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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART I: CRUDE OIL & NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Oil prices finished 2% down as the market remained pensive about the upcoming OPEC summit in April.

Although ‘OPEC Alliance’ countries (producers co-operating with latest output cuts) will not be attending the Vienna talks in a formal capacity, behind-the-scenes dialogue has been ongoing all the while.

With Iranian and Russian ministries having met up in January to discuss Russia extending its production cuts into next year and Saudi Arabia sending their foreign minister to Iraq (which was included in its latest production agreement) with a view to including Iraq in possible future production ceilings yet to be agreed.

Traders have been pointing out that there is no evidence to show that last November’s accord between OPEC and OPEC Alliance countries made any impact. Although it is true enough that crude prices have flat-lined since November (having jumped in the weeks running up to the accord), conversely there is also no sign the accord has not worked. The agreed cuts were modest, the first in over nine years and also the first of their kind in that they included several non-OPEC producers.

OPEC ministers are possibly playing a long game, with modest but universally-orchestrated limits in output, to be increased methodically rather than in any way likely to destabilise the market, and we would need to wait and see if and what OPEC ministers decide on in April before one can second-guess the success or otherwise of last November’s accord. The pace of oil price recovery has, however, been muted. This may or may not be connected to the delays to the public listing of Saudi Aramco, ostensibly due to ‘complexities in the structure’ of the company flotation plan.

The mooted delay (up to 18 months) may reinforce scepticism about the expected speed of any oil price recovery, if this reflects the kingdom’s pessimism of the accord holding together. The value of the share offering is estimated at over £2 trillion and clearly very sensitive to prevailing oil prices. If market estimates are correct, the new company is valued at 20 times the capitalisation of the next largest oil major, ExxonMobil. It is conceivable that there have been worries that the oil market might not recover in time and these may have played a factor in the delay, although that itself is pure speculation. The Vienna meeting April could though be a turning point, in either direction.

With this week being CERA Week in Houston, perhaps we can expect the annual splash of shale stories over the next few days.  While shale drilling should place a price ceiling on any sustained oil price recovery, as pointed out in past issues of Energy Highlights, shale plays are generally short-term and expensive. Oil prices could comfortably ratchet up to $75/bbl or beyond before shale and higher-cost conventional oil output starts to kicks-in. Either way, the oil market will never loose its capacity to take people by surprise.

Natural Gas

The forward-year gas contract finished the first two months of the year off 10%, closing below 45p per therm. This reflects the view held by most traders of a fundamentally well-supplied market with a spate of further LNG export projects set to come online this year and next, many landing at European terminals.

Notable supplies include projects in Australia and South East Asia, although shale gas from the Americas will have a role will to play too. The UK market recently saw shale gas imports from the Peruvian jungle due for landing at Milford Haven shortly before going to press, and this healthy looking forward supply-picture has been helped along by Japan.

The country has gradually been releasing more and more gas on to the world spot market: the LNG contracts it had bought up in the immediate aftermath of Fukushima. This may have contributed to (or certainly given the impression of) an ‘LNG glut’.

The demand-side also paints a weak picture, with limited demand-call from generators and industry. However, there are some bullish signs on the horizon too. Geo-politics have recently turned adverse, with under-the-radar conflict areas in Russian-Ukraine and even the South China Sea among the potential supply-area worries.

However, any sustained uplift in gas prices is perhaps most likely to occur as a result of an indexation and long-term contracts issue. Indexation to crude prices still has the propensity to push prices up, with much of the piped and LNG sold across Europe still covered by these clauses. Within these contracts, even where oil and petroleum product indices may have seen their price-impact reduced or possibly removed altogether over the last 20 years, these price escalators indices have in most cases simply been substituted for producer price indices, which have recently been rising faster than oil prices themselves.

In fact, over the last five months alone, UK producer prices have been rising at annualised rates well over 10% according to estimates provided by industry trade associations. These will ultimately soon be reflected in official government statistics and will later directly influence gas contract prices, where the indexation effects can be lagged for six to nine months or, in unusual cases, even longer.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MARCH – MAY 2016 PART I: OIL

In this new series of articles, Dominic Whittome covers wholesale energy prices between March and May 2016, discussing issues such as fluctuations in the price of Brent crude, falling shale production and decreasing prices across Europe’s gas and electricity exchange, as well as the possibility of these rising again in the future.

