Risk has always been a factor in the oil and gas industry. Before the development of 3-D seismic and more advanced petroleum modeling, it was not uncommon for operators to drill numerous dry holes before making a discovery.
Yet, as the latest petroleum technology continues to reduce exploration risks, new risks in the industry are surfacing with the proliferation of another kind of technology. Cell phones, the Internet and social media are now a global standard, having expanded into practically every country on the planet. As a result, communication among people, families, tribes and societies has become nearly instantaneous.
For the oil and gas industry, this has created a relatively new and serious vulnerability to social risks in both developed countries and Third World nations that can be more costly than a dry hole and stop a project dead in its tracks.
A case study performed by ENODO Global, a consulting firm specializing in risk analysis and population-centric engagement, took a hard look at the Dakota Access Pipeline project, initially expected to cost $3.7 billion. After 87 percent of the pipeline was completed in 2016, protests began when it was revealed that part of the pipeline would be rerouted near a Native American burial site.
What began as a handful of concerned messages on YouTube turned into thousands of people permanently camped near the site and, later, a worldwide social media opposition campaign — ultimately costing $100 million in project delays and $10 million in security costs, said Jim Sisco, president and founder of ENODO Global.
“Today, extreme losses and multi-year project delays often are the result of unidentified or unmitigated social risks,” he said.
Unprecedented social risks have left many operators — even the mighty majors — simply unprepared for the consequences, Sisco said. Having witnessed a number of costly project interruptions on the exploration, development and production fronts, Sisco insisted that the “we got this” mentality combined with “outdated” business models, which fail to account for social risks, no longer work.
Africa: The New Frontier
The Dakota Access Pipeline project is a close-to-home example of how communication technology can increase costs and stall a project, which is now moving forward after presidential intervention. Yet, similar situations are popping up all over the planet — particularly in developing countries where people are quickly gaining access to technology and social media platforms.
As operators advance into unexplored and underexplored territory for viable discoveries in the sub-$50 a barrel climate, many are headed to resource-rich Africa, said Eric Hathon, AAPG Member and director of Conventional Exploration for Marathon Oil. “Africa is a frontier,” Hathon said. “That’s where a lot of the potential is.”
In fact, Africa has had unprecedented success in the past decade, claiming more than 50 percent of major worldwide discoveries, said David Blanchard, past president of the AAPG Africa Region and 2015-17 board chairman of the International Petroleum Technology Conference. “There is a real interest in exploring in the rift basins in east Africa and the interior of Africa,” he said.
Exploration in Africa has always involved multiple levels of risk. Transparency, contract sanctity and government regulations have always been issues between some African governments and third-party investors. Yet, realizing that resource exploitation is essential for their nations’ growth, countries such as Egypt, Ghana, Kenya and Gabon are stepping up to the plate and playing by the rules, Blanchard said.
Operators are doing their part as well.
“The private sector industry in general is taking a more proactive approach to closing the expectation gaps between governments and private sector investors,” he said.
Yet in countries where people’s needs are great, savvy citizens are no longer tolerating their governments to solely benefit from their nations’ resources. With cell phones in-hand and Facebook and Twitter accounts active, many are forging digital connections, banding together and demanding their share. And, as seen by Sisco, many outside operators are unprepared for this new social climate.
A New Breed of Social Risks
While social risks have always existed in both Third World and developed countries, as evidenced by the Dakota Access Pipeline project, they are becoming more difficult to wrangle, Sisco said.
He referenced an incident in Kwale, Kenya, where citizens mobilized in 2014 to petition the national government to allow local communities to excise a tax on a mining company (Base Resources headquartered in Australia), believing they would not otherwise directly benefit from the project. Unified through social media, they were successful and increased annual project costs by $11,220 in business permits for all mid-sized mining companies, as reported by Reuters Africa.
“If that mining company had properly engaged with those Kenyan communities and came to a fair agreement to meet their needs, the communities likely would not have asked for that tax,” Sisco said.
