Acorn Ideas

Issue No. 30, January 2015

Social and Environmental Performance - Considerations for Difficult Commodity Price Environments

Periods of low commodity prices present significant challenges to energy and mining companies and create a number of business related hardships (not least of which may include lower returns on investments, reduced access to capital, and less available cash to service equity and debt). On the other hand, downturns may offer:

  1. “Clarifying” lenses for refocusing resources on business fundamentals.
  2. A “buyer’s market” with acquisitions more attractively priced than in boom times.
  3. Some relaxation of fiscal terms by governments to attract investment.

These (and other) business opportunities have implications for managing social and environmental performance:

1. “Clarifying” Lenses for Refocusing Resources on Business Fundamentals

Because of the fiscal challenges to commodity-producing economies during downturns (inability to achieve national and local budget targets, potential shortfalls in provision of public services, etc.), there is often greater potential for social unrest or regulatory assertiveness that impacts or even targets the perceived “deep pockets” of extractives companies. For this reason, compromising robust environmental and social risk management processes and programs may have unanticipated consequences ranging from short-term work stoppages to potentially undermining longer term social (and legal) license. Not only does a consistent social and environmental strategy help to address some of these issues or risks themselves, but it also provides a platform to resist contractual or other forms of more costly “rent” related resource nationalism. Focus areas that don’t necessarily stretch budgets during a downturn include:

  • Emphasize business case evaluation for various social and environmental performance activities. Ideally, business case justification is an ongoing part of any company’s internal processes (regardless of the current commodity regime), but is even more essential during downturns. This is especially important in facilitating internal alignment among various functions and disciplines to advance collective corporate objectives of preserving both short and long term (e.g. production and NPV respectively) commercial value.
  • Step up local external communication and engagement strategies to help buffer ripple effects from capital project delays or postponements on government budgets, local procurement, and employment expectations.
  • Review effectiveness of employee, contractor, and community-based grievance mechanisms to help address issues as they arise and manage possible escalation.
  • Ensure consistency in social investment budgets to mitigate interruptions and/or identify exit strategies through local partners, trusts/foundations and alternative funding.
  • Maintain “no compromises” on policies and procedures to mitigate the downside of environmental, safety and social risks.
  • Reduce process complexity and consolidate less efficient approaches to environmental and social issues through multi-disciplinary teams or task forces (government affairs, procurement, community relations, and HES) and via efforts with NOC or joint venture partners.
  • Review supply chain “hot-topic” risks and invest in enhanced coordination with major suppliers to avoid the need for reactive spending. Possible area of focus includes labor issues, local content (including possible deployment of multi-company or multi-stakeholder mechanisms) and security/human rights.

2. A “buyer’s market” with acquisitions more attractively priced than in boom times

From a buyer’s perspective, comprehensive social and environmental due diligence in support of M&A activity mitigates downside risk and helps to avoid excessive purchase price premiums. In addition, companies seeking to employ external financing for their acquisition activities will likely be required to conduct detailed environmental and social due diligence through Equator Bank or multi-lateral financing.

On the sell-side, vigilance in strategically determined areas of materiality is also required as high levels of unmitigated social and environmental risk are certainly factors in determining asset attractiveness, potential liability, financing and fair market value of a given asset or enterprise. Key focus areas for both buyers and sellers include:

  • Develop and apply a check-list of major social and environmental risk areas (derived from IFC Performance Standards and other areas of best practice) to identify vulnerabilities as well as areas of strong performance.
  • Deploy third parties to validate findings and avoid potential blind spots.

Other potential beneficiaries during a downturn include refiners and smelters that may see at least temporary gains in margins. For those companies with integrated and/or downstream only operations, this may offer an opportunity to reassess environmental and social performance (particularly bearing in mind that a slow-down in the upstream may also correlate with shifts in stakeholder and activist attention to downstream activities).

3. Potential relaxation of fiscal terms to attract investment

Notwithstanding the constraints posed on capital spending by low commodity prices, emerging markets with technical resources and reasonable fiscal terms will continue to attract oil, gas, and mining investors. Given the impacts of lower commodity prices on host governments; however, there is no doubt that social and environmental issues will be at the forefront of public discourse (if not directly factored into bid round requirements and subsequent negotiations on items such as local content). Some potential focus areas include:

  • Integrate host country competencies and resources into negotiating strategies and shared value offerings. While companies have to carefully manage their in-country spending during difficult economic periods, effective and targeted local content strategies can:

    a) buffer lingering government concerns over economic concessions in fiscal terms;

    b) contribute to addressing local community development aspirations; and

    c) potentially reduce project project-related risks and/or costs over the long term.

  • Demonstrate both technical and stakeholder engagement competencies. Because governments will be under pressure from their constituents, lower commodity prices will also raise expectations on foreign investors to demonstrate and deliver on social and environmental performance (particularly in areas receiving significant public scrutiny (i.e. unconventionals in Colombia and Mexico or mining in sensitive and frontier areas).

Environmental and social performance have become integral to overall project success and the need for enhanced effectiveness of these programs is even more pronounced during periods of depressed commodity prices. At Acorn International, we are dedicated to enhancing business value through excellence in environmental and social performance and are pleased to offer our services and global network of local partners to discuss your organization’s needs.

 

 

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Issue 29 -A Window into the Opposing View - Stakeholder Concerns about Oil and Gas in Mexico
Issue 28 -Why Non-Technical Risks Matter to the Mexican Apertura
Issue 27 -Equator Principles:Drivers of Sustainability in the Oil and Gas Industry?
Issue 26 -The Transparency Tightrope: Examining UNEP’s New Access to Information Policy
Issue 25 -July 2014: Bouston
Issue 24 - July 2014: Land Tenure and Property Rights - Where Legal Compliance May Not Be Enough
Issue 23 - May 2014: 3 Things I Learned in Mexico - Non-technical Risks in the Oil Industry
Issue 22 - April 2014: Capacity Building on Stakeholder Engagement
Issue 21 - March 2014: Above-ground Facilities and Stakeholder Engagement: Deploying the 'CAC'
Issue 20 - March 2014: A Starting Point for Shared Equity
Issue 19 - March 2014: What It Takes to Run a Great Consulting Firm
Issue 18 - February 2014: Considering Human Rights - Trends and Lessons in Oil and Gas Impact Assessments
Issue 17 - June 2013: Managing Environmental Health in International Development Projects
Issue 16 - January 2013: Integrating Environmental and Social Performance throughout the Project Lifecycle
Issue 15 - January 2013: The State of Shale Play in 2013
Issue 14 - August 2012: Building Environmental and Social Governance in Host Countries
Issue 13 - May 2012: Human Rights and Business: A New Era
Issue 12 - February 2012: Extractive Industries Confront Pressure for Greater Transparency
Issue 11 - January 2012: Key Updates to the IFC Sustainability Policy and Performance Standards
Issue 10 - June 2011: Oil & Gas and NGOs: New Rules of Engagement?
Issue 9 - February 2010: Annual Study of Sustainable Development Priorities
Issue 8 - January 2009: Annual Study of Sustainable Development Priorities
Issue 7 - May 2008: Top Ten Lessons Learned About Health Impact Assessment
Issue 6 - January 2008: Annual Study of Sustainable Development Priorities
Issue 5 - September 2007: Results of web forum with our International Partners
Issue 4 - January 2007: Annual Study of Sustainable Development Priorities
Issue 3 - May 2006: Suggestions and tips for safe international travel
Issue 2 - January 2006: Annual Study of Sustainable Development Priorities
Issue 1 - November 2005: The Top 10 “unspoken" criteria for determining the success of EIAs

 

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