The cost of Brent Crude went on a rollercoaster ride in March and April. Prices began rising amid hopes of a possible agreement at OPEC’s production ceiling talks in Doha, only to fall back once those expectations were dashed. Prices then soared to $50/bl by the end of April, far above the “new $20/bl -$30/bl range” discussed in some trading circles as recently as February. In the event, the market shook off the stand-off in OPEC and the 15-Dated Brent contract ended the period up over 23%.

Meanwhile, North American shale production has proved much more price-sensitive than some pundits anticipated. Shale projects generally have a very short plateau period so ongoing development is key. Production may well have been set to decline anyway as indirect government subsidies were to be curtailed, although the prolonged slump in oil prices may have bought this to a head. The IEA itself predicted a possible fall in shale investment at the end of last year, observing a sharply increasing price sensitivity once oil prices fall below $60/bl.

Last month the IEA announced that non-OPEC oil production was falling at a faster rate than at any time in the past 25 years. Looking forward, one key price driver will be how soon the current impasse between Iranian and Saudi oil ministers can be broken. Longer term, there is also the issue of how quickly wider Middle Eastern and Venezuelan crude production can be ramped up and brought to market as global oil demand gradually recovers, especially if non-OPEC production continues to disappoint.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article remains the copyright property of Prospect Law and Prospect Energy and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Energy.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 01332 818 785 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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CUADRILLA FRACKING APPEALS OPEN IN BLACKPOOL

A Public Inquiry into four planning appeals under s.78 of the 1990 Town and Country Planning Act have opened in Blackpool in Lancashire, against the decision of Lancashire County Council to refuse to permit drilling at two well sites in Little Plumpton and Roseacre Wood, hydraulic fracturing those wells and flow-testing the shale gas, and associated monitoring works. The appeals are listed to last for 5 weeks.

They are the first appeals to consider the Government’s shale gas policy, and have all been recovered by the Secretary of State for his personal determination. The appeals have raised a number of interesting, and inevitably controversial, issues.

First, there is the application of the presumption in favour of planning permission contained within paragraph 14 of the National Planning Policy Framework (NPPF). The Appellant argues that because the development plan does not expressly provide for hydrocarbons expressly, in line with the PPG, it must be either absent, silent or out-of-date. However, absence and silence have been interpreted as a high threshold, see Lindblom J in Bloor Homes East Midlands Limited v SSCLG [2014] EWHC 754 (Admin.). As to whether a policy is “out of date” by reference to paragraph 215 NPPF, the Inspector will have to resolve whether a given policy is inconsistent with the corresponding parts of the NPPF.

Second, there is a significant conflict in the expert noise evidence, between whether to use the British Standard for construction and open cast sites, or to use the British Standard for industry and commercial sources of noise – in short whether the drilling and fracturing operation (nearly 2 years) is akin to a construction site or an industrial site. There is also dispute as to the extent to which the WHO Night Noise Guidelines (2009) replace the WHO Community Noise Guidelines (1999) on Lowest Observed Adverse Effect Level (SOAEL) and Significant Observed Adverse Effect Level (LOAEL), or indeed whether LOAEL and SOAEL in WHO Guidelines are targeted to, less intrusive, anonymous (transport) noise, rather than noise with a specific character, as the appeal schemes are said to be.

Third, there is debate as to the weight to attach to the Joint Ministerial Statement on Shale Gas “Shale Gas and Oil Policy” (16 September 2015) (“WMS”). However, that debate may ultimately be somewhat redundant as it appears to be common ground after the first week of cross-examination of the Appellant’s witnesses, that the WMS is not encouraging unsustainable (by reference to the NPPF) shale gas exploration. Thus an exploration project which conflicted with the NPPF judged objectively, as a whole, would not derive any support from the WMS.

