Antoine Heuty and Linda Pappagallo
The costs associated from escalating conflict with neighboring communities can be substantial for extractive sector companies. Here are three examples of what the oil, gas and mining community labels “non-technical risk” – risks associated with social and environmental disruptions at site level.
Kokopo LNG Project, New Guinea
In Kokopo, the capital of Papua New Guinea’s East New Britain Province, ExxonMobile has been constructing a Liquefied Natural Gas (LNG) project with a budget of US$ 19 billion. The massive project is build in the midst of 117 villages, and affects some 3,000 landowners and nearly 34,000 residents. Production was expected to begin in 2014, but the schedule is under pressure as delays and simmering conflicts with affected communities have massively escalated costs of the project.
At the very heart are concerns over landownership. In the initial contract with Papua New Guinea’s government, ExxonMobil agreed to carry out “Social Mapping and Landowner Identification” (SMLI) studies, which would have to be approved by the government before development licenses would be granted. The SMLI process would determine who would have access to compensation before the start of the project, and once production began, access to equity interest and royalty payments. While the SMLI studies were implemented, landowners and tribal chiefs complained about rigged procedures. To complicate matters, SMLI procedures failed to capture informal land rights in a region where 97 percent of the land on which the project is developed is controlled by indigenous communities, and where land is owned and administered in accordance with tribal customs and conveyed to the next generation orally.
In large part due to these shortcomings landowners have criticized ExxonMobile’s LNG project. Many feel that they have not been dealt their fair share of the windfalls from the project, and that issues they consider existential risks have not been properly addressed. Early work was delayed in 2009 due to mobilization from disgruntled landowners and to this day the Kokopo agreement remains an unresolved point of contestation in Papua New Guinea. In late 2012, ExxonMobil announced a US$ 3.3 billion cost overrun of the construction budget, a third of which was attributed to work stoppages and protests over land access.
Conga Project, Peru
The Conga Project is a gold and copper mining project currently under development by Minera Yanacocha, a subsidiary of Newmont Mining, in Northern Peru. Here, conflict with communities has congealed around water issues. Plans to develop the mine would threaten four high-altitude lagoons, two of which would be used to supply water to the mining site while the other two would be turned into deposits for mine waste. Local farmers have been concerned that the Conga Project would negatively affect water resources crucial for their crops and, in response, have taken to blocking roads and installations. The regional government has been supportive of the protestors.
As the protests escalated and protestors died in clashes with security forces, Newmont suspended all activities at the US$ 4.8 billion project in November 2011 at the request of Peru’s central government, which had previously bee supportive of the project. Since then Minera Yanacocha has been working on reservoir projects at the site to quadruple the local water supply, hoping that the project could restart in 2014 if the social license to operate is regained with the local community and the regional government.
Analysts believe that a cancellation of the Conga Project would have serious ramifications for Newmont in terms of its medium-term production and revenue targets. But besides the costs for Newmont, troubles at the project have spilled over into other sectors of the Peruvian economy. Investors have become wary of supporting projects as higher country risk discounts have been added by international business risk rating agencies. In addition, the Chamber of Commerce and Production of Cajamarca estimates that the 10 months of protests have incurred economic losses of up to US$ 600 million across various sectors of the economy.
North Mara, Tanzania
The North Mara Gold Mine is a project under ownership of Barrick Gold that operates in one of the most underdeveloped regions of Tanzania. The region has historically been known for its gold wealth and small-scale artisanal mining, but the industrial-scale gold extraction that started in 1997 has changed the economy of the region. Up to 10,000 families have been displaced due to expanding open pit operations, and close to 40,000 villagers previously involved in artisanal mining found themselves jobless as their sites were swallowed by the development and could not find employment with Barrick as their skills are useless for large mining operations. As a result, many have resorted to “invading” mining sites on a daily basis to mine waste rock, but in 2008 a large group of intruders started looting and destroying corporate mining equipment worth US$ 15 million.
To deal with these security incidents, Barrick has ramped up security measures and now employs more than 300 security personnel and contractors to guard the mine. An additional two-dozen Tanzanian police patrol the site under a security agreement in which Barrick pays for their expenses and part of their salaries. Security-related expenses amounted to US$ 20 million in 2010 alone. In an additional effort to keep invaders out, the company has budgeted US$ 14 million to build a 14-kilometer concrete wall around the site. The focus on security measures has turned the mine into a de-facto fortress, which further alienates Barrick from local communities.
This is the second part of a series of three blogs that discuss the concept of shared value in the extractive industries. Yesterday’s blog discussed three types of substantial costs that are associated with community conflict in oil, gas, and mining, while the third and final part will discuss some of the outcomes of this week’s Shared Value Leadership Summit in New York.
Antoine Heuty is the founder of Ulula. He is an experienced development practitioner with a long track-record designing and delivering policy reforms and working for social good with business, civil society and government in over twenty countries.
Click here for his full bio
Linda Papagallo is a monitoring and evaluation specialist. She is designing Ulula’s methodology for collecting, organizing and analyzing data. She is an expert in field based project management of randomized control trials, socio-economic and environmental analysis.
Click here for her full bio
Founder & CEO
Antoine is globally recognized as a thought leader on energy and natural resource management and has appeared on CNN International, Fox, Le Monde, and BBC. Before starting Ulula, Antoine worked with the United Nations Development Program and was Deputy Director of Revenue Watch Institute, which he helped grow into a leading organization in oil, gas and mining governance.