Worldwide, local communities are becoming an increasingly significant threat to oil and gas operations. In Ecuador, in 2011, a judge awarded an indigenous community $18 billion against Chevron for environmental damage accumulated over 30 years of production in the region. About a year later, in Algeria, evidence confirms that al-Qaeda leveraged the local population to obtain intelligence to facilitate the Maghreb (AQIM) attack on the Amenas facility.

In Romania, in 2013, a few hundred protestors were able to halt Chevron's implementation of a shale-oil project. In the US, activists have been able to prevent or delay approval of the Keystone XL Pipeline project despite broad public and union support. And in Nigeria, the Movement for the Emancipation of the Niger Delta (MEND) continues to kidnap personnel, bunker oil, and create a costly and, in some cases, untenable operating environment.

These examples have one factor in common: Local communities either facilitated or were directly responsible for their outcome.

And while the tactics used against the industry differ in each case, the result is the same—significant cost to the targeted companies. Decades of such examples result in the unavoidable conclusion that executives now have a fiduciary obligation to their shareholders to engage local communities. Failure to secure the social license to operate across the life cycle of a project will often result in increased production costs and reduced company value.

While some energy companies recognize this trend, little has been done to take action against or mitigate the effects of community-based production risk. The most common industry response after Amenas was to review safety and security procedures, increase physical and technical security, and update emergency response and preparedness plans. These were defensive actions, largely, rather than proactive efforts within local communities.

Another lesson from these events is that the profitability of any given project rests upon much more than just the investment required to erect and operate a facility; it also involves the opportunity cost of lost production and future damage awards when the community revokes a company's social license to operate. In other words, investing in communities over the life cycle of a project is not only the right thing to do; it can increase profitability over time.

This article defines the various environments in which community-based production risk is found. It discusses appropriate response options and recommendations using existing industry capacity to mitigate community-based production risks. And it demonstrates how even the most troubled production environments can be made more stable by integrating existing corporate security and engaging local populations.

Cost considerations

Operating costs and revenue generation are generally viewed in terms of production, as evidenced by Eni's disappointing 2013 forecast of falling oil and gas production in Nigeria and Libya, mainly because of “geopolitical factors.” However, in today's operating environments, the cost of lost production should also be viewed through a community-based, production-risk lens.

Community-based production risk impacts production in a variety of ways: through litigation, agitation and regulation; criminal behavior and theft; and direct attacks on facilities and personnel. This is the result of populations having increasing influence, resources and opportunities to access or disrupt production, depending on how they interpret the utility of the activity to their lives.

In the Turkana region of northwest Kenya, oil and gas exploration activities have come into conflict with the pastoralist Turkana people, which in turn has led to the suspension of operations because of employment concerns. Recently, as mentioned previously, Chevron suspended its exploration for shale gas in Pungesti, Romania, following protests against fracing by a few hundred people in the capital and the local area. Similar community mobilization efforts related to shale-gas production and potential environmental damage are under way in North America and Western Europe. These activities demonstrate the impact of community-based production risk and its associated costs.

The magnitude of oil and gas operations cannot help but impact the sociopolitical equilibrium of communities. The relationship between industries and communities changes over the life cycle of projects, depending on the degree of effort every member puts into it. What might have appeared in the past to be a technical effort is viewed today as a persistent social relationship that, because of scale, scope and value, requires sustained interaction to build, strengthen and maintain a positive rapport.

Communities now mobilize, peacefully or violently, when they perceive or observe the negative impacts of environmental damage and/or that oil and gas revenues are disproportionately accruing or being distributed exclusively to one group. When this occurs, existing social, political, and cultural divisions tend to be exacerbated and latent ones revived. Even in benign operating environments, vast amounts of social capital and investment must be expended to operate, due to targeted activism by members of society.

Findings from the Statoil Amenas investigation reinforce the oil and gas industry's lack of community-based attention, focusing instead on traditional physical security practices. For example, according to the report:

  • outer and inner security measures failed to protect the people at the site from the attack in Amenas;
  • the Algerian military was not able to detect or prevent attackers from reaching the site;
  • security measures at the site were not constructed to withstand or delay an attack of this scale and relied on military protection working effectively; and
  • neither Statoil nor the joint venture could have prevented the attack, but there is reason to question the extent of their reliance on Algerian military protection.

Production risk continues to be viewed in terms of security—protecting facilities and personnel from criminal actions. The oil and gas industry relies on a “traditional security” model involving a dual strategy of policing by government authorities and hardened security measures supported by private security companies guarding facilities. This strategy fails because governments are symbolically embedded in their environments, and the more oil and gas companies rely on them for protection, the more they are associated with whatever symbolism the local communities ascribe to their governments. In developing nations, governments are often viewed as illegitimate, corrupt or unresponsive, and the companies that depend on them for security are viewed similarly.

Applying a community-based production-risk approach in the early phases of exploration and development allows companies to identify potential causes of insecurity or conflict. By engaging local communities early on through proper public engagement activities and development initiatives, companies can establish links to forge mutually dependent relationships. And by maintaining these relationships throughout the projects' life cycle, companies can reduce the likelihood of production loss due to litigation or criminal activity.

