China learns that hearts and minds as important as oil finds

As the Chinese are now finding in Iraq, winning a drilling contract is only part of the battle: you also have to win over the local people living alongside your wells

China National Petroleum Corporation's contract at the Ahdab oilfield in Iraq has resulted in dissatisfaction among the local population and the project's direct neighbours say that they are benefitinShow more

Reports emerging last week from bloggers and journalists based in Baghdad provided a sobering reminder, if one were needed, of the complex reputational and operational challenges that will face foreign oil companies that want to work in Iraq.
Referring to the China National Petroleum Corporation's (CNPC) work at the Ahdab field, the first post-2003 oilfield development contract signed with Baghdad, the reports have highlighted dissatisfaction among the local population and the project's direct neighbours that they are benefiting so little from a multibillion-dollar development. The manifestations of this discontent, particularly about the small number of jobs that have been given to locals, have apparently included the sabotage of equipment and the emergence of a local-rights movement to lobby the Iraqi government for greater local benefits.
The oil and gas industry is all about the management of risk. Exploration risk, technical risk, price risk, safety risk, security risk, political risk; all of these are managed on a daily or sometimes minute-by-minute basis by energy companies wherever they operate in the world. And yet it is extraordinary how often these same companies are blind-sided by a key risk that they have failed to mitigate: reputation risk.
Although there are many ways to attempt to calculate it, the only sure way for an energy company to understand the value of its reputation is to lose it. Anyone who has tried to win new contracts, enter new markets, recruit talented staff, access finance or maintain good relations with their neighbours when their organisation's reputation is being dragged through the mud will tell you that reputation is a valuable asset worth protecting.
Many energy companies now take precautionary steps to prepare themselves to protect their reputation in the event of a major accident. In addition to all the procedures and drills to ensure that the company can respond swiftly and effectively at an operational level to any incident "inside the fence", the best prepared companies also have plans, and staff who are trained and rehearsed, to respond to all those who care about the incident "outside the fence"; the media, the government, relatives of staff, shareholders, and the company's own employees.
However, as health, safety and environmental standards constantly improve across the industry, it is thankfully increasingly rare that oil companies have to respond to such sudden operational accidents. Instead, it is now more common that an oil company's reputation is damaged by either a "corporate incident" - something that happens at headquarters rather than in the field - or criticism of the company's behaviour that steadily grows to fever pitch.
Those who know the industry will likely be just as familiar with corporate scandals such as Shell's reserves "rebookings", or arrests at Total, as they will be with infamous operational accidents such as the Exxon Valdez oil spill or BP's Texas City refinery explosion. But the negative perceptions that are hardest for an oil company to shed are those created by long-lasting "open sore" issues such as Total's presence in Burma, ExxonMobil's public stance on climate change, or Shell's community relations in the Niger Delta.
Which brings us back to Iraq. All the oil companies that are considering future deals in Iraq will have spent much effort identifying and mitigating the direct physical security risk of operating in the country; weighing up the operational and perception risks of operating under armed security, against the risk of attacks and kidnappings of staff. At first glance, this may appear to be the biggest risk that oil companies will face in the country, but it would seem that both the improved security environment, and the security companies' six years of experience of protecting people on the ground has enabled oil companies, whether Asian, Russian or western, to feel that they can reduce the risk of violence towards their employees to a level that is "as low as reasonably possible" (ALARP in oil industry jargon).
Equally, many companies will have considered the reputation risks of signing deals that will undoubtedly attract criticism from various quarters of the international media, civil society and some shareholders. Companies have had more than six years to consider their communications strategy around this issue and should by now have decided how much time and attention to focus on discussions with those who are passionately against foreign oil companies returning to Iraq, and how much with the larger majority that is either ambivalent or at least open to hearing the oil companies' case.
However, almost certainly, the single most challenging risk for oil companies entering Iraq will be winning the support of their project's immediate Iraqi neighbours. As CNPC is apparently experiencing already, if the local or "fenceline" community feels that it is being negatively impacted by the development, and that too few of its benefits and too little of its wealth are flowing directly to them, then they will find all sorts of ways to cause the company embarrassment and operational cost and delay.
There is no simple solution. The local community's expectations will always be extremely high; everywhere in the world, populations are disappointed that oil projects are so much more capital and technology intensive than they are labour intensive. When poor rural communities suddenly have corporate neighbours living in high-tech, well-provisioned, air-conditioned comfort, some degree of resentment is almost inevitable. The key is to start engaging with the population as early as possible to give yourself the best chance of understanding and managing their expectations (before you even start trying to meet those expectations). This involves helping the community to organise itself to tell you their collective needs and interests (rather than just listening to those who shout loudest or approach you first), being clear about what you will not do (otherwise you will be asked to provide everything for evermore) and finding ways to build local capacity such that the community is better able to compete for jobs or low-tech service or supply contracts.
If foreign oil companies - including any UAE-based energy investors - get this right, they will be welcomed locally, and praised internationally. But any company that gets this wrong may well find that people all over the world are still referring to its mistakes in 20 years' time. So the most important step is to understand that winning the local community's acceptance and support is absolutely as critical as protecting staff, or indeed, finding oil in the first place.
Rob Sherwin is the Middle East managing director of the reputation management consultancy Regester Larkin