Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.
Oil & gas, and mining companies, also generally called the extractive industries, play a key role in many nations’ development by contributing to the growth of their economies and generating needed revenue income for the governments. For the extractive industry investors, getting stakeholder engagement which includes the communities, is a key element of securing a social license to operate. Governments also have their responsibilities to ensure communities are adequately consulted and shown the big common good picture before decisions are made on the extractive industry developments in particular regions. Companies in extractive industry projects should also equally go above and beyond the minimum legal requirements of environmental, social, and human rights standards so to contribute more to sustainable development outcomes.
The menacing and overstayed global pandemic recognized as ‘Covid-19’ has had a catastrophic impact on the already challenges economic woes, and hence negatively affecting the livelihoods around many developing nations and enforcing disaster management programs, state of emergency laws such as applying nationwide lockdowns to help curb the spread of the disease. Demand and supply shocks have triggered global recessions, governments have been chopping and changing rules which adversely affects foreign investors in particular, that witnessed a steep decline in the inflow of the foreign direct investments (FDI) in the extractive sector. FDI plays an integral role as a source of finance to strengthen these countries’ economic future, especially amidst a crisis while fostering employment growth and social transformation.
Investing in the extractive industry accumulates many positives – aligning from tax savings to high profitability. The demand for oil and gas will not go down anytime sooner despite the inventions/usage of other non-renewable energy sources and therefore it would be considered nonsensical for investors to pass up the opportunity to contribute towards the oil, gas and mining sectors in many developing nations who want to access to major funds to yield higher returns for not only nations but to investors as well
The world consumes nearly 97,103,871 barrels of oil per year with the United States being at the forefront. Oil, gas and minerals have been the leading energy source since the start of the industrial revolution. With, that being said, let us discuss some of the major advantages of investing in the oil and gas sector:
- Huge Return on Investments
- The return on Investments in the extractive sector is very financially rewarding for those highly qualified investors since it can yield more returns than other investment options. Improved technology, reconnaissance methods and better drilling machinery have lowered the risk of investment encouraging more and more investors to venture out into the oil and gas sector, and especially in newer green frontiers.
- Another important factor to consider is the ‘dividends’ many companies in the oil and gas sector often pay in dividends, it allows those investments to make regular income and is often seen as very lucrative to many investors.
- Increase in Demand
- Oil and Gas production has steadily been on the rise during these last few years contrary to popular belief that there was a decline. Growing consumption from developing nations such as India and China are driving these demands. These developing nations need the energy to grow and require more and more crude oil as they develop. Despite the alternative sources of energy, it is not as rewarding and fulfilling for them as the oil and gas sector.
- Many low-income nations need the benefits of mining just to survive. Demand will never fall for such countries who consider the mining as a “need” more than just being a commodity that can be bought and sold.
- Passive Income (Generational Wealth)
- Even if an investor accrues any loss, it can be easily offset from other types of income such as Interests, wages, capital gains etc. It truly has the potential to deliver for many years despite its initial challenges.
The extractive industries sector plays a dominant political, social, and economical role in the lives of approximately 3.5 billion people living in 81 countries. Investments in extractive industries have the potential to be transformative for many developing countries. Yet, if not managed prudently, investments can fail to translate into long term sustainable development, and instead cause economic, social, and environmental harm. CCSI (Columbia Center On Sustainable Development) researches trends and good practices, and works with governments, companies, civil society, communities, and development partners, to develop and implement approaches toward maximizing the benefits of natural resources for host countries and communities and minimizing potential harms. The approach adopted by Peru is an example for many to follow. The National Society of Mining, Petroleum, and Energy (SNMPE) estimates that their mining and energy investments exceed $35billion. Peru along with the assistance of the IFC (International Finance Corporation) aims to increase its investment capacity). Their approach included;
- Establishing an investment committee to coordinate and oversee the implementation of investment projects.
- Building mid-term planning capacity aimed at improving resource allocation to attend basic needs of local communities.
- Building the capacity for private & public investment
- Build trust in the information sharing processes which includes transparency & accountability measures.
- Building the financial system.
All nations need to strive and implement a similar approach to Peru to attract more foreign investors who will be more likely to invest in a nation that increases its investment capacity and aiming to improve the infrastructure of the nation.
