature of the included benefits depended on reindeer herders’ leadership negotiation skills, but most were in-kind. If the management of funds was delegated to the Indigenous enterprises, they were obliged to submit reports on their spending. In addition to colonialism, dependency, and inefficiency in respect to local communities, according to our observations, such top-down system is prone to persisting inequity based on the unequal access to distributed benefits. After partial transition from socio-economic agreements to compensations in 2013, increased self-sufficiency of reindeer herding enterprises and depletion of state resources diminished the level of paternalism in the Nenets region. Concurrently, strengthening local institutions represented by reindeer herding enterprises were able to partially capitalize on compensation payments to become more economically mature, self-sufficient, and independent compared to the 30

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However, both socio-economic agreements and compensations are negotiated by the local leaders leaving most Indigenous herders in an inequitable position outside the negotiating table. In the case of the villages of Verkhnemarkovo, and Tokma in Russia’s Irkutsk region, the regional Irkutsk Oil Company adopted standards prescribed by company’s creditors, the European Bank of Reconstruction and Development (EBRD), and the Russian legislation. In Verkhnemarkovo, the company primarily follows national standards by arranging payments to the municipal governments and, occasionally, local organizations. In Tokma, with a large Indigenous population, the EBRD standards are followed and a compensatory agreement is negotiated with the local Evenk hunting enterprises (although only leadership is involved). The CCSR mode is driven by companies, although often is mediated by outside entities, such as banks, shareholders, investment funds, and the state. In the cases we surveyed, the companies, however, implemented rather limited benefit sharing practices, sometimes only to meet a required or expected minimum. The CCSR mode is a business strategy that is prone to external control and changing rules following the decisions made by the companies (or investors, or international organizations), not the local residents. Although the agency of local stakeholders is elevated compared to the paternalistic mode, both the process and distribution of benefit sharing may be highly inequitable. Procedural and distributional equities could vary depending on company and regional context, but in our cases, with the exception of North Slope, they are medium or low.

early post-soviet years. This marked a shift from paternalistic to predominantly company-driven mode of benefit sharing arrangements (see below). Similarly, the North Slope Borough of Alaska distributes multiple benefits to Indigenous people using money coming from taxes on oil infrastructure in a paternalistic way. The Borough is the largest regional employer, has its own hospitals and police, builds houses, and funds schools. The Inupiat residents often expect multiple benefits, such as housing and infrastructure given for granted. As part of their benefit sharing policy model, oil companies (Surgutneftegaz and Lukoil) in the Khanty-Mansi Autonomous Districts sign annual socio-economic cooperation agreements with the regional government and municipalities. These agreements normally include support for social infrastructure in towns and villages, such as schools, kindergartens, recreation centers, road construction etc. The decisions are made based on the determination of local needs by the authorities without much consultation with residents. De facto this means that the companies assume some government functions and expenses creating another instance of the state-company paternalist model. Additional compensatory payments to Indigenous groups without designated traditional territory, are simply allotted by companies to local administration that, in turn, distributes it with only few consultations with the locals and little transparency. A major flaw of the benefit sharing policies based on paternalistic mode is their failure to ensure the satisfaction of local residents. Benefit sharing policies are typically associated with relatively weak local institutions that do not provide a fertile environment for community development. Paternalistic mode creates a situation when residents express exceedingly high, unrealistic expectations of energy companies or of benefit-distributing local authorities, as they are perceived to replace functions abandoned by the national, regional, or local state, but often receive limited, unsatisfactory, or misdirected benefits in return. On the other hand, the companies fall victim to the various levels of government (usually national and regional), which, in turn, place unreasonable expectations on companies to help them in delivering services to communities. Under paternalistic mode both procedural and distributional equities are typically low.

