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The curse of oil?
The curse of oil? ~ark ~oody-Stuart MOODY-STU A RT, M . 2004. Th e cur se of oil? Proceedings of the Geologis ts ' Association, liS, 1- 5. The discover y of hydr ocarb ons in a country results in a number of cha llenges: th e result ant enviro nmenta l impact; distort ion of th e eco no my an d social cha nges, often related to lab our-force migrati on which ca uses stra ins on th e infrastruct ure suppo rting populat ion cent res; and, finally, possible misuse of the resulting revenu e a nd associated corruption . While techn ology ca n help to min imize the enviro nmental imp act, the rema ining ch allen ges ca nno t be remed ied by the resource comp an y alone ~ co nsultation, plann ing and partner ship are necessary . The steps which com panies sho uld tak e to ens ure real benefits fro m hyd rocarb on development are exa mined , an d the role of internation al bodies in sett ing standards, against which local solution s ca n be benchmarked, are di scu ssed. Exa mples are drawn from the Philippines, China, Nigeria , Oman and Chad. Key words: oil and gas explora tion, hydrocarbon development, socieconomic factors, corpor ate issues, government al issues Anglo American plc, 20 Carlton House Terrace , L ondon S W I Y SAN, UK
My first jo b in Shell was as a field geologist in Spain in 1966, doing onshore fieldwork to provide a geological base for extrapolation to the offshore Mediterran ean . People in rural Spain in those days were often very poor , and they clearl y regard ed collecting rocks and measuring stratigraph ic sections in a search for oil as borde ring on lunacy. They were however very polit e, and the most comm on query as we walked across their land was 'Co uld you not find something useful, like water'? In spite of all the changes in Spain, political and economic, the need for water has not chan ged. In most developing countries, people regard the possibility of finding oil as something almost magical, something which, like winning the lottery, will bring great opportunities. And so it can, but like winning the lott ery it can also bring great problems. In developed countries, although still apparently enthusiastic about the lottery, people are less sanguine about exploration or exploit ation of oil and gas. Similar attitudes apply to oth er minerals - down to and including quarrying of rock . Thi s text was first presented orally as th e President ial Address to Th e Geological Society of London , 7 May 2003. Mark Mood y-Stu art was appointed a man aging dir ector of the Royal DutchlSh ell G ro up in 1991 a nd was cha irman of the committ ee of man aging d irector s from 1998 to 200 I . He was co-chairma n of the G 8 Ener gy Task Fo rce (2000, 2001) and cha irma n of Business Action for Sustainabl e Development (2002) . He joined An glo American as chai rma n in December 2002. He was appointed Kni ght Co mma nder of the Order of St M ich ael and St G eor ge in June 2000, and was awarded the Ca dman Med al by th e Institute of Petroleum in 2001. We ar e most gra teful to him for perm itting the PGA to reprint his Add ress. Proceedings of the Geologists ' Association, 115, 1- 5.
1. The impacts of hydrocarbon development The impact of the discovery of hydrocarb ons, the resulting economic impact and the social changes which that brings, together with the environmental implications have sometimes been referred to as the 'curse of oil'. The implication is that the Pandora's box which is opened might well have been better left closed. I have heard hydrocarbon development variou sly blamed for environmental devastation, destruction of traditional lifestyles, the sappin g of national drive and inventiveness, the destruction of agricultural econom ies and civil strife. The benefits of the increased income, the opportunities which that bring s to a nati on, as well as development and training for employment in the industry and the multiplier effect throu gh the supply chain are often forgotten. But it is certainly valid to ask if the negative consequences are inevitable, or if they can be avoided or mitigated while deriving the benefits. The source of the curse is threefold: first the environmental impact, second the negative economic and social impacts - inflation, migration, dam age to other parts of the economy - and third the really disastrous consequences of misuse of the revenue and the corruption which so often goes in parall el with that. The climate effect is an important one, but not really what is referred to as the 'curse of oil' , although it may be so in the future . We had an excellent Geological Society meeting recently on climate, with strong participation from the energy indu stry. So I am not going to address it here - I will perhaps return to it on another occasion. To ensure that a resource is really a benefit, all three of the challenges I have mentioned need to be tackled 00 16-7878104 S15.00
© 2004 Geol ogists' Associati on
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M. MOODY-STUART