Fourth, the weight to be attached to benefits. Planning permission is sought only for the exploration stage. It is a real possibility that following 6 years of exploration, shale gas is not commercially extractable at the proposed locations and thus the wells are decommissioned and plugged. Therefore, the decision taker can only place weight on the very small number of construction and security jobs that will be created to construct and maintain the wells, and the receipt of knowledge of the commercial viability of extracting shale gas at the locations. Placing weight on the benefits of a wider commercial shale gas industry in the North West is highly unlikely given that this would require at least a further planning application and may not even be a commercial reality.

Without question these appeals are a definitive test for the fledgling shale gas industry in England (readers will know that hydraulic fracturing is not presently permitted in Scotland or Wales). The seven planning barristers appearing in the appeals, including Prospect Law’s Ashley Bowes, reflects the scale of the financial stakes and the importance and complexity of the legal issues under consideration.

 

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Energy accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

This article remains the copyright property of Prospect Law and Prospect Energy and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Energy

For a PDF of this blog click here

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A STEP CLOSER TO FRACKING?

Britain has moved a step closer to ‘Fracking’ with the news that a decision to block the extraction of Shale Gas in South Lancashire could now be overturned by the Secretary of State.

Although a local planning inspector at Lancashire County Council will still hear the Energy firm’s appeal in February as per the usual course in planning appeals, they will now only have the power to compile a report and forward suggestions. A final decision will instead lie in the hands of Greg Clark, the Secretary of State for the Department for Communities and Local Government, who has chosen to depart from the usual process because the prospect of extracting Shale Gas is a matter of “major importance having more than local significance”.

This follows Mr Clark’s September decision to afford himself a final say over planning appeals concerning Shale Gas, as s.62A of the Town and Country Planning Act 1990 allows him to do.

In June of this year, Cuadrilla’s applications to instigate ‘Fracking’ at two sites, Roseacre Wood and Little Plumpton, were rejected by Lancashire County Council’s Development Control Committee, with nine from the fourteen strong committee rejecting the proposals on the grounds that the sight of Fracking operations and the noise arising from them would cause an ‘unacceptable adverse impact” on the rural setting that was to host them.

As we previously reported, central government have appeared keen to promote ‘Fracking’ despite indications that support for the technique has reached an all time low. Moreover, with opposition to the extraction of Shale Gas often heard at local levels, the significance of this development cannot be underestimated. Groups such as Friends of the Earth have been quick to voice concerns that this development will help to sideline local opinions.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

For a PDF of this blog click here

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FALL IN PUBLIC SUPPORT FOR FRACKING

The government are failing to win public support for Fracking, with surveys hinting at a sharp decline in public support despite efforts to create a market for Shale Gas.

YouGov and the University of Nottingham have studied public reactions to Fracking extensively since early 2012. The results of their latest survey, involving over 6,000 people, suggested that little more than one in ten people now support the technique. If its previous studies are to be believed, support for Fracking reached a high of nearly 40% in July 2013.

More correctly known as hydraulic fracturing, ‘Fracking’ involves pumping a mixture of chemicals and sand into rock fractures so as to extract gas and oil. The technique dates back to the 1940’s. In the UK, areas such as Nottingham, Derbyshire and parts of Leicestershire have long been known to have excellent potential for the extraction of shale gas.

In spite of this, ‘fracking’ has been suspended in the UK since 2011, when drilling in Blackpool was linked to minor earthquakes. Earlier this year, two planning applications, submitted by Cuadrilla, were also rejected by Lancashire County Council amidst vocal opposition, with the decision issued on the grounds that operations could cause auditory and visual pollution in a rural landscape. Opponents of Fracking also frequently contend that drilling has the potential to pollute drinking water.

Nonetheless, in recent years the government has appeared keen to change public perceptions; reducing the subsidies available for wind and solar energy whilst insisting that Fracking could be key to making the UK energy self-sufficient. Companies like Cuadrilla, GDF Suez and Ineos have recently been granted over 1000 miles of land to explore for potential fracking, whilst another 5000 square miles will be subject to consultation, given their proximity to protected areas.

