As the interim Iraqi government begins building the foundation for a new democratic future, hopes are high in the international community that Iraqi oil revenues will be key in helping to construct the building blocks needed to reconstruct Iraq and bridge the divides between its diverse ethnic population. Is there a role the private sector can play in helping the international community address potentially explosive ethnic conflicts around the globe and help strengthen international security? How has the oil industry played a role in conflict resolution and peacebuilding initiatives in places like the Sudan or Angola?

On July 8, 2004, USIP hosted a project report by senior fellow Jill Shankleman on "The Role of Business in Peace Making: A Case Study of the Oil Industry." Shankleman's presentation addressed the evolution of corporate social responsibility standards, their application to the oil industry, and their implications for conflict management and resolution. Her research over the past year at the Institute has focused largely on Sudan, Azerbaijan, and Angola.

Jill Shankleman is director of J. Shankleman Limited, a business-consulting firm which she founded in 2000. She has done extensive consulting for the public and private sector alike, and has worked extensively with companies in the oil and gas industries to help them assess the social impact of investment in areas such as the former Soviet Union, Angola, Algeria, Indonesia, China, Bolivia, and South Africa. Her writing and editing experience includes serving as project manager for the three-volume 1996 investor's guidebook, Environment, Health, and Safety Law and Practice, and co-authoring a working paper on mixed-sector partnerships.

Report Summary

A fire burns near an oil refinery in Iraq. (AP Worldwide)

As the international oil industry continues to expand into previously inaccessible developing regions, such as the Caspian Sea region and West Africa, international corporations have been developing and trying increasingly to implement corporate social responsibility strategies for sustainable development. However, are corporate responsibility strategies sufficient for dealing with the challenges presented in conducting business in developing regions around the globe, many of which are subject to ongoing virulent ethnic conflicts? Discussing her research over the past year, Institute senior fellow Jill Shankleman suggested that an answer to the question may be found in an analysis of the mechanisms linking oil and conflict in producer countries, and by examining three case studies (Angola, Azerbaijan, and Sudan) and the circumstances preventing or heightening the risks of conflicts in each case.

Oil And Conflict: Patterns And Linkages

Briefly summarizing and reviewing the literature on the relationship between oil and conflict in oil producing states, Shankleman noted that two major trends could be found. The first focuses on the collection of oil revenue by governments and the "pattern of incentive(s)" that it generates. Shankleman stressed that a number of studies have found that a violent conflict is not an inevitable consequence of oil development in zones of conflict or postconflict environments. Oil production, however, does often heighten the risk that a conflict will erupt—a risk further heightened by the presence of three conditions in the region: low per capita income, economic decline, and high dependence on natural resources. Moreover, the literature also indicated that the wealth that accrues through oil production could facilitate corruption at the government level along with predatory attitudes in an oil producer state. Thus, government oil revenue, Shankleman pointed out, also has the potential to serve as a catalyst for violent conflict when injected into the political process, as it can finance warfare, create incentives for secession, and trigger conflict between ethnic, religious, and/or regional groups striving for political control of the state.

The second major focus Shankleman found in the literature centers on the impact of the oil production industry on the social, economic, and environmental aspects of a country. For example, in addition to using land for land-based terminals or pipelines, the oil production industry can impact regional transportation (such as through transportation modernization and infrastructure development), housing, population (such as through the inflows of new people to the region), and even a region's cultural/social aspects. In particular, the high concentrations of single male workers fostered by oil production can create new social stresses—including increased prostitution, violence, and organized crime. Environmental disruptions occurring during the construction stage, before the companies or governments are able to allocate funds from the revenues for environmental preservation projects, also may be a source of social stress, Shankleman pointed out.

Corporate Social Responsibility and Conflict Prevention

Started as a social philanthropical concept during the 1990s, Corporate Social Responsibility (CSR) has developed into a broader philosophy that emphasizes the steps businesses should take to improve the quality of life and create opportunities for the communities in the countries in which they do business. Recently, Shankleman noted, the concept of CSR has been applied to the role of businesses in conflict prevention, resulting in the development of three key principles for businesses working in zones of conflict. First, businesses should be "conflict sensitive." In other words, businesses should be sensitive to the potential impact of their actions in zones of conflict and to the way in which their activities are carried out so as not to trigger or exacerbate existing conflicts. Second, realizing that employment is one of the major factors to potentially minimizing the risk of conflict, businesses should be directly involved in creating employment through investments and projects. This includes encouraging development of local business and other practices that would lead to increase of local employment as well. Third and lastly, businesses can potentially manage and minimize factors leading to the outbreak of conflict through "business diplomacy" and/or direct involvement of the business in affecting the structural components that can exacerbate existing tensions within the region.

