It can’t have escaped your notice that it is now one year since the explosion and fire on board the Deepwater Horizon platform in the Gulf of Mexico. The worst environmental disaster in United States history, the incident has cost BP billions, and the potential for a legal judgment of gross negligence hangs like a cloud over the company.
But you knew all that already. Many tons of ink have already been spilled in analyzing what went wrong, why the disaster happened (and we still don’t know all the answers) and what future disasters loom in the near future. But we probably already know more than we realize.
BP wasn’t alone in the Gulf – they were at the helm of a large and complex chain of contractors and subcontractors, each of whom had their own roles to play – and many of whom haven’t escaped scrutiny for the roles they played or didn’t play. Cameron International, supplier of the blowout preventer, Halliburton, in charge of the cementing, and Transocean, owner of the rig, are all coming under fire for their contributions (and some seem less willing than others to face up to this increased scrutiny, as Transocean shareholders will have discovered already).
It’s this very business model that I am most interested in here. In recent decades, the oil and gas sector has evolved a way of working that involves complex and fragmented chains of contractors and subcontractors – since the mid-1980s, contractors have gone from providing a fairly small minority of man-hours in the industry to over 75% today (as this report from OGP illustrates). That means that the vast majority of the actual work being done in the sector – the actual boots on the ground – belong not to the branded, international company, but to its contracting chain. What the industry does together – as teams working on projects – determines their success in creating positive social and environmental outcomes. It’s also part of the reason why oil and gas companies deliver such divergent levels of performance in different locations.
The truth is that there are numerous – and daunting – problems facing the sector, but many of them stem from the fact that hydrocarbons are increasingly being exploited in difficult, remote and challenging environments. These may be deep water, tar sands, areas of high biodiversity, areas used for traditional livelihoods, regions of poverty and low social development, areas where governance and regulation may be weak – the result is that the challenges of delivering real benefits to shareholders and local communities simultaneously while also avoiding major environmental damage are immense. Lots of people shorthand this as the ‘end of easy oil’. (An oil-sector person once asked in response: ‘When was oil ever easy?’)
Here comes the shameless plug: Today, a new IIED report, Shared Value, Shared Responsibility: A new approach to managing oil & gas contracting chains has been launched, co-authored by Dr. Emma Wilson (IIED’s energy team leader) and me, looking at the environmental and social performance of oil and gas contracting chains. It builds on three years of research and interviews in the sector to understand the challenges and identify some possible solutions. The report is intended primarily for the international operating companies and their first-tier contractors, but we think it sheds light on the broader problems that governments and civil society would find useful as well.
Some of our main findings:
- We believe many companies and contractors lack a sense of shared responsibility for the overall outcomes of a project. Their legal obligations, and their customary business practices, mean they tend to focus on their individual roles and responsibilities, which means there isn’t anyone who owns the totality of a project’s impact.
- There is no real lack of systems and processes at the industry’s fingertips that can be used to define and enforce the standards of performance expected from a project. The problem is that they aren’t adequately implemented. Sometimes, it borders on being a paper exercise, and much more effort should go into supporting and ensuring contractors and subcontractors are able to meet expectations.
- With oil and gas operations taking place in all sorts of countries and regions, there are bound to be cultural and contextual challenges in moving between these regions. Sometimes these challenges hamper contractors’ ability to meet international standards of performance, such as when local contractor markets are underdeveloped, or corruption has taken hold, or operating companies are unfamiliar with local practices.
As far as solutions go, each situation is unique, but in general:
- Early-stage planning and assessment is key to success, and companies should collaborate across all their stakeholder groups to understand the local context to enable clear planning, as early as possible, even before contracts are signed.
- Underdeveloped local markets are a limiting factor, making operations difficult and local benefits limited. Companies should work proactively to build long-term capacity in local markets to service the oil and gas sector (and broader economy) in the future.
- Company procurement processes can play a role in proliferating performance standards, sharing good practices, resisting corruption and increasing transparency and accountability.
- Contracts themselves need to contain a balance of incentives and penalties, to ensure that environmental and social performance are given equal treatment alongside speed and cost of delivery, and to ensure that standards and expectations are clearly understood and contractors are empowered to make the right decisions.
- Training and capacity building on the job will help improve contractors’ ability to deliver in the real world, and to keep the focus on the overall outcomes, rather than just on distinct and limited tasks.
- There are many good mechanisms for providing oversight and good quality communication throughout the contracting chain, including encouraging contractors to do more of the front-line engagement with stakeholders in the community.
- Reporting, responsiveness and good community liaison activities will help build trust and accountability with external stakeholders.
It’s not our intention to point the finger of blame solely at the industry – governments can make it difficult and even impossible to ensure good performance; national oil companies are often inadequate in their response to the environmental and social challenges, and impossible to influence; under-developed local contractor markets are the result of long-term failures of markets and society. The solutions are long-term and require a lot more research and collaboration than we have been able to do, but we hope this is the beginning of a proactive and responsible debate and collaboration to come.
Please let us know what you think!