sharedvalue, sharedresponsibilitypubs.iied.org/pdfs/16026iied.pdf · 2015. 7. 24. · a new...

Emma Wilson and Judy Kuszewski 2011

Shared value,shared responsibilityA new approach to managing contracting chains in the oil and gas sector

A new approach to managing contracting chains in the oil and gas sector

Shared value,shared responsibility

Emma Wilson and Judy Kuszewski 2011

Authors

EmmaWilson, International Institute for Environment and Development (IIED) | [email protected] Kuszewski, independent corporate responsibility advisor | [email protected]

Copyright © International Institute for Environment and Development, 2011

International Institute for Environment and Development (IIED)3 Endsleigh StreetLondonWC1H 0DD, UKTel: 44 20 7388 2117 (international); 020 7388 2117 (UK)Fax: 44 20 7388 2826 (international); 020 7388 2826 (UK)

Design by Alex Chilton Design, email: [email protected]; www.alex-chilton.co.ukCover picture: Anatoly Ustinenko/istockphoto.comEdited by Anna Barnett, email: [email protected] by Oldacres, London, website: www.oldacres.co.uk

Citation: Wilson, E. and J. Kuszewski (2011) Shared value, shared responsibility: a new approach tomanaging contractingchains in the oil and gas sector, IIED, London.

ISBN 978-1-84369-810-4

This report can be downloaded free of charge at: http://pubs.iied.org/16026IIED.html. An 8-page executive briefing canbe downloaded free of charge at http://pubs.iied.org/G03059.html. Printed versions of the report and executive briefingare available from [email protected].

Table of contents

Acronyms and abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Part 1: Why good contracting chainmanagement is essential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111.1. The oil and gas industry in an age of complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

1.1.1 New frontiers, new risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111.1.2 Multiple interests and responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111.1.3 Multiple business functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121.1.4 Cultural shift required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

1.2. The trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131.2.1 Challenging operating environments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131.2.2 Complex contracting chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141.2.3 Spread of international good practice standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181.2.4 Local content requirements in investment agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

1.3 The changing climate of responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211.4 Moving forward together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Part 2: Understanding the challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .252.1 Lack of a sense of shared responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

2.1.1 Links are weak between IOCs and subcontractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .252.1.2 A ‘tick-box’ mentality undermines implementation of standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .262.1.3 Contractors and subcontractors are less visible than operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .262.1.4 Companies and governments lackmutual understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .262.1.5 Advance planning is often inadequate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

2.2 Inadequate implementation of systems and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .282.2.1 Commitments are subject to negotiation between IOCs and partners . . . . . . . . . . . . . . . . . . . . . . . . . . . .282.2.2 Procurement processes pay insufficient attention to standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .282.2.3 Contracts fail to incentivise good environmental and social performance . . . . . . . . . . . . . . . . . . . . . . . .282.2.4 Procedures for harmonising standards are confusing and complex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .292.2.5 Enforcement of standards is difficult across dispersed contracting chains . . . . . . . . . . . . . . . . . . . . . . .292.2.6 Public engagement and reporting remains limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

2.3 Cultural and contextual challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .312.3.1 Underdeveloped contractormarkets pose risks as well as opportunities . . . . . . . . . . . . . . . . . . . . . . . . . .312.3.2 Corruption and patronage hamper effective contractormanagement . . . . . . . . . . . . . . . . . . . . . . . . . . . .322.3.3 Limited understanding of local culture and practice increases risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Part 3: Taking action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Action 1: Collaborate on early-stage planning and assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Action 2: Invest in capacity building in underdeveloped local markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36Action 3: Encourage uptake of standards through procurement processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38Action 4: Ensure that contracts incentivise good practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40Action 5: Build capacities and trust on the job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41Action 6: Ensure excellent communication and oversight throughout the chain . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Action 7: Build trust and accountability with external stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Part 4: Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

INTERNATIONAL INSTITUTE FOR ENVIRONMENT ANDDEVELOPMENT 5

TABLE OF CONTENTS

Acronyms and abbreviations

API American Petroleum InstituteCLO community liaison officerEBRD European Bank for Reconstruction andDevelopmentEIA environmental impact assessmentEPC engineering, procurement and constructionESIA environmental and social impact assessmentFEED front-end engineering designGRI Global Reporting InitiativeHSE health, safety and the environmentIFC International Finance CorporationIFI international financial institutionIOC international oil companyIPIECA International Petroleum Industry Environmental Conservation AssociationISO International Organization for StandardizationNGO non-governmental organisationNOC national oil companyOGP International Association of Oil andGas ProducersOHSAS Occupational Health and Safety Advisory ServicesPSA production sharing agreementSME small andmedium enterprises

About the authors

SHARED VALUE, SHARED RESPONSIBILITY: A NEWAPPROACH TOMANAGING CONTRACTING CHAINS IN THE OIL ANDGAS SECTOR6

Dr Emma Wilson is a senior researcher at IIED andheads the institute’s Energy Team.Her researchfocuses on the ways that enterprise and investment canbe directed towards sustainable use of energy, locallyand globally. Emma has over 15 years’ experience ofworking on issues related to the oil and gas industry,community relations and corporate responsibility. Hercurrent work ranges from issues around governance ofmajor energy investments to analysis of effectivemodels for delivering sustainable decentralised energysystems and services. Emma has worked in Russia,Kazakhstan, Azerbaijan, Nigeria, Ghana andQatar.

Judy Kuszewski is an independent corporateresponsibility expert and advisor with over 18 years’experience in the field. From 2000-2008 she served asDirector of Client Services with SustainAbility, theLondon-based think tank and consulting firm. In thisposition, she workedwith clients across a wide range ofindustries. She is also known for her work in the area ofcorporate sustainability reporting, engagement andstandards. Judy has been involved in the developmentof the Global Reporting Initiative, as project directorand on various governance andworking parties.

Acknowledgements

This report is the result of several years of discussion, research and consultation. It draws on research originallycommissioned byWWF-UK and developed by IIED and SustainAbility. The original research included interviewsat corporate level and site visits in Kazakhstan and Russia, all anonymous.We thank all those involved for theirvaluable insights and candid views.

Specifically wewould like to thank the following from the original team:

• James Leaton (formerly ofWWF-UK)• Jean-Philippe Renaut (SustainAbility)• HalinaWard (formerly of IIED), Saule Ospanova (local consultant) and local respondents in Astana and Atyrau,

Kazakhstan• Aleksey Knizhnikov and colleagues atWWF-Russia and theirMurmansk office, and local respondents inMur-

mansk andNaryan-Mar, northern Russia

The following two publications relating to the original field research can be downloaded from the IIEDwebsite:Knizhnikov, A. and E.Wilson. 2010.Responsible contracting in the Russian oil and gas industry. WWF-Russia.Moscow. (http://pubs.iied.org/G02723.html)Ospanova, S. andH.Ward. 2009.Towards good practice in the oil and gas contracting chain: Kazakhstan countryreport. IIED. London. (http://pubs.iied.org/G02751.html)

Wewould specifically like to thank the following for their assistance with the consultation and review relating tothis report:

• Yasmin Crowther, independent consultant• Matthew Lynch and PetterMatthews, Engineers Against Poverty• Rachel GodfreyWood, research consultant• James Leaton, freelance sustainability consultant• Saule Ospanova, independent consultant, Kazakhstan• Lorenzo Cotula, IIED• Frances Reynolds, IIED• Linda Siegele, FIELD (Foundation for International Environmental Law andDevelopment)• Einar Leknes, International Research Institute of Stavanger• Alistair Clark, European Bank for Reconstruction andDevelopment• ElizabethWild, BP• Karina Litvack, F&C Investments• IPIECA (Estella Nucci and companymembers of the Social ResponsibilityWorking Group)• Statoil (AnupamaMohan and colleagues)• Sakhalin Energy Investment Company, Ltd. Social Assessment Group• BP social issuesmanagement and external affairs experts• BPAzerbaijan External Affairs Team• AMEC environmental and social issues experts• Other company representatives who prefer to remain anonymous

The researchwasmade possible by the financial support of:WWF-UK, UKDepartment for InternationalDevelopment (DfID), Swedish International Development Co-operation Agency (SIDA), Norwegian Agency forDevelopment Co-operation (NORAD), the Directorate General for International Cooperation (DGIS)(Netherlands) and Irish Aid.


ACKNOWLEDGEMENTS


Executive summaryAs the oil and gas industry pushes into evermoresensitive areas, the risks are increasingly beinghandled by complex chains of contractors.Effective management of contracting chains —from early assessments to communication andoversight — is critical to ensure good social andenvironmental performance. This responsibilityshould be shared throughout the contractingchain, across company departments, and betweengovernment and industry, with space forindependent third-party oversight.

From the deepwaters of theRussianArctic to the tarsands in theCongoBasin, new technological challengesandnatural hazards are fast becoming thenorm in the oiland gas industry.High prices and concerns about energysecurity have driven expansion of the industry intoregions that carry heightened technological, political andsocial risks. Lesswell known are the challenges theindustry faces as a result of its complex contractingchains.Whilemost people are familiarwith a handful ofbrands such asBP, Shell andExxonMobil, at least 70 percent of a typical oil or gas project is contracted out tolower-profile service providers and their subcontractors.

The fallout from the April 2010 Gulf ofMexico disasterhas shone a spotlight on alleged systemic failures andongoing difficulties in these contracting relationships— and on their importance for good environmentaland social performance. Shared value, sharedresponsibility draws on three years of research andinterviews within the sector to highlight an array ofcritical challenges facing oil and gas companiesinvolved in complex supply chains, and to identifyurgent and longer-term actions for progress.

Complex chains pose new challengesMany risks and opportunities in the oil and gas indus-try relate to the work ofmajor service contractors such

asHalliburton, Transocean, Schlumberger and AMEC.These specialised companies have global reach andrevenues as high as US$15-20 billion annually. At thesame time, an increasing number of contractors andsubcontractors based in host countries are securingcontracts withmajor oil and gas projects.

Complex contracting chains raise a number ofquestions:

• Who is responsible for ensuring that contractors andsubcontractors are properly prepared to address allrisks, however unlikely?

• What actionsmust an operating company take tocheck that its contractors and subcontractors canmeet their contractual requirements and that theywork to international good-practice standards?

• How can high standards for environmental andsocial performance bemaintained, evenwhen speedand low cost of delivery are priorities?

Shared value: local content and local benefitsAs the governments of oil-producing countries, fromNigeria to Kazakhstan to Venezuela, seek greater con-trol of their oil and gas resources, there are pressures toexpand the role of local businesses in contractingchains. ‘Local content’ rules aim at socio-economicgains for host countries, but raise new issues for oper-ating companies, whose ability tomeet localprocurement targets depends on the capacities of thelocal workforce.

Specialised contractors are increasing in numberwithin some oil-producing countries, with risingdemand from large-scale projects. Inmany regions ofthe world, however, the targetsmay be unrealistic.The challenge is to optimise local content in oil andgas projects — and thus share their value—while also

preserving high standards of health and safety, environ-mental protection and societal wellbeing. Sharedvalue, shared responsibility focuses primarily onconstruction activities, which have the greatest impacton local environments and communities. The role ofnational oil companies (NOCs) is worthy ofmoreanalysis, but this lies beyond the scope of this report.

Shared responsibility: building relationshipsbeyond legal contractsThe primary tool formanaging contractor responsibili-ties and performance remains the legal contract. Inpractice, thismeans that focus tends to be greatest onthe relationship between operating companies andfirst-tier contractors, while effectivemanagement ofthe rest of the contracting chain receives less attention.The contracts themselves tend to incentivise cost andspeed of delivery, whichmay come at the expense ofenvironmental and social performance.

Divisions betweenbusiness functions are another poten-tial obstacle to effectivemanagement of contractors.Different departments— such as projectmanagement,procurement, local content, health, safety and environ-ment (HSE) and external affairs—must operate inharmony and align their objectives, policies and initia-tives. Improvements in internal corporate synergy andorganisational effectiveness are essential. Responsibilityalso needs to be sharedwith other stakeholders. Thisrequiresmeaningful engagementwith government,communities, civil society organisations and otherswithbeneficial knowledge, skills or relationships.

Risk management in practiceShared value, shared responsibility emphasises thegrowing importance of ‘managerial responsibility’ —the extremely difficult task of applying standards andimplementing procedures across the entire contractingchain to ensure good performance.Managerial respon-sibility extends over and above legal requirements;

demandsmore than the adoption of standards andprocedures on paper; and requires that consultationwith stakeholders results in conscious efforts toaddress the issues raised.

Good communications, training, oversight and corporateculture are often taken for granted in complex situationsinvolvingmany organisations and an array of obligations.Failure to attend to these needs carries risks such asincreased costs anddelays, increased financial liability,contractual disputes, negative social and environmentalconsequences, community tension, reputational damageand, ultimately, loss of investment opportunities.

The challengesThe specific problems faced by international oilcompanies (IOCs) and their contractors in upholdingtheir various responsibilities vary from one situation toanother.We have identified three broad sets of factorsthat hamper effective chain-wide performance:

1. Lack of a sense of shared responsibility throughoutthe contracting chain and across stakeholdergroups. Responsibilities are typically fragmentedacross a project. There is a need for shared ownershipof activities and outcomes overall, rather than just theindividual tasks taken onby eachpartner.

2. Inadequate implementation of systems andprocedures to enforce standards and incentivisegood performance. It is not enough simply to adoptstandards and policies on paper; they have to beimplemented and enforced.

3. Cultural and contextual challenges in widelydiffering regions of the world. Companiesmustcome prepared to address themany contextualfactors in a new country, including the perceptionthat international best practices do not alwaysapply.


EXECUTIVE SUMMARY

Taking actionWepropose seven key actions primarily aimed atoperating companies and lead contractors. The actionsalso offer guidance for governments, civil societyorganisations and otherswho seek to collaboratewith companies or to provide oversight of oil industryactivities.

Action 1: Collaborate on early-stage planning andassessments. Assess workforce capacity, enterprisedevelopment opportunities, stakeholder expectationsand local content strategy; agree on environmental andsocial obligations, standards and evaluationmethods.

Action 2: Invest in capacity building in underde-veloped local markets.Fund programmes to buildlocal capacity, including public-private joint initiatives;engage with and support local business associationsand networks.

Action 3: Encourage uptake of standards throughprocurement processes.Ensure health, safety,environmental and social expectations are includedin prequalification and tender processes; make suretender processes are open, transparent and free ofcorruption.

Action 4: Ensure that contracts incentivise goodpractice. Balance incentives for cost, schedule andresponsible practices, including provision of dedicatedfunds for environmental and social measures; workwith lead contractors to align expectations of environ-mental and social performance and ensure that they dothe samewith subcontractors.

Action 5: Build capacities and trust on the job.Where required, assist contractors in developing andfunding environmental and social management plans;consider longer-term contracts to support capacitydevelopment.

Action 6: Establish excellent communication andoversight throughout the chain. Ensure open lines

of communication and feedbackmechanisms; coordi-nate oversight activities to lessen confusion andoverlap; support local community liaison officers.

Action 7: Build trust and accountability withexternal stakeholders. Encourage public reportingusing recognised guidelines (e.g. of the Global Report-ing Initiative or the International Petroleum IndustryEnvironmental Conservation Association); encouragegood practices in public engagement and resolutionof grievances; encourage independent oversight bythird-party organisations.

Future visionSuccess in delivering good social and environmentaloutcomes will strengthen the industry’s ‘social licenceto operate’ and its ability to respond effectively tostakeholder expectations. But it will require aconcerted effort across the industry, both top-downand bottom-up, and across stakeholder groups.Shared value, shared responsibility does not attemptto prescribe specific remedies at this stage— thesemust result from dialogue and efforts to createcommon solutions over time. However, we do offerour own vision for what some of those solutions couldusefully address.