3.3. Partnership mode This type of benefit sharing builds tripartite partnerships among the energy companies, government, and Indigenous communities. In theory, the partnership mode is better positioned for promoting development and self-reliance in the Indigenous communities. Such partnerships have been a characteristic of oil extraction on the Sakhalin Island. Sakhalin Energy and Exxon Neftegaz Limited operating in the region developed partnerships with the regional state and Indigenous peoples through tripartite agreements, which set up procedures for distributing funds to Indigenous communities, organizations, and family enterprises [29]. The success of benefit sharing practices in the two cases in highly dependent on the corporate policies and on whether loans from global investment institutions were received [15]. Sakhalin Energy, through loans and investments, is influenced by the standards of international financial institutions (such as the World Bank and the International Finance Corporation) in respect to dealing with the environment and Indigenous people. Sakhalin Energy adopted global standards, including free prior and informed consent, and annual third party evaluations [15]. The company’s Indigenous Minorities Development Plan includes the participation of Indigenous people in decisions about allocating grant funding to NGOs and indigenous family enterprises. Although this approach was initially popular, it generated tensions and conflicts among community members around the distribution of funds. Exxon Neftegaz Limited was not significantly influenced by international financial institutions. The benefit sharing arrangement incorporated grant funding available to communities where drilling occurred, but not for other island communities. Implementing benefit sharing programs at a smaller scale than Sakhalin Energy [29], Exxon distributed funds only to organizations, not individual households. Indigenous residents also receive occasional employment from oil companies. Both benefit sharing policies utilized the investment mechanism (e.g., Sakhalin Energy’s “development plan”), that is not designed to directly address or compensate the damages (environmental degradation and cultural losses) suffered because of oil extraction. More so, the partnerships exclude non-Indigenous local stakeholders, who remain outside of the current benefit sharing arrangements. Although the partnership mode seemingly leads to more desirable

3.2. Company centred social responsibility (CCSR) mode Here we refer to a “narrowly defined” corporate social responsibility mode where a company plays a central role in setting benefit sharing arrangements by adopting globally developed standards or standards imposed by various international organizations, funding agencies, or legislation. Companies pursuing the CCSR mode rely on global standards and local practices, but frequently tend to fulfil only a bare minimum required by both local and global stakeholders. In many cases the CCSR-based benefit sharing programs are designed to please the investors and shareholders and to address the needs of local communities only to the extent needed for earning the ‘social license’ to operate. Company’s contributions to local communities under this mode often take forms of compensations or targeted investments. For example, in the Khanty-Masnsi Autonomous District of Russia, in cases where Indigenous people reside on officially designated traditional territories, Surgutneftegaz and Lukoil conclude standardized compensatory household agreements with the registered Indigenous family enterprises. The content of a standardized agreement is suggested by regional authorities. Thus, little attention is typically given to the individual household needs and to what extent their traditional land is damaged by oil operations. Resultantly, heavily and lightly affected households receive the same benefits. In the case of Nenets Autonomous District, since 2013, the ad hoc, limited-term agreements have been substituted by formal compensations for damage to the pasture lands calculated using federally approved methodology. With this new arrangement, the amount of money channelled to Indigenous peoples increased as much as 5–10 times. 31

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– – – Shareholder

Tripartite partnership between companies, state and indigenous communities. Investment in communities via grants/ development programs. Procedural equity: high Distributional equity: low – Partnership

Company centered social responsibility

–

Socio-economic agreements with regional and municipal governments Procedural equity: low Distributional equity: low Compensatory agreements with indigenous communities, ad hoc sponsorships Procedural equity: low Distributional equity: low – –

Socio-economic agreements with regional and municipal governments Procedural equity: low Distributional equity: low Standardized agreements with registered indigenous family enterprises Procedural equity: low Distributional equity: medium – Socio-economic agreements with regional governments and reindeer herding enterprises (before 2013) Procedural equity: low Distributional equity: low Compensation payments to indigenous reindeer herding enterprises calculated using government approved methodology Procedural equity: low Distributional equity: medium – Paternalistic

Irkutsk Region Table 1 Benefit sharing arrangements.

