CommDev has developed this section in partnership with Business for Social Responsibility (BSR).
Executive Summary | Industry Structures | EI and Community Development | Opportunities and Challenges
This section provides a brief overview of the mining, oil and gas industries, followed by an examination of their challenges and opportunities for community development in general and at each of the following phases of the project lifecycle. These include: 1) Exploration; 2) Development, Feasibility and Financing; 3) Construction; 4) Production; 5) Refining, Transport and Retail; 6) Closure and Decommissioning.
Figures 1 and 2 present these phases in the framework of the oil, gas and mining value chains and suggest ways to turn challenges into opportunities for community development.
Oil, gas and mining (OGM) companies find and extract depletable natural resources – meaning resources that will not renew themselves, at least not in our lifetimes.
Mining companies explore for and extract metals and minerals – including coal, copper, gold, silver, platinum, iron ore, diamonds, nickel and zinc. Once extracted, these resources are refined into materials for manufacturing, energy production or for direct consumer purchase, such as jewelry. Large-scale industrial mining companies are classified by their size, ownership structure and focus on specific minerals or activities. Exploration companies prospect, discover and study new resources with the hope of making a significant find to sell to a producer company. Senior and junior producer companies develop, construct and operate mines. (“Senior” companies have proven experience operating a mine and can already document a certain level of pre-tax cash flow.) Many mining companies are public, which means they are owned by shareholders and are publicly traded on international stock exchanges, while others are state-owned. A small minority are privately held companies.
Oil and gas (O&G) companies explore for and extract crude oil and natural gas, which are subsequently refined and sold as transportation fuels and for electricity generation. These companies are typically classified based on their ownership structure and degree of vertical integration. Majors are multinational public companies, some of the largest in the industry based on their market capitalization. They are also typically vertically integrated, meaning they are involved from exploration to retail. In contrast, independent oil companies usually focus on either “upstream” (exploration, production) or “downstream” (transport, retail) activities. State-owned/controlled companies are also significant players in the industry as they control some 94% of proven global reserves.
THE EXTRACTIVES INDUSTRY AND COMMUNITY DEVELOPMENT
A number of key features create tremendous opportunity, and responsibility, for the extractives industry to contribute to community development. First and foremost, the scale of extractive operations – their physical size and the high revenues they produce – and their long length of operation mean that they can have a profound impact on both local communities and countries.
Extractives activities represent tremendous possibility for local and national economic growth. This possibility is particularly profound when one considers that the majority of future mineral, oil, and gas reserves are located in developing countries – and often in the most remote and poor areas of these countries. However, this opportunity can be lost when the economic opportunities generated by the presence of an extractives operation are not maximized and revenues from operation are not prudently invested to stimulate further development. The finite nature of resources and fluctuation of revenues with commodity prices also make careful planning critical to sustain and stabilize investment in development.
Second, such operations can also profoundly transform the environments and social milieu of host communities, in positive and negative ways. Extraction involves dramatic physical transformation; and the large number of people who are involved in and affected by extractives operations can result in equally striking social change. The appropriate – and safe -use of technology can mean the difference between lasting environmental damage and the ability of future generations to make use of the same land and resources.
The movement of people, due to influxes of labor or resettlement of existing populations, can bring new resources and livelihoods to communities or disrupt the fabric of survival and social life. Employment can cultivate new skills which expand the horizon of economic opportunity and provide financial resources that meet pressing local needs and stimulate local business. But safety and security on the job as well as the protection of community health are fundamental to taking advantage of these promises.
Balancing risk and promise are the great challenge for the extraction industry. But companies who achieve this balance are likely to find that the benefits of striving for positive social impact translate into long-term business success.