and they are in increasing order of difficulty. The remedy does not lie with the resource company alone planning and partnership are needed. 2. The environmental impact The easiest to tackle is the straight environmental impact. The footprint required on land for modern seismic lines is small. We have shot 3D seismic surveys through many towns and even through greenhouses in the Netherlands. (In greenhouses, the technique is to use small explosive charges, having opened the top ventilation panels). You could shoot 3D seismic surveys through London with less disruption than the frequent repairs to gas or water mains. Where we used to cut (or even bulldoze) wide strips in forested landwe can now avoid big trees. With computing power, lines do not have to be straight. Some years ago in a survey in a sensitive area of Madagascar we ran a seismic survey largely using people on foot. I was amused to hear of the monitoring organization admitting that their monitors in Land Rovers probably did more damage than the seismic party of hundreds of people on foot. Similarly, in the Turkana region of Northern Kenya, Richard Leakey commented on the survey plan that if we did what we promised it would be fine. I asked our people to go back to him on completion and ask his opinion. We got the 'all clear,' with one small oversight subsequently corrected. The same is true of drilling. We can now cluster wells through longer drilling-reach and better guidance. This reduces the footprint and allows sensitive sites to be avoided. BP have done this at Wytch Farm, allowing development and extension of the field. We could locate a well cluster on the south bank of the Thames somewhere near Shell Centre and tap an oil field under Islington in north London, or anywhere in the City or West End. In marine drilling, runoff from rigs is controlled and we no longer dump cuttings on the seabed. In most areas pipelines have ceased to be a source of concern. And there are industry projects with IUCN (The World Conservation Union) and others to address issues of biodiversity preservation and working in sensitive areas. Technology can deliver solutions. Many of the solutions deliver cost-benefits at the same time, but we should not pretend that that is so in all cases. Environmental standards are not the same all around the world. They are not uniform even in a country such as the United States - different states have different standards. I remember a conversation with the oil minister of Gabon in London after we had been discussing the techniques we were using to minimize the impact of the industry on Gabonese forests. He said that as a Gabonese he loved trees, but Gabon has billions of them and they had great need for oil revenues for development. He would be concerned if at the extreme, for example, we avoided developing an
oilfield which would benefit Gabon because a single tree would be threatened. I was able to assure him that firstly I thought it very unlikely, as we could probably find a technological solution, but secondly that it was clearly a role in every country for a legitimate government to decide between the sometimes conflicting demands of tree preservation and industrial development. But, equally, an international company must have certain minimum standards, benchmarked against international standards. If a development was not economically possible in line with these standards, or it was unrealistic to expect a process of continuous improvement towards these standards, the company should not take part. 3. This is not just from the goodwill of industry ... Does all this come about through the good will of industry? Of course not. Human nature often resists change. We carryon doing what we know works. It is more trouble to change. The change comes from pressure from society - and remember people who work for corporations are a part of that same society from a raising of awareness and, indeed, from legislation. The way in which these changes occur in practice is reasonably clear. An issue is identified, perhaps by an industry sector itself, but perhaps more often by others - governments, non-governmental organizations (NGOs), affected communities. There is a lot of discussion and consultation on how to address it. Leading companies begin to take steps in line with the practical way forward developed from those discussions. There will undoubtedly not be complete agreement on what needs to be done. Consumers are key to this process, rewarding leading companies with their business, with those not complying with improved practice being gradually shunned. And as practical methods are established, legislation is often required to ensure general compliance. 4. We need to build confidence through open and honest reporting against targets This is very much a matter of trust and confidence. Open and honest public reporting, preferably against published targets and standards, is very important in building this confidence and allows all to see what progress is being made. Some standardization of reporting is sensible for two reasons. First, it allows businesses and the public at large to benchmark performance against others in the same industry, leading to competitive improvement. And second, if there is a standard reporting format this protects business from the load of responding to queries in many different formats. That is why the Global Reporting Initiative (GRI) is as important for business as it is for society at large. It hastens the day when there will be standard formats, with some standard elements of reporting and others specifically tailored to industry sectors. The
THE CURSE OF OIL?