Yet falling support has also been reported in research conducted by the Department for Energy and Climate Change (DECC), who interviewed over 2000 households in July and found a support rate of approximately 21%, 6% lower than in February last year. The DECC Public Attitudes Tracker seemed to suggest a public preference for wind and solar, finding that 75% of the public supported sources of renewable energy.

Although these results suggest they are facing an uphill struggle, DECC have made a clear commitment to Fracking; they have previously argued that it could contribute billions to the UK economy. As such, it would be surprising to see them give up their battle to convince the public right now.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resources projects in the UK and internationally.

For more information, please contact Edmund Robb on 07930 397531, or by email on: er@prospectlaw.co.uk.

For a PDF of this Blog click here

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DIFFERENT APPROACHES TO CORPORATE SOCIAL RESPONSIBILITY (CSR)

Mark Jenkins, Prospect Energy
The philosophy behind western approaches to CSR

Western approaches to the formulation of Corporate Social Responsibility strategy are overwhelmingly secular. They tend to flow out of one of a number of paradigms. We can perhaps categorise these paradigms as follows:

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MITIGATING THE EFFECTS OF THE CURSE OF RESOURCES: CSR STRATEGY

Mark Jenkins, Prospect Energy

In my last blog I looked at some of the security consequences of the Curse of Resources; using the specific examples of Nigeria and Egypt.

In this blog I will look at some of the social consequences of the Curse of Resources, and consider the role that can be played by Corporate Social Responsibility (CSR) in mitigating these consequences.

Undermining the local social fabric

The initial arrival of oil companies in Chad generated significant impact on the country’s social fabric. Eleven primary schools were closed as teachers left their posts to seek employment as middle managers in the oil industry – on infinitely better terms.

There was a sudden growth in prostitution. The clients came from expatriate oil workers, and local farmers who were suddenly extremely rich as a result of compensatory payments given to them by oil companies, for access to their land.

There was an increase in paramilitary activity, both in regard to the protection of oil assets, and also as a result of local “bunkerers” purchasing arms with the profits they had made as a result of selling oil on the black market.

The decline in local agricultural activity generated a sharp rise in the local price of millet and food. Unemployment among locals living in the vicinity of exploration and production activities occurred at the same time as the sharp rise in food prices.

Social License to Operate (SLO)

The term Social License to Operate (SLO) refers to a stakeholder perception of the legitimacy of a project, a company or an industry. Ernst and Young have said that a failure to achieve a SLO represents the fourth biggest risk to the success of commercial operations in the extractive industry.

Corporate Social Responsibility (CSR)

A Social License to Operate is often expressed using terms such as CSR, Community Acceptance and Reputation. Kenya is an example of a country which, keen to avoid the kinds of problems inflicted by the Curse of Resources on countries such as Nigeria and Egypt, has enshrined the principle of public participation in its constitution, under Article 10, (2) and Article 69 (d).

Escalating social and economic problems brought about by globalisation have raised new questions – as well as expectations – about corporate governance and ethical and social responsibilities.

In general CSR is taken to denote corporate activities – beyond profit making – which include issues such as protecting the environment, caring for employees and conducting ethical trade and community investment policies.

The increased interest in CSR that currently exists throughout Europe, especially Scandinavia, reflects a growing discontent with corporate self-interest and self-indulgence.

A role for multi-national corporations in resource rich countries

Multi-national corporations are increasingly encouraged to resolve economic and social problems, especially in frontier/emerging markets, many of which are resource rich.

In such situations multi-national corporations are capable of resolving economic and social problems in a way not possible for national governments, especially if those countries are suffering from the typical effects of “resource curse” such as a rentier mentality, corruption, over-centralisation and a collapse of local industry.

Exploration and production operations of the oil and gas industry tend to take place in remote locations. Consequently, the extractive industry tends to have an especially acute awareness of the issues faced in remote areas where the government’s writ does not apply, and the challenge of acquiring a social licence to operate is significant.

The empowerment of local communities

Renewed contemporary interest in CSR is also due to factors such as growing market pressure for CSR principles to drive commercial activity, increasing regulatory pressure (especially from NGOs concerned about environmental damage and the rights of workers), the prevalence of social media – empowering local communities whose voices previously were not heard, and the increasingly competitive edge given to companies who implement CSR driven policies.

