By Jimmy Ahmed
Since the 1980s, some major changes relating to the management of Safety, the Environment and Stakeholder Relations have been taking place in the Petroleum Industry, resulting in poor and unhealthy business relationships between Oil and Gas Companies and the various stakeholders in the Industry. Safety and environmental management are now very well integrated into all aspects of the business processes and operations. One key area that is still undergoing embedment and yet to be fully integrated into venture management, and which has the potential to add lots of value to the business towards sustainability is Business and Stakeholder relationship management. The Industry has since realised that the growing costs of managing the fall outs and negative reputation that the poor stakeholder relationships were having on their Business and profitability was unacceptable. This was the advent of “Business Sustainability”, the effective management and coordination of financial, social and environmental (the three pillars of sustainability) risks, obligations and opportunities. The impact of these changes on the Industry has not only been seen in the quality of and increased manning levels but also in the increased costs associated with managing these new focus areas of the Business, albeit, leading to more responsible and sustainable outcomes. This article focuses on one aspect of managing these changes, Stakeholder Relationship Management.
The more successful companies that become Partners of Choice, and clinch better oil and gas deals with major resource holders, are those with a good reputation on having built and are maintaining sustainable relationships with host governments and other stakeholders; relationships based on trust, respect and a win-win mindset. It is therefore fair to say that ‘any relationship that is not based on a ‘win-win’ formula will not be sustainable and will end up in ‘Acrimony’.
Many companies in those days felt they knew what the society and stakeholders needed without the need for effective engagements and consultations. In some cases, the Companies were already operating in the countries before the Independence of those countries, so adapting to the new system with local host governments was a novel idea. Over time, friction in the relationships developed, between the Companies on the one hand and the governments, the host communities, Non-Governmental Organisations (NGOs) etc. on the other hand, leading to major reputational issues, high down time and production losses in the business. Something needed to give or be done to change the dynamics. Chief Executives who should be spending most of their time managing the business were spending almost 100% of their time managing crisis, mostly caused by poor relationships with their Business Partners, Host Governments, host communities, NGOs, Regulatory authorities and the NOCs.
What Changed and why?
With increasing oil prices, increased profitability of the Industry and increased social and environmental awareness of the impact of the industry on society and the environment came “lots of interest and pressure” from Resource owners, (mostly Governments), Non-Governmental Organisations (NGOs), Business Partners in Joint Ventures and host communities. These interests and pressures were of a varied nature, from demanding: a bigger share of the profits by resource owners and host governments, more transparency from Business Partners, more inclusiveness by host communities and more sustainable social and environmental practices by the industry.
The following are some of the issues and root causes of the changes:
- Lack of shared objectives and goals, lack of trust, and unmet expectations on the part of Stakeholders and Business Partners. Governments are committed to their people to provide social services while oil and gas companies want to invest in projects that will deliver the highest returns on investments for their shareholders.
- Changes to Petroleum fiscals Laws and Regulations by Host Governments and Resource owners mostly targeted at resource control and increasing Government take.
- Structural Tension caused by irreconcilable differences between the current reality versus the visions and goals of the Partners in the business relationship. Creating appropriate action plans to move all Parties from where they are, to where they want to be, often times increases the tension, requiring lots of formal and informal meetings and engagements. For example, in some developing countries, the Governments want some of their gas resources utilised for local/domestic consumption and power generation at gas sales prices much lower than oil and gas companies can get from exporting the gas. Governments also expect the oil and gas companies to spend their resources on domestic gas projects that do not rank high in Operating Companies’ economic project list.
- Outdated fiscals, Petroleum Laws and Regulations requiring review in the light of changes that have taken place in the business environment over time. The fiscal terms of some of the contracts were incentivised and put in place to attract investors during periods of high-risk investments with the companies bearing all the risk. Companies wants to stretch the duration of incentives while resource owners feeling that the investor has more than recouped the invested capital, hence the need to remove/reduce the incentive earlier granted.
- Increased Commercial disputes and mistrust between Business Partners in Petroleum Ventures leading to Arbitrations and court cases caused by perceived lack of transparency of the Operator and perception of Operator making ‘profit from cost’ using their home offices or proxy companies.
- Host Communities impacted by the activities of the Industry agitating for more inclusiveness, sometimes in violent ways, alleging not being carried along by the Operators. Expectations of Industry to replace or act as governments in the Communities where they operate to provide infrastructure needs etc. mostly in developing countries.
- NGOs constituting themselves into Industry “ombudsmen”, to ensure that the industry operated responsibly, ethically and in a sustainable manner for the benefit of society.
- Perceived arrogance of oil and gas companies and their staff in dealings with host government officials and external stakeholders.
A recognised best practice to manage and foster Business Sustainability is Stakeholder Engagement. It leads to organisations learning from customers, employees, host communities, Host Governments, Partners etc. The engagements are not unidirectional, only pushing out messages, but form the basis for gathering business intelligence, understanding the business environment, other Parties’ positions and needs, finding common grounds and involving stakeholders or taking their needs too into decision-making. These engagements also help to build mutual trust in the relationships between the Companies and their various stakeholders.