Table 1 summarizes our discussion and indicates the levels of procedural and distributional equities [35,26] and economic benefits experienced by local communities under each mode. Equity and economic opportunity are two of the key pillars of sustainable development, and Table 1 illustrates the degree to which each mode promotes sustainability. Although the four stylized modes of benefit sharing represent a convenient classification framework for systematizing various arrangements, in most regions we found two to four co-existing modes. The Alaska North Slope represents the most vivid example of a mixture among the three benefit sharing modes. The shareholder mode exists alongside with CCSR and paternalistic arrangements. In addition to state, regional, and village corporation dividends, companies, such as Conoco-Phillips, provide support to communities, which may include fuel, scholarships to students, sponsorship of events, and community infrastructure. Multiple benefits come to Indigenous people through the State of Alaska and the North Slope Borough, both of which receive taxes from oil infrastructure. They subsidize hospitals and police, build houses, and fund schools. Conoco-Phillips and Exxon-Mobil benefit

Sakhalin Island

3.5. Mixed modes

Nenets District

Shareholder mode involves dividend funds, shares from regional and village corporations. Under the shareholder mode in the North Slope of Alaska there are several “layers” of benefit sharing. First of all, every Alaska resident receives the Permanent Fund dividends. Secondly, the Indigenous people of the North Slope are almost always shareholders of the for-profit Arctic Slope Regional Corporation (ARSC) and usually hold shares of one of the village corporations, thus receiving dividends from both. ASRC contracts with many oil companies and receives royalties from oil extraction on Native-owned land. Village corporations own the surface title to the land, receive royalties through surface-use agreements, and contract oil field services from oil companies. However, not all village corporations are equally successful. Although Alaska Natice Claim Settlment Act (ANCSA) created strong Indigenous institutions, such as regional and village corporations [32,33], the shareholder mode has a number of serious limitations [34]. The main shortcoming is the distribution of shares. There are multiple conflicts in the North Slope communities around benefit sharing. Shareholder eligibility requirements often exclude younger Indigenous residents creating a bitter inter-generational conflict. Therefore, tensions occur between those who are born before and after 1971. ASRC and several other native corporations give fewer rights to “afterborns,” while others distribute dividends only for those born before 1971, or who have inherited shares, or received them as a gift. Tensions continue within Indigenous families around gifted and inherited shares. In addition, dividends are collected by beneficiaries who may not reside in the community creating a leakage of capital. Lastly, by diversifying their investment portfolios Alaska native and village corporations contribute to reducing resource dependency, but create an outflow of capital, partially offset by the inflow of dividends. Despite tensions, it is important to acknowledge that income from oil extraction is shared between companies and Indigenous communities, and Indigenous peoples have broadened opportunities for economic development. The shareholder mode leads to elevated procedural equity, but may not improve distributional equity (medium).

Knanty-Mansi District

Alaska North Slope

3.4. Shareholder mode

Distribution of tax dollars by North Slope Borough Compensatory payments through NPR-A mitigation strategy Procedural equity: low Distributional equity: high Companies provide support to communities (fuel, scholarships, infrastructure and events sponsorship, etc). Procedural equity: high Distributional equity: high –

benefit sharing processes and outcomes, it still lacks granting Indigenous people full control over funding. While civil society and local institutions in Sakhalin Indigenous communities substantially strengthened as the partnership was unfolding, this benefit sharing arrangement was not devoid of considerable problems, such as internal tensions among beneficiaries. Under this mode, procedural equity is relatively high, but distributional equity remains at a lower level.