Issues to be addressed by CSR when combating the effects of the Curse of Resources

There is a connection between the Curse of Resources and CSR. Many of the effects of the Curse of Resources are exactly the kinds of issues that CSR policies seek to address. Examples include:

  • The environment. Usually local communities are especially concerned about matters such as air and water pollution, water extraction, impacts on bio diversity and waste management. As we have seen one of the effects of the Curse of Resources is increased pollution of the environment.
  • Business conduct. CSR policies strive for transparency and ethical commercial practice. One of the effects of the Curse of Resources is less transparency and increased levels of corruption.
  • Workers rights and safety. CSR policies strive for better rights and safety conditions for workers. One of the effects of the Curse of Resources is reduced safety measures and rights for workers.
  • Community relationships. CSR policies cover matters such as land access and ownership, equitable sharing of benefits and human rights violations by security forces. We have seen that the features of the Curse of Resources involves violent disputes over land access and ownership, a failure to ensure equitable sharing of benefits, and human rights violations by security forces.

 

Introduction to Prospect Energy, Prospect Law and Mark Jenkins

Prospect Energy is an energy specialist technical consultancy firm based in London and the Midlands of the UK. It is a sister company of Prospect Law. The two firms provide advice on energy development projects and energy related litigation for clients in the UK and internationally.

Mark Jenkins advises clients on how to achieve commercial resilience in high-risk/non permissive environments. Among Mark’s specialist areas of expertise are the management and motivation of traditional communities such as Bedouin tribesmen in the Sinai Desert, Somali Muslims in NE Kenya and Eastern Orthodox Christians in remote parts of Eastern Europe. He has a particular interest in Islamic culture and has worked on the staff of HRH Prince Ghazi bin Muhammed bin Talal, Special Advisor and Personal Envoy to HM the Hashemite King of Jordan. Other interests of Mark’s include renewable energy, especially solar power, and economic solutions which are based on the principle of sufficiency, rather than consumption.

For a PDF of this blog click here

For more information please contact us on 01332 818 785 or by email on: info@prospectenergy.co.uk.

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EXAMPLES OF THE CURSE OF RESOURCES AT WORK

Mark Jenkins, Prospect Energy

Nigeria and Egypt are two good examples of countries suffering from the effects of the Curse of Resources.

The Curse of Resources in action – Nigeria
Since Nigeria achieved independence in 1960 it has experienced a civil war resulting in the death of over one million people, military rule for thirty years, and four failed and six successful military coups.

Corruption has been endemic. It has been estimated that Nigeria’s rulers have stolen somewhere between $400 billion USD in the period between 1969 and 2000.

Illegal bunkering has stolen between 5–10% of the country’s oil produce. Bunkering is the process whereby pipelines are illegally tapped in order to fill plastic jerry cans with crude oil, which is then shipped abroad.

In the meantime the country’s economy has shrunk, despite the wealth of the country’s resources. Despite the fact that Nigeria is the world’s seventh biggest producer of oil, 57% of its population live on less than $1 USD a day. In the Niger Delta, the area producing 100% of Nigeria’s on-shore oil, local residents do not have either electricity or running water.

The environmental damage caused by oil production has been massive. More than 1.5 million tons of oil has been spilled in the Niger Delta over the course of fifty years of oil extraction. Combining the effects of this with the toxic effect of gas flaring, it is not surprising to see that the Niger Delta has become one of the most polluted places on the planet.

The situation in the Niger Delta is a classic example of the destabilising security consequences of Dutch Disease.

Destabilising security conditions

The Movement for the Emancipation of the Niger Delta (MEND) is a terrorist grouping which sees itself as fighting on behalf of the Ijaw tribesmen of the Niger Delta. MEND’s leader has said he is fighting for:

“..the economic emancipation of the people of the Niger Delta, who have suffered decades of criminal neglect, brazen theft and damage to their environment by the Nigeria state and the oil majors. The problem in Nigeria has a very simple solution. Let the people of the Niger Delta control their resources. Our enemies comprise anyone, state of corporate body standing in the way of that.”

