Social and Economic Impact

Sustainable Development and Macro-Related Policies

While the oil and gas industries provide significant opportunities for developing economies, at the same time, they bring substantial risks that need to be managed and mitigated by governments, investors, and communities. The depleting nature of oil and gas resources make it particularly important that governments and economic policies ensure that the benefits of their exploitation contribute to the development of the human, social, and physical capital needed for sustainable development.

Unfortunately, in certain cases, neither investment nor oil revenues have been able to guarantee economic growth or poverty reduction. Thus, the presence of major oil and gas industries has been associated with a variety of negative social and environmental outcomes. The so-called “Paradox of Plenty,” where resource development fails to generate the sustainable benefits expected, is one of the most urgent challenges:

• At the local level, where industry enclaves are surrounded by poor indigenous communities receiving little sustainable benefits from the development.
• At the national level, where the large rent flows do not translate into long-term growth in human and physical capital, which forms the basis for sustained growth.

Governance and Revenue Management

To manage the problem the following key policies are critical: (a) the establishment of transparency and accountability with respect to revenues earned and their disposition; (b) consultation with principal stakeholders in developing plans for the use of resource revenues; (c) credible oversight and audit of the implementation of these plans; and (d) serious attention to building local institutional capacity.

The World Bank strongly advocates the need to comprehensively address both environmental and social impacts of hydrocarbon development. The limited access to reserves in traditional areas, together with the incentives offered by host governments is allowing the industry to extend its exploration and development operations to more geographically remote areas often home to isolated local and indigenous populations, and also to fragile ecosystems and unique biodiversity. Importantly, it is in such remote areas that governments and local communities are likely to have the least capacity to deal effectively with the issues.

Properly managed, oil and gas operations can be expected to provide major benefits to the communities in which they take place. A list of potential benefits can include: (a) increased local employment; (b) the transfer of technical and commercial skills and development of local capacity; (c) a share in fiscal revenues at the local level; (d) enhancement of local social infrastructure and improvement in the delivery of services, especially in areas such as health, education, transport and power as a result of increased public funds and investor contributions; and (e) positive multiplier effects in and beyond the communities in which the extractive operations are located.

Facilitating Stakeholders Dialogue and Participation

The World Bank is actively facilitating a dialogue between key stakeholders and assisting in the collection and dissemination of best practices. A growing number of approaches are being adopted by governments and industry, among them:

• identification and clear articulation by governments and investors, in consultation with local communities and civil society generally, of clear and appropriate policies on social impacts;
• incorporation of policies into laws, regulations, and contractual obligations;
• effective local consultation in project design, implementation, and operation;
• detailed social impact assessments (SIAs) as part of project preparation, including plans for addressing all areas of concern;
• continuous monitoring and evaluation of social impacts as operations proceed;
• clear provisions for compensation in the event of any harm, and investor social funds to proactively address social concerns;
• effective participation in the project benefits at the local level, including sharing of fiscal revenues;
• investment in institutional capacity in local government and populations; and
• increased corporate sensitivity to social concerns at both project and management levels.

Small Scale Projects, Local Employment, and Local Entrepreneurship

Rural populations often have limited access to development opportunities. Two of the limiting factors are access to reliable modern energy sources and knowledge and capacity to be active participants in development. However, as a result of recent major energy projects, in particular gas pipelines, there is a window of opportunity to develop the capacity of rural/indigenous peoples to benefit more extensively from these projects.

Communities in isolated regions are not attractive targets for distributors of electricity or natural gas since they are perceived to lack the “critical mass” and the ability to pay. The use of natural gas has the potential for widening access to electricity, since it may readily be used for small-scale power generation and for a wide spectrum of household, commercial and small industrial uses. Pilot projects in Africa and Canada of small rural gas applications have proven successful. Using stranded gas reserves or new gas pipeline systems it is possible to address this obstacle by developing economic small scale gas projects for such rural communities.

To mitigate adverse impacts of such developments, it is of critical importance to develop within the indigenous communities a basic knowledge of the risks and benefits of the hydrocarbon industry. Working with their own organizations, indigenous peoples are attending Bank sponsored training programs that can develop their capacity to participate in the monitoring of operations and in accessing a share in the industry benefits.