OPPORTUNITIES AND CHALLENGES IN THE PROJECT PHASES AND VALUE CHAINS
- Exploration
Growing worldwide demand for minerals and petroleum, coupled with a dwindling resource base, are pushing exploration efforts into ever more remote regions. This presents both a challenge and an opportunity for OGM companies to contribute to community development with populations that are typically not reached, or are otherwise underserved, by governments, development agencies and/or NGOs. During exploration, companies obtain permission or legal licenses from national governments to explore in certain areas of the country for a set period of time. An exploration team uses computer modeling, geological mapping and land/aerial surveying techniques to identify areas with high resource potential. They then drill for sediment samples or use seismic testing to determine the depth and quality of a specific reserve. Company personnel may not always adequately inform or engage with local communities about exploration, which can be problematic if exploration is carried out on lands important to communities. In these situations, weak community engagement will, at best, result in missed opportunities for community input, support and involvement as a project moves into later phases. At worst, weak relations established during exploration can create a negative reputation for the project and increase the likelihood of local opposition as the project moves into the feasibility stage. - Feasibility & Design
Once a promising resource is identified, a company will either sell the property to a producer or further develop the property on its own through additional feasibility studies. Companies invest significant time and resources in studying the technical feasibility of extraction; associate environmental impacts and mitigation; social, political and cultural risks; and the cost and financial return of production under different future price scenarios. One important component of feasibility studies that has direct implications for community development is site-selection for the operation. When potential sites are located in or near areas important to local communities, a company will need to carefully evaluate site options for impacts to biodiversity, economic and cultural livelihoods and other impacts if individual or group resettlement will be required. At this stage, the company can begin to lay the groundwork for an effective resettlement plan that will not simply displace local people, but rather create opportunities for sustainable alternative livelihoods. - Investment Decision
International institutions (private-sector banks, multilateral organizations and government agencies) often play a decisive role in project financing. For large projects with national development significance, the International Finance Corporation (IFC) may participate as a lender. In these cases, project loans are conditional on the company’s ability to demonstrate appropriate assessments of and plans to address potential social and environmental impacts. (See IFC Performance Standards). For other projects, companies may turn to private sources of capital such as multinational banks. Over 80 of these private financial institutions have adopted the Equator Principles, which require a social and environmental review to ensure that a proposed investment sufficiently addresses social risks. These review processes establish a formal way in which OGM companies, in a relatively early project phase, can identify activities to take advantage of the wide range of potential community development opportunities that exist at a site level. - Construction
Once all permits, permissions and licenses have been approved, an OGM company is ready to begin construction. Depending on the size and complexity of the site, construction will typically last anywhere from one to four years. During this period, a company will hire specialist contractors (often hundreds or thousands of people) to supervise specific aspects of construction or development. The entire labor force during construction (including contractors) may be three to four times the size of the labor pool required during actual operation. This massive increase in the need for labor presents both challenges and opportunities for an OGM company depending on the local availability of qualified employees and suppliers, or “local content.” If the company builds local capacity to work with the mine from an early phase, this can help build community support for the operation. If, on the other hand, the community becomes disillusioned with employment and income-generation prospects, their disappointment can persist throughout the life of the operation. (See Local Content for more detail.) - Operation
Once construction is complete, operation can begin. The length of this phase will vary depending on the size of the reserve and the future price of the resource, but usually lasts for 20-30 years. In the mining industry, mines are either developed underground or above-ground in open pits. In both cases, ore (a mixture of the mineral and other rock) is extracted and then processed through physical (grinding and crushing) and/or chemical (leaching or filtering) mechanisms. To extract oil & gas, companies drill several wells on land or offshore and then use a pressure-based system that allows the resource to flow to the surface naturally or use injections of steam or water (enhanced oil recovery) to extract more of the resource from underground reservoirs. - Downsizing and Closure
A project typically ceases operation once a contract concludes or the resource has been depleted to a point where it is no longer economically viable to extract. At this point, the project moves into the closure phase, although the company will likely have already begun environmental reclamation and restoration efforts years before the official closure period. In addition, planning for potential social impacts and post-closure land use is likely to occur decades in advance – if not at the very beginning during project design and feasibility.
Two key drivers or barriers to community development during operation are company social programs and management and distribution of revenue from taxes and royalties. (See Community Development Strategies). An OGM company typically pays taxes (on corporate income or for use of water/utilities), and some pay production royalties (another form of tax based on amount of resource produced) to the host country government. The revenue from these taxes and royalties often represents a sudden influx of millions of dollars annually to a local, regional or national government that may be plagued by corruption or otherwise ill-equipped to effectively channel these funds into community or regional development programs. OGM companies may have little control over how governments manage revenues, yet often suffer the community’s frustration at seeing so little of them turn into concrete programs or infrastructure that benefit community development at a local level.
Refining, Transport and Retail
Vertically integrated O&G companies transport resources through a combination of pipelines (above or underground) and ocean tankers. Crude oil is further processed into petroleum or other products at refineries. Natural gas is transported through pipelines or, with emerging technologies, can be liquefied, shipped and then turned back into a gaseous form for energy production. Mining companies usually ship their products via train or tanker and then sell their products to foreign intermediaries (e.g., smelters, processors, gem cutters) who will further refine and add value to the products. This process of adding value to raw products is called “beneficiation” in the mining sector and represents a key challenge/opportunity for local or regional development in extractives areas. Historical trends, economies of scale and skill requirements often prevent source countries from realizing in-country beneficiation and its associated economic development opportunities.
There are two key community-development challenges and opportunities that emerge as part of closure and closure-planning: 1) Whether the company has been able to restore local environment in order to directly or indirectly support future community development initiatives; and 2) Whether the local population will be able to maintain development benefits beyond closure.
Once a company completes all of its contractual obligations related to closure, the site and facilities frequently revert back to government ownership. In general, a host government will either keep the site closed or sell the property to a local operator or state-owned company that operates on a smaller-scale or at a lower-cost in order to extract any remaining resource. However, land ownership and use after closure can be a key point of disagreement between different stakeholders. Companies may have little ability to influence these conversations but an awareness of potential disagreement will help preparations to minimize conflict. Companies can also play a role in advocating for post-closure land use that supports local development.
FIGURE 1: Community Development Challenges
FIGURE 2: Community Development Opportunities
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