ORI is a reporting system that is developed in a unique partnership by those who have to produce the figures (initially industry, but in future governments and NOOs) working with representatives of civil society, to whom the figures will be of use in making choices. It was almost universally supported in declarations at Johannesburg. It is very important that corporations try it out and work to ensure its practicality and appropriateness for their sector. (I should confess that I am on the board of the ORI). 5. Islands of affluence and uneven development To maintain standards one needs people working in good conditions, well housed and with medical and educational facilities. We are rightly expected to deliver high standards everywhere - that means facilities have to be good. This creates the problems of 'islands of affluence' and of local inflation. Fine, you will say, then you just need to ensure that the communities in the area of development benefit as well as your own people. Contrary to popular belief, many resource developments have historically put considerable effort into community development projects and the supply of utilities. This then draws others into the area. So you get a population bulge caused by worker inflow and inflow of others drawn to the higher levels of economic activity. This is the second negative impact of hydrocarbon development and it can be further exacerbated by regional or national inflation, unbalanced development of the economy, and decline of the agricultural sector and traditional forms of employment. This is not just a symptom of developing economies - we have seen the same effect in The Netherlands in the 1960s with the development of natural gas (the so-called 'Dutch Disease') or Norway, where per capita oil production is greater than that of Saudi Arabia, with clearly distorting effects on the economy. All over the world developments and towns draw people, often with the growth of informal settlements. The town or city grows, there is increasing strain on the electricity and water supply and on the sewage system if one exists. Systems then break down. I have seen this process in action where water and electricity have been supplied with good intent free to neighbours from oil facilities, with resulting migration and huge strains on the systems. Perhaps one should supply the electricity, but charge for it and recycle the community-collected revenue for community development. We have had countless such good ideas. But this is part of the problem. We have good ideas and set about implementing them. The ideas and priorities need to come from the people. Some months ago I was asked by someone in the UN Foundation what were the real priorities for Afghanistan - power, water, communications? My answer was that I was the wrong person to ask, we need to ask the Afghans. This is not as flip an answer
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as it sounds, it is absolutely fundamental to addressing the issue. We see this day to day in Iraq at the moment. Desirable as it may be in the long term, I very much doubt that democracy is at the top of the list of requirements of a citizen of an Iraqi city. And the priorities for the restoration of utilities and law and order might well be different from that which a member of the coalition forces would suppose. 6. The need for partnership and consultation Resource companies have come to realize that if the development to which they contribute is to be sustainable, it must involve partnership and consultation. Real upfront consultation is the key - and acting on the input. In some cases it may be necessary to build community structures with whom one can consult. A mistake we have often made is to assume that the visible authority structures - whether they be local governments, village councils, local chiefs or village elders - necessarily represent the communities affected by our activities. And this is where other civil society organizations can help, for many are much more expert in building representative consultation structures than a company is, and furthermore unlike a company, they are not a priori an interested party. This is the classic sustainability management loop, for sustainability like any other business system needs a management loop. We need to think who is impacted; consult them, integrating that input into plans; set targets; and then report openly and honestly on performance - including the failures. Then listen to the response, engage further and go round the loop again in a process of continuous improvement. This needs to be done on a local basis, relating to each operation. 7. Project examples, small and large A good recent example from Shell would be the Malampaya project. The construction of a major concrete gravity-base structure for offshore gas production next door to an impoverished village in Subic Bay, in the Philippines, transformed the village. The population gained training, employment in the short-term construction activity, and skills which can be used elsewhere. But, more importantly, the revenue from these short-term economic benefits, with capacity building and the growth of genuine participatory social structures, allowed the development of livelihoods from fishing and fish ponds, school construction to ensure the educational future of the village children, and other communal benefits. Anglo American is also doing some very interesting work on long-term community sustainability after mine closure. In a sense the Malampaya project is a relatively easy one - a small village and a very large project. At the other end of the scale would be the E-W pipeline in China. With a pipeline over 4000 km long bringing gas
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to eastern China from the west, the project is in one sense a classic challenge of sustainable development. There are clear benefits for the air of cities in eastern China as gas replaces coal. The macro-climate effects are equally beneficial. But there are issues about the pipeline route and the benefits to the people in the producing region. A social impact study is being undertaken with involvement of the United Nations Development Programme, but this will remain a complex project. The ongoing issues in the Niger Delta are equally complex. The problems are clearly too big to handle by one company alone, or even by a consortium of companies. I believe that the environmental issues are relatively easily addressed and there is a structured programme to eliminate the major gas flaring that has been part of the history of oil development in the delta. Among other things there are massive and very successful investments in gas liquefaction projects - the largest investments in Africa and some of the most successful. But the problems of revenue allocation and distribution, questions of law and order, the construction of infrastructure and the tensions between different ethnic groups in relation to electoral and local government areas need proper regional planning and local and national government intervention. And that brings me to the issue of how the revenues are spent. Governments clearly have the key role in that. 8. The role of governments and governance
During my career in Shell, starting in the 1960s as a field geologist, I have had the pleasure of seeing countries develop from poverty to relatively affluent and well-functioning societies, often with major economic and other contributions from companies like mine. I worked in the Sultanate of Oman in the Middle East in 1967, when it was literally a medieval countryone or two doctors for a million and a half people, widespread incidence of trachoma (even in field geologists), people in chains on the streets and physical punishments for offenders. I was there a month or so ago and heard the present Sultan explain with justifiable pride that he had just appointed the first woman with ministerial rank, that the final stage of universal suffrage was being reached. Interestingly, he said to me that he had more women in the Majlis ad Daula, the upper house, which he appointed, than in the Majlis as Shura, which is elected. Oman is often held up as .an example of prudent development by the UN Development Programme; eye disease has been banished and education is universal with high standards. Similarly, I have seen Malaysia grow from a country in the 1960s with a level of per capita GDP below many African countries to a relatively affluent society. But I have also had the pain of seeing societies disintegrate. with social unrest, bitter feuds, corruption and environmental damage. Nigeria clearly comes to
