Petroleum companies must fight corruption, instill responsibility in evolution of social awareness

The social awareness in which an energy company conducts its business has been transformed dramatically over the last 30 years.

It is hard to imagine that, up until 30 years ago, the energy industry worked essentially with carte blanche authority in nearly all areas of the world. The industry was then forced to seriously restrain its practices and clean up its environmental messes. This was the first phase of a type of social "consciousness" that energy companies exhibited, highlighted by fiascos such as Exxon Valdez and Brent spar.

The second phase of consciousness was the issue of human rights. Many oil companies have been highly criticized for their dealings in countries that were literally killing their own populations. The latest incarnation of this is the opposition of human rights groups to companies working in Afghanistan, due to the treatment of its female population. In some instances, money from oil or gas operations was the fuel that kept these dictators strong. As a result, some petroleum companies have even published position papers on human rights.

Third phase

The energy industry currently finds itself in the third phase of consciousness-social development, which is a direct consequence of the first two phases.

Energy companies are currently pouring millions of dollars into social campaigns to save everything from Siberian tigers to native peoples in many developing countries. The word "community" is important here. Many multinational companies are trying to use the argument that, if they are working within or near a populated area, whether it is in rebel-controlled parts of Colombia or drilling next to an ancient graveyard in the tundra, the needs of the local community should be considered. The main counterparts for these multinationals have been the nongovernmental organizations that have sprouted in developing countries, largely for the purpose of ensuring that their land and community are not exploited by wealthy western organizations.

This third aspect of the sense of community has been the ubiquity of an energy company. In some capital cities, the presence of energy companies is very strong. This does not refer to their high-octane gasoline and their conveniently located filling stations; rather, it is the buses provided, the hospitals being built, the vaccines handed out, and the support provided to theaters for medieval operas. Many companies have their own particular social concerns-whether it be health, the arts, or small business-but these add-ons constitute their own budget lines in multimillion-dollar budgets.

While these concerns may be valid, many companies find that their role is taking on the inevitable: that of a government. In many cases, they appear to be doing more than the government itself.

Pitfalls for companies

Increasingly, the energy industry has become more vigilant as to the needs of the countries and its population in which they operate. However, they have crumbled with regard to reciting their own wants in operating in some countries, particularly those countries that are extremely poor and live on the "oil myth" that proclaims prosperity for all.

The subsequent allocation of a company's money (either for a field or simply a signature bonus) remanded to a country is at the heart of the problem. The number of Mercedes 600s in a president's entourage is one indicator of this abuse; a Swiss bank account is another.

The inevitable question has arisen: How far should charitable neutrality go towards a government that spends its population's money haphazardly or outright steals it? While this might be a very uncomfortable question, it is one that needs to be addressed. The first stage and even part of the second stage of "consciousness" was largely the fault of the energy companies. They were mistaken to think that they could escape criticism for serious neglect of the environment. They were also unwise to think that nobody would notice the human rights practices of some countries.

In phase three, companies are largely doing what governments are supposed to be doing. The industry pays out enormous sums of money for the rights to exploit a country's wealth. However, it finds itself in the unlikely position of having to cover many social benefits that the government should cover with a company's money. Phase four would be to stand up to them and question them on these allegations of theft and misappropriation of state assets-thus introducing the age of increasing accountability.

The approach

To tackle the allocation of a company's money to a corrupt government, unity is needed in establishing a certain set of rules that energy companies could present to these leaders. This set of rules could be hammered out in a short document, a code of standards, that would focus on:

• Greater accountability to the energy companies.
• Financial reporting to the companies on where money allocated to the government has been spent.
• Removal of many entitlements among government employees (business-class airfare, luxury cars, etc.)
• Use of the United Nations and other international organizations as an implementing agency for social programs.

A document based on this could be agreed upon by a working group of about 15 people representing the top 15 energy firms (both oil and gas). This plan would have the signature of as many major players as possible, but it would have to have the signature of companies such as Royal Dutch/Shell, BP Amoco PLC-ARCO, Chevron Corp., TotalFina SA-Elf Aquitaine, ExxonMobil Corp., Statoil, Lukoil, etc.

This document might seem like a wish list and unrealistic, but it could be very realistic, if the will to implement such a plan exists among the energy companies. Indeed, most companies should be interested in such a document from a public relations viewpoint. The potential millions of dollars that it could save a company in reaction to public criticism is another reason to consider such an idea.

Advantages, disadvantages

One large advantage for this proposal over the last 18 months has been the increasing consolidation of the energy industry.

These mergers indicate that there is less difference among the majors about policy. They have forged together their common ideas to stay profitable. Oil prices dropped to $10/bbl; companies could not afford to withstand a low-price outlook alone, so they have consolidated and cut a portion of their workforces. These companies now have united boardrooms, even if there is an element of federalism in their relations (sometimes co-CEOs).

