| Adapted from a speech to the International Breakfast of the Gas Processors Association annual convention Mar. 22 in Austin. |
There is more to relationships than the legalities on which they may be based. The international oil and gas industry was acknowledging that reality in the late 1990s when companies began to talk about the license to operate.
By "license to operate," the companies meant something beyond the production-sharing contracts that producers sign with host-country governments, or the EPC contracts engineering firms sign to build plants in countries not their own.
"License to operate" means not just legal permission to perform specified work but social sanction for business activity—even mere presence—in someone else's country. Judgments about it are rendered not in courts of law, but in the much less well-defined yet often more potent court of culture.
It was commendable that leaders of international oil companies even discussed the license to operate. It's not an easy topic. It elevates curiosity about agreements between companies and governments. It inspires dialog about touchy subjects, such as bribery and other forms of corruption. And it raises difficult questions about matters such as host-country sovereignty, religious tolerance, and the potential for political meddling by visitors.
So why were industry leaders talking about the license to operate?
Global expansion
In the 1990s, international oil companies were expanding around the world very rapidly.
Opportunities were limited in the thoroughly developed, conventional hydrocarbon basins of Europe and North America. But opportunities were opening in a number of oil-producing countries needing capital but struggling after years of depressed oil prices. At the same time, governments of countries that hadn't produced oil and gas before were making deals available in the hope of generating wealth from resource development.
Inevitably, opposition arose. Nongovernmental organizations demanded a say in production-sharing agreements and other international contracts. Their motivations were often environmental, sometimes anticorporation, and increasingly antiglobalist. These combined pressures received extreme expression in the violent protests that rocked the World Trade Organization ministerial meeting in Seattle in 1999.
At about the same time, it was becoming clear that activity by international oil and gas companies didn't always mean a local surge of wealth—or at least in wealth visibly beneficial to broad populations. Economists in this period refined a systematic body of knowledge around this subject. They called it the resource curse.
More importantly, people with no understanding of economics came to wonder why the hope for prosperity never came true for their families, in their huts, in their villages—with well-appointed expatriate compounds often in clear view yet, inexplicably, worlds away. The political unrest and widespread poverty that continue to plague Nigeria painfully illustrate the problem.
At some point, companies began to realize that they couldn't just retreat behind the contracts they had signed with governments. They couldn't just cite preemptive legalities and say, "Our responsibility begins and ends with these documents."
So, in executive speeches and roundtable discussions, some companies began openly to address the license to operate—and to discuss uncomfortable topics.
Fighting corruption
This new discussion coincided with—and no doubt partly resulted from—a surge in international efforts to fight corruption.
Once tolerated as an inescapable fact of commercial life, corruption increasingly came to be seen, in the words of World Bank Pres. Robert Zoellick, as "a cancer that steals from the poor, eats away at governance and moral fiber, and destroys trust."
And I will assert that trust is the core currency of social sanction—and therefore essential to the license to operate.
This is one reason why the oil and gas industry can't avoid the topic of corruption. Another reason is that the international war against corruption has flared up on many fronts.
In 1997, the United States and 33 other countries signed the Organization for Cooperation and Development Anti-Bribery Convention. In rough terms, the convention internationalized the Foreign Corrupt Practices Act enacted by the United States 20 years earlier to treat the bribery of a foreign official as a criminal act.
In 2002, the Extractive Industries Transparency Initiative emerged at the instigation of former United Kingdom Prime Minister Tony Blair.
A year later, the United Nations General Assembly adopted the UN Convention against Corruption.
Also at about this time, the World Bank launched an anticorruption program. And regional initiatives emerged in Latin America, Africa, and Asia.
What seemed to be a determined, international war on corruption provided a strong foundation, and no doubt some of the motivation, for the expressed concern by oil and gas companies for the license to operate.
Discussion fades
Yet the discussion seems to have faded. Why?
One easy answer is that the concept has been absorbed into a more general emphasis—albeit an important one—on corporate responsibility.
Still other possible reasons are at hand for what I see as drift in the industry's focus away from the license to operate.
One of them is that conditions have changed.
For international oil and gas companies—operating companies, at any rate—the world no longer overflows with opportunities. Now that oil prices are back in a zone able to make most upstream and midstream work reasonably profitable, host-country governments increasingly keep the best projects for themselves.
At the same time, national oil companies are pushing into expatriate work, competing more and more with their private counterparts for deals abroad.
With competition growing for a shrinking universe of opportunities, private companies face new complexities and, after the nationalizations and unilateral contract changes that some countries have made recently, new questions about the stability of international agreements.
Many private companies no doubt feel that their bargaining positions have weakened or at least turned more complicated than they were before.
Tangible problems like these have a way of moving abstractions such as the license to operate down the hierarchy of corporate priorities.
Motivations weaken
Also, motivations may have weakened.
Since the terrorist attacks in New York and Washington, DC, on Sept. 11, 2001, the politics of antiglobalization has lost its edginess. To be sure, factions opposed to international trade remain active. But they have to temper their extremism or risk being seen in the same light as terrorists.