mind. So what is the difference? I do not believe that my values, or those of the colleagues with whom I worked in those countries were different. Neither were the policies of the board different - people on the boards had often worked in the countries concerned and were familiar with the issues and comparisons. But the outcomes are very different. In some we can look with pride at what has developed. In others the outcome has been far from happy - and we were part of that too. The role of society and government is crucially important to the outcome. That is in no way to absolve a company of its responsibilities companies and the people who work in them are essential parts of society. But it is to say that a company cannot do it on its own. As they develop the world's natural resources, energy and mining companies find themselves working in what may be described as difficult countries. To say the least. not everything in these countries is as we might wish. Ten or twenty years ago, many of us would have said that if we run our operations in a country to high standards, devote effort to the development and training of our people there, have sound community projects for our neighbours. pay our taxes honestly and in the right place and do not bribe people, we were doing a good job. If the government took those taxes and spent them unwisely, or wasted them on foolish projects, or worse still stole them, this was a matter for the citizens of the country, not for a foreign enterprise. Likewise, surely we could not be held responsible if the behaviour of the government towards its people did not accord with international standards? I believe that society's views on this have changed and, frankly. so have my own. Some time ago I had a discussion in London with a minister of a country in which the company I worked for had a major operation. He was deeply concerned about the irregular activities of certain people in his country. We had (as a matter of deliberate policy and principle) avoided any connection with their activities and the minister knew it. None the less he asked me to intervene in some way. When I pointed out that this was no concern of mine, that it was not my country or my government and asked why, therefore, I should involve myself in any way, he replied that when it all went wrong I could guess whose fault it would be seen to be. At first this seemed to me to be grossly unfair. But on reflection. was it really so unfair? We had a major economic stake in the country. We were longstanding friends and partners of the country. Had the issue been a natural disaster, or even a social issue for the nation, we would have immediately offered to play our part. Is it the act of a friend to avert one's eyes and walk down the other side of the street when a crime is being committed, just because it is not our business? This is a very delicate issue. As foreign investors we have no mandate. No one elected us. Perhaps such situations are still not our responsibility. But they certainly are our concern, and we should think very hard how best we can contribute to their amelioration
THE CURSE OF OIL?
and resolution, again perhaps in partnership with others. I used to say to people I worked with, when someone comes to you with a problem, never say that is not our problem because we are a business. If it is a problem for society, it is a problem for us. You cannot have good business in a fractured society. The question is rather, is there a contribution we can make from our skills. And who can we work with - for action by companies alone will rightly be treated with suspicion and may well be regarded as inappropriate, if not illegitimate. 9. Some possible approaches The movement for greater transparency in resource revenue payments (Extractive Industries Transparency Initiative) is one approach to the improvement of governance. This is being led by the British government and supported by Global Witness and many responsible resource companies. BP made some pioneering steps in Angola. But we have to realize that there are many countries where the revenue generated from the industry is well known, but it is still misapplied. In spite of questions and articles in the local press, leaders simply ignore the challenge. The example of hydrocarbon development in Chad and the Chad-Cameroun pipeline is an interesting one. Many NGOs adopted the position at the outset that development of Doba should not go ahead, because in such a poor country with a history of civil strife, people would simply fight over the wealth created. My initial view of this was that it was breathtaking arrogance to assume that people are too poor or backward to deserve wealth. But on sober reflection, I realized that such strife is not an unlikely outcome. So could we reduce the possibility of strife while still generating a means of support for a desperately poor country? Plainly companies could not do it, but the World Bank had more legitimacy although not in the eyes of all. Companies wanted Chad to have an equity share in the pipeline in order to bring the benefits of co-ownership. They wanted the World Bank to lend Chad the money to do this because it would give the World Bank leverage in the issue. I believe the plan for the fairer allocation of revenue, developed in conjunction with the Chad government and civil society organizations, local and international, was a good start. Any deviation shows not the failure of the idea, but simply that the leverage which it was thought that the World Bank had might not be sufficient. But even if it fails (and in spite of initial problems and challenges it has not
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failed yet) it contains the elements of a way forward, with lessons that can be learned. NEPAD (the New Partnership for Africa's Development) is an alternative solution and being home developed is more desirable. That, too, is a brave experiment with governments agreeing on standards of popular participation, of security, of plans for infrastructure and introducing the concept of country peer review. I think this is a great 'Made in Africa' solution. It, too, may not work, but it deserves our wholehearted support. NEPAD peer review, if it works, is an alternative to the Chad World Bank solution. The leverage of peer review also has its limits, however, and a combination of World Bank, donor and peer review might be the best way forward. These collective steps, the painstaking struggle to develop sound governance in each and every country by building from the inside with active participation of all sections of society, including business are, I believe, the only way forward. This can be supported from the outside by targeted development assistance and the International Financial Institutions. 10. Steps to avoid the 'curse of oil' I hope from the foregoing, the steps we need to take to ensure real benefits from hydrocarbon development are clear. We can use technology to address the environmental issues - this is relatively straightforward and lies at the heart of our business. We need to put in place consultation structures with local communities to ensure that what we are doing for their benefit is really what they want. We need to be certain we are talking to the right people. This is something that can be greatly assisted by civil society organizations, both local and international. But, perhaps, the most important and the most difficult, is to work with others to ensure that local and national governance structures are in place - including structures for the sound governance of business. Where does business responsibility for that end? We should not usurp the government's role. But we have a responsibility, where governance has failed, to unite as industry with other players, NGOs, labour unions, religious organizations etc., to work to rebuild the governance foundation. For it is that governance, of countries as well as corporations, that makes the difference and which, in the end, is the means not just to ward off the 'curse of oil' but to turn that potential curse into a driver for sustainable development in the true sense.
