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High stakes in the shifting sands of the oil sector are not best served by low tactics

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Ruth Sunderland

Sunday 23 August 2009

Whatever you think of the deal to allow the Lockerbie bomber Abdelbaset al-Megrahi to end his days with his family in Libya, British business interests are a big factor. Energy companies such as BP, Royal Dutch Shell and BG have been making steady inroads into Libya, where there are an estimated 44bn barrels of crude beneath the desert sands, since the then prime minister Tony Blair met for talks in Colonel Gaddafi’s tent in 2004; a second meeting between the two men in 2007 coincided with the signing of further deals. BP has already invested $900m (£550m), but that could rise to $20bn over the next 20 years.

If controversy over Libya were not enough, the oil company is also moving back into Iraq after being thrown out decades ago. It has done a deal with Baghdad over the Rumaila oilfield despite formidable political and security challenges and the ire of some protesters, who contend that the company is endangering its assets and its reputation by trying to profit from the proceeds of the war.

Energy companies, mining groups and others have always dealt with regimes some find unpalatable: oil, gas and other valuable commodities, rather inconveniently, are not always to be found in friendly, democratic places with well-defined property rights. BP has plenty of experience of this, not least in its Russian joint venture, TNK-BP, which has been marked by struggles for control with its oligarch partners. Timothy Summers, the most senior British executive at the operation, is leaving soon – the latest in a string of high-profile departures.

The adventures of the mining firm Rio Tinto in China have been similarly fraught. A planned investment in the Anglo-Australian group by the state-owned miner Chinalco collapsed after objections from other shareholders; talks over the price that Chinese steelmakers pay for their iron ore have been shot through with tensions and the jostling culminated with the arrest of four Rio employees on charges of bribery. The allegations against the four have been downgraded, suggesting an easing of relations, but it’s still no picnic – chief executives of multinationals need to add top-level diplomatic skills to their professional toolkits.

The recession and shifting balance of economic power from the developed world to emerging nations is bringing geopolitical risks into sharper focus. In a recent report for the insurance market Lloyd’s of London, the consultancy Control Risks warns that companies should not be fooled if the authorities in emerging markets appear more investor-friendly in the short term. High asset prices have in the past led some governments to renegotiate contracts with western businesses, increase their stakes in joint projects or simply expropriate assets. Falling prices, it reckons, may have temporarily curbed this behaviour, but the chances are it will resume. Recession places greater pressure on state finances, making protectionism more tempting and populist policies more attractive to distract attention from local difficulties. The worse the recession, the higher the risks.

Given the buccaneering history of British businesses abroad, one can hardly blame emerging countries for being chary of a new wave of energy and resource colonialism, even though they still need western expertise to develop their own economies. What can companies do? Obviously, they need detailed understanding and close engagement with political stakeholders; they could also design projects in a way that makes it hard to turf them out, for instance by using technology that is hard to replicate. Wherever they do business, companies can at least be responsible in their own behaviour: they should also look to bring genuine, long-lasting benefits to host countries, as, to be fair, BP is doing in Libya by investing $50m in education and training. And instead of just shipping in expats and using locals as cheap labour, companies need to plan training, recruitment and succession so that locals are involved at senior management level.

Realpolitik in business will always be with us, but there is a lot firms can do to lessen local mistrust, and reduce their risks.

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