This includes developing a culture of shared ownershipand responsibility throughout contracting chains; anincreased emphasis on communication and long-termoutcomes; an industry-wide effort to raise capacitiesand participation among local firms; and a commitmentfrom all companies in the chain to engagemeaningfullywith external stakeholders, ensuring that issues andconcerns are addressed appropriately and adequately.

Shared value, shared responsibility has been devel-oped through dialogue and consultationwith a range ofstakeholders, and this report aims to stimulate furtherdialogue.Wewelcome your comments, arguments andsuggestions onmaking these and other good practices acommon and permanent feature of oil and gascontracting chains in years to come.


1.1 The oil and gas industry in an ageof complexity

As the oil and gas industry expands its horizons andincreases in complexity, the risks and challenges ofextracting hydrocarbons are becoming ever greater.Many of these challenges relate to the collaborativeefforts between international oil companies (IOCs)and their contractors and subcontractors to deliverprojects on the ground.

In this report we argue for a range of good practices andwider recognition of the ‘shared responsibility’ neces-sary to complement the trend toward increasinglycomplex and distributed systems formanaging envi-ronmental and social risks in the industry.We alsoargue that the current state of affairs underscores theneed formeaningful engagement and collaborationbetween industry players and other stakeholders,including government, local communities, civil societyorganisations, consultants and researchers.

1.1.1 New frontiers, new risksConcerns about energy security, alongwith high oilprices, are driving the oil and gas industry into evermoresensitive and risk-laden environments. These includedeep and ice-boundwaters, tar sands, conflict zones andindigenous peoples’ lands. In thewake of high-profiletragedies such as theApril 2010Gulf ofMexico spill—andmore frequent lower-profile cases of pollution andconflict, such as in theNigerDelta—pressure is intensi-fying for the industry to demonstrate its ability to delivergood environmental and social performance.

At the same time, with increased outsourcing andhost-government efforts to capturemore benefits fromproduction, the oil industry operatingmodel is shiftingtowards evermore complex chains of contractors andsubcontractors. Despite its perceived efficiencies, this

model oftenmakes it difficult for operating companiestomanage social and environmental risks effectivelyand to promote sustainable development in the regionswhere they operate.

Ensuring good social and environmental performanceis a complicatedmatter for any industrial sector.Success relies on a combination of technical skill,effective riskmanagement, the rightmix of regulationand government support, an alert and informed civilsociety, the ability of companies to listen and beresponsive, and collaboration between industryplayers. Some or all of these factors exist in regions inwhich some oil and gas projects are located, while inothers (especially in new oil-producing regions) theymay be compromised or immature.

1.1.2 Multiple interests and responsibilitiesOperating companies are not alone in wanting toensure positive outcomes, or in being subject to stake-holders’ expectations of good performance. There aremany social and environmental issues for whichgovernments have or should have primary responsibil-ity, such as upholding human rights or settingemissions limits. In practice, however, stakeholdersmay not alwaysmake this distinction andmay havehigh expectations of the ability of companies to addressmultiple challenges effectively.

Moreover, the risksofpoor social andenvironmentalperformancemean it is in the interestsofbusiness toworkwithother stakeholders toensurepositiveoutcomes.Thechallenges facedbycompanies in regionsasdiverseas theNigerDelta and theRussianFarEast vary tremendously,but all have significant consequences forbusiness success.And the impactof catastrophicheadline-grabbingeventssuchas theExxonValdezorDeepwaterHorizonunder-lines the fact thatmajor challengesarenot restricted toregionsofweakgovernance.


PART 1WHYGOODCONTRACTING CHAINMANAGEMENT IS ESSENTIAL

PART 1

Why good contracting chainmanagement is essential1

evident, however, that legal contracts, corporate codesof conduct, standards and policies alone do not ensuregood practice throughout the contracting chain. Asdetailed in Part 2, this is because of the considerabledifficulties in implementing changes in attitudes andbehaviours far beyond the capabilities of any legalcontract.

Moreover, the industry needs to commit to take sharedresponsibility, across the industry and in collaborationwith external stakeholders. This involves buildinggreater trust and communication, and overcomingwhathas been referred to as a ‘culture of complacency’.1 Thisrefers to an over-reliance on tick-box compliancewithstandards and procedures that undermines the ability ofindustryworkers and regulators to remain alert to risksand respond effectively to unexpected challenges.

This cultural shift is necessary industry-wide, acrossstakeholder groups and throughout contracting chains.It not only applies to the external-affairs andHSEdepartments of companies, but needs to be embeddedthroughout industry operations.


1.1.3 Multiple business functionsEffectivemanagementof contractor performance relatesto a rangeof business functions (seeFigure 1). Internalcorporate synergy andorganisational effectiveness aretherefore essential. A variety of departments, includingprojectmanagement, procurement, local content, health,safety and the environment (HSE) andexternal affairs,must operate inharmonyand seek to align their objec-tives, policies and initiatives.

It requires a concerted effort on behalf of executive andmid-levelmanagers to address issues in a consistentway and to ensure that standards and codes of conductare implemented across the range of business functionsand throughout the contracting chain.

1.1.4 Cultural shift requiredOver recent decades, against the backdrop of pressurefrom international non-governmental organisations(NGOs), investors, governments and lenders, the oiland gas industry has beenmaking efforts to improveenvironmental and social performance and adopt inter-national standards of good practice. It is becoming

Figure 1: Corporate objectives in contractor management

Riskmanagement

Maintaining technicalintegrity and HSEperformance

Contractormanagement

Corporateresponsibility

Company policy andobjectives on EHSperformance

Regulatoryrequirements

Meeting expectationson local content

CommercialGeneratingsustainablereturns oninvestment

Social licenceto operate

Securing support fromstakeholders

External/governmentrelations

Building relationshipswith host countriesand communities


Public concern regarding the industry’s environmentaland social performance is perennially high, andespecially sensitive in the aftermath ofmajor incidents.Risks are exacerbated inmiddle- and low-income coun-tries, where operating companiesmight encounter:

• weak or poorly enforced regulatory regimes

• local procurement requirements in investmentagreements with the host government, where localcontractorsmay not have sufficient capacity orexperience tomanage social and environmentalimpacts effectively

• lack of capacity in civil society to hold the govern-ment and industry to account

Furthermore, the oil industry inmany developingcountries is dominated by national oil companies(NOCs), who retain control of a largemajority ofhydrocarbon resources globally, andmay enter jointventures with IOCs andmajor contractors.2

The examples in Box 1, below, represent cases whereeffective contracting chainmanagementmight becompromised by extreme challenges relating to thenatural environment (e.g. isolation and difficult orunexplored terrain); poor governance of resourceextraction; or cross-cultural communication (including‘first contact’ with local communities).

1.2 The trends

Several factors have emerged over recent years thatnow put contracting chains at the centre of attention.These include the following:

• Challenging operating environments

• Complex contracting chains

• Spread of international good-practice standards

• Local content requirements in investmentagreements

1.2.1 Challenging operating environmentsOil and gas has always been a highly technical business.Now, driven by technological advances and increasingconcerns over energy security, as well as fluctuating butsufficiently high oil and gas prices, the industry contin-ues to expand into evermore sensitive and difficultoperating environments, including:

• technically challenging natural environments (e.g.deepwater, tar sands, extreme cold)

• areas on or close to lands andwaters traditionallyused for local livelihood activities

• undisturbed areas or fragile ecosystems


Box 1: The oil and gas industrymoves into new and sensitiveenvironments

With high oil prices and concerns about energysecurity, oil and gas exploration and production isincreasingly taking place in difficult environmentaland social terrain. Deepwater oil extraction isexpanding, with reserves located at a depth of 600feet accounting for 42-56 per cent of all discoveriesbetween 2006 and 2009.3Most deepwater oil findshave been in the ‘golden triangle’ of the Gulf ofMexico (12 oilfields below 400metres) and off theshores of Brazil (15) andWest Africa (10).4

Oil sands aremostly located in Alberta, Canada, andcurrently account for 1 per cent of global oil produc-tion (this is expected to rise to 4 per cent by 2035).5

Oil sands development requires larger energy

inputs, with higher greenhouse gas emissions, thanconventional oil (estimates range from 10-25 percent to asmuch as 300 per cent greater).6 Eni isproposing controversial oil sands exploitation inthe conflict-prone Congo Basin, around 50-70 percent of whichwould occur in primary forest orother biodiverse areas.7

The potential for social conflict can also be high.For example, oil and gas concessions currentlycover nearly half of Peru’s Amazonian rainforest (upfrom 7 per cent in 2003), overlapping with over halfof Peru’s titled indigenous land.8 In 2009 clashes atBagua led to the death of at least 23 police officersand 10 protestors. Further oil extraction is proposedin regions inhabited by isolated indigenous peoples,potentially increasing their risk of disease andsocial conflict.9

Example activities Environmental and social aspects Time horizon

Seismic surveysTesting geology for presenceof hydrocarbons

• Habitat or wildlife disturbance from use of explosives

1-6 months

Road buildingClearing habitat and creatingaccess for vehicles andpeople to exploration sites

• Disturbance of habitat, wildlife, traditional activities• Access roads providing increased opportunities fordamaging activities such as deforestation and poaching,but also enhanced opportunities for livelihood and leisureactivities

• Community inconvenience (e.g. noise, dust)• Threats to wildlife breeding grounds, marine life,domestic animals; disturbance of agricultural andindigenous peoples’ land

• Employment/business opportunities, labour standards,living standards

• Land acquisition, resettlement, socio-economicdisplacement

• Threats to cultural heritage

6 months to 2 years

Pipeline constructionRiver crossings, over-land/under-sea pipelines

2-5 years

Construction of processingfacilitiesLarge-scale construction onland/shorelines

2-5 years

Materials supplye.g. pipe, cement, steel

• Environmental impacts of quarrying/other sourcing• Pollution issues associated with factory production• Employment/business opportunities• Labour standards, living standards

2-4 years forconstruction

Manufacture of goodse.g. equipment, clothing

• Employment/business opportunities• Labour standards, living standards• Materials sourcing• Pollution issues associated with factory production 2-4 years for

construction; ongoingfor operationsSupport services

e.g. catering, laundry,logistics, transportation

• Employment/business opportunities• Labour standards, living standards• Opportunities from local sourcing of foodstuffs• Food quality and other service standards

Table 1: Examples of activities in the contracting chain

1.2.2 Complex contracting chainsRecent evolution of the oil and gas industry has beenshaped by industry drives towards greater efficiencythrough increased outsourcing and by the efforts ofhost-country governments to capturemore benefitsfrom oil and gas production, notably through inclusionof ‘local content’ targets in investment agreements(discussed in Section 1.2.4).

As a result, the industry operatingmodel is shiftingtowards increasingly complex, long and diffuse chainsof contractors, subcontractors and suppliers. TheInternational Association of Oil andGas Producers(OGP) asserts that contractors currently carry outmore than 75 per cent of work-hours in the industry.10

Different IOCs vary in terms of how reliant they are oncontracting chains. The phenomenon of contractingchains is universal, but some players outsourcemuchmore than others, ormore in some regions than others.

In this document, we focus on contracting chainsrelated to the construction phase ofmajor projects.This includes some high-risk activities (see Table 1).Contractors tend to suffermore fatalities than operat-ing companies and frequently find themselves on thefront line of relations with local communities.

Industry contractors range from largemultinational oiland gas field services companies with a wide range ofcompetencies, down to small, independent local firmsoffering one or two key services. These service


providers are hired to deliver goods and servicesthroughout the exploration, construction, operationsand decommissioning phases of hydrocarbon projects.

Major service companies such as Transocean, Hallibur-ton, Schlumberger, Parsons Brinckerhoff, AMEC andothers (see Table 2)manage significant volumes of localcontracting on behalf of operating company clients,through formal procurement processes.

This contractingmodel allows operating companies tofocus on their core competencies, avoiding the need tomaintainmany costly specialist services in-house whentheymay only be required periodically. It allowsmajorservice companies to specialise and offer the sameservices to a range of oil company clients worldwide.It provides development opportunities for localbusinesses, with positive local outcomes such asemployment and tax revenue.

Companies tend to avoid local procurement of high-risk services unless highly skilled service companiesare available. But evenwhere highly qualified andexperienced companies are involved, the complexity ofcontracting chains poses a challenge for environmentaland social performancemanagement and oversight.When less experienced contractors and subcontractorsare unfamiliar with international standards, or lack theincentive to implement them, the operating company islikely to face additional challenges.Moreover, the large

volume of contracting within the industrymeans thatriskmanagement in the contracting chain substantiallyaffects the industry’s environmental and socialperformance as a whole.

Complex contracting chains raise anumber of questions:

• Who is responsible for ensuring thatcontractors and subcontractors are properlyprepared to address all risks, howeverunlikely?

• What actionsmust an operating companytake to check that its contractors andsubcontractors canmeet their contractualrequirements and that they work to interna-tional good-practice standards?

• How can high standards for environmentaland social performance bemaintained,evenwhen speed and low cost of delivery arepriorities?

Box 2 on the April 2010 Gulf ofMexico disaster, illus-trates just how complex thesemanagement questionscan be in practice, and how the challenges can unfoldwith uncontrolled consequences.



Table 2: Selected major service companies — size and main activities

Company Main activities Size

AMEC Engineering, construction, project management,consulting

US$2.5 billion revenue23,000 employees

Halliburton Drilling, pipelines, project management US$14.5 billion (2009)50,000 employees

Maersk Oil tankers, drilling US$48.5 billion (2009)115,000 employees

Parsons Brinckerhoff Mainly onshore pipelines US$2.1 billion13,000 employees

Schlumberger Drilling, cementing US$22.7 billion105,000 employees

Transocean Rig-based construction services US$11.6 billionOver 21,000 employees

Baker Hughes Reservoir development, drilling US$9.7 billion (2009)34,400 employees

Box 2: Deepwater Horizon: a case studyin complexity11

On 20 April 2010 the DeepwaterHorizon rigexploded in the Gulf ofMexico. BP had hired the rigto drill itsMacondowell in 1,500metres of water,66 kilometres from the shores of Louisiana. The rigwas owned and operated by Transocean and hadperformedwell internationally since 2001 when itwas built byHyundai Heavy Industries. Of the 126workers on board, 11 lost their lives, 9 of whomwereTransocean employees. The oil spill (4.9millionbarrels) continued until 15 July, when the well wastemporarily capped before being sealed on 19September.

Initially the US government named BP as theresponsible party, holding it accountable for clean-up and damage. In fact, a wide range of companieswere involved as co-owners, contractors and suppli-ers, including Transocean, Anadarko,MOEX,

Halliburton and Cameron International. BP’s billhas totalled over US$8 billion to date, not includingfunds set aside for potential future damages.

Investigations have been conducted byBP,Transocean, theUSCoastGuard andBureau ofOceanEnergy, and theUSpresident’s nationalcommission.12 TheUSMineralsManagement Service(MMS; nowknownas theBureau ofOceanEnergy orBOE)was criticised for inadequate inspections priorto the disaster andpoor documentation of it. Theywere also considered responsible for a flawedwellplan, alongwithBP, Anadarko andMitsui.

In November 2010, BP released its report, includinganalysis of events leading up to the accident, with25 recommendations to prevent a similar accidentin future. The investigation concluded that no sin-gle factor had caused the tragedy, but there hadbeen a sequence of failures involving a number ofdifferent parties (see diagram below).


Well integritywas not

establishedor failed

Hydrocarbonsentered the wallundetected and

wall control was lost

Hydrocarbonsignited onDeepwater

Horizon

Blowoutpreventer

did not sealthe well

Critical Factor Critical Factor Critical FactorCritical Factor

Res

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EXPLOSIONAND FIREA

nnul

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Pre

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teg

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test

ing

Wal

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resp

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Hyd

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surf

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cont

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Fire

and

gas

syst

em

BO

PE

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genc

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tion

Source: BP. 2010. Deepwater Horizon Accident Investigation Report. p.181

The recommendations from the BP report covertwo broad areas:

1. Drilling and well operations and Operat-ing Management System implementation.Actions include updating and clarifying technicalguidance documents and standards for opera-tions and reporting; developing trainingprogrammes for contractors; enhancing in-houseexpertise in blowout prevention; recommendingthat industry associations develop good-practicestandards; and strengthening of audit processes.