Manuscript received 13 May 2003; revised typescript accepted 25 June 2003 All invited comments and author rejoinder accepted 25 November 2003
My first jo b in Shell was as a field geologist in Spain in 1966, doing onshore fieldwork to provide a geological base for extrapolation to the offshore Mediterran ean . People in rural Spain in those days were often very poor , and they clearl y regard ed collecting rocks and measuring stratigraph ic sections in a search for oil as borde ring on lunacy. They were however very polit e, and the most comm on query as we walked across their land was 'Co uld you not find something useful, like water'? In spite of all the changes in Spain, political and economic, the need for water has not chan ged. In most developing countries, people regard the possibility of finding oil as something almost magical, something which, like winning the lottery, will bring great opportunities. And so it can, but like winning the lott ery it can also bring great problems. In developed countries, although still apparently enthusiastic about the lottery, people are less sanguine about exploration or exploit ation of oil and gas. Similar attitudes apply to oth er minerals - down to and including quarrying of rock . Thi s text was first presented orally as th e President ial Address to Th e Geological Society of London , 7 May 2003. Mark Mood y-Stu art was appointed a man aging dir ector of the Royal DutchlSh ell G ro up in 1991 a nd was cha irman of the committ ee of man aging d irector s from 1998 to 200 I . He was co-chairma n of the G 8 Ener gy Task Fo rce (2000, 2001) and cha irma n of Business Action for Sustainabl e Development (2002) . He joined An glo American as chai rma n in December 2002. He was appointed Kni ght Co mma nder of the Order of St M ich ael and St G eor ge in June 2000, and was awarded the Ca dman Med al by th e Institute of Petroleum in 2001. We ar e most gra teful to him for perm itting the PGA to reprint his Add ress. Proceedings of the Geologists ' Association, 115, 1- 5.
1. The impacts of hydrocarbon development The impact of the discovery of hydrocarb ons, the resulting economic impact and the social changes which that brings, together with the environmental implications have sometimes been referred to as the 'curse of oil'. The implication is that the Pandora's box which is opened might well have been better left closed. I have heard hydrocarbon development variou sly blamed for environmental devastation, destruction of traditional lifestyles, the sappin g of national drive and inventiveness, the destruction of agricultural econom ies and civil strife. The benefits of the increased income, the opportunities which that bring s to a nati on, as well as development and training for employment in the industry and the multiplier effect throu gh the supply chain are often forgotten. But it is certainly valid to ask if the negative consequences are inevitable, or if they can be avoided or mitigated while deriving the benefits. The source of the curse is threefold: first the environmental impact, second the negative economic and social impacts - inflation, migration, dam age to other parts of the economy - and third the really disastrous consequences of misuse of the revenue and the corruption which so often goes in parall el with that. The climate effect is an important one, but not really what is referred to as the 'curse of oil' , although it may be so in the future . We had an excellent Geological Society meeting recently on climate, with strong participation from the energy indu stry. So I am not going to address it here - I will perhaps return to it on another occasion. To ensure that a resource is really a benefit, all three of the challenges I have mentioned need to be tackled 00 16-7878104 S15.00
© 2004 Geol ogists' Associati on
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M. MOODY-STUART
and they are in increasing order of difficulty. The remedy does not lie with the resource company alone planning and partnership are needed. 2. The environmental impact The easiest to tackle is the straight environmental impact. The footprint required on land for modern seismic lines is small. We have shot 3D seismic surveys through many towns and even through greenhouses in the Netherlands. (In greenhouses, the technique is to use small explosive charges, having opened the top ventilation panels). You could shoot 3D seismic surveys through London with less disruption than the frequent repairs to gas or water mains. Where we used to cut (or even bulldoze) wide strips in forested landwe can now avoid big trees. With computing power, lines do not have to be straight. Some years ago in a survey in a sensitive area of Madagascar we ran a seismic survey largely using people on foot. I was amused to hear of the monitoring organization admitting that their monitors in Land Rovers probably did more damage than the seismic party of hundreds of people on foot. Similarly, in the Turkana region of Northern Kenya, Richard Leakey commented on the survey plan that if we did what we promised it would be fine. I asked our people to go back to him on completion and ask his opinion. We got the 'all clear,' with one small oversight subsequently corrected. The same is true of drilling. We can now cluster wells through longer drilling-reach and better guidance. This reduces the footprint and allows sensitive sites to be avoided. BP have done this at Wytch Farm, allowing development and extension of the field. We could locate a well cluster on the south bank of the Thames somewhere near Shell Centre and tap an oil field under Islington in north London, or anywhere in the City or West End. In marine drilling, runoff from rigs is controlled and we no longer dump cuttings on the seabed. In most areas pipelines have ceased to be a source of concern. And there are industry projects with IUCN (The World Conservation Union) and others to address issues of biodiversity preservation and working in sensitive areas. Technology can deliver solutions. Many of the solutions deliver cost-benefits at the same time, but we should not pretend that that is so in all cases. Environmental standards are not the same all around the world. They are not uniform even in a country such as the United States - different states have different standards. I remember a conversation with the oil minister of Gabon in London after we had been discussing the techniques we were using to minimize the impact of the industry on Gabonese forests. He said that as a Gabonese he loved trees, but Gabon has billions of them and they had great need for oil revenues for development. He would be concerned if at the extreme, for example, we avoided developing an