A major investment crisis is looming over if the Covid-19 pandemic is not efficiently contained sooner. Several economies around the world are sustained by investments in nations’ extractive industry particularly when looking into Africa that does not have the necessary infrastructure, types of equipment, skills, etc. needed to efficiently extract minerals from Earth.
Corruptions ever remained a major case-stopper for the inflow of the investment, as universally Investment/Money is known to be very coward, and therefore is such prevalent dilemma when investors deal with developing nations where state corruption is high. The movement for increasing the benefits that communities realize from extractive industries has long been rooted in transparency. Transparency is a fundamental tool to promote efficiency and accountability in converting natural resource wealth into long-term social and economic development.
These issues can be avoided by focusing on the core of the nation and what makes up the local economy. Several benchmarks are used to derive the true face value of the investments for the extractive sector.
There are several benchmarks to focus on when discussing the survivability of the local economies from the extractive sector investments. Four of those benchmarks are:
- The Covid-19 pandemic has created the largest disruption of education systems ever recorded in history, with nearly 1.6 billion being affected around 190 countries in all continents. Social distancing and lockdowns have meant nearly all learning institutions have had to shut down their physical space and instead now rely on e-learning. This has exacerbated the pre-existing difference of opportunities for many vulnerable communities that tend to live in rural or poor areas with no access to technology to continue their learning. This has blocked the provision of essential services to communities that need access to quality learning to grow and adapt to the harsh changing world of today.
With many nations yet to announce a timeline for the re-opening of institutions, it further wreaks havoc and chaos on the development of these communities. Preventing this education crisis from escalating needs to be a top priority for world leaders. The pandemic has plunged all extractive resources under a deep global recession, but leaders need to mitigate now to minimize long-term damages. Strengthening the domestic resource mobilization, coordinating with key actors (i.e health community), and strengthening the resilience of education systems for equitable and sustainable development are key development strategies to combat education sectors.
- Lack of safety and labour protection are the two types of abuse that seem to be dominating all employees on all levels. These employees regularly suffer from poor health, and many continue to work in these unsafe conditions which lead them to expose their loved ones. Governments and mining companies should ensure more effective checks and balances are implemented to ensure maximum respect for human rights so that no more lives are lost in the pursuit of profits in efforts to combat this crisis. Restructuring the extraction site to better accommodate employees is a start, along with the support of employee retention and recovery. Providing more incentives during the COVID-19 period will be encouraging.
- Millions of workers, whether self-employed or on wages suffer from being furloughed or considered redundant. Governments around the world have implemented various measures to combat this, such as deploying stimulus packages or reducing interest fees of loans. Many with low or irregular incomes are often finding themselves resorting to negative tactics all for survival.
- In recent times, arguments have arisen about the implementation of community health associated with the extractive industry have intensified. Particularly in Africa, where key site workers seem to get taken advantage of. It will require the incorporation of human rights norms, ethics, and morals into the extracting process. Historically, it has been proven many times in Africa and in many other extractive countries that they place more emphasis on the exploration of resources than on the worth of human rights. Governments should ensure more efficient checks are placed to ensure maximum respect for human lives and those communities to whom the sites belong, to mitigate the unnecessary loss of lives. Extractive Companies should also be held accountable and assist governmental efforts such as building to combat human negligence. It is about time for those held accountable to put the health and safety of humans over profits.
Global Extractive markets have been heavily impacted by the effects of the Covid-19 pandemic spread. Fluctuations in oil and other commodities prices due to reduced economic activities along with excess supply has disrupted economies, whereby these effects will be felt by communities of those major oil/mine exporting countries. It is yet to be determined whether these disruptions will have an irrecoverable impact on the global economy or lasting consequences. Only time will tell how such global pandemics are dealt with by induvial communities. But despite all the fiasco surrounding the extractive sector, it is unlikely to lose its position in the global economy due to the world’s constant hunger for energy. Investments will for sure see a major increase soon post-covid era.
The authors, young graduate brothers, Mohamed (24 Yrs old) and Mohamoud (23 Yrs old). Specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.
|Mohamed Feysal Hawar
Extractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.
Mahmoud Feysal Hawar
Extractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.