Acorn Ideas

Issue No. 31, February 2015

Fast Money Beware: Non-Technical Risk Due Diligence


In an interview at the 2015 World Economic Forum in Davos, the CEO of private-equity firm Blackstone Group LP stated that, “Oil is the biggest investment opportunity in the world [right now].”1 Many analysts expect the drop in oil prices to the mid $40’s to spur significant asset sales and consolidation in the industry.2

Super-majors, national oil companies, and independents with strong balance sheets will likely be active participants in mergers and acquisitions (M&A), but the sudden price move is also likely to entice new participants to the sector from hedge funds, private equity groups and others in search of fast returns.

Prior to any M&A all players will conduct due diligence on investments of this magnitude, and while industry stalwarts typically understand the complete spectrum of risks involved, new participants may not fully account for “non-technical risks” (i.e. political, regulatory, environmental and social issues), despite their frequency. Within the oil, gas, and mining sectors, equity and debt investors alike have codified environmental and social due diligence into corporate requirements via the IFC Performance Standards and Equator Principles.

Given the commercial value tied up in both “above-ground” risk and social license, M&A investors in the oil patch need to integrate non-technical risks into their due diligence. Potential risks are different for each transaction, but here are three suggestions that apply generally:

  1. Integrate Specialists with Knowledge of the Local Context, Particularly for Foreign Transactions: Whereas financial and technical risks are typically grounded in numbers or models, evaluation of non-techncial risks requires an understanding of stakeholder perceptions, political ideaology and potential harm to the environment. Use of specialists that understand the local context is paramount, particularly in developing countries, where information is often scarce, second-hand, and unreliable. Ideally, these specialists should be from the project area.
  2. Track Emerging Legislation: The regulatory framework for the oil and gas industry is continously changing, and new regulations can have significant impacts on project viability. This is especially true of unconventional plays, where public scrutiny is high and technologies are evolving quickly. Hydraulic fracturing (‘fracking’) faces opposition and regulatory action at the local, state and national level. For example, the city of Denton, Texas banned fracking in late 2014, and in Pennsylvania the state is considering adding a 5% severance tax3 4 .
  3. Evaluate Company Environmental and Social Management Systems: Oil and Gas Supermajors and large independents have robust environmental and social management systems (ESMS), complete with policies, procedures and tools for evaluating, documenting and managing non-technical risk. These processes help ensure management is aware of these issues, and that they are managed appropriately. Many small oil and gas players (again, especially in the unconventional plays) are ‘lean’ and focus efforts on developing assets as fast as possible, while maintaining compliance. In many cases, mere compliance with the law can still leave companies open to a host of issues that represent material business risks.

Acorn International LLC delivers social and environmental risk management consulting services to the extractive industries and investors worldwide. We work with local partners in over 80 countries worldwide. We look forward to engaging in continuous improvement for the industry and building capacity with our partners.


1 Mattiolo, D. Wall Street Journal. Blackstone’s CEO: Oil Is ‘Biggest Investment Opportunity in the World’. 22 Jan 14. Accessed 23 Jan 14: http://blogs.wsj.com/moneybeat/2015/01/22/blackstones-ceo-oil-is-biggest-investment-opportunity-in-the-world/?mod=yahoo_hs

2 Sutherland, B., Deveau, S., and R.Penty. Bloomberg. Oil Rout Ratchets Up Pressure on Producers to Sell: Real M&A. Accessed 23 Jan 14: http://www.bloomberg.com/news/2015-01-20/oil-rout-ratchets-up-pressure-on-producers-to-sell-real-m-a.html

3 Baker, M.B. 2014. “Denton Defends Fracking Ban as it Hits the Books”. Star-Telegram. Accessed 12 February 2015: http://www.star-telegram.com/news/business/barnett-shale/article4362268.html

4 Russ, H. 2015. “Pennsylvania Governor Proposes New Tax on Natural Gas Extraction”. Reuters. Accessed 12 February 2015: http://www.reuters.com/article/2015/02/11/us-usa-pennsylvania-fracking-tax-idUSKBN0LF24620150211

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Issue 30 -Social and Environmental Performance - Considerations for Difficult Commodity Price Environments
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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