How different are the challenges rural communities face when making a deal with big oil?
Promised Land is now in theaters and I couldn’t wait to see it given my day job at Oxfam. Matt Damon and John Krasinski star. The movie depicts a small rural town in Pennsylvania as an international gas company comes in, promising to make millionaires of the struggling local farmers off of the shale deposits under their lands. Some eagerly jump to sign leases with the company while others worry about potential environmental impacts on their lands and waters.
The film really struck a chord with me because it highlights some of the seemingly insurmountable challenges that rural communities, in the US or elsewhere, face when deciding whether to make a deal with big oil. In Promised Land, the local high school teacher has a PhD from MIT, past experience as a Boeing engineer, and the time to do some internet sleuthing on the potential benefits and impacts of fracking. Many communities faced with the prospect of becoming oil boom towns, however, are not so lucky.
Citizens in developing countries face even more daunting information asymmetry challenges when oil and mining companies come to town. Often governments sign oil deals with companies directly and choose to keep the terms of these agreements and the amount of revenues generated by projects secret from their citizens. Logistical challenges like high illiteracy levels and limited internet access compound the situation, making it very difficult for communities to engage in negotiations with project sponsors on an equal footing.
In Peru, for example, the multi-billion dollar Peru LNG pipeline project crosses through two of Peru’s poorest regions, Ayacucho and Huancavelica. Communities in these two regions faced serious challenges when engaging in consultation processes with the company, given that approximately one-third of women in the regions are illiterate and only around 10% of the population uses internet services.
Also, almost all governments in the world have legal regimes that provide for government ownership of oil, gas, and mineral deposits. This means that oil companies can bypass making deals with landowners and negotiate directly with government. Communities that oppose development projects on their lands risk being displaced. The beleaguered town in Promised Land faces a number of disadvantages as they attempt to negotiate with a multinational company willing to bribe and cajole its way to community approval. The town must contend with a local leader with dubious ethics and competes with the high school basketball team for meeting space. However, ultimately they at least have the right to decide whether or not to sign a lease with the company.
Weighing potential costs and benefits around high-risk extractive industry projects is a challenging endeavor for any community. However, a few key measures to promote transparency and community engagement can go a long way:
― Governments should disclose the oil and mining contracts that they sign with companies. This will increase government accountability to their citizens by creating positive incentives for good deals and closing off possible avenues of corruption. Over the long term, contract disclosure will also contribute to a more stable investment climate since better deals are less likely to be overturned by future governments.
― Governments should disclose the revenues they receive from oil and mining companies, and companies should disclose the revenues that they pay to governments. Landmark section 1504 (“Cardin-Lugar”) of the 2010 Dodd-Frank Wall Street Reform Act goes a long way towards promoting good governance of the extractive industries by requiring companies registered with the US Securities and Exchange Commission to disclose their payments to governments. Beyond this, the more companies and governments that adopt revenue disclosure policies the better, both for citizens and for responsible companies which would benefit from a level playing field.
― Finally, governments and companies should commit to obtaining the Free, Prior and Informed Consent of local communities before implementing oil and mining projects on their lands. Consultations with local communities should be inclusive and adequately informed, and if communities decide against a development project, their decision should be respected.
These measures will not solve all of the challenges associated with oil development for communities around the world, nor the ones portrayed by Hollywood. However, they will create a framework that helps to ensure that local communities affected by oil projects are more informed about these projects, and have control over decisions that govern their lands, their health, and their livelihoods.