Editorial: Support for transparency

April 25, 2005
Quietly but steadily, support is increasing for transparency in oil and gas companies’ dealings with foreign governments.

Quietly but steadily, support is increasing for transparency in oil and gas companies’ dealings with foreign governments. Among other places, progress is evident in the Extractive Industries Transparency Initiative (EITI). Launched in September 2002 by UK Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg, the EITI aims “to ensure that the revenues from extractive industries contribute to sustainable development and poverty reduction.”

The EITI, administered by the UK Department for International Development, held its second major conference Mar. 17 in London. The conference mainly elaborated principles agreed at the first meeting on June 17, 2003, also in London, and set goals for the next meeting, in March 2006. At this stage, because EITI represents major and potentially uncomfortable change in international business practice, what’s most important is participation.

Welcome growth

By that metric, the EITI shows welcome growth. Oil and gas companies that EITI lists as having taken action to implement its principles since the 2003 conference are BG Group PLC, BP PLC, ChevronTexaco Corp., ExxonMobil Corp., Marathon Oil Corp., Repsol YPF SA, Royal Dutch/Shell Group, Statoil ASA, and Total SA.

This month, the initiative gained another oil-company supporter along with a strong endorsement of its principles. At the annual conference of the Australian Petroleum Production and Exploration Association, Don Voelte, chief executive of Woodside Energy Ltd., Perth, announced his company’s decision, after a year of study and consultation with foreign governments “and other parties,” to participate in EITI. “We haven’t joined [EITI] because we feel under pressure to do so from governments, investors, or nongovernment organizations,” Voelte said. “We are doing so because we believe it’s the right thing to do, and we believe it makes sound business sense.” The Woodside executive called transparency of payments by companies to governments “the greatest mitigation” of “three risks that go hand in hand with exploration success in developing nations.” Those risks:

Unrealistic expectations about the speed and effects of oil revenues on general living standards.

Inadequacy of planning for the economic side effects of new industry, such as altered trade patterns, inflation, and diversion of labor and other resources away from local businesses.

Misappropriation, poor management, and inequitable distribution of oil revenues.

In areas where these risks are high, companies can choose either to not operate or to build safeguards and develop practices “to ensure oil is a blessing and not a curse,” Voelte said. For Woodside, the first choice isn’t an option. “We do not believe it is our role to make judgments about which countries are worthy of the development of their resources.”

Transparency, Voelte said, helps companies explain to governments and local communities that the general benefits from exploratory success require time and can be limited. By improving economic planning, it also helps governments avoid problems such as the trade imbalances that can accompany the strengthening of national currencies and the unsustainable domination of economies by oil and gas. Transparency also helps prevent the “oil curse,” the social tension that can develop in countries where, because of corruption and weak oversight, wealth resulting from oil and gas work benefits relatively few citizens.

“Payment transparency,” Voelte added, “is a joint responsibility of industry and government.”

It is, in fact, essential to the legitimacy of international oil and gas work. It’s the best front-line antidote for corruption, which in many places represents a systemic impediment to poverty relief. Where corruption thrives, in fact, oil and gas work can’t contribute to general prosperity. Where oil and gas work can’t contribute to general prosperity, it has no defensible reason to occur.

Need for change

The companies adopting principles of EITI and similar initiatives understand this. They recognize the needs for both change and a global, coordinated effort to make it happen.

The list doesn’t yet include all oil and gas companies working internationally. But it should. All oil and gas companies in or pursuing international ventures should adopt EITI principles and work toward disclosure of all their payments to foreign governments. They should do so because, as Voelte said, it’s the right thing to do and makes sound business sense. For holdouts, a little of that outside pressure from investors and others surely is in order.