Let us now turn our attention to another country where the Curse of Resources has caused huge damage – Egypt.

The Curse of Resources in action – Egypt

Egypt’s oil production peaked in 1996 and since then has declined by approximately 26%. Since the 1960s Egypt has moved from complete food self-sufficiency to excessive dependence on imports subsidised by oil revenues. Egypt currently imports 75% of its wheat.

Declining oil revenues have increasingly impacted food and fuel subsidies. Food prices are generally underpinned by high oil prices because energy accounts for over a third of the costs of grain production. This has further contributed to surging global food prices.

Food price hikes have coincided with devastating climate change impacts in the form of extreme weather in key food basket regions.

Since 2010 there have been droughts and heat waves in the US, Russia and China leading to a dramatic fall in wheat yields, on which Egypt is heavily dependent. The subsequent doubling of global wheat prices directly affected millions of Egyptians who already spend approximately 40% of their income on food.

In many ways Egypt is a microcosm of current global challenges. In a time of climate extremes and population growth there will continue to be increases in food prices, particularly when oil prices are not cheap. For the last few years the food price index in Egypt has fluctuated above the critical threshold for probability of civil unrest.

Bearing this in mind it is not unreasonable to assume that the civil unrest that drove the Arab Spring was precipitated by hunger, rather than high-minded philosophical musings about the supposed benefits of western democracy.

Resource rich countries that depend, like Egypt, on imports to maintain their food supplies will suffer, unless they take as many proactive measures as they can to protect their agricultural sector.

Introduction to Prospect Energy, Prospect Law and Mark Jenkins

Prospect Energy is an energy specialist technical consultancy firm based in London and the Midlands of the UK. It is a sister company of Prospect Law. The two firms provide advice on energy development projects and energy related litigation for clients in the UK and internationally.

Mark Jenkins advises clients on how to achieve commercial resilience in high-risk/non permissive environments. Among Mark’s specialist areas of expertise are the management and motivation of traditional communities such as Bedouin tribesmen in the Sinai Desert, Somali Muslims in NE Kenya and Eastern Orthodox Christians in remote parts of Eastern Europe. He has a particular interest in Islamic culture and has worked on the staff of HRH Prince Ghazi bin Muhammed bin Talal, Special Advisor and Personal Envoy to HM the Hashemite King of Jordan. Other interests of Mark’s include renewable energy, especially solar power, and economic solutions which are based on the principle of sufficiency, rather than consumption.

For a PDF of this blog click here

For more information please contact us on 01332 818 785, or by email on: info@prospectenergy.co.uk.

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INDICATIONS THAT A COUNTRY IS SUFFERING FROM THE CURSE OF RESOURCES

 

Mark Jenkins, Prospect Energy

Some indications that a country is suffering from Dutch Disease/the Curse of Resources are as follows:

First, there is a glut of foreign exchange, inflating the value of the country’s currency. Imported goods become cheaper than domestic ones.

Second, cottage industries collapse, especially in rural areas. This means a crisis when the natural resources run out. Furthermore, the collapse of cottage industries reflects the country’s move from being a productive economy, to an “allocation” one. Concurrent to this a rentier mentality takes over the country, corruption explodes and the state militarises in order to secure its mineral wealth for the country’s elite. There is an influx of wealthy foreign workers whose presence inevitably becomes exploitative. The issue of land rights suddenly becomes a source of tension as people stake claims to the ownership of land from which oil is being produced.

All these factors quickly combine to undermine the country’s security. The inevitable resentment of those, especially the local communities, unable to benefit from the discovered resources is quickly exploited by individuals and groups who wish to cause trouble – often for entirely selfish reasons such as financial gain, or the furtherance of their own radical political agenda.

 

The Curse of Resources at work?

In early November 2013 protests by local residents forced a two week shut-down of an oil company’s operations in Northern Kenya. Locals claimed that the company had failed to deliver an effective community investment programme.

A local politician said: “There is a need for the community to be provided with knowledge and training to protect themselves from up-coming hazards to these resources.”

