Managing Risk in Complex Operating Environments

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Managing Risk in Complex Operating Environments
NOT AN OFFICIAL UNCTAD RECORD

• Sarah Meyers
• Senior Analyst, North Africa
• Control Risks
• 10th Africa Oil Gas Conference
• Algiers, April 2006

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Outline

• General framework for operating in complex
  environments in Africa

• Case studies The challenges and opportunities

• Considerations for risk mitigation

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Outline

• General framework for operating in complex
  environments in Africa

• Case studies The challenges and opportunities

• Considerations for risk mitigation

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The curse of oil

• Natural resources are often seen as a curse
  rather than a blessing, associated with conflict,
  corruption and environmental damage.
• Successionist rebellions are more likely if a
  country has valuable natural resources,
  especially oil.
• Little incentive to tax citizens means that there
  is no outlet to hold leaders accountable.
• Dutch disease sudden inflow of dollars leads
  to appreciation of local currency, making non-oil
  sectors less competitive on the world market.

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General framework for increasing risk

• Governments and oil companies disagree over the
  curse of oil how it should be addressed or
  even if it exists at all.
• It is undeniable that oil companies work in some
  of the most complex, and sometimes even hostile,
  environments.
• Becoming more acute because of the push for more
  reserves and exploration continues.

Risk Exposure
Time
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The Above-Ground Risk Landscape
Politics and Governance
Security

• Political Instability
• Unclear Legislation / Security of Tenure
• Corruption / Poor Governance
• Changing Royalty / Tax Regimes

• Civil unrest / ethnic conflict
• Kidnap
• Insurgency and terrorism
• Labour unrest
• Theft and pilferage

Reputation and Social
Infrastructure and Health

• Community opposition / social licence to operate
• Partner reputation
• Human rights

• HIV / AIDS
• Disease
• Lack of transport, communications infrastructure

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No longer working in isolation
Oil gas project
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Reputational risk

• Greater involvement by a number of players with
  different objectives.
• The development of natural resources almost
  inevitably involves complex trade-offs between
  conflicting objectives.
• Greater attention and easier distribution of
  media and the Internet.
• Growing influence of NGO activism and direct
  action campaigns in the US and northern Europe
  and to a lesser extent southern Europe.

• Result Oil companies are now more likely to
  take reputational issues into account when
  investing in new countries.

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Different comfort levels

• Majors
• Considerable influence when deciding whether or
  not to invest in a country
• Although they maintain influence, some of their
  power wanes once they have decided to enter a
  country.
• Massive investment in country means that it will
  be difficult to just walk away or to sell up
• Size makes them more vulnerable to NGO pressure.

• Juniors
• Corporate strategy based on high risk high
  return.
• Focus on exploration in different environments
  little long-term commitment.
• Competitive advantage because of their
  willingness to operate in high risk environments
  that the majors wont touch.
• Cant ignore entirely because wont be able to
  sell out or form partnerships if their projects
  are tainted.

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Determinants of commercial impact

• Nationality Pressure groups are most
  influential in Northern Europe and the US. Less
  effective in Southern Europe and still less in
  south and south-east Asia. Least concerned by
  reputational risk are China and Russia.
• Upstream/downstream Companies with downstream
  operations are potentially exposed to a boycott
  at the pump. Companies solely engaged in
  exploration and production face no such risk.
• Stock market listing Publicly-listed companies
  are more exposed to pressure from pension funds
  and other shareholders.
• State-ownership Companies that are wholly or
  partly state-owned are more vulnerable to
  pressure from politicians in their home countries.

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Outline

• General framework for operating in complex
  environments in Africa

• Case studies The challenges and opportunities

• Considerations for risk mitigation

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Case study Western Sahara

• Dispute over the territory has not been resolved
  legality of operations is unclear.
• Both Morocco and the Saharawi Arab Democratic
  Republic (SADR) have issued exploration licenses
  for the same areas.
• An American company is conducting exploration
  under contract from Morocco
• Number of companies were recently awarded
  contracts by SADR
• NGOs are particularly active and have forced
  several companies operating under Moroccan
  contracts to withdraw.

• Bottom line
• Companies operating under Moroccan licenses face
  serious censure for their activities, including
  divestment campaigns.
• Companies operating under SADR licenses are
  unable to conduct activities because territory in
  which the concessions are located is currently
  held by Morocco.

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Case study Sudan

• Comprehensive Peace Agreement (CPA) ended the
  civil war but has failed to resolve issues over
  wealth-sharing and control of natural resources.
• National government and southern regional
  government have issued conflicting licenses for
  the same concession.
• US sanctions against Sudan remain in place.
• NGOs and direct action groups have waged
  successful divestment campaigns against several
  companies.

• Bottom line
• Reputational risks have shifted, but not
  disappeared. Divestment and direct action
  campaigns are gaining momentum, particularly in
  the US.
• The operating environment under the CPA remains
  uncertain.

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Outline

• General framework for operating in complex
  environments in Africa

• Case studies The challenges and opportunities

• Considerations for risk mitigation

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Risk Mitigation
Operations in complex and hostile environments
are possible if you
Understand the operating environment on all levels

• International
• National

• Regional
• Local

Engage with the local community

• Understand that perception is reality.

• Community ownership of projects

Achieve the appropriate levels of security

• Make security part of the whole system

• Balance security and the ability to operate

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Some Key Questions for investors

• Where in the country is the project?
• Who are the partners?
• What is the political risk strategy?
• What is the anti-corruption strategy?
• What are the projects legacy issues?
• What is the community engagement strategy?

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• Merci pour votre attention
• Sarah Meyers
• Senior Analyst, North Africa
• Control Risks
• sarah.meyers_at_control-risks.com