The Petroleum Industry already had relatively small in house Teams or Departments and or external groups (Legal Firms and Lobbyists) that managed what was in those days referred to as External Relations or Public Affairs. These were mostly small teams of a few staff, often perceived to be “dead woods”, headed by a middle level Manager, mostly managing Corporate social events, with no voice at all in senior Management. They also led the organisations in managing these engagements with their limited understanding of the discourse at the time, sometimes supported by lobbyists, particularly when it came to proposed changes to Petroleum, Environmental, Safety or Fiscal Laws and Regulations with potential to impact the profitability of the Companies. These teams were essentially “Door Openers or Gate keepers”! That was the level of attention the companies felt this aspect of their businesses needed at the time.
Where we are today
As the realisation of the need for very strong and effective business and stakeholder relations management grew in the Industry, Relationship Management teams in these companies grew beyond imagination, in some cases with more staff than some Technical(Petroleum engineering and Exploration) departments put together! While those functions were in the past staffed mostly with “staff that were no longer needed in core functions”, today, those functions are staffed with the brightest and best, high potential staff. – ‘High flyer high potential’ technocrats and staff that should be busy managing Assets or Business Functions to improve the bottom line and grow the business are now sent to manage these Relationships. In some cases, as development assignments for the high potential staff, in preparation for senior management roles, same as with a stint in Safety Management.There is also a Stakeholder Relationship management staff on most senior management teams, and /or top management meetings.
These changes to the way Stakeholder relations are managed have also increased the cost of doing business but the very positive impact of these costs on sustainability and profitability are now also very obvious. Besides increased staff costs, Corporations are having to spend more on logistics too, including the use of private jets and company guest houses by Executives outside of operational bases, to attend numerous and sometimes very unnecessary impromptu crisis management meetings with various stakeholders within countries and globally. Some of these costs and inconveniences can be avoided by having structured engagement plans and programmes in place. The cost benefit analysis of these increased spending is now clearly seen as having positive impact on the profitability and sustainability of the business.
Suggestions and Recommendations
Companies will have differences in their understanding and management of their stakeholders but one aspect comes out as best practice today which is, that it is not an area to be neglected as a core aspect of managing non-technical risks to achieve sustainability of the business.
- Effective management of stakeholder relations should not be put at the back burner but must be built into the business and venture processes from inception (feasibility stage of the project) right through to project abandonment.
- Carry your stakeholders along in whatever you do to always have a shared understanding and build trust. Engage proactively with all stakeholders and do not decide what you think is good for them. The relationships and engagements must also be maintained and carried out in an ethical manner and based on mutual respect.
- NOCs and resource owners are getting smarter and wiser, trying to get more or claw back value from their resources, so ensuring fair deals in win-win business relationships throughout the venture life will create a “goodwill credit” for the companies during difficult economic periods or for consideration in new ventures.
- The era when Relationship Management positions were filled with “Dead woods” or people the company did not know what to do with is long gone and any company that does not understand that will lose a lot of value. The Business and Stakeholder Relations teams should have a mix of core Business staff (Senior Technical professionals versed in the Key business processes who can more convincingly engage stakeholders and are empowered / trusted to make some key decisions)and staff skilled in interpersonal and People skills. The teams should also be represented in the top management of the companies with a seat at top management meetings where business deals and issues are discussed. Organisations and companies that have realised the value these positions bring to the business have elevated them to the levels of Executive Directors.
- Even in small companies or ventures with Partners, the importance of ensuring that all Parties are kept happy with timely and transparent information, to guide their decision making, for approvals of business plans and budgets should not be underestimated.
- If critical skills and knowledge gaps exists in the capacity of your venture Partners, particularly with the ‘senior’ partners, mostly National Oil Companies (NOCs), the Operator should have a skills and knowledge acquisition programme in place to bridge the gaps and make them competent to fully understand the Business processes and be effective Partners. This can save valuable time in removing bottle necks in your achieving timely targets.
- If contracts are meant to be reviewed periodically, all Parties MUST ensure that these reviews happen as planned or delays agreed in formal engagements, to avoid problems that could arise from perception of a party deriving undue benefits from the delay.Some contracts may give undue advantage to a party in the venture at some stage of the project, but ensuring that contract review clauses are adhered to in a timely manner will help to sustain the relationship and enhance trust.
- For small companies who need to manage staff numbers, they need to identify critical stakeholders and develop appropriate relationships management strategies, i.e. whether and which stakeholders the company would directly manage, and/or use consultants to manage others.
Jimmy Ahmed is a Non-Technical Risk Management Consultant in the Petroleum Industry. He retired as an Executive Director of Shell Pet. Dev.Co. of Nigeria Ltd.