A particular source of tension related to the matter of who was going to benefit from economic opportunities. It was decided that the oil company would open local offices to enable communication with local stakeholders, and that a concerted effort would be made to give casual, and skilled work to locals.

A committee of local community leaders was formed to decide where contracts should be awarded. The committee has, however, found it difficult to avoid charges of nepotism and corruption. This is a problem that is frequently faced in such situations.

Not all the locals are convinced that sufficient efforts have been made to prevent the impact of the Curse of Resources on their community. Positive developments such as the obvious benefits that will accrue in the form of the benefits of visible investment, and new jobs, are outweighed, it has been claimed, by local perceptions of injustice and heightened insecurity.

New hotels have opened in the areas as a result of increased local growth rates, but non locals who have gained employment have reported local resentment at their success, and there are widespread complaints about a rise in the crime rate. There have been reports that the discovery of oil has exacerbated long-standing tensions between local tribes.

The loss of seasonal grazing lands around the oil-fields, has led to arguments relating to land ownership. This has resulted in cattle rustling incidents, such as one that caused the death of four people, and the driving away of large quantities of livestock.

In order to deal with incidents such as this the Kenyan Government has transferred large numbers of security personnel to protect oil infrastructure installations. This makes people think that the Government values the security of oil assets more than it does people and communities.

Locals are certainly not uniform in their opinions about the nature of the situation they are faced with.

However, there is certainly a strong sense among many that most of the revenue from the oil will not go to them, that they will suffer negative environmental impacts, that jobs and contracts go to well-connected outsiders, that increased local insecurity has been caused by issues relating to land rights -generated by the stampede by local tribes to benefit from oil revenue.

 

Kenya and the principle of Public Participation

From the very beginning of oil exploration in Kenya – the authorities have been keen to tackle the problems caused by the Curse of Resources. In fact the principle of public participation was conferred by the Kenyan constitution under Article 10 (2) and Article 69 (d), specifically to help combat the effects of the Curse of Resources.

Over the next few months I will be blogging on the subject of the Curse of Resources. First, I will look in detail at the specific problems that are caused by the Curse of Resources, then I will look at ways in which the effects of those problems can be successfully mitigated, using appropriate CSR policies in order to achieve a Social License to Operate among communities resident in areas of extractive operations.

 

Introduction to Prospect Energy, Prospect Law and Mark Jenkins

Prospect Energy is an energy specialist technical consultancy firm based in London and the Midlands of the UK. It is a sister company of Prospect Law. The two firms provide advice on energy development projects and energy related litigation for clients in the UK and internationally.

Mark Jenkins advises clients on how to achieve commercial resilience in high-risk/non permissive environments. Among Mark’s specialist areas of expertise are the management and motivation of traditional communities such as Bedouin tribesmen in the Sinai Desert, Somali Muslims in NE Kenya and Eastern Orthodox Christians in remote parts of Eastern Europe. He has a particular interest in Islamic culture and has worked on the staff of HRH Prince Ghazi bin Muhammed bin Talal, Special Advisor and Personal Envoy to HM the Hashemite King of Jordan. Other interests of Mark’s include renewable energy, especially solar power, and economic solutions which are based on the principle of sufficiency, rather than consumption.

For a PDF of this blog click here

 

For more information please contact us on 01332 818 785, or by email on: info@prospectenergy.co.uk.

 

 

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THE CURSE OF RESOURCES AND LOSS OF A SOCIAL LICENSE TO OPERATE

 

Mark Jenkins, Prospect Energy

Some years ago I was asked by a client from the oil and gas industry to produce a risk assessment, and security plan for some of its operations in Eastern Europe. A particular focus of attention was an oil-field the size of Cornwall situated in a mountainous area inhabited by traditional, Eastern Orthodox communities.

The client had called me in because acts of theft, and sabotage of the company’s assets had become so endemic that its operations there were becoming commercially unviable.

Arriving at the company’s corporate headquarters I was given a brief by the corporate security officer. The suggestion was made that the problems could only be resolved through increased security measures; ie more drones, barbed wire and security guards.