2. Contractor and service provider oversightand assurance. Actions include review andstrengthening of oversight, monitoring andcontrol standards and functions; sharpening upmanagement systems and procedures; andreview and strengthening of contractor require-ments and contractor verification processes.

Despite the existence of good-practice standards,high levels of awareness and experience and a rigthat had performedwell internationally, there weremany areas of operations and oversight that wereflawed. This underscores the importance of payinggreater attention tomanagement of contractingchains, even in regions of the world where onemight expect good levels ofmanagement andoversight from all parties. Even though the disasterwas a singular event among the tens of thousandsof wells safely drilled in the Gulf ofMexico, theimpacts have been profound for the entire industry.

In his official statement on 9November 2010,WilliamK. Reilly, the co-chairman of the USNational Commission chargedwith investigatingtheMacondowell incident, referred to a ‘culture of

complacency’ permeating BP and its lead contrac-tors Halliburton and Transocean that, in his view,lay at the root of the tragedy:

Reilly refers to an unacceptable level of poor deci-sion-making, including badly run tests, thepremature removal of safety barriers, the ignoringof warning signs, and the failure— at all levels,including senior executives— to take risksseriously. Reference wasmade to ‘financialpressures and time limits’, which, it was argued,appeared to have had amajor impact on individuals’responses.13

TheUS president’s national commission report ofJanuary 2011 states: “The record shows that with-out effective government oversight, the offshore oiland gas industry will not adequately reduce the riskof accidents, nor prepare effectively to respond inemergencies. However, government oversight,alone, cannot reduce those risks to the full extentpossible. Government oversightmust be accompa-nied by the oil and gas industry’s internalreinvention: sweeping reforms that accomplish noless than a fundamental transformation of its safetyculture.”14



‘We have said from the beginning thatthe explosion on the Deepwater Horizonwas a shared responsibility amongmanyentities. This report makes that conclu-sion even clearer ...’

Bob Dudley, Chief Executive Officer, BP

‘Whatever else we learned and sawyesterday is emphatically not a cultureof safety on that rig. I referred to aculture of complacency and speakingfor myself, all these companies weheard from displayed it. And tome thefact that each company is responsiblefor one or more egregiously baddecisions, we’re closing in on theanswer to the question I posed at theoutset of yesterday’s hearing, whethertheMacondo disaster was a uniqueevent, the result of special challengesand circumstances, or indicatessomething larger, a systemic problemin the oil and gas industry.’

William K. Reilly

Box 3: Supply-chain initiatives in othersectors

Electronics. The Electronic Industry CitizenshipCoalition (EICC) was established in 2004 by keyelectronics companies. By 2009 the EICC included42 electronics companies. The EICC uses a code ofconduct with 38 principles covering five areas(labour, health and safety, environment, manage-ment systems and ethics). The code of conduct issubject to ongoing revision based on suggestionsfrommember companies and external stakeholders.There is a system of professional auditing usingunified tools andmethodologies. The EICCmaintains ongoing dialogue withNGOs, who believethe initiative has had a positive effect on environ-mental impacts and discrimination, with lessprogress on collective bargaining, job security andworkers’ awareness of their rights.14

Forest products. There are severalmajor initiativeson forest-product certification, notably the ForestStewardship Council (FSC) and the Programme forthe Endorsement of Forest Certification Schemes(PEFC). These initiatives have demonstrated thedifficulty of achieving the dual goals of improvingstandards in a supply chain and includingmorelocal-level enterprises. Local community organisa-tions often find certification processes expensive,and theymay not be well placed to reap the benefits.

On the other hand, certification has encouraged thetransfer of newmanagement techniques andtechnological innovations. Companies have beenable to break into newmarkets andwin conces-sions. Positive impacts also includemarket trans-parency, efficiency and an enhanced ‘licence tooperate’, whichmake companiesmore attractive topotential investors.15

Agriculture. There aremany different supply-chaininitiatives in the agricultural sector. The FairtradeFoundation and the Rainforest Alliance both use aset of performance standards to improve agricul-tural practices. The Fairtrade Foundation offers aguaranteedminimumprice for a commodity and anadditional ‘social premium’ to be invested in aproject by the recipient community, and ensureshigh environmental and sustainability standardsduring production. The Rainforest Alliance workswith farmers to improve their practices, therebyencouraging them to bemore environmentallysustainable, efficient and productive. They arecurrently adapting their standard to include small-holders and unorganised farmers.There is a tensionbetween enforcing high standards and increasingthe cooperation of poorer groups whomay find therequirements too costly. The Fairtrade LabellingOrganization (FLO) has looked into the possibilityofmaking the standardsmore flexible for small-holder producers.16


1.2.3 Spread of international good practicestandardsThere is an increasing emphasis on the need tomain-tain high environmental and social performancestandards in the oil and gas industry. Pressure fromNGO campaigns, ethical investors and governmentsincreases with every high-profile disaster, andwithevery local incident that has an impact on livelihoodsand ecosystems. Standards have also been evolving inresponse to a growing awareness of the importance ofmanaging contracting chains responsibly. The oil andgas industry can benefit from the experiences of othersectors where chain-wide responsibility has beenincreasingly promoted. Box 3 offers a glimpse into thekinds of activity being pursued in other sectors.

Most IOCs have facilities certified to internationalstandards of the International Organization ofStandardization (ISO) and theOccupationalHealth andSafety Advisory Services (OHSAS). Primarily these

include ISO 9000 (quality), ISO/OHSAS 18001 (healthand safety) and ISO 14001 (environmentalmanagement), andmany have established equivalentinternal performance standards. Companies are draw-ing up codes of conduct and environmental policies, andare engaging in sustainability reporting. Several IOCshave signed theVoluntary Principles on Security andHumanRights and have becomemembers of initiativessuch as theUnitedNations (UN)Global Compact, whichincludes a set of good-practice principles, and theGlobalReporting Initiative (GRI) for sustainability reporting.

In their quest to ensure projects comply with interna-tional standards throughout the contracting chain,companies are increasingly requiring that these stan-dards be part of tender processes. Other drivers formajor contractors include sustainability reporting,rankings andmembership in industry associations.

Throughout the chain, theremay be varying levels of



ment plans, monitoring and reporting requirementsand audits. These processes and procedures arediscussed further in Part 2.

The industry is developingmechanisms to addressenvironmental and social performance throughout thecontracting chain. For example, Statoil uses a voluntarysupplier declaration scheme to encourage first-tiercontractors to adopt international good-practice stan-dards. Contractors sign the declaration, committing torecognisingHSE and social standards. Statoil has signedup to theVoluntary Principles on Security andHumanRights, adherence towhich is included in all of theirsecurity contracts, with compliance training provided.Some of Statoil’s other contractors, such asHalliburtonandMaersk, are now starting to take on board theVoluntary Principles themselves. Furthermechanismsare being introduced to procurement processes, includ-ing pre-screening on human rights. The procurementagency Achilles has also beenworking on a socialstandard, which is still under development.22

There is increasing awareness about the importance ofreporting by all members of the contracting chain. TheInternational Petroleum Industry EnvironmentalConservation Association (IPIECA), along with OGPand the American Petroleum Institute (API), haveissued recommendations on the inclusion of reportingin the contracting chain as part of their newly-revisedIndustry Voluntary Guidance on Sustainability Report-ing.23 The GRI is also pilot-testing an oil and gas sector

Box 4: Evolving standards: focus oninternational financial institutions

A key driver for the uptake of global environmentaland performance standards in the oil and gas sectorare the conditions placed on project finance.Lenders and investors require adherence toperformance standards so as to reduce risk in theirinvestments, and employ exhaustive due-diligenceexercises.

In 2006 the International Finance Corporation(IFC) approved its revised Performance Standards(PS) on social and environmental sustainability.These define the roles and responsibilities of IFC’sclients and the conditions for IFC support. Theyinclude environmental and social managementsystems (PS1) and labour standards (PS2), amongothers. IFC standards are taken as a benchmark forthe oil and gas industry, although other interna-

tional financial institutions (IFIs), notably theEuropean Bank for Reconstruction andDevelop-ment (EBRD) and havemore stringent performancestandards, particularly in relation to social issues.The IFC standards have also been adopted by theEquator Principle Financial Institutions , a group ofabout 90major financial institutions representingover 90 per cent of global project finance activi-ties.19

The IFCwebsite has considerable information andguidance on supply-chainmanagement.20 Theyrequire clients to assess the performance of ‘thirdparties’ and provide training where necessary.Third parties include the ‘principal contractor’, butnot other contractors in the chain. This reflectscurrent attitudes in the industry that focus on therelationship between operating company and leadcontractor, while effectivemanagement of the restof the contracting chain is given less attention.

awareness of ISO standards.Major international con-tractors, such as Schlumberger and AMEC, tend to holdcertifications to international standards.18 NOCs andjoint ventures are increasingly adopting voluntarystandards and requiring this of their service providers.For example, TNK-BP and its service providers arecertified to ISO 14001. Kazakhstan’s national companyKazMunaiGaz likewise has established a parallel set ofstandards, with some of its daughter enterprisesformally certified with ISO 14001 andOHSAS 18001.19

In general, quality, health and safety take priority,while environmental and social issuesmanagementremains of secondary concern.

Further along the chain, however, it becomes increas-ingly difficult to find companies that are certified tointernational standards, particularly in the sphere ofenvironmental and social issuesmanagement. Localservice providersmay lack the skills required for thebest environmental and social performance. Thismaybe due to lack of investment or lack of sufficientengagement with the sector to identify the value ofacquiring these skills.

So how are standards promoted throughout thecontracting chain?

Companies have systems for transferring environmen-tal and social standards to their contractors, includingcontracts, bridging documents (to align standards andexpectations), project-specific HSE and social manage-

supplement to its reporting guidelines and is creating asupply-chain reporting protocol for universal use,including within the oil and gas sector.24

1.2.4 Local content requirements in investmentagreementsGovernments of oil- and gas-bearing regions, especiallyinmiddle- and low-income countries, are increasinglyincluding local content targets in the investmentagreements that they negotiate with oil and gas compa-nies, and increasingly enshrining such requirementsin law. Local content targets are ratios for the employ-

ment of local people and the procurement of localgoods and services.

Local content provisions are employed by governmentsto capturemore of the value of hydrocarbon develop-ment in-country. Ultimately, these efforts should helpto support the long-termdevelopment of the sectorlocally so that future oil and gas projects can bring thedesired sustainable benefits to the local economy.

The ability of a company tomeet local procurementtargets depends on the nature of the work to be


Box 5: Local content development inKazakhstan: the role of the government25

Promotion of local content in the oil and gas sectoris amajor policy priority for the government ofKazakhstan. New legislation is in place and thetarget for procurement fromKazakhstan suppliersis 50 per cent by 2012; for services, the target is upto 90 per cent. In April 2010, 34 oil and gas industrycontracts were terminated due to noncompliancewith local content requirements.

Legislation requires that production sharing agree-ments include at least 50 per cent to be held by theNOCKazMunaiGaz, and requires companies tosubmit their local procurement plans to the govern-ment for review. The use of single-source tenders islimited, and foreign companiesmust offer a 20-per-cent cost reduction overKazakhstan companies towin a bid. The legislation also calls for provision ofequal conditions and remuneration forKazakhstanpersonnel, including for subcontractedwork.Electronic procurement has been introduced toenhance transparency. A public tender is requiredfor supply to state-controlled companies of certaingoods and services. Contracts also stipulate fines forfailure tomeet local content requirements.

The government’s Concept onFurtherDevelopmentof Local Content (2009) proposes improvement oflegislation in support of domestic companies; fixedrequirements for local content in contracts; tariffsand other incentives; and transitioning to interna-tional standards and requirements, includingmanagement systems. The plan’s successwilldepend largely on clear and consistent economicand legislativemechanisms for implementation. TheAction Plan to 2012 includes:

Stage I (2009-2010): definingmajor prospectivecategories for goods and services, as well asminimallocal content requirements for subsurface users,and developing appropriate legislative provisionsStage II (2010-2011): availability of state subsidiesor credit schemes to promote prospective domesticproducers of good and services. Technologytransfer, science support and acquisition of newskills feature prominently here.Stage III (2010-onward): state support for domesticentrepreneurs’ access to internationalmarkets. Agovernment working group, in collaborationwithoperators and service companies, will targethuman-resource training capacities and coordina-tion of the skills base for the industry.

TheMinistry of Oil andGas and theMinistry ofIndustry andNewTechnologies have attempted toformalise the definition of local content and havecreated a comprehensive registry of local companiesproviding specialised services in different regions.

ANational Agency for the Development of LocalContent has been set up, with the twoministries asprimary shareholders. Its role includesmanagingand updating the registry, facilitating the imple-mentation of local content policy and ensuring thatprocurement practices are transparent.

Observers express concern about the pace of thesechanges in the light of limited capacity among localsuppliers andworkers, which requires longer-terminvestment. There are still concerns around lack oftransparency and access to the tendering process,lack of reporting from the government andbusiness, and the lack of transparency aroundfinancing for capacity-building schemes and smallandmedium enterprise (SME) development.

undertaken and the availability of enough peoplewith the right skills and talents to do the job.Specialised contractors are increasing in numberin some oil-producing countries, with rising demandfrom large-scale projects, partly in response to localcontent targets.

Where specialised contractors donot yet exist, operatorsare expected tomeet local content targets inotherways—for example, by focusingon the local cateringor clothing-manufacturing industries, by investing in training andcapacity-buildingof local enterprises (seeSection2 ), orbyhelping to register local branches of international serv-ice companies (an approach thathasbeenquitecontroversial, as it is seenas aneffort tobypass the rules).

Some companies comment that they feel forced intolocal content obligations by governments. Other com-panies understand that pursuing local procurementobjectives can deliver a range of strategic and businessbenefits, such as reducing transportation or labourcosts, or enhancing relations with the host governmentand building a ‘social licence to operate’ within hostsocieties. Observers note the need formore dialoguebetween companies and government agencies aroundthemutual benefits of optimising local content.

It should be emphasised that building local capacitiestomeet local content targets is not the sole responsibil-ity of the industry. Government has a key role to play.In the case of the Sakhalin-2 project, for example, ajoint steering committee was set up between the

Sakhalin regional government and the project operator,Sakhalin Energy, with some participation frommajorcontractors. This body identified, discussed andapproved the social investment projects that couldmost effectively contribute to sustainable developmentin the region. Box 5 describes the effortsmade by thegovernment of Kazakhstan to promote development oflocal capacity tomeet local content targets.

Expectations of high levels of local content from the out-set frequently lead to disappointment. Often aninitial ‘boom’ of high employment— for example, inpipeline construction— results in a subsequent ‘bust’once the construction phase is over. Governments andlocal businesses need to bemore strategic about thekinds of capacities that they focus ondeveloping over thelong term. In some cases, a better optionmaybe to bringin an experiencedworkforce for the short constructionperiod,while cultivating skills in areas that aremorelikely to be required in the longer term (e.g.manufactur-ing, businessmanagement and catering).26

Several experts with whomwe consulted emphasisedthat governments and other stakeholders should seekto optimise rather thanmaximise local content.27 Thatis to say, local contracting should provide the greatestpossible long-term benefits to society in the context oflocal skills and capacities. Thismay not necessarilyresult in themaximumpossible local spend in the shortterm. Highly technical and complex skilled work can-not be carried out by an inexperienced local workforce,whereas less skilled workmight lend itself well to



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greater local involvement, including logistics,transportation, catering, laundry, office work, environ-mental and social surveys and long-termmonitoring,andmiddle-management functions, moving towardsuppermanagement over time.