A second advantage, although only in certain regions, is the amount of upstream activities that are needed before investments pay off. Central Asia is an excellent case in point. The amount of infrastructure needed is enormous. Not only have the companies involved been obliged to essentially build everything from scratch, they have also been obliged to pay the government large portions of money for the exploitation of these fields. Given the amount of investment that is needed in this area of the world, only the majors are able to compete. These majors rely on enormous cash reserves into which they are able to dip, allowing them to invest $1 billion and wait for a profit after several years. Smaller companies are unable to compete in this manner.

In Central Asia, only the majors are able to accept such a demanding job. If they could unite on a working document concerning governmental corruption, then the governments in the area would be forced to agree to this working set of principles.

In other areas of the world, where smaller companies would be able to better compete, the document's success might not be as measurable. In this respect, the only way to ensure the participation of smaller companies would be to apply pressure on them, forcing them to adhere to such a document. The clout that a major has among his smaller colleagues is usually enough. In addition, from a public relations point of view, this is a coup. Who wouldn't want to get on this bandwagon?

The expected response would be one of fury on the part of a president, who could threaten to discontinue any involvement of that company in his country's energy exploitation. He could threaten that, but who will fill the company's place if all of the majors agree to it? Nobody, if everybody agrees.

Another big advantage in this approach is the reliance on reputations. Most of these "big men" cherish their reputations in the West. They enjoy the pomp and circumstance showered upon them on state visits. However, if they refused to agree to the set of principles, it would be a blow to their image abroad. This type of initiative among energy companies would only be welcomed by politicians in power, as it reinforces policies related to human rights and indigenous peoples in London, Paris, and Washington, DC.

Finally, some may argue that this is not fair to shareholders, who could be missing out on potential bonanzas and huge rate of returns on their stock purchases. This may be so, but the amount of opposition that a company subjects itself to in dealing with a corrupt government is potentially more damaging to that company, both economically (through boycotting) and socially (public relations viewpoint).

Some other "rogue" companies may win several contracts, but in the long run, those who accept such a document will be better off. The companies that agree to this could also expect favored treatment by their nation's politicians.

How can an oil company do this? Wouldn't it be interfering in the government's business? Yes, it would be interfering in a government's business; however, it would be justifiable, as a company's operations can account for upwards of 30% of the nation's gross domestic product to a government, and then the money disappears. The crisis over the Bretton Woods institutions' loans to Russia is a good example of this. There should be no difference between the international finance institutions in Washington, DC, and those private companies who work with the governments of developing countries. These two entities should be working together to highlight this issue.

UN role

The UN, while not being the most efficient organization, is in a unique position to work effectively with energy companies in the implementation of projects.

An example would be the following: An oil company must pay $500 million dollars for a production-sharing agreement. In a working agreement with the country's president, the two sides might agree that $100 million will go to the national bank to prop up the national currency, $200 million will pay pensions, and $200 million will be used for social programs, such as poverty reduction, microcredit, or business skills training for the local population.

The company will have to verify where the $300 million went for the currency backing and the pensions, but it could rely heavily on the UN and its specialized agencies in the implementation of projects in the social sectors.

Most social issues that the majors are interested in overlap considerably with programs of the UN. The UN, either the UN Development Program, UNICEF, or the World Health Organization, already exists in all developing countries. In some cases, oil companies have used UN agencies to this end, but on a small scale.

It has become a growing phenomenon that multinationals have hired social program coordinators who are working with NGOs in the implementation of projects. While this is admirable on the part of the energy companies, this is not their primary purpose. That purpose, exploiting a country's hydrocarbons, becomes unclear when so many other people are hired for projects that are not at all related to the business at hand.

Instead, these petroleum companies should give their money to the UN, where it can be implemented properly, by experts, who know the development issues facing the country. In addition, the donations are put through a rigorous set of rules and regulations concerning auditing and the expenditure of large sums of money.

The UN is able to import items duty-free through a simplified customs procedure. Some UN agencies, namely UNICEF, also have charitable status in the UK and US, allowing any donation to be written off a company's taxes. For these services, the UN usually charges a modest 3-5% handling fee to cover administrative costs. This is considerably less than the time, effort, and money that goes into the development of social programs by the likes of Shell or Chevron.

Indeed, BP Amoco (in Angola) and Chevron (in Kazakhstan) have both taken advantage of the UN system to do exactly this, and the reviews thus far are impressive.

Conclusion

After a recent discussion with an executive from a major oil company operating in the former Soviet Union, his reply was only to scoff at it and say that corruption occurs everywhere, even in Texas.

However, the majors are not being criticized for aiding and abetting corruption in Texas. They are criticized for their work in developing countries.

This idea may seem a bit farfetched, but it is something that the energy industry needs to face-and soon.

Too often, energy companies react too late in "consciousness" issues. They missed the boat on the environment, were too late for human rights, and were essentially forced into social development, largely to clean up their image from the first two stages.

Now would be a good opportunity to address this issue head-on, when the industry can do it on its own terms and not on somebody else's.

The Author