To the extent companies once felt obliged to defend global operations against dramatized assaults on international commerce, the motivation may have eased as headlines became less shrill.
In recent years, meanwhile, anticorruption programs have suffered setbacks.
Credibility of the UN Convention against Corruption gained nothing from the Oil for Food scandal, in which 2,253 companies from 66 countries are alleged to have paid bribes totaling $1.8 billion for contracts related to the UN's program for filling humanitarian needs in war-torn Iraq.
And the United Kingdom's Serious Fraud Office has been criticized for suspending in 2006 its long-running investigation into allegations of corruption in the BAE Systems Al Yamamah weapons deal with Saudi Arabia. The UK government said security interests, mainly related to Saudi Arabia's assistance in the fight against terrorism, took precedence over anticorruption efforts. The anticorruption group Transparency International called the decision "a grave blow to the [OECD Anti-Bribery] Convention because it opened a loophole that other governments could also exploit."
Even worse, anticorruption efforts undertaken by governments and organizations haven't stopped individual instances of corruption, as high-profile cases involving respected company names recently have shown.
As an intellectual foundation for developing a license to operate, the global anticorruption movement—for good reasons as well as bad—is, if not fractured, certainly more fragmented than it was before.
Enforcement gallops
But make no mistake about importance of the subject. Although the global anticorruption movement may have stumbled in a place or two, anticorruption enforcement gallops ahead, especially in the United States.
According to Trace International, a group that tracks anticorruption activity, the US Securities and Exchange Commission and Department of Justice have taken a total of 308 enforcement actions under the Foreign Corrupt Practices Act since enactment in 1977.
And enforcement is increasing. Trace International maintains a compendium of all types of enforcement actions, most of which involve the FCPA but a growing number of which are made under the OECD Convention.
Through 2003, total actions of this type were in single digits each year.
In 2004, the number of enforcement actions grew to 14. After falling to 13 in 2005, the number has risen each year to a total of 53 last year. So far this year, there have been eight enforcement actions.
I understand that the FBI has five agents working full-time on FCPA enforcement.
FCPA cases, I should point out, are expensive to lose. Criminal punishment can include fines of as much as $2 million on corporations and $100,000 on individuals plus prison sentences of up to 5 years—and sometimes more if the violators are deemed to have benefited from corruption by more than the maximum fines.
The enforcement crackdown I have described might be another reason companies have become wary about discussing the license to operate. The wrong words misconstrued in the wrong place might mean costly legal trouble.
Disappointing project
Last but not least on my list of developments that may have worked to muffle talk about the license to operate is disappointment over a project that was supposed to set new standards for disclosure and accountability.
I refer to the development of oil fields in Chad and construction there and across neighboring Cameroon of a 670-mile pipeline. At the request of the consortium of oil companies involved in the project, the World Bank provided partial financing and created an unprecedented system for keeping track of funds paid to the respective governments.
If successful, the framework set in place by the World Bank for money-handling and reporting could have served as a new model for the ever-elusive ideal of transparency. But that part of the project failed after the Chadian government, under pressure from an influx of refugees fleeing war in neighboring Sudan, reneged on its commitments. In September 2008, after negotiations with the Chadian government that turned bitter, the World Bank withdrew from the project.
Less to say
So let me summarize developments I've suggested as possible reasons why companies in this industry have less to say than they did before about the license to operate:
• One is that they've unconsciously smeared the subject into other aspects of corporate responsibility.
• Also, the competitive landscape has become more complex and, in many ways, more difficult as national oil companies pursue investment opportunities outside their own countries.
• The antiglobalization agenda doesn't prod companies as it did before to publicly address the legitimacy of their international work.
• The anticorruption push has, in some cases, sustained blows to its own credibility and evolved from a righteous cause to an enforcement threat.
• And a project that was supposed to set the pattern for transparency didn't live up to expectations.
So what now for the license to operate?
Important topic
If anything, the topic is more important than ever.
The participation of companies owned by governments in international oil and gas ventures and partnerships is not new, of course. But it does give international deals a political dimension that's missing—or at least not so prominent—when relationships are between only private companies and host-country governments.
In the new, increasingly complex system of international energy agreements, questions will arise about sovereignty, the intentions of governments that own globally aggressive energy companies and service firms, the roles of nonstate companies that compete and form partnerships with state enterprises, and the money at the center of everything.
The system casts many shadows. Where it doesn't produce visible benefits to host-country populations, suspicions will arise. And where questions don't elicit prompt and thorough answers, people jaded by historic corruption and power politics will default to the most sinister possible interpretation of events.
For this type of automatic cynicism—corrosive as it is to the trust essential to the license to operate; indeed, to the very legitimacy of expatriate energy work—the only antidote is transparency, systematically applied.
By "transparency" I mean showing where the money goes. A reinvigorated discussion about the license to operate has to start here.
Creating and maintaining transparency is, of course, easier said than done.
Three steps
I'll suggest three steps.