oilfield which would benefit Gabon because a single tree would be threatened. I was able to assure him that firstly I thought it very unlikely, as we could probably find a technological solution, but secondly that it was clearly a role in every country for a legitimate government to decide between the sometimes conflicting demands of tree preservation and industrial development. But, equally, an international company must have certain minimum standards, benchmarked against international standards. If a development was not economically possible in line with these standards, or it was unrealistic to expect a process of continuous improvement towards these standards, the company should not take part. 3. This is not just from the goodwill of industry ... Does all this come about through the good will of industry? Of course not. Human nature often resists change. We carryon doing what we know works. It is more trouble to change. The change comes from pressure from society - and remember people who work for corporations are a part of that same society from a raising of awareness and, indeed, from legislation. The way in which these changes occur in practice is reasonably clear. An issue is identified, perhaps by an industry sector itself, but perhaps more often by others - governments, non-governmental organizations (NGOs), affected communities. There is a lot of discussion and consultation on how to address it. Leading companies begin to take steps in line with the practical way forward developed from those discussions. There will undoubtedly not be complete agreement on what needs to be done. Consumers are key to this process, rewarding leading companies with their business, with those not complying with improved practice being gradually shunned. And as practical methods are established, legislation is often required to ensure general compliance. 4. We need to build confidence through open and honest reporting against targets This is very much a matter of trust and confidence. Open and honest public reporting, preferably against published targets and standards, is very important in building this confidence and allows all to see what progress is being made. Some standardization of reporting is sensible for two reasons. First, it allows businesses and the public at large to benchmark performance against others in the same industry, leading to competitive improvement. And second, if there is a standard reporting format this protects business from the load of responding to queries in many different formats. That is why the Global Reporting Initiative (GRI) is as important for business as it is for society at large. It hastens the day when there will be standard formats, with some standard elements of reporting and others specifically tailored to industry sectors. The
THE CURSE OF OIL?
ORI is a reporting system that is developed in a unique partnership by those who have to produce the figures (initially industry, but in future governments and NOOs) working with representatives of civil society, to whom the figures will be of use in making choices. It was almost universally supported in declarations at Johannesburg. It is very important that corporations try it out and work to ensure its practicality and appropriateness for their sector. (I should confess that I am on the board of the ORI). 5. Islands of affluence and uneven development To maintain standards one needs people working in good conditions, well housed and with medical and educational facilities. We are rightly expected to deliver high standards everywhere - that means facilities have to be good. This creates the problems of 'islands of affluence' and of local inflation. Fine, you will say, then you just need to ensure that the communities in the area of development benefit as well as your own people. Contrary to popular belief, many resource developments have historically put considerable effort into community development projects and the supply of utilities. This then draws others into the area. So you get a population bulge caused by worker inflow and inflow of others drawn to the higher levels of economic activity. This is the second negative impact of hydrocarbon development and it can be further exacerbated by regional or national inflation, unbalanced development of the economy, and decline of the agricultural sector and traditional forms of employment. This is not just a symptom of developing economies - we have seen the same effect in The Netherlands in the 1960s with the development of natural gas (the so-called 'Dutch Disease') or Norway, where per capita oil production is greater than that of Saudi Arabia, with clearly distorting effects on the economy. All over the world developments and towns draw people, often with the growth of informal settlements. The town or city grows, there is increasing strain on the electricity and water supply and on the sewage system if one exists. Systems then break down. I have seen this process in action where water and electricity have been supplied with good intent free to neighbours from oil facilities, with resulting migration and huge strains on the systems. Perhaps one should supply the electricity, but charge for it and recycle the community-collected revenue for community development. We have had countless such good ideas. But this is part of the problem. We have good ideas and set about implementing them. The ideas and priorities need to come from the people. Some months ago I was asked by someone in the UN Foundation what were the real priorities for Afghanistan - power, water, communications? My answer was that I was the wrong person to ask, we need to ask the Afghans. This is not as flip an answer
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as it sounds, it is absolutely fundamental to addressing the issue. We see this day to day in Iraq at the moment. Desirable as it may be in the long term, I very much doubt that democracy is at the top of the list of requirements of a citizen of an Iraqi city. And the priorities for the restoration of utilities and law and order might well be different from that which a member of the coalition forces would suppose. 6. The need for partnership and consultation Resource companies have come to realize that if the development to which they contribute is to be sustainable, it must involve partnership and consultation. Real upfront consultation is the key - and acting on the input. In some cases it may be necessary to build community structures with whom one can consult. A mistake we have often made is to assume that the visible authority structures - whether they be local governments, village councils, local chiefs or village elders - necessarily represent the communities affected by our activities. And this is where other civil society organizations can help, for many are much more expert in building representative consultation structures than a company is, and furthermore unlike a company, they are not a priori an interested party. This is the classic sustainability management loop, for sustainability like any other business system needs a management loop. We need to think who is impacted; consult them, integrating that input into plans; set targets; and then report openly and honestly on performance - including the failures. Then listen to the response, engage further and go round the loop again in a process of continuous improvement. This needs to be done on a local basis, relating to each operation. 7. Project examples, small and large A good recent example from Shell would be the Malampaya project. The construction of a major concrete gravity-base structure for offshore gas production next door to an impoverished village in Subic Bay, in the Philippines, transformed the village. The population gained training, employment in the short-term construction activity, and skills which can be used elsewhere. But, more importantly, the revenue from these short-term economic benefits, with capacity building and the growth of genuine participatory social structures, allowed the development of livelihoods from fishing and fish ponds, school construction to ensure the educational future of the village children, and other communal benefits. Anglo American is also doing some very interesting work on long-term community sustainability after mine closure. In a sense the Malampaya project is a relatively easy one - a small village and a very large project. At the other end of the scale would be the E-W pipeline in China. With a pipeline over 4000 km long bringing gas