Case Studies

Georgia Oil Institution Building Project

With the accelerating development of oil and gas in the Caspian Region in the 1990s, Georgia found itself in the role of a critical transit country for oil and gas exports. However, its economy has not traditionally been focused on oil and gas, and public institutions were greatly weakened by civil disorder and economic collapse following the break-up of the Soviet Union. To assist Georgia to maximize the benefits of potential oil and gas transit revenues for sustainable development, the Bank and Georgia agreed on an Oil Institution Building Project in 1997.

The Bank credit financed a feasibility study of a potential Baku-Supsa major export pipeline, as well as financial and legal advisors for pipeline negotiations. The feasibility study covered economic, financial, legal, engineering and environmental issues, and provided the responsible state agency (GIOC) with substantial training. It also involved the extensive use of Georgian consultants alongside international experts, ensuring that local knowledge was incorporated and that technology was effectively transferred. In addition, a National Oil Spill Contingency Plan is being prepared under the Integrated Coastal Zone Management Project financed by the Bank.

Using the training provided by the Project, together with international advisors, the Georgian Government and GIOC were able to formulate negotiating positions in pipeline transit negotiations in a much better-informed manner than during the initial stages of Caspian oil development. It could be argued that mutually-acceptable and sustainable compromises with private oil companies and other governments could be more easily reached in this way.

GIOC also coordinated domestic policy reforms that laid the foundations for a more effective and advantageous set of transit arrangements in Georgia. This was supported in 1999 by the Energy Sector Adjustment Credit (ESAC) from the Bank, which underpinned key legal reforms, including for eminent domain procedures (compulsory purchase or easements in the public interest) and for environmental liability in case of transportation of hazardous substances (including oil). In addition, Georgia ratified a number of important international treaties related to oil spills. These reforms created a legal framework in Georgia that encouraged sustainable private investment in oil and gas pipelines, while protecting environmental and social interests and maximizing the benefits for Georgia's population.

Mozambique: Village Gas and Power Development

The Bank's first mini gas turbine electrification project using natural gas was recently implemented in Mozambique. Natural gas from the Pande field is transported by plastic pipeline to the small towns of Vilankulo and Inhassoro, where gas is used to generate electricity in five mini gas turbines. The construction of an electricity distribution network and installation of gas-fired generators was completed at a cost of about US$2 million. Service connections were initially made to about 250 consumers, but electricity demand has been strong with the number of consumers increasing by 60% over the first few months of operation. Cost recovery tariffs were implemented, sufficient to provide a reasonable return on capital investment. No subsidies are given to consumers except for a small number who pay life-line tariffs. The billing and collection has been beyond expectation, exceeding 98%, and technical operation has been excellent.

Electrification has promoted economic activities and improved the social welfare. Small businesses have started-up or expanded their existing operations. Schools now provide a better learning environment, and clinics operate longer hours and provide safer services because of the reliable electricity supply. Street lights have provided safer streets and prolonged the economic and social life in the towns.

Relevant Publications

• Changing Patterns of Household Expenditures on Energy: A Case Study of Indonesia and Pakistan by Robert Bacon, Soma Bhattacharya, and Masami Kojima, Extractive Industries for Development Series, #6, June 2009
• Changes in End-User Petroleum Product Prices: A Comparison of 48 Countries by Masami Kojima, Extractive Industries for Development Series, #2, June 2009
• Vulnerability to Price Increases: A Decomposition Analysis of 161 Countries by Masami Kojima and Robert Bacon, Extractive Industries for Development Series, #1, June 2009
• "Oil Price Risks: Measuring the Vulnerability of Oil Importers," Masami Kojima and Robert Bacon, Public Policy for the Private Sector, ViewPoint Note No. 320, 2008. (148KB)
• Extractive Industries Review, Background Paper, 2001. (135KB)
• Environmental and Social Regulation of Oil and Gas Operations in Sensitive Areas of the Sub-Andean Basin, (English and Spanish), ESMAP Report No. 217/99, 1999.

Presentations

Eleodoro Mayorga Alba, Mitigation of Social Impact of Oil Operations. Presentation to the World Energy Council Congress. Buenos Aires, October 2001. (105 KB)

IFC Manuals

• Investing in People, 2005.
• Doing Better Business through Effective Public Consultation and Disclosure,1998.
• Integrating Social Concerns into Private Decisionmaking – A Review of Corporate Practices in the Mining, Oil, and Gas Sectors, World Bank Discussion Paper No. 364, 1998.

Links

• Extractive Industries Review
• Chad-Cameroon Pipeline
• Compliance Advisor / Ombudsman-- for IFC or MIGA funded projects write to: cao-compliance@ifc.org