IIED’s interest in contracting chainmanagementwas initially spurred by the challenges ofmanagingenvironmental and social risks in the context ofincreased local content requirements in developingand emerging economies.28 The case of DeepwaterHorizon, however, along with a subsequent nearmisson a Shell/Transocean rig in theNorth Sea,29 haveunderscored the fact that serious challenges are notrestricted to less developed parts of the world withweak governance.

1.3 The changing climate ofresponsibility

There have been a few notable efforts tomake concretea shared framework formanaging responsibilities andimpacts beyond areas of direct company control. Forexample, a 2002 IPIECA/OGP report onmanagementof social issues recognises the role contractors play indelivering social performance on the ground.30

More recently, OGP, in collaborationwith theInternationalMarine Contractors Association and

International Association of Geophysical Contractors,issued a set of technical guidelines to ensure health,safety and environmental performance is factored intothe contracting process.31 These guidelines attempt tocodify a range of relevant procedures that can befollowed throughout the project lifecycle, and thereforereflect a growing understanding of this critical relation-ship in delivering good performance.

TheUNGlobal Compact has been involved in introduc-ing the concept of a company’s ‘sphere of influence’ as away to help companies understand the scope of theirresponsibility in addressing human rights issues, andmay be useful in understanding other issues as well.The idea is that a company’s influence over a situation— and therefore its direct responsibility for outcomes—diminishes further from the locus of control. Figure 2shows how one company, BHPBilliton, has illustratedthis concept using concentric circles.

Although each project is distinct, different participantstend to play certain roles in controlling and influencingone another towards desired outcomes, directly orindirectly, as illustrated in Figure 3.

As Figure 3 illustrates, projects are subject to direct andindirect lines of control and influence both top-downand bottom-up, with IOCs seen as primary targets forinfluence. Notwithstanding the roles of


Employees/contractors

Local communities

Suppliers

Security forces

Business partners

Government

Increasing control / degree of influence

Figure 2: BHP Billiton’s human rights ‘sphere of influence’ management model

Source: http://sustainability.bhpbilliton.com/2006/community/ourApproach/humanRights.asp

CommunitiesDirect experience of performance

via subcontractors; seek alliesin civil society and government

RegulatorMay have direct

relationships throughcontracting chain;

corruption can be an issue

Contractor

Subcontractor Subcontractor Subcontractor

IOC(JV/NOC)

Host Government

Civil societyMay include local groups,

often focused on government,and international groups,

who target IOCs andtheir financial stakeholders

LendersOften with increasing

requirements forperformance standards

InvestorsSeek to limit risk

and maximise returns

Direct influence

Indirect or lesser influence

Primary target

Secondary target

government and civil society, the exact nature of acontractual arrangement between companies— andthe associated financial rewards—will depend on thenature of the goods or services being sought and thecapabilities and risk appetite of the contractor.

Usually, contracts focus on legal transfer of authorityfor certain activities and outcomes, while formalresponsibility for results ismaintained by the operatingcompany. But the responsibility landscape has shiftedsignificantly in recent decades and now encompassesdomains beyond the realmof legal responsibility. Theseare not equally recognised or accounted for in relation-ships between companies in the contracting chain.Table 3 (overleaf ) identifies three realms of responsibil-ity and the risks of failure in each.

The area of legal responsibility (legal compliance),illustrated in Table 3, is well understood and charac-terised by specific criteria and a binding system ofconsequences if criteria are notmet. Nonetheless,in regions of poor governance andweak regulatoryenforcement, it is possible to evade legal responsibility.Furthermore, where contracts provide an inadequatebalance of incentives and penalties it is possible forcontractors to fail tomeet their full range of contrac-tual requirements by being forced to prioritise someaspects (e.g. time and cost of delivery) over others (e.g.environmental protection) (see Section 2.2.3).

A second area is that of responsibility to stakeholders,encompassing the expectations of a company’s stake-holders for the environmental and social outcomes of aproject, whichmay extend over and above compliancewith the law. For example, a companymay be legallyliable to pay up to an agreed limit to cover the cost ofcleaning up an oil spill, but public and governmentexpectationsmay result in them paying well over thatamount. A company’s actions in this areamay be influ-enced by a legal requirement tomeet local contenttargets, but it may also be a strategic decision toenhance government relations and the company’ssocial licence to operate.

A third domain, whichwe termmanagerialresponsibility, is less well understood as a distinctarea of responsibility. Yet this is often the key elementthat ensures companies in the contracting chainare able tomeet expectations and contractualrequirements. It includes themanagement actions(capacity-building, monitoring, communication andoversight) required to ensure that contractual obliga-tions and stakeholder expectations aremet. These relyon the proactive commitment of the contract holder.Decisions to investmore or less effort, money and timeinmeetingmanagerial responsibilities tend to bevoluntary, although they are frequently essential inorder tomeet legal requirements— and theymay bereferenced in formal contracts.



Figure 3: Influence, control and pressure among stakeholders

that we highlight in this paper. The term ‘sharedresponsibility’ in the title underlines our view thatgovernments and civil society, as well as the variouscompanies thatmake up the contracting chain, alsohave important roles to play in ensuring positiveenvironmental and social outcomes.While focusingprimarily on actions for oil and gas operating compa-nies andmajor service contractors, we emphasise theimportance of government oversight, investment andsupport, and civil society’s capacity to hold businessand government to account.

This exploration is based on the premise that it is inthe interest of all stakeholders to develop a competentlocal oil and gas service industry that canmanageenvironmental and social issues effectively. Therecommendations and actions contained in this reportare aimed at helping to deliver this. It is our intentionto stimulate discussion, debate and experimentationaround the challenges and actions to address them,whichwill better enable all companies to carry outtheir roles effectively and to create the best possiblesocial and environmental outcomes.


Environmental and social responsibilities Risks of failure

Legal responsibilitySpecified, formallybinding and compliance-based; enforced bygovernment regulatorsand contract holders

• Legal compliance• Conformity to international standards included in investmentagreements and contracts

• Meeting local content targets• Carrying out mandatory public consultation and social invest-ment

• Implementing adequate emergency-response procedures

• Legal sanctions,fines and penalties

• Contractualdisputes

• Court cases andassociated costsand delays

Responsibility tostakeholdersResponsiveness tothe expectations ofstakeholders for goodperformance beyondlegal and contractualcompliance

• Meeting good-practice standards not included in nationallegislation or contracts

• Transparency• Ensuring meaningful and responsive engagement withstakeholders

• Respect for and protection of the local environment andlivelihoods over and above legal obligations

• Development of beneficial and equitable social programmesfor local communities on a voluntary basis

• Reputationaldamage

• Loss of sociallicence to operate

• Loss of futureinvestmentopportunities

ManagerialresponsibilityEfforts applied bycontract holders tomaintain good environ-mental and socialperformance throughoutthe contracting chain

• A culture of shared risk and responsibility• Effective communication throughout the chain• Training in technical and managerial skills and culturalawareness

• Technology transfer• Effective oversight and monitoring

• Loss of control overproject outcomesand impacts

• Inability to meetlegal responsibilitiesand responsibilitiesto stakeholders

Table 3: Three areas of responsibility32

This report argues that the domain ofmanagerialresponsibility can sometimes be taken for granted incontracting chains of the oil and gas sector. Thiscompromises companies’ ability tomeet both legal andstakeholder responsibilities. It also presents variousunnecessary challenges for companies in ensuring goodenvironmental and social outcomes.

1.4 Moving forward together

Itmust be recognised that the circumstances we havedescribed in this section— as well as the proposedresponses— are complicated.Making progress is notwithout risk or downside, as it may sometimes increaseoperating costs, add delays and require considerablemanagerial attention. But at the same time, the expec-tations of governments, companies in the value chainand society are legitimate, and the business case forcompanies tomeet those expectations is substantial,compelling and growing.

Furthermore, we do not assert or imply that companiesare solely responsible for addressing the challenges


PART 2 UNDERSTANDING THE CHALLENGES

Many of the challenges of ensuring good social andenvironmental performance throughout the contract-ing chain aremultifaceted, long-standing, evenintractable. Our research demonstrates that signingup to international good-practice standards and devel-oping corporate policies andmanagement systemsalone is not sufficient to ensure good environmentaland social performance. It depends on those standards,policies andmanagement systems being effectivelyimplemented and embedded in everyday practiceacross the whole range of business functions andthroughout the contracting chain. And it requiresmeaningful collaboration between industry playersother stakeholders.

We have identified three broad sets of factors thathamper effective chain-wide performance:

1. Lack of a sense of shared responsibility through-out the contracting chain and across stakeholdergroups. Responsibilities are typically fragmentedacross a project. There is a need for shared owner-ship of activities and outcomes overall, rather thanjust the individual tasks taken on by each partner.

2. Inadequate implementation of systems andprocedures to enforce standards and incentivisegood performance. It is not enough simply to adoptstandards and policies on paper; they have to beimplemented and enforced.

3. Cultural and contextual challenges in widelydiffering regions of the world. Companiesmustcome prepared to address themany contextualfactors in a new country, including the perceptionthat international best practices do not always apply.

Key challenges are identified and described in thissection under these three headings, andwe offer a

number of recommended actions for overcoming thechallenges in Part 3: Taking Action.

2.1 Lack of a sense of sharedresponsibility

Despite the complexity and importance of contractingchains, these chains tend to function as collections ofindividual interests rather than as coherent and coordi-nated professional teams. This is perhaps themostimportant challenge, fromwhich the others flow. Giventhe distribution of responsibilities across a typicalproject, there is a strong need for shared ownership ofa project and its outcomes overall, rather than just theindividual tasks and jobs taken on by each partner.

WilliamK.Reilly, the co-chair of theUSNationalCommission set up to investigate theDeepwaterHorizon tragedy (seeBox 2), referred to a ‘culture ofcomplacency’ in the oil and gas industry, inwhich poordecisions aremade and risks ignored despite thepresence of excellent riskmanagement systems onpaper. Observers also point to a lack of coordinatedefforts to ensure andpromote responsible practiceinternally (betweendifferent business functions);amongmembers of the contracting chain; and betweenstakeholders, including industry, local enterprise associ-ations, government agencies, IFIs, independent experts,communities and civil society organisations.

2.1.1 Links are weak between IOCs andsubcontractorsIOCs engage closelywith their lead contractors, butengagemuch lesswith subcontractors further down thechain. Yet allmembers of the chain are expected tounderstand and implement international standards andcodes of conduct that IOCs have publicly committed tofollowing in all their operations. Because of the oftendiffuse and decentralisedway inwhich contracting

PART 2

Understanding thechallenges2

chains operate, it can be difficult for all parties to sharethe same view of social and environmental performanceexpected from them, and from the project overall.

2.1.2 A ‘tick-box’ mentality undermines imple-mentation of standardsMajor oil and gas companies are increasingly signingup to corporate responsibility initiatives, adoptinginternational good-practice standards, and developingworld-class policies, procedures andmanagementsystems. All this effort is undermined, however, when a‘tick-box’ mentality takes over. Thismeans themainfocus is on having standards, policies and procedureson paper, and there is less focus on the complicated

steps required to implement them effectively. Inter-nally within a single company, it is difficult to ensurethat everybody has bought into the need for newwaysof thinking and operating, and to change behaviour. Itis evenmore difficult to change culture and behaviouroutside the company, among contractors and subcon-tractors, who have their ownways of working.

Where standards and procedures exist on paper andeffective implementation is assumed, the result is afalse sense of security, not only formembers of thecontracting chain, but also for other stakeholders (suchas government regulators and even civil society organi-sations). Individuals do not challenge acceptedconclusions and are poorly prepared to respondwhensystems and procedures fail. An example is when a riskassessment is undertaken and the likelihood of a cata-strophic event happening is described as ‘very slight’,and then steps required to prepare for its eventualityare not followed through.

Critical analysis of good-practice standards frequently

focusesmore on the wording of the standards andprocedures themselves and less on the implementationmethods and their effectiveness on the ground. This isan area where further independent researchwould behelpful.

2.1.3 Contractors and subcontractors are lessvisible than operatorsContractors and subcontractors are less visible andtherefore less directly accountable to key stakeholdersin an oil and gas project. In some cases this leadscontractors to believe that they do not need to engagedirectly with stakeholders, as this is the responsibilityof the IOCs. Conversely, IOCs sometimes prefer toshift the attention to theirmajor service contractors,arguing that the contract between the IOC and the leadservice contractors should guarantee a certain level ofperformance from the rest of the chain.

It is often themore visible ‘branded’ IOC— rather thanNOCpartners or service contractors and subcontrac-tors— that is held responsible in reports fromproblemregions of theworld, such as in the case of Shell in theNigerDelta or the Russian Far East. CampaigningNGOssometimes prefer to name the IOCs as having the leadresponsibility, as they are seen to be themost amenabletomodifying their behaviour in response to externalpressure. Similarly, where IFIs are responsive toNGOconcerns theymay also become the conduit for thoseconcerns. Despite this, it is the subcontractorswho tendto havemore direct contact with local communities andbe responsible for direct environmental impacts.

2.1.4 Companies and governments lack mutualunderstandingProponents of corporate social responsibilityfrequently highlight the need to better align thesustainable development goals of government andindustry.Where industry and government are seen tobe engaging closely, this has both negative and positiveoutcomes. Itmight take the form of aggressive lobbyingof government to promote oil industry interests andthe interchange of high-powered roles in industry andgovernment (seen in OECD and developing countriesalike). The governmentmay explicitly promote theinterests of theNOC, directly or indirectly.

Relationsbetweengovernments and companiesmaybecomeadversarialwhere they arebasedprimarily onnegotiations rather thana commonsearch for solutions.IOCsand foreignNOCs frequently find it difficult to builda constructivedialoguewithnational government repre-sentatives on issues suchas environmental regulationand local content. InKazakhstan, for example, observers


‘The United KingdomHealth and SafetyExecutive formally defines the safety culture ofan organization as “the product of individualand group values, attitudes, and perceptions,competencies, and patterns of behavior thatdetermine the commitment to, and the styleand proficiency of, an organisation’s health andsafety management.” Amore popular descrip-tion is that safety culture means doing the rightthing even when no one is watching.’

US presidential commission report, p.218(http://www.oilspillcommission.gov/final-report)


havenoted that companies often feel forced intodeliver-ingunrealistic local content targets,whereasmoremeaningful dialoguemight result in abetter understand-ingof themutual benefits of strategically optimising localcontent in international oil andgasprojects.

There are considerable sustainable developmentbenefits of closer industry-government engagement.The experiences ofNorway andAlaska are frequentlytaken as amodel for emerging oil-producing countries.Outcomes include theNorwegian and Alaskan develop-ment funds, Alaska’s Native Corporations and theinvolvement of indigenous people in decisionmakingand benefit sharing.33

2.1.5 Advance planning is often inadequateAll too often the project cycle does not allow for advanceplanning and engagement. Key issues are not discussedat the time of the initial negotiations between govern-ments and operators around investment agreements.For example, local content targetsmay be agreed, butways of achieving these targets are not discussed. In

general there is insufficient advance understandingof where local capacities are lacking. This limitsopportunities for up-front investment in capacity-building for local enterprises and services such as oilspill response teams.

In general this points to a lack of government leadership,which is especially importantwheremultiple companiesareworking in one region.Observers, however, also notea lack of collaboration on advance planning betweenindustry and government, and across the industry.Within the industry itself, local content, social or otherrequirements are often tacked on, once the overallcontours of the project are set, and it is exceedinglydifficult for large contractors, especially, to reset theirplans once contracts have been signed andwork begun.

The project cycle runs from complex front-endengineering design, detailed design, construction,installation and commissioning to long-termoperations and asset support. (Figure 4 is a genericrepresentation.)