Alaska Permanent Fund dividends, ANCSA regional and village Native corporations distribute dividends to eligible shareholders, investment in local businesses Procedural equity: high Distributional equity: low/medium

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Among the four modes of transnational corporations TNC benefit sharing arrangements, none appear to be ideal. However, some modes, and corresponding TNC policy models, are more advantageous for meeting community needs and fostering sustainable development in remote regions. Benefit sharing must go beyond compensations for loss and top-down paternalist interventions. Partnership and shareholder modes seem to bring more desirable results, but they are not devoid of shortcomings. While based on the overall principles, such as distributional and procedural justice, the successful benefit sharing models in the Arctic energy sector should be locally nuanced and embedded. An Impact and Benefits Agreement (IBA) model widely used by extractive companies in other jurisdictions and sectors (e.g. in Arctic Canada) is another opportunity to tailor benefit sharing to specific community needs, while establishing contractual relationships between the companies and communities [38].

sharing arrangements meandering between the CCSR and partnership modes. The shareholder mode appears to be the most dominating part of the mix, although it also experiences multiple pitfalls due to internal tensions and the lack of distributional equity among Indigenous residents. Compensation payments are also a part of the mix. In Alaska, the Northeastern National Petroleum Reserve Regional Mitigation Strategy was negotiated by the Bureau of Land Management with ConocoPhillips in 2015 as a compensation for adverse impacts of oil and gas extraction at the newly opened Greater Mooses Tooth Unit One project [36]. In 2016 first $7 million were allocated. This strategy will become a new policy tool used as a template for further compensation agreements for new extractive projects in the Reserve [36]. Tensions emerge between the city administrations, tribal governments, village and native corporations around the distribution of funds as these three entities have different interests. Tribal governments are not benefitting from oil extraction directly and tend to be more environmentally oriented. They are often not in favour of future oil development. The city government is usually neutral or pro-development, while regional and village native corporations are typically pro-development.

Acknowledgements This research was supported by the NWO, the Netherlands Organization for Scientific Research, Arctic Program (‘Developing benefit sharing standards in the Arctic’, No. 866.15.203), the Finnish Academy Arctic Program (‘Oil Production Networks in the Russian Arctic’, No. 286791) and National Science Foundation Arctic-FROST project (PLR #1338850).

4. Policy perspective Benefits shared by extractive energy sector operating in the Arctic are highly variable and depend on institutional, financial, political, and geographical settings. Notably, experiences from Russia, which evolved substantially in the last two decades, present a number of useful lessons and good practices to be considered. In Russia, we observe an evolution of local institutions and increase in their ability to negotiate and manage more community-driven, equitable benefit sharing arrangements. As noted, underdeveloped institutions and weak civil society may derail most well-intended benefit sharing policies. A ‘mismatch’ between the capacity of institutions and requirements of benefit sharing frameworks will likely lead to dysfunctional relationships between companies and communities. Therefore, as a part of benefit sharing obligations, companies and the state must work with Indigenous and other affected communities to build local institutional capacities and human capital. This will ensure that benefit sharing policies are nuanced, responsive, empowering, and contribute to sustainable development of Arctic communities in a just and equitable manner. Another missing link in some locations, especially in the Russian Arctic, is the lack of a mandatory social-economic impacts assessment and monitoring that could greatly assist in developing appropriate benefit sharing arrangements. Thus, it is apparent that we need to significantly improve our knowledge base about benefit sharing in the Arctic energy sector, and we urge the Arctic Council Sustainable Development Working Group or the newly formed Arctic Economic Council to conduct a synthesis study with the aim of finding best practices, identifying lessons learned, and initiating an inclusive, multi-stakeholder process of developing guidelines for companies on benefit-sharing arrangements in the Arctic. Given the complexity of legal, institutional, natural, and cultural settings, this work could be conducted by expert groups embedded in both the energy industry and communities across the Arctic. This process could go concurrently with and be a supplement to the emerging Arctic Investment Protocol [37]. There is little doubt the benefit sharing policy for Arctic regions is essential, as it impacts the livelihoods of thousands of Arctic residents who depend on land, sea, and access to natural resources. It is important that the energy sector shares a portion derived from the resource extraction with the local inhabitants in an equitable, transparent, and just way, allowing all stakeholders to be a part of the process and outcome of benefit sharing. In other words, benefit sharing arrangements must contribute to sustainable development in Arctic communities.

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