At the same time, companies can develop advanced indication and warning systems through community engagement. In many respects, community-based engagement is, therefore, a security and intelligence function. In the Amenas case, dedicated interaction could have led to an element of the local population warning plant personnel of a large number of armed, non-local individuals in the area.

According to industry experts, the greatest threat to the energy sector emanates from physical attacks by domestic terrorists, which are typically politically or economically motivated. These attacks can cause long-term, catastrophic financial damage to companies. Investing in community-based, production-risk activities can mitigate this threat and maximize profitability.

The alternatives are demonstrated in two examples below. After Amenas, BP lost $9.25 billion in market value and Statoil lost $8.68 billion in a protracted sell-off, while the broad energy indices remained relatively stable. Although larger companies are insulated from such devaluations, smaller companies are far more vulnerable.

The $18-billion court award in Ecuador divided by 30 years equals roughly $600 million per year in community-based production risk, not to mention the cost of litigation fees. In this particular case, Chevron might win an appeal in US courts, but its operating environment is now more difficult, its overall costs of production are elevated, and its social license to operate is far from guaranteed. Investing 1% percent or less of the court award per year in community-based engagement, beginning 30 years ago, might have resulted in a different operating environment.

Assessing risk

Community-based production risk has become the norm, rather than the outlier, in today's operating environment. This partly results from a changing security environment, which is now complex and interconnected and cuts across political, social, economic and technical lines. More and more, operations are carried out in some of the world's most volatile and insecure regions, increasing risk as well as costs. The security challenges faced in this new operating environment are exacerbated by factors such as:

  • expanding global energy demand and new technologies driving exploration and production into remote areas that are more difficult to protect and in closer proximity to local populations;
  • Al-Qaeda's, affiliated Islamic jihadists', criminal organizations', and revolutionary groups' ability to capitalize upon local populations' grievances to gain political influence and threaten or attack industry assets;
  • the proliferation of radical jihadist ideology; arms and equipment; and tactics, training and procedures across the Middle East and North Africa;
  • increased population density—especially growth in youth populations—in operating areas, creating additional stresses on already weak social infrastructure and public services;
  • the explosion of communications technology, which allows bad actors to coordinate activities, share tactics and methods, and mobilize groups through agitation or violence; and
  • increased political instability in conflict-affected, oil-producing/exporting nations.

Fortunately, it's possible to determine the degree to which industry is a welcomed, valued member of society, plot the results on a map, and record the attitudes over time. Since attitudes change based on interactions, industry can become more welcome and less subject to violence with the right mix of public relations, development, and security activities. Knowing where a project is starting out, or in which position it is currently operating, will help determine the right mix.

Figure 1 provides a contextual assessment of a project's production environment and a generic indication of the community-based production risk most likely to manifest as the relationship with the community evolves. The vertical axis denotes the degree to which the population generally views industry as a positive or negative factor; the more positive the relationship, the more welcomed by the community it will be and vice versa. The horizontal axis represents the degree to which the population views violence against industry as normatively acceptable; when violence is unacceptable, legal institutional resolutions to community grievances are the norm.

The upper-right quadrant is the ideal production environment. The population generally views industry as a benefit and violence against it is considered unacceptable. Community-based production risk is restricted to litigation and legal fees, which can result in significant costs, as the Ecuador judgment indicates. Perpetrators of violence against industry are restricted by social norms and willingness by the community to turn in suspects to authorities.

The lower-right quadrant shows the result when industry loses popularity with the community. Fortunately, violence against it is still normatively unacceptable. In this case, community-based production risk is likely to be manifested in demonstrations, work disruptions and heavy regulation. Combined, these production risks can amount to extraordinary costs, especially when production is idled, as in the Romania and Keystone Pipeline cases.

The upper-left quadrant represents the production environment as traditionally viewed by industry. Although operations are generally welcomed, violence against industry is considered normatively acceptable by parts of the community that feel slighted in some way. In such cases, segments of society passively accept violence and criminal behavior against industry, though the majority does not directly participate.

The lower-left quadrant is the highest-risk production environment. Not only does the community accept violence against industry, but also industry, for a variety of reasons—political, economic, cultural—is unwelcome, rendering it completely exposed to losses from bunkering, kidnapping and direct attacks.

Understanding and assessing existing production environments allows industry to apply the appropriate activities to redress community-based production risk.

Redressing risk

Despite the variety of community-based production risks posed by populations, industry can take steps to mitigate these dynamics. However, developing a comprehensive understanding of local communities and the impact industry has on them is key to detecting risks before they mature. The more accurate industry is in redressing local communities' needs, the more local populations will respect that industry understands their contexts and value its presence. With a baseline understanding developed, industry can apply the appropriate mixture of corporate social responsibility (CSR), security and PR activities throughout the life cycle of the project.

The modern threat environment requires incorporating the population into a comprehensive community-based, production-risk strategy to avoid the pitfalls of a traditional security approach. With genuine engagement and proper analysis of the population, the public can be a terrific source of information about everything happening in the area, including criminal and violent activity. Moreover, industry can build allies within and among the populations that could become active opposition against violence or terrrorism.