The following day I travelled up to the oil-field. It quickly became very clear to me that increased security measures would not improve the situation, and that what the company needed to do was restore its relationships with the local communities.

The Company had lost its Social License to Operate, the root cause of the vast majority of security problems faced by the extractive industry.

In my experience as a risk management consultant – operating across some of the world’s most high-risk environments – the root causes of the collapse of a company’s Social License to Operate are invariably to be found in the phenomenon known as Dutch Disease/the Curse of Resources.

 

What is Dutch Disease/the Curse of Resources?

In 1959 – three years after Royal Dutch struck oil in commercial quantities in the Nigerian Delta – another well was sunk by the company in the village of Slochteren in the northern Netherlands, in partnership with Exxon of the USA.

The biggest gas field in Europe was discovered.

Soon after, however, people outside the industry began to lose their jobs. Other sectors in the Dutch economy slumped. In 1977 the Economist coined the term “Dutch Disease” to describe the phenomenon.

“Dutch Disease” refers to the apparent relationship between the increase in the economic development of natural resources, and a decline in the manufacturing/agricultural sector.

Dutch Disease enters a country through its currency. Basically, an increase in revenues from natural resources makes a nation’s currency stronger, compared to that of other countries.

Consequently, the nation’s other exports become more expensive for other countries to buy. Imports become cheaper making the affected country’s manufacturing/agricultural sector less competitive. Arable land lies fallow as local farmers find that imported fare has replaced their produce.

Dutch Disease most often occurs in relation to natural resource discoveries. Mines and oil fields require huge investments of capital, but employ few people compared with the agricultural or manufacturing industries. Furthermore, natural resources discovered in Africa tend to go abroad in raw form so that other countries benefit from the value accrued, rather than the countries from which those resources came.

A cycle sets in, and as other parts of the economy decay, there is an increased dependency on natural resources by the affected country. As poverty breeds elsewhere the resource industry becomes an enclave of plenty for its leaders. Telecoms and financial services boom, while the process of industrialisation falters and then drops away.

When the oil runs out there is a crisis because the traditional industries no longer exist. Thus there is nothing for the country’s economy to fall back on. Furthermore, the loss of traditional cottage industries represents a serious undermining of a country’s identity, closely related as they usually are to a country’s cultural heritage. Their loss undermines the health of village economies, so that their populations migrate to the city. These communities fragment, and their unemployed youth are quickly radicalized or criminalized.

In his book “Untapped: The Scramble for Africa’s Oil” John Ghazvinian visited a supermarket in the oil producing state of Gabon. French cheeses and foie gras are available for sale, but bananas are not. During his stay in Gabon Ghazvinian was able to eat an abundance of fine French food and wine. But he never managed to find a banana, despite the fact Gabon is largely virgin rainforest, packed full of banana trees.

The phrase “Curse of Resources” refers to the observable phenomenon that resource rich countries grow more slowly, more corruptly, less equitably, more violently and with more authoritarian governments than others do. It is undeniably the case that there is a link between the existence of resource wealth, and an increased likelihood of weak democratic development, corruption and civil war. The greater the percentage of states revenues derived from natural resources, then the more pronounced these trends become.

 

Introduction to Prospect Energy, Prospect Law and Mark Jenkins

Prospect Energy is an energy specialist technical consultancy firm based in London and the Midlands of the UK. It is a sister company of Prospect Law. The two firms provide advice on energy development projects and energy related litigation for clients in the UK and internationally.

Mark Jenkins advises clients on how to achieve commercial resilience in high-risk/non permissive environments. Among Mark’s specialist areas of expertise are the management and motivation of traditional communities such as Bedouin tribesmen in the Sinai Desert, Somali Muslims in NE Kenya and Eastern Orthodox Christians in remote parts of Eastern Europe. He has a particular interest in Islamic culture and has worked on the staff of HRH Prince Ghazi bin Muhammed bin Talal, Special Advisor and Personal Envoy to HM the Hashemite King of Jordan. Other interests of Mark’s include renewable energy, especially solar power, and economic solutions which are based on the principle of sufficiency, rather than consumption.

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