Improved communication tools have given people more power and influence than ever before.
“As we flatten the world through globalization, information is spread so quickly. Governments can no longer be the sole regulators and make decisions that remain under the radar. People are demanding more from government. Where is my share of this reward? When people have more access to information, they become empowered,” Sisco said.
For operators, it is no longer enough to adopt textbook methods to tackle social risks. Along the same lines, giving $100,000 to a country’s minister of the interior or minister of petroleum and paying large public relations firms to iron the wrinkles in community relations no longer cuts the cake.
“More and more companies are recognizing that they can’t just enter a country with thousands of dollars for social programs and call it good,” Blanchard said. “You have to be engaged and proactive with the local communities.”
Social Risk Analysis
Today’s environment requires operators to employ detailed social risk analysis that ultimately allows an operator to come in, explore and produce with community support, rather than dissent, Sisco said. The method goes far beyond a cursory discussion with government officials and money spent on a hospital, school or water wells.
Rather, social risk analysis is a multi-step process that digs deeply into the identity of a community to understand the actual needs of a people, receive their buy-in on a project and regularly monitor and stamp out the potential for social unrest. The needed model is complex and must deliver real-time business intelligence operators can use to quell any kind of community distress that might be brewing.
Sisco is not an oil and gas man. Yet his expertise in risk management, which he developed while working as an intelligence officer in the U.S. Navy, has brought many operators to his door.
During Operation Enduring Freedom, Sisco was charged in 2009 with the daunting task of peacefully integrating U.S. Special Forces into Afghan communities. Through trial and error, he developed a process by which he could determine a community’s identity and needs, craft a near seamless integration process and ultimately deliver a service to the community that was met with welcoming arms.
Despite the differences in ethnicities and tribes that Sisco encountered in Afghanistan, he ascertained that most people identified themselves as farmers who struggled with failing crops. In response, the U.S. government, working with agricultural development specialists, introduced a low-cost agrarian program that increased agricultural yields by 350 percent, he said. As word of the program’s success spread to remote villages, the troops were embraced by the people who allowed them to carry out their mission without discord.
In fact, there was a 10-fold reduction in roadside bombs in some of the most insecure districts of the restrictive Kandahar province, Sisco noted, alluding to an article titled, “The Changing Role of Armies in the Age of Democracy,” published by Business Day in 2013.
“We made a point to see the world through their eyes,” he said, “and talk in a way that resonated with them.”
New World, New Model
Insisting that textbook strategies that involve business intelligence, security, public relations and corporate social responsibility (CSR) programs are no longer enough to keep projects out of the fires of conflict, Sisco said that social risk analysis is crucial in the age of social media and the empowerment it has brought to people.
Business intelligence is typically driven by broad geopolitical factors with an emphasis on formal institutions and business elites, he explained. “Standard business intelligence tools are not equipped to analyze large amounts of information that is continuously generated by news outlets and social media,” Sisco said.
He added that security measures focus on protecting a company’s assets and personnel, and can therefore create physical and psychological barriers that can impede efforts to establish stakeholder relations.
Public relations campaigns tend to be reactive in nature and often rely on strategies that fail to shape opinions and resonate with local populations. In that vein, CSR initiatives often overlook local grievances and basic needs when designing and implementing social development projects, Sisco said.
The right social risk analysis can fill the void where the above strategies intersect. “It is a new approach that can synthesize large amounts of data to help businesses proactively prevent social risks from becoming events that interrupt projects and up their costs,” he said. “It empowers leaders to make better decisions, identifies mispriced investments, reduces unexpected operating expenses and prevents lower productivity, project delays and even violence, which are all real-world manifestations of social risk.”
While social risks can never be completely removed, they can and must be mitigated for a successful operation, Hathon explained. “I’m more of a believer in risk management than risk reduction,” he said. “A critical mistake is overlooking your risk factors. In fact, the most dangerous risks are the ones you don’t think of.”