Operations &maintenance

Contractaward

Concept Development/ Approvals

/ Licensees / Wholeof Life Assessment

Proposaland tenderpreparation

Processdefinition

(PDFs)

Projectdefinition(P&IDs)

Engineering designProject initiation

Conceptualand detailedplant layout

Detailed designfabrication /Constructiondocuments

Materialacquisition

Fabrication

Fabrication

Pro

cure

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t

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commissioning

Start upcommissioning

Handover

Maintenance DecommissionDemolition

and siteremediation

Handbacksite to owner

Fabrication

Site preparation, foundations, underground services,steel and equipment installation, piping,

instrument, electrical installation

Construction

Decommission and handback

Figure 4: Project cycle

Source: http://www.clough.com.au/oil-and-gas/upstream-oil-a-gas-industrymenu-191/project-life-cycle-industrymenu-51.html

2.2 Inadequate implementation ofsystems and procedures

Although certain standards are becomingmore impor-tant as explicit elements of the contracting process,adequate attention is seldom given to ensuring theyare put into practice. It is not enough simply to adoptstandards and develop policies on paper. They have tobe implemented and enforced— and theremust besufficient capacity to do both. Experts within the indus-try as well as concerned observers recognise that notenough attention is paid to the issue of implementationand enforcement and forward planning remains a lowpriority.

Operating companies andmajor contractors are awareof the issue but in practice fail to anticipate it properly.This relates not only to social standards, which are stillpoorly understood in the industry as awhole, but also toHSE standards, which are better understood and havebeenmorewidely adopted. Our research— includinginterviewswith contractors on the ground— shows thatat times, the transfer of key standards, codes of conductand other procedures is limited to appending therelevant documents to the standard contract.

The contractormanagement process for an oil and gasproject typically consists of the followingmainelements:

• contract language and contractual requirements

• bridging documents to align standards andexpectations

• project-specific HSE and social managementplans

• monitoring and reporting requirements

• validations/inspections/audits by the companyof contractor operations

• end-of-project report

We argue that without sufficient training and aware-ness raising, a suite of documents is frequentlyinadequate to address the complexities of social andenvironmental requirements.

2.2.1 Commitments are subject to negotiationbetween IOCs and partnersThemajority of IOCs have developedmanagementsystems to address the environmental and social

impacts of their operations, including compliance withnational legislation, and usually these systems applywhen the company is amajority shareholder or jointventure partner. They tend to commit to working withpartners and contractors to deliver these standards, atleast to a large extent.

Butwith increasing requirements for IOCs to partnerwith host-governmentNOCs—andwith otherNOCs,such as theChinaNational OffshoreOil Corporation(CNOOC), increasingly operating internationally—IOCs sometimes find themselves in aminority position.In such situations, their commitments to implementcertain standards are subject to negotiation between thepartners andmay be compromised in practice.

2.2.2 Procurement processes pay insufficientattention to standardsIn prequalification/capability assessment andtender-selection processes, operating companies andengineering, procurement and construction (EPC)contractors tend to give preference to contractors whoare certified to international standards, particularlyISO 9001.

But although there is frequently a corporate-level com-mitment to adoptingmajor international social andenvironmental performance standards, industryobservers suggest that procurement processes still treatHSEand social standards as lowpriority. As alreadynoted, specific tools for ensuring that standards areincorporated into procurement processes (e.g. pre-screening onhuman rights) are only starting to beintroduced or are in the early stage of development.Companies seeking tomeet local content requirementssometimes take on subcontractorswith the requiredtechnical expertise, butwithout demonstrated expertiseinHSEand social standards (e.g. ISO 14001certification), with a view to developing thesemanage-ment skills on the job. This canwork only if training andsupervision are adequate and timely. (Some industryexperts appear to be shocked at any suggestion of lower-ing standards to allow local enterprises greater access.)Theremay also be issues around internal coordination.Corporate responsibility teamsmay get standardsadopted at a high level, but procurement teams are notprovided thenecessary support and training to ensurethat their procedures adequately incorporate the addi-tional requirements.

2.2.3 Contracts fail to incentivise good environ-mental and social performanceA key issue highlighted in the course of our research isthe language of the contracts negotiated between the


operating company and lead contractor, andwithsubcontractors along the chain. These contracts areimportant tools for establishing agreed sets of activitiesand obligations, setting standards, and establishingincentives and penalties for good or bad performance.Contracts generally require compliance with nationallaw and regulations (including environmental regula-tions and labour law). But enforcement of the law ishighly variable in some parts of the world, whichmayput a greater burden on the contract holder to ensuregood performance.

Theway that a contract is designed and negotiateddetermines the relative priority a contractor or subcon-tractor assigns to cost, speed of delivery, quality, andenvironmental and social performance. Box 6summarises some of the key elements of an EPCcontract. These elements also apply to other contractsthroughout the chain.

A key issue is the balance of incentives and penalties ina contract. Contracts tend to incentivise keeping to costand schedule (e.g. 80 per cent of incentives and penal-tiesmight relate tomeeting deadlines within budget,whereas 5 per cent relate to correct environmentalprocedures).Moreover, where budgets allocated toenvironmental and social protection are not ring-fenced, theymay be used for other purposes argued tobemore urgent. Fixed-sum contracts can pose a partic-ular challenge where no additional funds are providedtomeet any additional commitments that arise afterthe contract has been signed— for instance, followingimpact assessments.

Contract holders are limited in the sanctions that theycan invoke, particularly if they have tight constructiondeadlines tomeet. They can apply financial penaltiesandwithhold payment; they can address their concernsto the contractor’s parent company or shareholders.Contract terminationmay not be desirable in terms ofthe potential costs and delay involved in a court actionand the replacement costs in an industry alreadystretched for workforce during the construction phase.

2.2.4 Procedures for harmonising standards areconfusing and complexDifferent parts of the contracting chain are likely towork to different environmental and social standards(and it is worth noting that IOCs do not necessarilyhave higher standards than their contractors in everycase). It is essential to harmonise standards andapproaches at an early stage of the project.IOCs employ bridging documents to fill the gapbetween their corporate policies and those of their

first-tier contractors. This involves experts from theIOC looking at the contractor’s HSE and social policy,management systems and procedures tomake sure thattheymeet expectations.Where there are gaps they areaddressed. Relevant documents are appended to theEPC contract, including the project environmentalimpact assessment (EIA) and impactmitigationcommitments; HSE standards; and the code of conduct(including anti-corruption commitments). Thecontractor will pass on these requirements andcommitments to the subcontractors as they see fit.

Project finance adds a further layer of commitmentswhere lenders require an international-style environ-mental, social and health impact assessment (ESHIA)on top of the standard legal EIA requirements. Forexample, the BTC pipeline ESHIA consisted of 11,000pages and over 3000 commitments; there were over5000 commitments in the Sakhalin-2 project ESHIA.The timing of involvement of international financialinstitutions (IFIs) can also be problematic if newcommitments are overlaid on a project after it has beenapproved, after contracts have been signed and/or afterconstruction has begun.

Documents are sometimes available only in English,whichmay be a barrier to understanding for somecontractors and subcontractors. In any case, the docu-ments can be so dense and lengthy that assistance withinterpretation is essential, yet frequently overlooked.

2.2.5 Enforcement of standards is difficultacross dispersed contracting chainsAt project level, the operating company is responsibleformonitoring and oversight of the work of its first-tiercontractors, who in turn supervise andmonitor thesubcontractors. Contractors and subcontractors arerequired to submit regular reports on their perform-ance. On a construction site, the sitemanagermakessure that reporting requirements aremet, but cannotpersonally observe all behaviour and outcomes.

Operatorsmay arrange regular (e.g. monthly) andspontaneous site visits that include subcontractors,but the practical logistics of thesemay be difficultto arrange for distant locations. IOCs tend to haveprocedures for confidential internal reporting ofunsafe, illegal or unethical conditions or practices.These include confidential company hotlines andpolicies of non-retaliation towards whistleblowers builtinto company codes of conduct.35

IOCs admit that they cannot control everything thathappens, particularly in remote sites. Each partner



along the contracting chain is likely tomiss someinstances of standards not being upheld, proceduresnot being followed or warning signs being ignored.Despite IOCs’ drug and alcohol testing, policies of ‘nohunting, fishing and gathering’, and codes of conductwith anti-corruption clauses, drug and alcohol abuse,poaching and corruption still exist.

Many different agencies, including government agenciesand IFIs, have roles to play in enforcing legal regulationsand international performance standards. Civil societyorganisations also provide oversight and challengecomplacency. Yet there tends to be a lack of coordinationbetweendifferent entities. Some contractors andsubcontractors describewhat they see as toomuchsupervision andmonitoring,making it difficult for themto carry out theirworkwithout interference. Companystaff also report resistance fromcontractors and subcon-tractors during auditing andmonitoring visits.

Overall, the picture is one of good intentions andmulti-plemonitoring, supervision and audit arrangements,but one that at times suffers from insufficient overallcoordination between stakeholders and throughoutthe chain, and an inability to implement proceduresand systems effectively to enforce good-practice

standards universally. There also seems to be a lack ofunderstanding that a policy on paper is a feeble weaponagainst entrenched cultural practices.

2.2.6 Public engagement and reporting remainslimitedMostoperating companieshave stakeholder-engagementstrategies andorganisepublicmeetings to fulfil their legalobligations, IFIs’ requirements and corporatepolicies.Contractors and subcontractors, in contrast, rarely takepart in formal stakeholder engagement.Operatorsmaymake commitments at publicmeetings— for example, onlevels of local hiring—yet contractors and subcontractorsmaynotmeet these commitments if there are insufficientincentives in their contracts or lackof local capacity, or ifthey areunawareof the commitmentor of localsentiment on the issue.

Similarly, contractors have fewer reporting obligations.The project operatorwill normally be obliged to reportto the host governmentwith regular performance statis-tics, including information on issues such as accidents,ecological indicators andwastemanagement. They alsoreport to their shareholders and to the public (via annualreports and sustainability reports). Someoperatingcompanies include their contractors’ performance in


Box 6: The EPC contract

TheEPC contract is themain project contractthat legally binds the operator and the leadcontractor (the EPC contractor). It includes ascope of work, outlining the technical specifica-tions and detail of the activities to be undertakenor services to be provided. These objectives arefrequently linked to incentives in the contract,mostly in the formof penalties and fines.

The basic priorities in an EPC contract are time,cost and quality.34 Other features include:

• A single point of responsibility. The EPCcontractor is responsible for all design,engineering, procurement, construction,commissioning and testing.

• A fixed contract price. Risk of cost overrunsand the benefit of any cost savings are shiftedto the contractor’s account.

• A fixed completion date. Damages arepayable if this date is notmet.

• Performance guarantees.These aremeasuredin termsof output, efficiency and reliability.Damages arepayable if the contractor fails tomeet theperformance guarantees.

• Caps on liability. Liability is capped at apercentage of the contract price (frequently100 per cent). Damagesmight be capped at 20per cent of the contract price.

• Performance specification. This details theperformance criteria that the contractormustmeet, but the contractor is left todetermine how they aremet. Thus, almost allthe construction risk is passed to thecontractor.

• Control. In return for a guaranteed price andcompletion date, the operator cedesmost ofthe day-to-day control over the construction.They have limited ability to intervenewhenproblems occur during construction. Themore they interfere, the greater the likeli-hood of the contractor claiming additionaltime and costs.

their own corporate statistics. In general, lead contrac-tors are obliged to report only to the operating companyon their ownperformance, and they tendnot to reporton the performance of their contractors. This tends toreduce accountability across the contracting chain.36

2.3 Cultural and contextual challenges

Citizens of oil-producing countries that experienceheightened oil-related pollution or conflict often feelthat oil companies do not consistently uphold globalenvironmental and social standards. Accurately or not,they perceive companies as failing to bring theirgood-practice experience to these countries. Thiscan underscore the importance of culture and socio-political context in ensuring good environmental andsocial performance.

WhereWestern companies areworking in non-Westerncontexts, they frequently need to take into account theinherent tensions and trade-offs between the internalcorporate environment and the state of governance andaccountability in the host countries. There aremanycontextual factors, themost obvious being levels oftransparency and corruption in national governmentand society as awhole, levels of democratic participa-tion and the ability of civil society to hold government

and industry to account, and the capacities of theworkforce involved in the project (be it predominantlylocal or importedworkers).

2.3.1 Underdeveloped contractor markets poserisks as well as opportunitiesIn regions with underdevelopedmarkets for oil and gasservices, thesemay be dominated by one or two leadingcompanies. Performance, whether on quality, social orenvironmental standards, may suffer through lack ofcompetition. Theremay also be political pressure fromgovernments for operators to workwith favouredsuppliers. This can create or exacerbate significantchallenges with respect to bribery and corruption(see section 2.3.2).

In some cases governments exert strong pressure tosupport the development of contractormarkets so as toincrease opportunities formaximising local content inoil and gas projects. Operators andmajor contractorsmay find it hard to justify delaying development of aproject — perhaps for a year—while potential contrac-tors are trained. Few projectmanagers are given thebest incentives to build time for training contractorsinto project schedules, particularly when this trainingis not ‘on the job’, but relates to development of thelocalmarket.



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2.3.2 Corruption and patronage hampereffective contractor managementIn December 2010Nigeria’s anti-corruption agencydropped bribery charges against former USVicePresident Dick Cheney and oil services companyHalliburton after the company agreed to pay finestotalling up to US$250million in a case dating back tothemid-1990s. This case, like that of BakerHughes inKazakhstan (where a US$4million bribe was paid for aUS$219million contract), hit the headlines during theWikiLeaks revelations of late 2010.

The above are high-profile cases of alleged corruptionon amassive scale.Muchmore common, butmuchmoremundane, are the transactions that take placelower down the contracting chain. Doing business atany level inmany oil-producing nations is impossiblewithout instances of patronage, cronyism and corrup-tion in all tiers of the contracting chain. This presentsmanagement challenges throughout a project’s lifecycle and can limit the effectiveness of a host govern-ment’s efforts to capturemore of the value ofhydrocarbon development within the country.

In some cases corruption cannot be remedied bycompanies alone or at all, for examplewhere corruptgovernment officials block or dissolve effective legisla-tion. Transactions carried out in the lower tiers of thecontracting chainmay remain ‘invisible’, despite theirpotential to create operational and reputational riskshigher up the chain. Thesemight include small-scalebribery for overlooking violations of environmentalregulations, or bribes paid for foreignwork permits.Such bribesmay happenwithout the knowledge of otherplayers in the contracting chain. At that level, theymaybe an example of culturally accepted behaviour.37

Leading companies often have a code of conduct thatexplicitly states their ‘zero tolerance’ of bribery andcorruption. InWestern headquarters, company expertsmay state with confidence that their code of conductprevents corrupt practices throughout theiroperations.

On the ground, however, many company staff feel thatthey lack the power to address corruption throughoutcontracting chains. Lack of resources for auditsmay bejust one problem. Promoting zero tolerance amonglocal staff is unlikely to remove underlying issues.Thesemay relate to local expectations and establishedpractice, along with the pressure of performancetargets that can bemetmore easily if a bribe is paid.Furthermore, where companies are forced to work injoint venture partnerships withNOCs in hostcountries, it is very difficult to alter the culture andpractices of those NOCs.

2.3.3 Limited understanding of local cultureand practice increases risksChangingbehaviour is asmuchamatter of culturalchange as it is amanagementor regulatory issue.Therehavebeenpositive examples of changingbehaviour in theoil andgas industry.OnSakhalin Island inRussia, theseinclude efforts to encourageworkers touseprotectivegear suchashardhats onworksites, andpromotionofroad safety (encouraging thewearingof seatbelts anddiscouragingdrink-driving). Road-safety campaignshavealsobeenextended to thewider community.

Uptake of international standards and business culturemay, however, be influenced at the individual andcorporate level by the attitude that ‘we don’t wantoutsiders to tell us what to do’. This extends to theproject sites, where local workersmay refuse to wearhard hats and safety clothing because they have neverdone so before for similar work.

