Oil, Gas and Compliance: The ‘Deep Blue Sea’ of Corruption
In Thieves of State, author Sarah Chayes (part two of my interview with Sarah will appear next week) defines the ‘resource curse,’ as where “valuable raw materials are discovered in a country lacking robust institutional safeguards, and the “rents” these resources produce rupture any contract between rulers and ruled.” She focuses on the Nigerian example, where as the thirteenth largest oil producer in the world “life expectancy, educational achievement, and average income, taken together, is about the same as that of their resource poor neighbors.” Other countries, such as Algeria, are also referenced where oil and gas “were being scooped up for the benefit of a criminal elite.”
Having gained my own front-line experience in the defense sector, I found this treatment of oil and gas extremely interesting, and wanting to learn more, especially in the context of the recent fall in oil prices, I read The Secret World of Oil (Amazon link here) by Senior Investigative Reporter Ken Silverstein. As Mr. Silverstein states in his introduction a “constant in the energy business is corruption,” adding, “two central figures in this world are fixers and traders.”
Legitimate and Corrupt “Door Openers”
In the world defense, fixers would also be called agents, third parties and intermediaries, who, as Mr. Silverstein describes, “open doors for corporate clients and arrange introductions to the various potentiates they know.” He adds “they help companies navigate the local bureaucracy, or provide the lay of the land with political and economic intelligence, or point to important people or companies that should be courted or hired in order to curry favor.” Mr. Silverstein’s accurate definition could easily be applied to both legitimate and/or corrupt services, and therein lies part of the challenge, as the mixing of both makes the best-intentioned vetting and due-diligence process all that more complicated. Indeed, not all agents serve “as bagmen to dictators,” as one executive shared; rather, as this same individual stated, “there’s a real art to acting as an agent, and the role differs from country to country.”
Mr. Silverstein explains how “oil company executives are sent overseas to make deals, and they are measured by performance.” Quoting a Chevron Executive, “You’re supposed to be clean, but you’re also supposed to create business.” Wait! I didn’t discover the zero-sum game of “what does management really want, compliance or sales?” As this Chevron executive adds, “That leads to a tension, and a temptation to use middlemen. Let him do whatever he needs to do; I’m not part of it and I don’t’ want to know.”
Blindness at the Front Lines
In my experience, such “blindness” is a commonly embraced attitude that is easy to rationalize at the front lines, while at the same time presenting great legal peril. In addition, what about the complexities of ownership, where in certain countries third party title might be shared among private and state personnel? What of the peril where front-line personnel are “directed” to use certain third parties to hold local contracts (something I experienced in defense), where those entities are owned, wholly or in part, by public officials or their relatives? What happens when they are told if they don’t use those agents they don’t “get the business? Can local registries be a trusted source of due-diligence to provide transparent documentation when it comes to beneficial and/or minority ownership?
As another executive stated, “the businessman has no choice but to do what those guys want. He’s between the devil and the deep blue sea.” As to how that gets done, Mr. Silverstein references traders who speak of “ever more sophisticated forms of payoffs that may skirt the spirit of anti-bribery laws but are often technically legal.” Sounds like a compliance accident waiting to happen!
Reflecting upon the writings of Silverstein and Chayes, and looking at recent events including what looks to be a multi-jurisdictional investigation of Petrobras, among other oil and gas anti-bribery enforcement actions, it becomes clear that the challenges in this market remain strong from a number of perspectives. Also, while Silverstein and Chayes focus on the corruption element that often pertains to exploration rights and production, what of the downstream providers of infrastructure goods and services?
More Licenses and Permits Often Means More Risk
What are the hazards for those multinationals where permits, transportation, local subcontracting and licenses are all a part of legitimately doing business? In this field, issues of trade, including US State Department (ITAR) Controlled goods, as well as permits and licenses for the use and transportation of hazardous goods, all are important project components that can increase the likelihood of corrupt requests. In addition, there is the potential interaction with sanctioned or debarred entities associated with sub-contracts.
Also, what of the risks associated with local immigration requirements when bringing in outside skilled workers? The issue of outside labor would seem to present tremendous corruption risk, where immigration officials hold up permits and work-visas, effectively threatening a work stoppage. If the local population does not have the skill set required to perform those necessary functions, where does that leave providers when such corrupt requests are demanded? In sum, it would appear that all of these components in certain regions would create an environment where requests for small and large bribes are built-in to the procurement and project landscape.
Conversely, reducing production and investment does not seem to be entirely devoid of corruption risk, even if it appears to be a reasonable economic solution. What happens when companies seek to transport equipment and technology back to more secure environments or to other regions? Will those goods be “held up” at the border with requests for small bribes as part of “extort and export?”
The Impact of Market Conditions
Furthermore, when I look at the recent dramatic reduction in oil prices, which will certainly put added financial pressure on exploration, production and infrastructure multinationals, I would think there would be greater temptation for corrupt behavior from a number of perspectives. First, front line business teams will certainly be under pressure to increase sales and to expedite existing projects, in order to compensate for revenue reductions and projection shortfalls. Will management be tempted to “not ask questions” when forecasts are achieved in low integrity regions in the environment of revenue reduction?
As to the demand side, when I asked Alison Taylor, Director Energy & Extractives at BSR, about this dynamic, she responded, “social chaos and heightened security risk in the high-risk (low integrity) oil producing states will become the new norm due to the drop in prices. While Western consumers will enjoy the economic benefits of lower oil prices, this added value is not necessarily enjoyed on the producer side. And as power structures become more fluid, key political stakeholders as well as low level bureaucrats who may be removed or exposed at any moment, might increase their demands for bribes while they are still in positions of authority.”
In addition, as revenue models and forecasts get recalculated based on market conditions, it is inevitable that expense and spending projections will be revisited. Accordingly, will compliance and training programs that are now even more critical in the context of Alison’s comments, now become fatalities in that financial remodeling? When I asked Alison about that possibility, she replied “given prices plunging and profits vanishing, some companies might be tempted to cut corners on regulatory, social and governance risk management, but now is not the time to reduce spending in these critical areas.” Indeed, an environment where corruption risk is greater in terms of supply and demand, is not the place to reduce compliance support.
How all this will impact the existing state of compliance will be of great interest to me when I attend the Inside Intelligence 2nd Annual Anti-Corruption in Oil and Gas for the Americas on March 23-24 in Houston Texas (link here). While I will participate in two sessions with compliance leaders from the industry, reflecting upon my own experiences where relevant, I also look forward to hearing the views and perspectives from the other presentations. It will be valuable for me to listen to, understand, and engage in the discussions where industry leaders will share their own viewpoints and challenges with respect to corruption risk. In the context of these challenging issues and market conditions, it certainly promises to be a resonating and valuable two days.