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M. MOODY-STUART
to eastern China from the west, the project is in one sense a classic challenge of sustainable development. There are clear benefits for the air of cities in eastern China as gas replaces coal. The macro-climate effects are equally beneficial. But there are issues about the pipeline route and the benefits to the people in the producing region. A social impact study is being undertaken with involvement of the United Nations Development Programme, but this will remain a complex project. The ongoing issues in the Niger Delta are equally complex. The problems are clearly too big to handle by one company alone, or even by a consortium of companies. I believe that the environmental issues are relatively easily addressed and there is a structured programme to eliminate the major gas flaring that has been part of the history of oil development in the delta. Among other things there are massive and very successful investments in gas liquefaction projects - the largest investments in Africa and some of the most successful. But the problems of revenue allocation and distribution, questions of law and order, the construction of infrastructure and the tensions between different ethnic groups in relation to electoral and local government areas need proper regional planning and local and national government intervention. And that brings me to the issue of how the revenues are spent. Governments clearly have the key role in that. 8. The role of governments and governance
During my career in Shell, starting in the 1960s as a field geologist, I have had the pleasure of seeing countries develop from poverty to relatively affluent and well-functioning societies, often with major economic and other contributions from companies like mine. I worked in the Sultanate of Oman in the Middle East in 1967, when it was literally a medieval countryone or two doctors for a million and a half people, widespread incidence of trachoma (even in field geologists), people in chains on the streets and physical punishments for offenders. I was there a month or so ago and heard the present Sultan explain with justifiable pride that he had just appointed the first woman with ministerial rank, that the final stage of universal suffrage was being reached. Interestingly, he said to me that he had more women in the Majlis ad Daula, the upper house, which he appointed, than in the Majlis as Shura, which is elected. Oman is often held up as .an example of prudent development by the UN Development Programme; eye disease has been banished and education is universal with high standards. Similarly, I have seen Malaysia grow from a country in the 1960s with a level of per capita GDP below many African countries to a relatively affluent society. But I have also had the pain of seeing societies disintegrate. with social unrest, bitter feuds, corruption and environmental damage. Nigeria clearly comes to
mind. So what is the difference? I do not believe that my values, or those of the colleagues with whom I worked in those countries were different. Neither were the policies of the board different - people on the boards had often worked in the countries concerned and were familiar with the issues and comparisons. But the outcomes are very different. In some we can look with pride at what has developed. In others the outcome has been far from happy - and we were part of that too. The role of society and government is crucially important to the outcome. That is in no way to absolve a company of its responsibilities companies and the people who work in them are essential parts of society. But it is to say that a company cannot do it on its own. As they develop the world's natural resources, energy and mining companies find themselves working in what may be described as difficult countries. To say the least. not everything in these countries is as we might wish. Ten or twenty years ago, many of us would have said that if we run our operations in a country to high standards, devote effort to the development and training of our people there, have sound community projects for our neighbours. pay our taxes honestly and in the right place and do not bribe people, we were doing a good job. If the government took those taxes and spent them unwisely, or wasted them on foolish projects, or worse still stole them, this was a matter for the citizens of the country, not for a foreign enterprise. Likewise, surely we could not be held responsible if the behaviour of the government towards its people did not accord with international standards? I believe that society's views on this have changed and, frankly. so have my own. Some time ago I had a discussion in London with a minister of a country in which the company I worked for had a major operation. He was deeply concerned about the irregular activities of certain people in his country. We had (as a matter of deliberate policy and principle) avoided any connection with their activities and the minister knew it. None the less he asked me to intervene in some way. When I pointed out that this was no concern of mine, that it was not my country or my government and asked why, therefore, I should involve myself in any way, he replied that when it all went wrong I could guess whose fault it would be seen to be. At first this seemed to me to be grossly unfair. But on reflection. was it really so unfair? We had a major economic stake in the country. We were longstanding friends and partners of the country. Had the issue been a natural disaster, or even a social issue for the nation, we would have immediately offered to play our part. Is it the act of a friend to avert one's eyes and walk down the other side of the street when a crime is being committed, just because it is not our business? This is a very delicate issue. As foreign investors we have no mandate. No one elected us. Perhaps such situations are still not our responsibility. But they certainly are our concern, and we should think very hard how best we can contribute to their amelioration
THE CURSE OF OIL?