In some cases in outlying areas, community issues—especiallyminor ones— are addressed directly betweenlocal oil workers and local residents. In places wherethe oil workers are long-serving, these relations havedeveloped effectively.38Where the workers are new tothe area, theymay be unfamiliar with local culturalnorms— or theymay be perceived as unwanted inter-lopers taking local jobs. Thismay undermine theirability to resolve issues at the local level, and itmayincrease the risk of local-level conflict.


Creating resilient, responsive andhigh-performingrelationships throughout the contracting chain is a long-termprocess that requires commitment fromall partiesto achieve the right results. In this sectionweoutline a setof actions that havebeen identified as goodpractice.

Butmore than the individual actions, a critical changemust take place in the relationships between andamong various stakeholders. This includes relationsbetween operators and contractors or subcontractorsalong the contracting chain, but also relations withother stakeholders, notably government.We areadvocating not just amore explicit treatment ofenvironmental and social issues in contractingrelationships, but a significant shift in attitudesbetween the parties as to what outcomes are in the bestinterests of all involved, and how theywill worktogether to ensure those outcomes.

Some experts with whomwe consulted on this reportrightly noted that these actionsmay represent signifi-cant additional costs to the companies involved. Somecommented that thismay not be desirable tomanycompanies; others appreciated the value of investing inthese actions up front to reduce the cost of addressingmajor issues at a later date.

We do not offer guidance on how to prioritise differentoptions if such decisions have to bemade.We dorecommend, however, that the bottom line be goodenvironmental and social performance; in light of this,companies and governments in themore challengingoil-producing regions should work together to optimiserather thanmaximise local content, and all actorsshould ensure performance considerations andoutcomes remain top priorities.


PART 3 TAKING ACTION

PART 3

Taking action3

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Key activities:

• Define the legal requirements as they relate to thework to be carried out throughout the contractingchain. These should be passed to the contractingcommunity through an open and transparenttendering process that takes into account the needfor high standards of environmental and socialperformance (see Action 3).

• Complete an environmental and social risk assess-ment focusing on the contracting chain, identifyingany potential capacity gaps, and an action plan toaddress these risks and gaps (including training andmanagement procedures). Environmental andsocial impact assessments (ESIAs) should becarried out as early as possible; additional require-ments (e.g. from lenders) should be predicted well inadvance, preferably (in preliminary form) beforeEPC contracts are signed.39

• Identify stakeholder expectations and perceptionsand ensure that these are considered fully in theprocess ofmaking commitments and developingpolicies and procedures.Where expectations cannotbemet or perceptions are unrealistic ormistaken,they should bemanaged through awareness raisingand direct engagement. Stakeholder engagement isan ongoing process throughout the lifetime of theproject and should include contractors and subcon-tractors as early as possible. Commitmentsmade tostakeholders (e.g. regarding local hiring) should be‘owned’ by those responsible formeeting the com-mitments.

• Complete an analysis of workforce and local-enterprise capacity (including environmental andsocial performance) and of overall long-term socio-economic impacts and opportunities associated withthe project.40 Develop a policy and action plan tooptimise local content with a strategy for increas-ing education and building capacity in localmarketstomeet international environmental and socialperformance standards for the industry. This shouldpresent a broadly coherent view onmaking themostof local talent whileminimising risks.

• Clarify the environmental and social standards,procedures and methods that will be used tomanage and evaluate project performance. Opera-tors and contractors should collaborate on this, inconsultationwith government experts, to ensureconsistency across business functions and through-out the contracting chain.


Action 1: Collaborate on early-stageplanning and assessments

Assessment and planning need to take place in theearly stages of the project cycle —where possible,during the approvals and contract-negotiation phase,and at least during the stage of front-end engineeringdesign (FEED). Theymay also take place in the earlystages of strategic planning for business developmentwhen a company is seeking to develop new business in aregion, before any projects have been agreed.

The responsibilities table (Table 3) provides the frame-work for Action 1. It is in these early stages thatlegislative requirements and stakeholder expectationsare established andmanagement objectives are set. Inorder to foster shared responsibility for good environ-mental and social performance, it is important thatoperators work in collaborationwith government andfirst-tier contractors to the greatest extent possible.

Meaningful engagement with government is necessaryto develop appropriate local content strategies,emergency response plans, etc., and to understand andpotentially improve the overall environment thatenables responsible business practice. Understandingthe expectations and drivers of theNOC is also essen-tial. It is useful to collaborate with governmentagencies that are anticipating increased industrialactivity in a region or developing strategies in responseto legislative changes.

An example is the local enterprise capacities studycarried out jointly by theNorwegian andNigeriangovernments (see Box 7). If several operations arelocated in close proximity, operators could collaborateas a way to share the costs and benefits of joint assess-ments. Engagement should not be limited to thegovernment and the operator, as the contractingcommunitymay be better placed to assess localcapacities, understand development requirementsand ultimately deploy local services — either directly orthrough subcontracts.

At the earliest stages, it is important to foster a cultureof teamwork and shared responsibility between theoperator and the first-tier contractor. Joint assessmentsand engagementwith government agenciesmay be away to do this. Opportunities to cultivate this relation-ship are limited before the operator has identified itsfirst-tier contractor, but theremay be opportunities toengagemajor contractors collectively, especially wheretenders for several projects are on offer.



Box 7: Statoil: Enhancing fabricationcapabilities in the Nigerian oil and gasindustry41

In 2000, a detailed studywas commissioned jointlyby the governments of Norway andNigeria to assessthe enabling environment for private-sector devel-opment in theNigerian upstream petroleumindustry and to recommendways of increasing andimproving the capabilities of Nigerian supply andservice companies. The result was a report,Enhancement of Local Content in the Upstream Oiland Gas industry in Nigeria, which has subsequentlybeen used for work related to development of localcontent legislation inNigeria. The report identifiedthe fabrication industry (manufacture andassembly of project components) as having thehighest potential for increasing Nigerian content,taking into account the potential for increasingemployment and locallymanufactured equipment.

Based on this detailed contextual analysis, theproject Enhancing Fabrication Capabilities in theNigerian Oil &Gas Industry was created with the

aim of increasing the competence and capabilitiesof small andmedium-sized fabricators in Nigeria,enabling them to better compete for work in thecountry’s oil and gas industry. The project ismanaged by the IFC and is funded on a 50/50 basisbyNigeria andNorway.

The execution phase of the project ran from 2008 to2010. In this phase, seven small andmedium-sizedNigerian fabricators were assessed in detail againstinternational quality-management standards toidentify potential gaps. The project subsequentlyaims to workwith these seven companies over twoyears to help close these gaps through training andcapacity-building. The project has also establishedthe Fabrication Training Centre (FTC), located atthe Industrial Skills Training Centre in Lagos andofficially opened in October 2009. The trainingcentre includes classrooms andwelding workshopshas been used for the technical courses run by theproject.Work is ongoing to establish sustainablegovernance and participation, ensuring that theFTC has a long-term future after completion of theproject.


Action 2: Invest in capacity building inunderdeveloped local markets

In regions where the economic and business climate isimmature, the oil and gas sectormay suffer throughlack of access to sufficiently qualified subcontractors.The process of overall economic, enterprise and skillsdevelopment resides with government and localauthorities, especially wheremultiple companies arepresent in a region. Nonetheless, it is in the interest ofcompanies to support cross-industry collaboration onunderstanding local needs and investing in capacity-building, together with governments. Civil society canhelp to increase awareness and advocate onwhereresourcesmight best be applied.

Ideally, capacity-building ought to start in advance ofany specific project decisions. Thismay be possible if acompany is interested in a particular region and has anumber of potential investment opportunities. Forexample, Statoil’s supplier-development programme innorthwestern Russia started up several years beforethey negotiated a share of the Shtokman project.42

Where it is not feasible to plan in advance, these activi-ties should start as early as possible in the project cycle.In any event, the time horizon should be as long-termas possible; there is a limit to the depth of capacity-building that can feed into a two- or four-yearconstruction project, and all too often thismeans thelonger term is not addressed.

Capacity-building serves the interests of both compa-nies andwider society— the former by enabling localcontent targets to bemet in regions of low historicalcapacity, and the latter by stimulating robust andvaried localmarkets, and enhancing opportunities foremployment and enterprise development. Companiesthat take a long view of building up local contractormarkets andworkforces, including assessment of localcapacities and discussionwith local government aboutpriorities, may enjoy the strong support of local

communities and governments, and the best results.Thismay also help them secure future projects.

More andmore companies are using social investmentfunds to support education, training and capacitybuilding (see Boxes 8 and 9). Strategic investmentin building local capacity to provide services to theindustry is a prime opportunity for companies todeliver local development opportunities that candirectly benefit their business. Increasingly, this isviewed asmore valuable than one-off investments suchas building clinics or schools, whichmay have only ashort-term political benefit, especially in cases wherethere are no nurses or teachers, or where there is nofurther investment and buildings fall into disuse.

Key activities:

• Engage with government agencies and experts toascertain local capacity needs (see Action 1).

• Support educational programmes in highereducation establishments in subjects relevant tothe oil and gas industry.

• Fund programmes to build capacity of the localworkforce and businesses, including training ininternational environmental and social standards,in collaborationwith local government and/oreducational establishments.

• Encourage joint public-private initiatives in thisarea. Frequently public funds are available for localSME development, including such activities asEnvironmentalManagement Systems (EMS)certification, which allows for cost-sharing.

• Engage with and support existing associationsof contractors and suppliers to the oil and gasindustry to build enterprise andworkforcecapacities.



Box 8: BP Azerbaijan’s Enterprise Centre

BP set up its Enterprise Centre in 2002 on behalf ofits project partners in Azerbaijan (Chevron, Statoil,ExxonMobil and the State Oil Company ofAzerbaijan Republic or SOCAR). The aim is to helpsmall andmedium enterprises (SMEs) to enhancetheir business capacities and improve their oppor-tunities to win contracts withmajor oil and gasprojects. TheUS$15million Supplier FinanceFacility was launched in 2007 in collaborationwiththe IFC and theMicro Finance Bank of Azerbaijanto provide transparent sources of finance for localbusinesses, allowing them to use their contractswith BP as part-collateral for loans.

A three-year Enterprise Development and TrainingProgrammewas launched in 2007 to assist localenterprises in building the necessary skills andknowledge to reach international standards tocompete for supply-chain contracts. Initial adviceis provided free of charge, but local companies areexpected to invest in training and consulting asrequired. Such companies aremore likely — but arenot guaranteed— towin a contract with amajor oilproject in the future. Since the programme’s incep-tion, more than 150 local SMEs have undergoneassessments. In 2008, 14 local SMEs signed long-term contracts with BPAzerbaijan totallingmorethanUS$50million.43

Box 9: Statoil: Building the capacity ofeducational institutions in northwestRussia

Statoil has invested in developing the capacity oflocal education institutions in northwest Russia, aregion that is likely to become an increasinglyimportant operating area for the company incoming decades.

At Pomor State University, Statoil has contributedfinancially and in the form of technical assistance tothe development of a Bachelor of Business Admin-istration (BBA) degree focusing on petroleummanagement. The programme has been developedin close collaborationwith theNorwegianUniver-sity of Science and Technology, and it also receivesfunding from theNorwegianMinistry of Foreign

Affairs. Emphasis has been placed on building skillsand capacity within PomorUniversity itself toensure that in five years the university will be ableto run andmanage the BBAwithout any furtherexternal assistance. The first two groups of BBAstudents have recently graduated.

Statoil also helped to initiate a technology-transferprogramme between the Arkhangelsk StateTechnical University (ASTU) and theUniversity ofStavanger, aimed at expanding the technicalcourses offered at the ASTU to include advanceddrilling technology, offshore technology and seabedand underwater technology. New curricula weredesigned and offered for the first time in autumn2007. The programme has also led to further bilat-eral agreements and projects between the twouniversities in these areas.44


Action 3: Encourage uptake ofstandards through procurementprocesses

Part 1 and Part 2 highlighted several areas of concern inrelation to procurement processes. The first is the needto prioritise health and safety, environmental and socialstandards in procurement processes, alongside require-ments for other standards (such as ISO 9001 on quality).Second, there is a need to promote opportunities forsmaller local contractors to gain access. Often, localcontractors can benefit considerablywhen the procure-ment process is simplymade friendlier to small andnewly established businesses, andwhen environmentaland social expectations are clear from the beginning.Third, procurement processes need to be designed asmuch as possible to resist corruption and patronagepractices that are endemic inmany local societies.

Key activities:

• Include health, safety, environmental and socialstipulations in pre-qualification processes andtender requirements. Where SME suppliers are

unable tomeet these requirements immediately,arrangements should bemade to ensure training isprovided before the start of and during the course ofthe contractedwork.

• Increase the transparency and accessibility oftender processes by increasing the informationflow— for example, by publishing information onwebsites and community notice-boards, by engagingwith small-enterprise associationsorbyhostingsupplierworkshops.

• Introduce electronic procurement(e-procurement) systems that reduce the risk ofcorruption and patronage by keeping bureaucracyand gate-keeping to aminimum. Such systemspreserve the anonymity of bidders, which helpsensure contractors are hired on the basis ofmerit.

• Resist pressure from local authorities to hireor support specific enterprises. Itmay helpto bring third parties into discussions withauthorities to increase transparency aroundsuch discussions.

Box 10: ExxonMobil’s e-procurementinitiative in Chad45

ExxonMobil’s operations in Chad have included thedevelopment and implementation of a comprehen-sive system for procurement, especially gearedtowards the needs of SMEs. It hinges on ane-procurement system designed to remove humancontact at certain points in the process, thusavoiding corruption and enhancing consistency andtransparency of information and procedures. Thesystem includes:

• SME mapping to identify local SMEs andensure the greatest possible degree of outreach,so thatmore companies are aware of tenderopportunities

• SME rating system of one to three stars, used toassess ability and competency

• Public workshops, open to all comers, used tocommunicate uniformly and transparently to thecontractormarket about tender opportunitiesand ExxonMobil’s requirements

• Access to IT to enable interested companies toprepare and submit bids

• Training and skills enhancement to allow SMEsto build their capacity to use the e-procurementsystem effectively

• Access to finance, in partnership with financialinstitutions, to build SMEs’ ability to delivercontracts.



Box 11: Sakhalin Energy’s VendorDevelopment Programme, Russia46

Sakhalin Energy’s Vendor DevelopmentProgramme is aimed at preparing potential vendorsto apply for tenders in the oil and gas industry. Theprogramme is open to experienced oil and gasindustry contractors and to enterprises that have noprior experience in the oil and gas sector. Partici-pants in the programme receive a password thatallows them to accessmaterials via the SakhalinEnergy website.

Training courses coverHSE, qualitymanagementand tendering skills. Benefits include:

• learning about international companies’ require-ments for their contractors in environmentalprotection and safety, and quality of goods andservices provided

• access to information about Sakhalin Energy’stendering process, training in preparing bids andparticipating in tenders, and advice on themostcommonmistakes in preparing bids

• opportunities for companies to demonstratetheir capabilities.

Certificates are provided to companies on comple-tion of the training course. Sakhalin Energy empha-sises on its website that completion of the trainingdoes not guarantee successful bidding for any oftheir tenders. Sakhalin Energy also offers onlineaccess (password not required) to informationabout current and upcoming tenders for provisionof services, equipment andmaterials; a list ofsuccessful bidders formajor contracts that havebeen awarded; and news updates about local enter-prises that have won contracts with the Sakhalin-2project.


Action 4: Ensure that contractsincentivise good practice

As noted in Part 2, the way that a contract is designedand negotiated determines the relative priorityassigned to cost, speed of delivery, quality, and environ-mental and social performance.We have also cautionedagainst an over-reliance on standards and procedureson paper, andwe have emphasised the importance ofgoodmanagement practices, relationships and alert-ness. One of the experts we consulted commented thatthe search for the perfect contract is a bit like thesearch for theHoly Grail, and really it’s all about rela-tionships and building trust.

Be that as it may, we believe that there are certain areaswhere contracts can be designed to incentivise goodenvironmental and social performance. Current con-tractual design tends to disincentivise this.