Lessons from Oil Development in Angola, Azerbaijan, and Sudan

To better understand the role of oil development in zones of conflict, Shankleman then detailed her research on three case studies: Angola, Azerbaijan, and the Sudan. Each country, she noted, has both a rapidly increasing level of oil production and a history of violent conflict. However, oil development was not at the roots of any of the three conflict cases chosen, Shankleman stressed.

Discussing the findings from her research, Shankleman stated that investor companies in each of the three cases were lacking awareness of the potential impact oil revenues could have on exacerbating conflict and overestimated the effectiveness of traditional peace agreements or partial peace negotiations.

A look at the three cases also suggested that there were a distinct set of permissive socio-economic conditions, other than oil development alone, that when combined with oil development can lead to the outbreak of conflict. In particular, Shankleman's research found that violent conflict was most likely to occur in regions when:

1. Oil revenues accounted for a substantial percentage of government income;
2. Oil fields were located in a country region with a distinct identity (ethnic, religious, etc.);
3. The country had experienced ongoing unresolved conflicts or a civil war within the past decade;
4. Economic destitution is pervasive in the region; and
5. Weak government and ineffective institutions are incapable of managing revenues (whether from oil or other natural resources).

However, asked Shankleman, can CSR be applied by the oil industry to better prevent and mitigate conflicts in oil producing regions in zones of conflict?

The Way Forward

Based on her research on Angola, Azerbaijan, and the Sudan, Shankleman outlined five key findings in respect to the potential application of CSR by the oil industry in zones of conflict:

1. It is generally the largest companies that extensively put the CSR concept, both socially and economically, into practice. The basic notion behind it, in the cases where it was applied, was the protection of shareholder value.
2. High standards of impact assessment and management require "cultural, organizational, and operational changes" within businesses. In other words, just applying CSR without creating an internal framework where it can take root and grow was unlikely to be effective in either meeting the company's goals or in affecting external issues in zones of conflict.
3. In each of the three cases, studies individual businesses have been effective in promoting some changes, specifically in the area of revenue transparency, even though at times the businesses' efforts to raise the standard of transparency met resistance from the governments in question.
4. As the relative power of the government and businesses shift over time, the structure of the oil industry creates an intricate relationship in which business and government find themselves in conflict as much as in mutual dependency with oil and gas concessions.
5. Where conflict infringes on oil industry operations or it is possible that it would do so, companies reacted in various ways to the threat—such as suspending operations (for the long or short-term), selling out, or designing the projects in a way to avoid areas of tension and conflict, etc. The case studies also demonstrated that operations are more secured when they are offshore.

Shankleman concluded her discussion by noting that while oil development may present a risk to exacerbate or trigger a conflict in a developing or transitional country, the principal risk factor is the management of the oil revenues generated for the governments in oil producing countries. Possible grievances and tensions created in oilfield areas due to the way in which projects are carried out, she noted, also could pose a significant risk factor. However, contrary to popular opinion, her research found no evidence to support the claim that businesses are capable of making a serious contribution to the resolution of conflict once it has broken out.

Shankleman then wrapped up her presentation with a series of recommendations for both oil companies and policymakers alike:

• Increased private-public-nonprofit sector collaboration in zones of conflict would be of mutual benefit to all.
  More specifically, Shankleman suggested that major oil companies with experience in managing the social impacts of oil projects and pipelines should collaborate more extensively with other experts in the World Bank, NGOs, and governments.
• Public officials need to better understand the potential role that the private sector and oil industry in particular can and cannot play in preventing, managing, and resolving conflicts.
  Shankleman stressed that her research pointed to a need to increase the awareness of issues and potential opportunities amongst officials and civil society organizations/leaders in oil producing countries and to clarify how the industry works. One way this problem could be addressed, for example, would be for international organizations to sponsor regional conferences where oil industry officials, public officials, and groups working on civil society development could discuss issues of mutual concern and potential ways they can address common problems.
• Increased transparency by the oil industry in zones of conflict is key to promoting lasting stability.
  Shankleman underscored the importance of transparency for long-term stability from the findings of her three cases studies. To help promote this practice she recommended that companies push for disclosure of concession agreements in order to encourage an open information mode.

Bringing her presentation to a close, Shankleman noted that there is a need for external stakeholders to pull together, on a country-by-country basis, and try to ensure that if oil is found, there is a coordinated and informed development of the oil sector with a focus on ensuring wider substantial development benefits for the oil producing society.