Acorn Ideas

Issue No. 44, April 2016

Not Too Technical

Extractive industries spend large percentages of capital project and operating budgets on managing engineering, reservoir, safety, legal and financial risks to control potential losses and reduce the overall cost of production. This is a wise practice, and the industry has established widely-accepted models, standards and practices that help predict, quantify and define means to manage these “technical” risks.

But what is increasingly more influential in determining the success of the industry’s investments, is the management of “non-technical” risks. These are the risks associated with acceptance by host communities, labor and human rights concerns, and cultural and environmental impacts. Non-technical risks are critical and problematic for extractive industries for 3 main reasons:

1. Management of non-technical risks is becoming an increasingly influential determinant in the success or failure of capital investments and operations in the industry.

Investors are finding that their rate of project failure is much more susceptible to stakeholder opposition, labor stoppages and allegations of human rights violations than problems of facility design, geotechnical instability or poor quality oil/mineral resources. For this reason, over the last 5-10 years the World Bank Group’s private lending arms, along with most of the world’s largest private investors, have adopted strict standards for managing social and environmental risks prior to investment. The sensitivity of investment to non-technical risks is particularly strong in countries that are opening to new investment opportunities to developing their resources – and often these are the countries with the least capacity to reliably govern the concerns that arise around resource development.

2. Unlike financial, engineering, reservoir or safety risks, non-technical risks are extremely sensitive to local understanding and solutions.

We use globally-accepted methods for predicting and reducing technical risks – and while there can be cultural differences in how we apply management practices, the level of variation and uncertainty in the outputs is generally manageable. But the cultural norms influencing what a host community will need to accept a development vary greatly by country, region and group. Understanding these norms, and seeing the investment from the perspective of those who will ultimately determine its viability, requires balancing an understanding of good social and behavioral science theory with an appreciation of what people believe, how they make decisions and what justifies their actions as a group. And creating solutions for those communities requires blending the discipline of consistently applying international best practices with a commitment to applying home-grown agreements that are sensitive, meaningful and resilient enough to be respected and sustained over the life of the investment.

3. We lack established models, such as those used for defining financial and technical risks, when it comes to understanding non-technical risks.

Widely accepted economic forecasting models and benchmarks, established design standards, trusted reservoir modeling techniques, regulatory roadmaps and legal precedents give us a reasonable degree of confidence in making decisions about whether we can manage the technical, financial and legal risks of an investment. Such a tool set is not available for predicting the more subjective and less well-tested dynamics that influence community opposition, labor unrest, human rights concerns or intolerable environmental changes. Fortunately, an important body of “good international industry practice” guidance is emerging on which we can rely for direction in understanding what practices are likely to be most effective and accepted by our stakeholders in managing non-technical risks. See our resources page http://www.acornintl.net/guidelines_global.html for some examples, and watch this space for more over time.

Understanding and managing non-technical risks to extractive industry investments will continue to become more challenging, and require careful attention, as host communities, labor groups and other critical stakeholders rapidly absorb and influence emerging guidance on stakeholder engagement, land acquisition, human rights, environmental resource valuation and similar considerations. Helping investors manage this challenge is the crux of what we do at Acorn International, and applying our unique brand of “local content & global assurance” to get the balance right is why we have been successful. Because sometimes the trickiest risks are the ones that are not too technical.

 

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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. Use of these local specialists is paramount, particularly in developing countries, where information is often scarce, second-hand, and unreliable. We look forward to engaging in continuous improvement for the industry and building capacity with our partners.

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Issue 43 -Myanmar - Another step in the transition
Issue 42 -Meeting expectations in human rights reporting - a delicate balance
Issue 41 -FPIC Is Here To Stay
Issue 40 -A Multi-Stakeholder Partnership in Ghana: Marine and Fisheries Management
Issue 39 -The Colombian Social Responsibility Framework: An Evolving Model
Issue 38 -Social Network
Issue 37 -A Community Look-back on Ebola
Issue 36 -Ghana and the Voluntary Principles: Implementing the Human Rights Protection Framework
Issue 35 -Inundation
Issue 34 -Colombia: Local Hiring Requirement for O&G Industry
Issue 33 -Mature and Frontier Mining Geographies: Where does Greater Risk (and Reward) Reside?
Issue 32 -Local Content in Mining: Increasing Expectations and Potential Solutions
Issue 31 -Fast Money Beware: Non-Technical Risk Due Diligence
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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