Key activities:

• Recognise that the areas of a contract carrying thebiggest incentives and penalties will be prioritisedover others. Therefore, find a balance betweenincentives for cost and schedule, and those forresponsible practice, tomake sure that costand schedule are not prioritised over otherconsiderations.

• Ring-fence budget lines for environmental andsocial protection, or be prepared to allocate addi-tional funds when the need arises.

• Allow contractors to review technical specifica-tions and suggest amendments to their terms ofreference in advance of signing contracts; incorpo-rate amechanism for capturing feedback and lessonslearned post-signing.

• In addition to including environmental and socialstandards for the project in all EPC contracts,

prioritise development of bridging documents.Comparison of standards to align approaches andagree common standards andmeans of assessingperformance is essential during negotiationsbetween the operator and a first-tier contractor.

• Workwith first-tier contractors to include corpo-rate environmental and social standards in allsubcontracts and to createmechanisms to supportunderstanding and implementation.

• Provide support and training to help contractorsunderstand and apply commitments to goodenvironmental and social performance and riskmitigation. Seek, where feasible, to completepreliminary environmental, social and healthimpact assessments before signing contractswith first-tier contractors.Where IFIs (or otherstandard-setters) are expected to be involved, theirinvolvement should be pre-empted by preparingfor a full ESHIA and other likely requirements.Where this is not possible, the risks ought to beassessed andmitigated. Contractors should beinformed in advance of signing contracts aboutpossible further requirements, with provisionfor additional budget to allocate to laterrequirements.

• Extend transparency and anti-corruptionrequirements to contractors (and require thatthey are extended to subcontractors); provideappropriate training and awareness-raising foremployees in all departments and at all levels of thecontracting chain.

• Itmay also be useful to provide training and aware-ness-raising for local officials and others whomaybe engaged in small-scale ethics transgressionslower down the chain. Understanding these peopleand their constraintsmay offer insights into ways ofaddressing corruption at this level.



Action 5: Build capacities and truston the job

Contractors can benefit from on-the-job trainingwhatever their level of skills and capacities — andwhatever the local context. For example, trainingmightrelate to the set of skills outlined in the BP assessmentof the DeepwaterHorizon disaster (see Box 2 in Part 1),or to building the skills of inexperienced local contrac-tors to improve social riskmanagement (see Box 12below). Other key areas include emergency responsetraining, particularly oil spill response, and road safety.

Where the capacity of local contractors is low, compa-nies tend to follow one of two preferred paths. Somefocus on capacity-building of local contractormarketsas a whole, with a view to building up the available poolof local contractors (see Action 2). Others have apreference for longer-term contracts with local con-tractors, combinedwith capacity-building on the job.47

Regardless, the overall aim of on-the-job capacity-building is to enhance the ability of contractors tomeetand exceed requirements— for robust, quality service,and for environmental and social performance.

Key activities:

• Set aside sufficient budget for contractor capacity-building on the job and develop a long-termmanagement plan to ensure social and environmen-tal skills and knowledge are up to date.

• Provide training to contractors to aid understandingof the full technical specifications and environmen-tal and social standards appended to their contracts;assist contractors in developing their ownenvironmental and social management plans.

• Assist contractors in planning and carrying outappropriate training and awareness-raising forsubcontractors.

• Ensure reporting, communication and feedbackmechanisms are effective and consistent through-out the contracting chain, between operatingcompanies, first-tier contractors and subcontractors.

• Consider, where possible, longer-term contractualrelations for local subcontractors with the aim ofbuilding contractors’ capacities, mutual understand-ing and trust over time.

• Develop cultural awareness among contractors andsubcontractors, particularly those from outside theregion, to facilitate their engagement with localcommunities. At the same time, operating-companystaff from outside the region can also learn fromlocal contractors with greater local understandingand knowledge.


Box 12: Sakhalin Energy: managementof social issues in the contractingchain48

This box summarises actions taken in 11 key areasby Sakhalin Energy’s Social Assessment Group tomanage social impacts over the lifetime of theSakhalin-2 project. The construction phaseinvolved 10 first-tier contractors andmore than 100subcontractors, with up to 25,000workers at thepeak of construction activities. Some contractorshadmultinational personnel, and some consisted ofRussian nationals only.

1. ContractsDuring the tender process, the results of social,environmental and health impact assessment wereconsidered in the EPC contracts. At a later stage,when the project’s Health, Safety, Environment andSocial Action Plan (HSESAP) was developed (as arequirement of the project lenders), its provisionsbecame compulsory requirements for contractors.

Initial bid release. Bidders were required toinclude a preliminary Social PerformanceManage-ment Plan (SPMP) as part of the tender bid(including plans for community engagement, griev-ance resolution, impactmitigation and standards).

Evaluation of bid offer. Bidders were required torespond to socio-economic questions; preliminarySPMPwas analysed.

Contract award. Social-performance terms andconditions were included in final bid discussions.

Post-award. Contractors were assisted in preparingfinal SPMP; contractor plans were reviewed; a planfor compliance with Sakhalin Energy requirementswas devised; assistance in improving the planwasgiven; the planwas approved; workshops andtraining were offered.

Ongoing interactions and monitoring.SocialAssess-mentGroup specialists interactedwith contractorsduring construction; contractors’ community liaisonofficers (CLOs)were assisted in community interac-tion; SPMP implementationwasmonitored.

The first-tier contractors whose work related toconstruction of facilities or pipelines with signifi-cant potential social impacts were required to

preparemore detailed Socio-EconomicManage-ment Plans as part of their tender submission.First-tier contractors incorporated the plans intotheir contracts and cascaded the relevant commit-ments to their subcontractors. Some plans wererevised based on lessons learned or additional andaltered commitments.

2. Code of conductDuring induction, all contractor staffwere trained onthe code of conduct, including business principlessuch as confidentiality of information, acceptance ofand reporting of gifts, and other general principles ofbusiness conduct; the policy against hunting, fishingand gathering of natural resources; contractor campmanagement andworkers’ housing; interactionwithlocal communities; grievance procedure; publicbehaviour;wastemanagement; and other require-ments.Keyprovisions of the code of conductwerediscussedwith communities. Awareness campaignsincluded leaflets, posters andmeetings, and signifi-cantly contributed to compliance. Awareness andcompliance, including cascading of the policy to staffand subcontractors, have beenmonitored by theSocial AssessmentGroup andCLOs.

3. CLOsSakhalin Energy requires contractors to have theirownCLOs or to nominate a social focal point to beresponsible for addressing communitymatters.Responsibilities include building andmaintaininggood community relationships, monitoring socialissues, liaising with Sakhalin Energy’s CLOs, socialreporting, assistance to communities, participatingin contractors’ social projects, and regular openhours and publicmeetings organised by SakhalinEnergy. In the construction phase, the onshorepipeline contractors had six CLOs (including twofor the subcontractors), with social focal pointsnominated for the threemajor construction sites.Sakhalin Energy provided training to CLOs, facili-tated access to information, conducted internal andexternalmonitoring, andmaintained records onconsultation, social monitoring and grievanceresolution.

4. Grievance resolutionGrievance resolution involves Sakhalin EnergyCLOs and Social Assessment Group, and contrac-tors’ CLOs and social focal points. The SocialAssessment Groupmonitors the status of griev-ances on amonthly basis and ensures that



managers aremade aware of issues not resolvedwithin the stipulated 45working days; the groupalso watches for repeated grievances thatmayrequire special efforts to address an underlyingissue. The grievancemechanism has received recog-nition fromUN representatives testing the RuggiePrinciples and an award from the Shell Group.

5. Russian content and employmentThe Sakhalin-2 project Production Sharing Agree-ment (PSA) commits Sakhalin Energy tomaking itsbest effort to use at least 70 per cent Russian labour,materials, equipment and contractors over the lifeof the project. Contractors have reported regularlyon the Russian content of employment, goods andservices, and overall progress has been reported inthe corporate annual report. Contractors wererequired to provide accurate information about jobopportunities in advance to local communities.Regularmeetings have been held with local employ-ment centres. Beyond the commitmentsmade inthe PSA, Sakhalin Energy has encouraged procure-ment from locally owned and operated businesses.

One of the challenges has been to keep local expec-tations realistic. At every publicmeeting conductedby the company in Sakhalin communities, contrac-tors have explained the standards and competen-cies required of people working on the project.Sakhalin Energy’s CLOs have regularly visited localcommunity employment centres to elicit localperceptions of contractors’ efforts to recruit andhire local and Russianworkers, and tomake surethe information providedwas sufficient forplanning within the local labourmarket. Contrac-tors are required to support training and educa-tional programmes and initiatives in communities(e.g. career fairs). Contractors havemaintainedemployment records that identify the communitiesemployees came from and have reported on recruit-mentmeasures taken in communities.

6. ResettlementThe project’s Resettlement Action Plan describesthe policy framework and procedures to addressland acquisition and resettlement (based onWorldBank policy). It contains compensation andmitiga-tionmeasures for people and enterprises affectedby the project. Contractors were required to includein their socio-economic plans the steps to be takenif they planned to acquire property or land,describing how theywould adopt the principles and

procedures of the project’s Resettlement ActionPlan, coordinate their intent to acquire land orproperty with Sakhalin Energy, assess potentialsocio-economic impacts using amethodologysimilar to that used by Sakhalin Energy, conductcommunity consultations and provide results toSakhalin Energy for review and approval prior toacquisition, and takemeasures to reduce identifiedadverse impacts to acceptable levels.

Key areas 7-11Other aspects of social issuesmanagementthroughout the contracting chain include campmanagement (living standards, behaviour, andleisure and services); archaeology and culturalheritage (meeting international standards tomitigate impacts); indigenous peoples (engage-ment and communication plans, socio-economicplans, grievance resolution and impactmitigation,based onWorld Bank policy); and social invest-ment spending (contractors were required to set uptheir own social investment projects, based onSakhalin Energy criteria).

12. Monitoring and reportingThemonitoring and reporting process consists of amulti-level interface between the company andcontractors. CLOsmakeweekly reports to SakhalinEnergy; the contractormakesmonthly reports toSakhalin Energy using the Social ComplianceMonitoringHandbook (see below); the contractor’sCLOs have daily contact with Sakhalin EnergyCLOs andmonthly debriefingmeetings in SakhalinEnergy’s head office. Sakhalin Energy carries outbiannual fieldmonitoring of contractor perform-ance (primarily via polling of communities andcontractor workers, direct observations anddocument reviews).

The Social ComplianceMonitoringHandbookforms the basis for themonitoring process. Itincludes checklists, questionnaires and reportingdata sheets. Completed questionnaires and check-lists are delivered to the Social Assessment Groupmonthly and undergo quantitative and qualitativeanalysis. Training and refresher sessions on how touse the handbook have been held regularly forcontractors and subcontractors; the sessions alsogive them an opportunity to provide feedback onthe process. CLOs have the principal responsibilityfor observing the work of contractors anddescribing their activities in reporting forms.


Action 6: Ensure excellentcommunication and oversightthroughout the chain

In addition to having contracts, policies andprocedures, and building the capacity of contractorsand subcontractors to implement these effectively,attention should be paid to the quality of relationshipsbetween the operating company and the othermembers of the contracting chain.

Constructive relationships are built by ensuring goodcommunication,mutual trust and shared understand-ing of goals and objectives. Reporting and oversightmechanisms should be clear, consistent and not oner-ous; they should be coordinatedwith any third-partyreporting and oversightmechanisms.

Key activities:

• Establish open lines of communication betweenoperators, contractors and subcontractors, with anexplicit agreement that performance expectationsare a shared aspiration.

• Establish feedback loops and other learningmechanisms so contractors can continuouslyimprove and learn from each other.

• Ensure sufficient on-site supervision, coordinatingefforts with government, lenders and others toavoid overload or confusion for supervisory staffor contractors.

• Require first-tier contractors to includesubcontractors’ health, safety, environmental andsocial performance indicators in the company’sown results when reporting internally.

• Ensure that confidential internal whistle-blowingmechanisms (e.g. hotlines) extend to contractorsand subcontractors, and feed into response mecha-nisms for improved practice.

• Provide CLOs (usually hired by operators) withsufficient authority to work with contractors andsubcontractors. Contractors and subcontractorsshould be encouraged to engage with the CLOs ofoperating companies, andwhere appropriate shouldemploy their ownCLOs.



Action 7: Build trust and accountabilitywith external stakeholders

NGOs and community groups are calling for greatertransparency about contractors and subcontractors,and greater clarity about chains of responsibility relat-ing to a project. As noted in Part 1, there is increasinginterest (including fromGRI and IPIECA) in publicreporting that includes contractors and subcontractors.It is important to enable public scrutiny of and confi-dence in performance along the chain and to buildpublic understanding of the realities and challenges ofmanaging complex contracting relationships.

Contractors and subcontractors should be encouragedto take part in stakeholder-engagement initiatives asmuch as possible. Key approaches to stakeholderaccountability include publicmeetings, educationalcampaigns, tracking and reporting of formal statistics,and company-led grievance procedures. Third-partyoversight49 includesmonitoring panels, citizens’oversight bodies (see Box 13), direct NGOmonitoringof project activities (see Box 14), and use of socialmedia tools, such as Niger DeltaWatch, an onlinemonitoring tool that allows people to report and locateenvironmental and social issues (not only those relatedto the oil and gas industry).50

There are various ways for companies to support third-party oversight by civil society groups. Direct fundingcan be controversial and is often refused byNGOs andcommunity groups. There are some examples, however,such as the Alaska initiative described in Box 13 below,where companies in a single region have contributedto a central fund that is governed in such away as tobe clearly independent from company influence.

Whether NGOs are independently funded or not, oper-ating companies should be prepared tomeet with them,engage inmeaningful dialogue and provide introduc-tion and access to contractors and subcontractors asappropriate. Contractors and subcontractors shouldalso be encouraged to build their skills in open publicengagement and engage directly with local NGOs andcommunity groups.

Key activities:

• Encouragemore public reporting of performanceby all members of the contracting chain, using asystematic reporting framework such as the GRIGuidelines or IPIECA guidance. Operators shouldinclude contractors’ health, safety, environmentaland social performance indicators in the company’sown results when reporting to the public, govern-ment and shareholders.

• The lines of responsibility betweenmembers of thecontracting chain should bemade clear in publicdocuments. Ideally this should cover both themanagement systems and processes for ensuringgood performance throughout the contracting chain,as well as the actual performance attained.

• Contractors and subcontractors should be encour-aged to engage with the CLOs of operatingcompanies and, where appropriate, hire their own.CLOs should be providedwith adequate informationand tools on social and environmental performancetomeet stakeholders’ needs and anticipate risks.Grievance mechanisms and CLO activities shouldprovide opportunities for communities to addressissues related to contractors and subcontractorseffectively. This should include a system of third-party recourse, for example if a contractor orsubcontractor is not paying its workers or is discrim-inating among them, or if local communities areaffected by negligent work.

• Encouragemore direct engagement of contractorsand subcontractors with communities and civilsociety organisations, including public consultation.

• Provide training in community relations andstakeholder engagement for contractors andsubcontractors, especially if they are unfamiliarwith local culture and issues.

• Consider citizens’ oversight groups as providersof effective third-party oversight, but providearms-length funding and appropriate governancemechanisms to avoid compromising their objectivityand legitimacy. Such arrangementsmay also requiresupport for necessary training, andwill need time tobuild the necessary trust between the local groupsand the operating company.


Box 13: The Prince William SoundRegional Citizens’ Advisory Council51

ThePrinceWilliamSoundRegionalCitizens’AdvisoryCouncil (PWSRCAC)wasmandated in theUnitedStatesOil PollutionAct of 1990. It is anindependentnonprofit corporation that aims topromotepartnership andcooperation among localcitizens, industry andgovernment, to build trust andtoprovide citizenoversight of environmental compli-anceby theAlyeskaPipelinemarine terminal inValdez,Alaska, and theoil tankers that use it.PWSRCAC is accountable to its 19memberorganisa-tions,which include representatives fromcommuni-ties, aquaculture, commercial fishing, environmental,Alaskanative, recreationand tourismgroups.

