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Managing social risk: Notes from the Peruvian Amazon

The lack of free, prior and informed consent to upstream oil and gas operations is at the heart of many social conflicts in the Peruvian Amazon

Growing gas potential, a buoyant economy and attractive fiscal incentives have made Peru particularly attractive to oil and gas investors. Since 2006 alone, energy companies have spent $5.3 billion on oil and gas projects, including $1.6 billion on exploration, mostly in the Amazon region.

The emphasis on hydrocarbon investment is part of the government’s ambitious development plan that encompasses mining and infrastructure projects across the Amazon – a region of extraordinary biological and cultural diversity.

Covering some 782,000 square km, or about 61% of Peru’s territory, it is one of the most biologically diverse regions on Earth, home to the second-largest rainforest area in the Amazon after Brazil. It is also home to more than 60 different indigenous peoples, each with their own language, territory and culture. There are also groups of indigenous peoples living in voluntary isolation, with no, or only irregular, contact with the outside world.

As of 2010, 322,092 square km, or 41.2%, of Peru’s Amazon region was covered by oil and gas concessions. Active and proposed concession areas now cover close to 70% of the region. Many of the hydrocarbon licences granted in recent years overlap sensitive and protected areas, and indigenous reserves. According to the Peruvian ombudsman, of 52 active upstream concessions in 2010: 46 overlapped with indigenous territories; 17 with proposed or created indigenous reserves; and 21 with protected areas.

Rising social conflicts

The overlap of petroleum activities with socially and environmentally sensitive areas has caused conflict with local and indigenous communities. Alongside concerns about the environmental impact of oil and gas development, the government’s licensing policy is encountering opposition from indigenous groups and communities that feel they do not enjoy the benefits hydrocarbon development brings, or are negatively affected by it.

At the heart of many social conflicts is the absence of free, prior and informed consent (FPIC) of affected communities. Although legally mandated as the government’s responsibility, consultation with local and indigenous communities often takes place only after concessions have been awarded, giving communities little or no scope to comment on, or object to licensing on their lands.

This can result in significant delays and complications for upstream operators. According to the ombudsman, as of mid-2010, there were some 15 unresolved socio-environmental conflicts involving energy companies. In some cases, blockades and other forms of protest prevent operators accessing concessions, which can cost millions of dollars for an exploration campaign.

The main obstacles for upstream operators in Peru’s Amazon are:

Challenging logistics – most concessions are in remote areas, accessible only by boat or foot, putting added strain on a company’s approach to community relations;

Absence of government – a lack of government presence and infrastructure results in high community expectation on companies to meet social-development needs;

Absence of FPIC – all too often, local communities are not consulted, or lack an effective voice to influence activities that dramatically affect them, increasing the need for upfront stakeholder engagement by oil and gas companies;

Social change – the Amazon region is experiencing rapid social change as a result of colonisation, illegal logging and drug trafficking. Consequently, oil companies risk becoming scapegoats for other, more predatory land-uses, especially when entering remote areas;

Peoples in voluntary isolation – operating in areas with known, or suspected peoples in voluntary isolation exposes a company to increased reputational risk and operational complexity; and

Existing grievances – in areas with a history of socio-environmental damage from past upstream operations, non-governmental organisations (NGOs) and communities tend to be more radicalised and opposed to development.

Host governments, for their part, often expect international oil companies (IOCs) to pursue exploration and development with expediency. At the same time, upstream operators must deal with local communities and NGOs that trust neither them, nor the government to protect local interests. IOCs are responding differently to these challenges.

Managing social risk

Talisman Energy’s policy is to obtain the consent of a two-thirds majority of each affected community before proceeding with a project. Meanwhile, Repsol has adopted a corporate policy on relations with indigenous peoples: the first of its kind among IOCs.

One way firms can address these complex issues is to conduct independent social-performance reviews (SPR). Repsol recently commissioned an SPR of its operations in Peru and Bolivia. The objective was to assess compliance with its indigenous-peoples policy, to measure the effectiveness of stakeholder engagement and to indicate corrective measures where needed. Other IOCs worldwide are adopting similar approaches.

SPR is a cost-effective assurance tool that can verify a companies’ operational performance and identify and address social risks. Repsol’s SPR, for example, confirmed the value of early and continuous stakeholder engagement. It also demonstrated that adopting a low profile is an ineffective way to manage stakeholder expectations – more often than not resulting in their needs being misunderstood or mismanaged. Significantly, it showed that communities often need capacity building to reach effective and durable agreements with companies. These lessons are relevant to IOCs worldwide.

Faced with the social and environmental risks inherent in operations in areas such as the Peruvian Amazon, energy companies need a systematic approach to human rights and social performance to identify and manage risks effectively. They must also focus on ensuring corporate standards are credibly implemented at a business-unit level.

Applying best practices, including SPR, can be useful in providing assurance and managing social risks for any company, regardless of size. Underlying this is the realisation that social performance is core business and an essential element of a company’s wider corporate responsibility.

Done well, this delivers significant corporate benefits: minimising potential risk and liability; and helping maintain the social licence to operate. Done poorly, a company faces project delays and higher costs; or failure and reputational damage.

Jay Wagner is director of Plexus Energy. Murray Jones, also a director of Plexus, was formerly head of social performance at Shell International.

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