Abstract

Faced with massive consolidations and unpredictable price swings, oil and gas companies increasingly turn to operational efficiency as the cornerstone of profitability, and many are adopting innovative cost reduction strategies. For example, in November 1999, BP Amoco engaged Pricewaterhouse Coopers for a $1.1 billion 10-year business process outsourcing agreement to manage the financial reporting, accounts payable and accounting responsibilities of its chemical, oil-exploration and production units.[1]

In one area, however, best practices remain the exception rather than the rule: community development programs.

Extractive industries in developing countries spend millions of dollars per year on community development programs in their areas of operation. For example, BP is soon to announce a global commitment to donate 1 percent of annual net revenues to social programs; while in Indonesia, P.T. Freeport donates 1 percent of annual gross revenues (US$ 16 million to US$19 million per year) to social programs in Irian Jaya. The authors estimate that global spending by oil, gas and mining companies on community development programs totals more than US$ 500 million per year.

While the goal of these development assistance programs is to better the communities in which the firms operate, the programs themselves are often designed and managed by operational staff whose backgrounds are in engineering and business rather than in community development.

As a result, corporate-funded community development programs do not often effectively serve either the firms or the communities.

Recently, some oil, gas and mining companies have begun to explore alternative approaches to community development. This paper assesses the traditional model and two emerging alternatives.

The Rationale for Company-Sponsored Community Development

Effective community development programs can help ensure an attractive business climate that fosters smooth operations, can create a competitive advantage when dealing with host countries, and can help meet corporate goals of responsible citizenship.

Community development programs represent one means of helping to ensure a productive business environment. Unrest within a community can strike a damaging blow to energy companies. For example, the Oil and Gas Journal reports that in the Niger Delta, operations of the Shell Petroleum Development Corporation were virtually brought to a halt for three years by community unrest. [2] More than 325 attacks on Shell's units occurred in 1998. Elf Petroleum Nigeria Ltd. lost more than 100,000 barrels of production per day for several weeks due to escalating violence and unrest. [3] In Indonesia, ExxonMobil's production facilities in Aceh are increasingly the targets of separatist action.

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