and resolution, again perhaps in partnership with others. I used to say to people I worked with, when someone comes to you with a problem, never say that is not our problem because we are a business. If it is a problem for society, it is a problem for us. You cannot have good business in a fractured society. The question is rather, is there a contribution we can make from our skills. And who can we work with - for action by companies alone will rightly be treated with suspicion and may well be regarded as inappropriate, if not illegitimate. 9. Some possible approaches The movement for greater transparency in resource revenue payments (Extractive Industries Transparency Initiative) is one approach to the improvement of governance. This is being led by the British government and supported by Global Witness and many responsible resource companies. BP made some pioneering steps in Angola. But we have to realize that there are many countries where the revenue generated from the industry is well known, but it is still misapplied. In spite of questions and articles in the local press, leaders simply ignore the challenge. The example of hydrocarbon development in Chad and the Chad-Cameroun pipeline is an interesting one. Many NGOs adopted the position at the outset that development of Doba should not go ahead, because in such a poor country with a history of civil strife, people would simply fight over the wealth created. My initial view of this was that it was breathtaking arrogance to assume that people are too poor or backward to deserve wealth. But on sober reflection, I realized that such strife is not an unlikely outcome. So could we reduce the possibility of strife while still generating a means of support for a desperately poor country? Plainly companies could not do it, but the World Bank had more legitimacy although not in the eyes of all. Companies wanted Chad to have an equity share in the pipeline in order to bring the benefits of co-ownership. They wanted the World Bank to lend Chad the money to do this because it would give the World Bank leverage in the issue. I believe the plan for the fairer allocation of revenue, developed in conjunction with the Chad government and civil society organizations, local and international, was a good start. Any deviation shows not the failure of the idea, but simply that the leverage which it was thought that the World Bank had might not be sufficient. But even if it fails (and in spite of initial problems and challenges it has not
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failed yet) it contains the elements of a way forward, with lessons that can be learned. NEPAD (the New Partnership for Africa's Development) is an alternative solution and being home developed is more desirable. That, too, is a brave experiment with governments agreeing on standards of popular participation, of security, of plans for infrastructure and introducing the concept of country peer review. I think this is a great 'Made in Africa' solution. It, too, may not work, but it deserves our wholehearted support. NEPAD peer review, if it works, is an alternative to the Chad World Bank solution. The leverage of peer review also has its limits, however, and a combination of World Bank, donor and peer review might be the best way forward. These collective steps, the painstaking struggle to develop sound governance in each and every country by building from the inside with active participation of all sections of society, including business are, I believe, the only way forward. This can be supported from the outside by targeted development assistance and the International Financial Institutions. 10. Steps to avoid the 'curse of oil' I hope from the foregoing, the steps we need to take to ensure real benefits from hydrocarbon development are clear. We can use technology to address the environmental issues - this is relatively straightforward and lies at the heart of our business. We need to put in place consultation structures with local communities to ensure that what we are doing for their benefit is really what they want. We need to be certain we are talking to the right people. This is something that can be greatly assisted by civil society organizations, both local and international. But, perhaps, the most important and the most difficult, is to work with others to ensure that local and national governance structures are in place - including structures for the sound governance of business. Where does business responsibility for that end? We should not usurp the government's role. But we have a responsibility, where governance has failed, to unite as industry with other players, NGOs, labour unions, religious organizations etc., to work to rebuild the governance foundation. For it is that governance, of countries as well as corporations, that makes the difference and which, in the end, is the means not just to ward off the 'curse of oil' but to turn that potential curse into a driver for sustainable development in the true sense.
Manuscript received 13 May 2003; revised typescript accepted 25 June 2003 All invited comments and author rejoinder accepted 25 November 2003