Fortunately, industry possesses many of the tools required to engage populations. Figure 2 illustrates the current suite of capabilities industry can use to engage communities. Unfortunately, industry is not applying these capabilities holistically in a community-based, production-risk strategy.

Traditional security, CSR, and PR tend to operate independently and be stove-piped within organizations. The failure to integrate activities and information across lines of operation, along with the lack of a comprehensive understanding of community-based issues or grievances, forces industry to revert to traditional practices to address risk.

Security professionals admit that security is merely a deterrent and cannot guarantee facility security or create stable operating environments. Furthermore, it is responsive in nature and geared toward protection from violence rather than prevention. Last, and most important, traditional security methods fail to leverage local communities as part of their risk assessments and strategy.

Opponents to industry understand this phenomenon and capitalize upon local populations' grievances to threaten or attack industry assets and gain political influence. In turn, political instability and conflicts (oftentimes with national governments, but also within communities) make the population a threat vector. In this respect, opponents have learned how to mobilize communities to support agitation and production stoppages. Tactics range from indoctrinating youth against the industry to supporting legal programs to train anti-industry litigators. Moreover, political alliances between activists, legislators and bureaucrats create extraordinary burdens, negatively impacting production opportunities.

CSR is a line of effort that has demonstrated much promise and is being recognized by industry as a way to mitigate risk. However, development initiatives can suffer the pitfalls of traditional development efforts and are typically oriented around a Western PR perspective. These initiatives cannot be short-term activities to facilitate infrastructure activities. They should emanate from the perspective of the population, not from what local leaders, government elites, or Western aid representatives believe is important. Companies often believe they are engaging the local population, but are actually engaging opportunistic charlatans masquerading as “community leaders,” provoking resentment from legitimate community members.

Companies also often fail to engage across a local community and may focus on one group while alienating others, who may have historic tensions with the engaged group. Development activities have to resonate with communities so that they view industry as investing in their knowledge, skills and, therefore, future.

Both PR and CSR activities have limitations. As currently practiced, they appeal to populations that are predominantly not disposed toward violence. Typically, they are reactions to community-based problems. By this time, the trends are already working against the industry, since many of the structural elements of the relationships have been contractually determined. If conceived of as long-term engagement tools over the life cycle of the project, PR and CSR activities can build relationships, identify potential grievances across space and time, and ameliorate tensions before industry opponents can capitalize upon them.

Mozambique and Ethiopia are two examples of countries that have been relatively stable in recent years but where numerous warning lights are flashing. In Mozambique, it is common knowledge that mineral extraction and natural gas finds reignited tensions between RENAMO rebels and the FRELIMO government. Clashes have thus far been limited to the central provinces of Sofala and Manica, but there are strong indications that violence will quickly spread to the northern provinces. The expected instability will certainly affect coal-mining operations in Tete and energy exploration in Cabo Delgado provinces. In fact, it is highly likely that those driving the turmoil will target foreign extractive companies.

Similarly, exploration activities are creating instability in Ethiopia. The ONFL's objection to African Oil's venture in Ogaden is well documented, but indications are that instigators of discontent are also organizing rural Omo populations to oppose exploration in the Lower Valley. Social movement and resistance organizers are playing on lowlander versus highlander identity conflicts that have to this point been latent. The threat of government—which is only marginally legitimate—encroaching on Omo territory and taking the spoils of oil for itself are causing the Omo to see the government as a potential thief. Here again, a proactive position by industry to introduce incentives and community-based engagement before production begins could generate the social capital and production license that would mitigate fears of upsetting the current social balance of power.

In the Mozambique case, tensions between RENAMO and the industry are likely to be high, since the FRELIMO government is so closely affiliated with foreigner extractive companies. Operations are likely to start out unwelcomed by significant portions of the population and be subject to disruption through demonstration, if not direct attack. Indeed, attacks on coal rail lines have already occurred.

In Ethiopia, however, the Omo do not necessarily view oil and gas companies in the same way they view the government. Operations might still be welcomed and disruption avoided if the local community—not just leaders or “representatives”—is broadly included in the benefits of production over the life cycle of the project. The projects in Omo areas might well be spared the problems currently befalling those in Mozambique.

Conclusion

Mobilized populations across the globe are denying industry the social license to operate and produce. These activities are assisted by nefarious actors and organizations' manipulation of community grievances to further their agendas. Industry has the ability and technology to respond effectively. By proactively cultivating and maintaining low-risk, politically stable operating environments through community-based production risk, it is possible to significantly reduce risk and increase profitability. In other words, investing in communities at the point of production over the life cycle of the project could, in many cases, be more profitable over time, due to persistent operation, than a simple transactional investment with the community at the time of project establishment.

James Sisco, director of GbHawk's Socio-Cultural Analysis Division, is a retired naval intelligence officer with a 23-year military career, with multiple deployments to the Middle East and Africa. David C. Ellis, lead analyst of GbHawk's Socio-Cultural Analysis Division, holds a doctorate in political science and has served as an intelligence professional for the US government. Riaan Niemand is FAF Development's director of operations for Africa, Central Asia and the Middle East.