Cornelius Graubner, February 24, 2014
A series of costly failures in major oil, gas and mining projects have led to a re-evaluation of risk assessments in the international mining community, and put the idea of getting-stakeholder-engagement-right in focus as a priority to protect value at risk. Recent events in the US – where community outreach efforts after a massive fire at two Chevron natural gas wells have sparked widespread criticism – suggest that it is high time to rethink stakeholder engagement in shale gas and unconventional oil.
The mining industry has had a difficult year: deteriorating Chinese demand for iron, coal and copper, plummeting commodity prices, escalating costs, and growing government interference have caused much headache for mining executives in 2013. But beyond the economics of the sector, non-technical risks – such as protests, permit delays or community disruptions – have come out prominently as key issue in a number of projects in trouble and cost companies billions of US dollars. A few cases to the point are Barrick Gold’s Pascua Lama project in Chile, where public protests put the project on hold and sent Barrick Gold’s shares plunging nearly 30 percent in just 2 months, or Rio Tinto’s coal projects in Mozambique, where the failure to secure shipping permits on the Zambezi River led to the company writing off $3 billion and the departure of the CEO and the head of the energy business. The list goes on. Accordingly, solving non-technical problems at site level was identified as the new science of mining at the recent Mining Indaba conference in Cape Town.
These discussions are highly relevant for shale gas and unconventional oil in North America, where the debate around exploiting unconventional extractives – commonly known as fracking – highlights the need for innovation on community engagement.
Last week Chevron’s community outreach efforts after a fire that burned with high intensity for five days, killed one worker and injured another, had a whole community worrying about their safety were met with sharp criticism. The company made a donation of $50,000 to be split between 27 neighboring fire departments and offered a $12 value certificate at a local pizza place for affected community members. An op-ed in local newspaper was quick to point out an apparent contradiction between Chevron’s $21 billion in profits in 2013 and the cheap nature of the community outreach. Ultimately, the story quickly spread through national and international media.
The reputational damage for Chevron in this case is an example of how a reactive approach to community engagement based on traditional philanthropy and corporate social responsibility runs the risk of ending up counter-productive. Short-term reputational boosters or seeking public relations credit for community engagement activities have limited impact and cement the notion that image is prioritized over outcome. More importantly, they miss the opportunity to credibly connect to community needs and turning engagement into sustainable growth opportunities for both the community and the business.
More often than not, reactive approaches tend to end up as case studies for too little too late. In a recent keynote at the NextGen Forum in Calgary, Michael Porter points out that traditional philanthropy and corporate social responsibility approaches practiced by extractive companies might address some of the high-visibility triggers of community tension, but fail to tackle root causes of societal need. Also, they do not help to identify the link with business. To sustainably protect value at risk companies need to move towards creating shared value, which puts addressing core societal needs in and around extractive operations front and center. Industry leaders are already experimenting with the concept. Pilot projects in oil, gas, mining and other high-impact industries show promising initial result, but some challenges remain to scale up shared value in extractive.
It is here where companies in North America could take clues from their colleagues overseas. The domestic oil and gas industry has been successful in mastering complex engineering tasks in deep waters with limited social challenges, but is now experiencing that projects on mainland raise questions beyond the technical realm. The case of Chevron’s controversial community outreach highlights the need to arrive at more sustainable solutions that focus on addressing key concerns of affected communities. These can include community-centered inclusive feedback mechanisms that allow shortening company’s response times to grievances, but would also help to mainstream progressive practice currently pioneered in mining operations into operations in shale gas and unconventional oil extraction. An added value of such programs would be in building data sets that can help move the public debate on fracking from its current entrenched stance into a more pragmatic direction.
Beyond the reputational damage to Chevron and the missed opportunity to create shared value for the community the episode highlights a broader challenge. Stumbling on community engagement when the economics of shale are under critical scrutiny can lead to a very quick erosion of any company’s social license to operate. For companies, now would be a good time to rethink stakeholder engagement and pioneer projects that create shared value in shale gas and unconventional oil operations here in the United States.
Cornelius is a senior expert on business and strategy development. As passionate development professional with over eight years of experience he has worked with groups in the former Soviet Union, Mongolia, Pakistan and Afghanistan on issues of organizational development and effective strategy implementation.