How Oil, Gas, and Mining Projects Can Contribute to Development

• Author: Kathryn McPhail
• Position: Principal Specialist in the International Finance Corporation's Technical and Environment Department

Oil, gas, and mining projects could be a boon for developing host countries, yet their environmental and social costs often outweigh their benefits. Partnerships between project developers, governments, and local communities are crucial for projects to have a lasting development impact.

Many developing countries, rich in natural resources, have welcomed private investment in their oil, gas, and mining industries. Although projects in the extractive industries can have a serious environmental impact and be socially disruptive as well-particularly if people must be resettled to make way for them-they can make a significant contribution to the economic development of host countries if their adverse consequences are minimized through careful planning. Because they generate sizable revenues, create jobs and business opportunities, and often bring new roads and access to water and power to the isolated rural areas in which they are typically located, they have the potential to stimulate economic growth, reduce poverty, and raise living standards. In addition, host countries benefit from being exposed to best international practices in project planning and implementation and forced to build up their administrative and institutional capacity.

Frequently, however, national governments reap the most benefit from these projects, while social and environmental costs tend to be borne by local communities. A recent World Bank study of two oil and gas projects and two mining projects in Colombia, Papua New Guinea, and Venezuela (see box) reveals that the communities affected by these projects believe that the environmental and social costs have been heavy, while expected benefits have either failed to materialize or not been distributed in an equitable manner. These findings are particularly striking because these three countries have laws requiring that a percentage of revenues from natural-resource-based projects be allocated to regional and local development initiatives. The project developers not only carriedout extensive social and environmental studies in an effort to mitigate negative impacts and maximize benefits but also provided large amounts of funding for social programs.

The importance of partnership

The missing ingredient in these four projects-and in many others like them-is partnership. For projects to contribute to the development of host countries, governments, private companies, and local communities or the nongovernmental organizations (NGOs) that represent them must be committed to working together as partners. Although each has different responsibilities, the partners must have mutually agreed objectives, shared responsibility for outcomes, clear accountability, and reciprocal obligations.

Projects studied by the World Bank

In 1998, the World Bank published "Integrating Social Concerns into Private Sector Decisionmaking: A Review of Corporate Practices in the Mining, Oil, and Gas Sectors" (Discussion Paper No. 384), a report by Kathryn McPhail and Aidan Davy based on a review of the literature and a survey of corporate project developers and nongovernmental organizations. To field-test the findings of the report, four privately financed projects were evaluated on the basis of extensive discussions with government, corporate, and community representatives:

* Operations of British Petroleum Exploration Colombia (BPXC) in Casanare, Colombia. The largest oil field in the Western Hemisphere, situated in an area of extreme conflict between guerillas, paramilitaries, and the army. Project infrastructure costs are $6 billion. Revenues began flowing in 1997.

* Chevron Niugini's Kutubu operation in the Kikori River Basin in Papua New Guinea. The country's first oil field is located in a culturally and biologically diverse ecosystem. Project infrastructure costs are $1 billion. Revenue stream began in 1992.

* Rio Tinto's Lihir gold project. This is the largest gold mine in Papua New Guinea. The indigenous Lihirian population numbers 8,000. Project infrastructure costs...