First, the international oil and gas industry should start afresh to talk openly about the license to operate as an issue of top priority. Companies should talk about the subject in trade associations; in conferences; in government forums; and in meetings with customers, partners, shareholders, and anyone else affected by their work.
As they talk about the license to operate, companies should disentangle the subject and the tough issues it encompasses from other topics now bunched under the heading of corporate responsibility.
Priorities such as health, safety, and environmentally sound behavior are vitally important and closely linked to the legitimacy of energy work—expatriate or otherwise. But the license to operate needs its own dialog if tough subjects like corruption and money flows are to receive the serious attention they deserve.
Second, companies should establish a single benchmark for everything related to the license to operate. That benchmark should be the welfare of people in countries where they work. And I don't mean enrichment of a few well-placed government officials and their families and friends. I mean whole populations.
The goal of any company properly concerned about the license to operate should be to leave any country where it works better off, in human terms, than it was before the work began.
By this standard, the World Bank's abortive Chad experiment officially received a failing grade last November. The organization's independent evaluation group called the project a technical and economic success. In environmental and social performance, the pipeline project was deemed to have been successful and, in Cameroon, "among the best in extractive industries projects in Africa."
But: "The evaluation finds that the program's fundamental development objective of reducing poverty and improving governance in Chad through the best possible use of oil revenues in an environmentally and socially sustainable manner was not achieved."
One of many lessons I draw from the failed Chadian experiment is that improving governance from outside a country's borders can be extremely difficult because outsiders don't control much.
This inherent limitation of outsider control leads to my third and final suggestion for enhancing transparency in service to a more effective and sustainable license to operate: Companies should make creative use of what they can control, which is largely defined by their contracts.
Room for transparency
The agreements companies sign with host-country governments may have more room for transparency than is generally assumed in the energy business.
Last September a group called the Revenue Watch Institute published a study called "Contracts Confidential: Ending Secret Deals in the Extractive Industries."
The title describes the thesis. To be honest, I read the study skeptically, thinking it might be just one more activist manifesto against oil companies and the way they do business.
But the text actually seems balanced and reasonable. I'm not a lawyer, and I don't have enough background in the nitty-gritty of international contracts to know how practicable the recommendations might be.
Still, some of the findings made me think companies can, in fact, refine international contracts to allow more light inside.
The Revenue Watch Institute study, for example, looked at confidentiality clauses and concluded that much of what these clauses cover in extractive-industry contracts doesn't have to be confidential.
A survey of several hundred contracts drew an interesting comparison between agreements in extractive industries and those in other businesses.
Contracts outside extractive industries, the study said, tended to have detailed confidentiality clauses reflecting careful negotiation over what types of information should and should not be disclosed about specific ventures.
In the extractive industries, by contrast, confidentiality clauses in 150 contracts surveyed by the study tended to be generic, often covering everything in the contract.
Of course there are competitive reasons peculiar to oil, gas, and mining for companies and governments to want to keep some contract terms, and certainly proprietary data and technical information, under wraps.
But blanket confidentiality imposed by boilerplate contract language sounds like secrecy for the sake of secrecy. To people not privy to contract negotiations—including host-country populations, antiglobalization activists craving a cause, or jurors deciding whether money transfers are legitimate facilitation payments or bribes—secrecy looks darkly suspicious.
Refinement of international contacts might, therefore, represent a solid step the energy industry can take in the direction of transparency—and therefore toward solidification of its license to operate.
Full circle
Now it seems I've come full circle. Earlier I talked against retreating behind the limits of contract legalities. Now I'm suggesting that the energy industry seek ways to make contracts more sophisticated, to make them documents to promote rather than hide behind.
What I'm really advocating, of course, is a search for places in which to build windows into contracts as a way to foster trust and develop relationship with everyone affected by the activity. I've made that point about trust and the license to operate several times now. There will be a quiz.
I'll close by acknowledging that the steps I've suggested conflict in some ways with standard practice. They may seem unrealistic, maybe naive, especially in a world where competition nudges behavior toward the lowest standards in practice.
But here's a bedrock reality: For international oil and gas companies and service firms not owned by governments, the license to operate isn't what it used to be. That condition has to change. And business as usual won't change it.
Consider this advice to corporate leaders from the chief executive officer of a company with $104 billion in annual revenue and 402,000 employees working in 190 countries: "True leaders don't go with the tide. True leaders have a set of core values they publicly commit to and live by in good times and bad. Beware of the phrase: 'Don't worry, we can get away with it because everybody does it.' The most dangerous words in business or sports are "everybody does it."
Those words, from an interview published in the Feb. 15 edition of USA Today, are from Peter Loscher, hired in June 2007 to fix Siemens AG, which by then had been hit by fines totaling a record $1.34 billion for a worldwide, apparently corporate habit of paying bribes and kickbacks.
"We've witnessed many examples of those who fall and the dire consequences for those they take down with them," Loscher said. "In business, the decisions of a few to act unethically and illegally can destroy the life savings and the lives of thousands of honest, hard-working employees."
Decisions such as those Loscher disparages also destroy trust.
And when you lose trust, it should be clear by now what vanishes next.
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