InFebruary 1990,PWSRCACandAlyeskaPipelineServiceCompanysignedacontract that ensures theindependenceofPWSRCACfromAlyeska, access toAlyeska facilities, guaranteedannual funding, andassurance that thecontractwill last as longasoil flowsthrough the trans-Alaskapipeline.Under the termsofits contractwithAlyeska,PWSRCACreviews,monitors andcommentsonvariousaspectsof thecompany’soperations, includingoil spill preventionandresponseplans, environmentalprotectioncapabil-ities, actual andpotential environmental impactsofterminal and tankeroperations, andraisingpublicawarenessabout thesematters.Thecouncilwasinitially fundedatUS$2millionayear.The funding isrenegotiatedevery threeyears; currentAlyeskafunding is approximatelyUS$2.8millionayear.

Box 14: Sakhalin Environment Watch:independent NGO oversight

Sakhalin EnvironmentWatch52 has beenworkingwith international partners since themid-1990s tomonitor and hold to account the Sakhalin oil andgas projects (in addition to work on forest protec-tion). Its strategies include extensive documenta-tion of the impacts of project activities such asdredging and pipeline construction on local wildlife,traditional land-use areas and local infrastructure.Sakhalin EnvironmentWatch has publishedphotographs frommonitoring expeditions on its

website, and some of its evidence has been used incourt cases relating to environmental damage. Thegroup has also collaborated on joint campaigns withlocal indigenous peoples’ organisations. It hasengaged directly with the Sakhalin-2 projectlenders and potential lenders (notably the EBRD)and has provided information on environmentaland social issues to themedia both nationally andinternationally. Sakhalin EnvironmentWatch doesnot take funding from oil companies; it is funded byinternational NGOpartners and foundations. Theorganisation does, however, engage directly indialogue with oil companies where possible.



As described in this report, a greatmany challengesarise from the difficulty of establishing coordinationand shared ownership of oil and gas projects. Thecomplexity and diversity of the contracting chainhas encouraged this state of affairs, and it has alsoincreased social and environmental risks inherent inprojects. Good social and environmental performancein practice relies on the actions of all stakeholderstogether, regardless of the good intentions andpractices of any individual. Therefore, a fundamentalrecognition of these challenges and commitment toimprovement over time and across the industrymustunderpin all of the initiatives and actions intended toimprove performance.

Beyond the specific actions recommended above,success will depend on a significantly improvedcommitment to collaboration and shared responsibilityacross the industry. It is too early tomake any defini-tive pronouncements about how this will be broughtabout.We propose the start of a new dialogue withinthe industry, based on the following essential elements:

• A culture of teamwork and shared ownership: IOCs,governments,NOCs, lead contractors and subcontrac-torswill need todevelop tools andattitudes thatsupport a joint approach toproject success.

• Less reliance on paper exercises, more on cultureand communication: In the execution of projects,partnersmust support one another in identifyingand resolving problems and challenges, not avoidingthem or deferring them to others.

• Emphasis on long-term time horizon andoutcomes, regardless of the timeline of individualactivities: Contractors and subcontractors shouldbe encouraged to see how their roles contribute tothe overall performance of the project and broadersustainable development goals.

• Agreement to improved industry-wide practicesto increase capacities and participation amonglocal firms: Thesemay include common procure-ment practices, a code of conduct or industrycommitment, common auditmechanisms andother tools.

• Commitment from all companies in the chain toengage meaningfully with external stakeholdersat all levels, ensuring that issues and concerns areaddressed appropriately and adequately.

Throughout this project, we have been convincedthat the oil and gas sector has the potential to deliversignificantly improved environmental and social out-comes through its contracting chain relationships.Weare also struck by the scale of potential consequences—bywhat the industry, environment and society have tolose if this potential is not fulfilled.

We remain committed to supporting and encouragingthe good practices and changes in attitudes that canhelp underpin the success of these endeavours.

PART 4

Conclusion4

Endnotes

1 Phrase used byWilliamK. Reilly, the chair of the US Presidential Commission reviewing the DeepwaterHorizon disaster (see Box 2).

2 This research does not treat the role and responsibility of NOCs in depth, given the difficulty in obtainingreliable information, as well as the substantial benefits that can be gained through leadership by IOCs and theircontracting partners.

3 IHS-SERA. N.B. 600 feet is far less than the 1000 feet used byUSMineralsManagement Service to define‘deepwater’ extraction; the industry is extracting oil as deep as 10,000 feet (3000metres).

4 BBC. 2010. Oil industry ‘double checking’ deep drilling safety http://www.bbc.co.uk/news/10298342

5 Brecha, R.C. 2008. Emissions scenarios in the face of fossil-fuel peaking,Energy Policy 36, 3492-3504

6 Verbruggen and alMarcohi. 2010. Views onpeak oil and its relation to climate change policy, EnergyPolicy 38: 10,5572-5581, andGreenpeace, (2009) Dirty oil:How the tar sands are fuelling the global climate crisis. See:http://www.greenpeace.org/raw/content/france/presse/dossiers-documents/dirtyoil.pdf

7 Stiftung, H.B. 2009. Energy futures? Eni’s investments in tar sands and palm oil in the Congo Basin. See:www.slideshare.net/boellstiftung/091109-energy-futures-eng

8 Matt Finer,M., andOrta-Martínez,M. 2010. A second hydrocarbon boom threatens the Peruvian Amazon:trends, projections, and policy implicationsEnviron. Res. Lett. 5 014012

9 Survival International, International NGO’s unite against oil giants. See:http://www.survivalinternational.org/news/6680

10 The International Association of Oil andGas Producers (OGP). 2010. OGP,HSEmanagement – guidelines forworking together in a contract environment, ReportNo. 423. See: http://www.ogp.org.uk/pubs/423.pdf

11 Berman, A.E. 21May 2010.What caused the DeepwaterHorizon disaster?The Oil Drum. See: www.theoil-drum.com/node/6493; Gulf ofMexico response. National Commission final report.www.oilspillcommission.gov/final-report; BP. 2010. DeepwaterHorizon Accident Investigation Report.See: http://www.bp.com/sectiongenericarticle.do?categoryId=9034902&contentId=7064891#; BPwebsite.See: www.bp.com/gulfofmexicoresponse; Snyder, J. 12 November 2010. BPHas Paid U.S.More Than $500Million for Gulf Spill Responses.Bloomberg News.See: www.bloomberg.com/news/2010-11-12/bp-has-paid-u-s-more-than-500-million-for-gulf-spill-response-gao-says.html; Transoceanwebsite. See: www.deepwater.com/fw/main/Home-1.html

12 http://www.oilspillcommission.gov/final-report

13 BobDudley quote taken from: http://gulfcoastmaritime.com/the-gulf-coast/bp-releases-deepwater-horizon-investigation-results/1323;WilliamK. Reilly quote taken from: 9November 2010. Hon. Reilly’s Opening State-ment. Press release, National Commission on the BPDeepwaterHorizonOil Spill andOffshore Drilling. See:www.oilspillcommission.gov/page/hon-reillys-opening-statement-nov-9-2010

14 http://www.oilspillcommission.gov/sites/default/files/documents/FinalReportChapter8.pdf (p.217)

15 http://www.eicc.info

16 http://www.fsc.org/; http://www.pefc.org;Macqueen et al. 2008. Distinguishing community forest products inthemarket, IIED (http://pubs.iied.org/pdfs/13547IIED.pdf)

17 http://www.fairtrade.org.uk/; http://rainforest-alliance.org/; http://www.fairtrade.net

18 See, for example, Schlumberger’s 2009Global Citizenship booklet, careers.slb.com/whoweare/globalcitizen-ship.aspx, and AMEC’s web page on environmentalmanagement, www.amec.com/divisions/earth and environ-mental/services/Environmental_management.htm



ENDNOTES

19 KazMunaiGaz website. See: www.kmg.kz; Ospanova, S. andWard, H. 2009.Towards Good Practice in the Oil andGas Contracting Chain: Kazakhstan country report. IIED, London. See: http://pubs.iied.org/pdfs/G02751.pdf

20 The Equator Principles website. See www.equator-principles.com

21 See, for example, Labour Standards Performance in Your Supply Chain,www.ifc.org/ifcext/sustainability.nsf/AttachmentsByTitle/p_LaborStandardsPerfor-mance_Ch6/$FILE/SAI_IFC_LaborHandbook_Ch6.pdf

22 Personal communicationwith Statoil employee.

23 2010. Voluntary sustainability reporting: Improving transparency, improving performance. IPIECApressrelease. Seewww.ipieca.org/news/20101206/voluntary-sustainability-reporting-improving-transparency-improving-performance; OGP, IPIECA, API. 2010. Oil and gas industry guidelines on voluntary sustainabilityreporting. OGP, IPIECA, API: London. See: http://www.ogp.org.uk/pubs/437.pdf

24 Supply Chain Disclosure. GRIwebsite. See: www.globalreporting.org/CurrentPriorities/SupplyChain/Supply-ChainDisclosure/; Oil andGas. GRIwebsite. www.globalreporting.org/ReportingFramework/SectorSupple-ments/OilAndGas/OilAndGasSectorSupplement.htm

25 Ospanova, S. 2010. Local Content Policy: Kazakhstan review.Working Paper. IIED and British Embassy Astana.See: pubs.iied.org/G02761.html.

26 For a discussion of the problems and inefficiencies associated with trying tomeet local content targets inregions with underdeveloped contractormarkets, see Nordas, H. et al. 2003.The Upstream Petroleum Industryand Local Industrial Development: A comparative study. SNFReport No. 08/03. Institute for Research inEconomics and Business Administration, Bergen.

27 Personal communicationwith contributors to a draft IPIECA report on local content.

28 See Knizhnikov A. and E.Wilson. 2010.Responsible contracting in the Russian oil and gas industry. WWF-Russia.Moscow; Ospanova, S. andH.Ward. 2009.Towards good practice in the oil and gas contracting chain.Kazakhstan country report. IIED. London.

29 http://www.guardian.co.uk/environment/2010/dec/07/transocean-oil-rig-north-sea-deepwater-horizon

30 IPIECA-OGP. 2002.Key questions in managing social issues in oil & gas projects, Report No. 2.85/332.http://www.ogp.org.uk/pubs/332.pdf

31 OGP. 2010.HSE management – guidelines for working together in a contract environment, Report No. 423.http://www.ogp.org.uk/pubs/423.pdf

32 SustainAbility (2004) distinguishes between legal liability (breached obligations under local, national or inter-national regulation or law) and perceived (or ‘moral’) liability (violation of stakeholder expectations of ethicalbehaviour that puts business value and social licence to operate at risk). SustainAbility. 2004.The ChangingLandscape of Liability: A Director’s guide to trends in corporate environmental, social and economic liability. See:www.sustainability.com/library/the-changing-landscape-of-liability

33 Nonetheless, environmental issues, such as opening up Alaska’s NationalWildlife Refuge to oil development,still remain subject to political wrangling and negotiation.

34 Mallesons, Steven, Jaques. 2004.EPC Contracts – Oil and Gas Sector. pp.7-8 www.mallesons.com/publica-tions/alerts/Construction_Alert/EPC_contracts_in_the_oil__gas_sector_August_2004.pdf

35 See for exampleBP code of conduct at:www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/C/coc_en_full_document.pdf

36 Good-practice examples do, of course, abound. For example, Sakhalin Energy (see Box 12) has encouragedcontractors to attend publicmeetings and requires that first-tier contractors also report on the performance oftheir subcontractors.

37 See for example: Thurber,M. et al. 2010. NNPC andNigeria’s Oil Patronage Ecosystem.Working Paper.StanfordUniversity. P.7. http://cisac.stanford.edu/publications/nnpc_and_nigerias_oil_patronage_ecosystem

38 Stammler, F. 2005.Reindeer Nomads Meet the Market: Culture, property and globalisation at the ‘End of theLand’. Lit Verlag, Berlin.

39 Governments should carry out strategic environmental assessments (SEAs), especially in regions wheremultiple projects are expected.

40 Ideally this kind of socio-economic survey should identify ways of avoiding the ‘resource curse’ by stimulatingother sectors of the economy. Support for this could be provided by government, by oil company social invest-ment and through project procurement activities.

41 EFCNFabrication Training Center officially opened inNigeria. Intsok press release. See:www.intsok.no/?id=3502; Statoil. 2009. Annual and Sustainability Report 2008. See: www.statoil.com/Annual-Report2008/en/Sustainability/Society/Pages/5-6-3-2-5_EnhancingLocalContentInNigeria.aspx

42 Statoil website. See:www.statoil.com/russia/en/environmentsociety/supplierdevelopment/pages/default.aspx

43 See: www.ecbaku.com

44 Statoil. 2009. Annual and Sustainability Report 2008. See:www.statoil.com/AnnualReport2008/en/CountrySpotlight/Russia/Pages/default.aspx

45 ExxonMobil, IFC. 2008.Developing a Transparent System for Local Contracting: A manual for practitionersbased on the eProcurement experience in Chad. See: www.ifc.org/ifcext/advisoryservices.nsf/Attachments-ByTitle/Business_Linkages_+Practice_Notes-Chad/$FILE/Chad+Manual+FINAL.pdf.

46 Sakhalin Energy website. See: www.sakhalinenergy.com/en/aboutus.asp?p=vendordp

47 TNK-BPworks to the principle of a ‘unified workforce’, with standardised reporting and training for companyemployees and contractors, and a focus on long-term contracts of three years ormore, aimed at building trustand harmonising approaches over time. See Knizhnikov A. and E.Wilson. 2010.Responsible contracting in theRussian oil and gas industry. WWF-Russia.Moscow, p.15.

48 Sakhalin Energy Social Assessment Group, personal communication.

49 IFIs can provide their ownmechanisms for the reporting of environmental and social impacts of oil and gasprojects by affected communities and interested parties. An example is the IFC/MIGACompliance AdvisorOmbudsman, an independent recoursemechanism for communities affected by IFC- andMIGA-supportedprojects. In such cases, the operating company is held primarily responsible for resolving communitygrievances. See: www.cao-ombudsman.org

50 Niger DeltaWatchwebsite. See: www.nigerdeltawatch.org

51 PWSRCACwebsite. See: www.pwsrcac.org/about/index.html; the contract between PWSRCAC and Alyeskacan be accessed at: www.pwsrcac.org/docs/d0000100.pdf

52 www.sakhalin.environment.ru/en


ISBN 978-1-84369-810-4

The International Institute for Environment and Development (IIED) is an independentpolicy research organization. IIED works with partners in middle- and low-incomecountries to tackle key global issues—climate change, urbanization, the pressureson natural resources and the forces shaping markets. IIED’s work on business andsustainable development aims to build an understanding of where and how businessescan most effectively contribute to sustainable development. This includes effectivemanagement of environmental and social impacts, and addressing poverty alleviationand environmental security through core business activities.

IIED3 Endsleigh StreetLondon WC1H ODD

www.iied.org

High oil prices and concerns about energy security are driving expansionof the oil and gas industry into ever more sensitive environments withgreater technological, political and social risks. While brands such as BP,Shell and ExxonMobil are well known, some 75 per cent of oil and gas industryactivities are typically contracted out to specialist service providers and theirsubcontractors. These contracting chain relationships can be difficult tomanage, and often carry social and environmental performance challenges.The fallout from the April 2010 Gulf of Mexico disaster shone a spotlight onsome of these difficulties in contracting relationships. Risks are heightened inless developed countries where corruption may be endemic and governanceweak. Effective management of contracting chains — from early assessmentsto communication and oversight — is critical to ensure good social andenvironmental performance. This report draws on three years of researchand interviews within the oil and gas sector to highlight an array of criticalchallenges facing oil and gas companies involved in complex supply chains,and to identify urgent and longer-term actions for progress.