The oil industry has a trust problem – can it put that right?

The oil and gas industry provides the energy that drives economic growth and social development, at a time when the environmental impacts of fossil fuels are being critically reevaluated against these benefits. In the past, the industry would have without question had a seat at the table in attempts to address the balance between costs and benefits for society’s long-term good. But today, it is not a foregone conclusion.

That’s because the oil and gas industry has a trust problem. Countless surveys reveal that energy companies are among the least trusted in the business world. According to the latest Edelman Trust Barometer – which surveyed 33,000 people across 28 countries – the energy sector fell well behind others such as technology or food and beverage.

The industry itself is all too aware of the extent of the problem – and seems to recognize the role it must play in fixing it. “The industry as a whole will need to address the serious trust challenges created by the failures of the worst among its ranks,” industry experts and academics from the Global Agenda Council on the Future of Oil and Gas wrote in a whitepaper on the topic.

If everyone recognizes there’s a trust deficit and agrees that we must do something about it, what next? The first step in any attempt to solve a problem, especially one this complex, must be an effort to understand its root causes. And as it turns out, there are several. We went to some of the experts who contributed to the white paper to find our more.

An industry defined by negative environmental headlines

By David Hobbs, Head of Research, King Abdullah Petroleum Studies and Research Center

It’s been more than five years since the Deepwater Horizon oil spill – an event referred to as the worst environmental disaster in US history – but the images are still fresh in the memory. Eleven people were killed in the accident, as were countless numbers of fish, birds and other wildlife. It was these images – oil-soaked turtles and dolphins – that made headlines around the world and shaped or cemented perceptions of the oil and gas industry.

Oil and gas companies have set expectations among their stakeholders that they can operate without negative environmental impacts, but in too many cases, their actual performance has fallen short. It may be one of the reasons why so many people seem to lack trust in the industry and risk ignoring the contribution that it can make to solutions.

This perception is, in part, unfair. Many operators work to high standards, taking all necessary precautions and going beyond reasonable efforts to clean up environmental damage when it does happen. But whether it’s fair or not, in the eyes of the public, the “bad apples” define the industry as a whole.

So what to do? We go into more detail in the white paper, but one of the first things that might help turn the tide would be the development of industry-wide standards for environmental performance, with transparent reporting. And while the entire industry should not be judged by the actions of a few bad actors, companies could hold one another accountable if they fail to meet acceptable standards. It could go even further by setting up systems to mutualize risk, which have worked well in other sectors, such as healthcare.

It might be many years before the public forgets the images of millions of gallons of oil washing up on American beaches. But these approaches could go a long way to building confidence in the ability of the oil and gas industry to operate to high standards while accepting responsibility for inevitable accidents that damage the environment.

Stamping out corruption, increasing transparency

By Duncan Wood, Director, Mexico Institute, Woodrow Wilson International Center for Scholars

The idea of a corrupt oil and gas industry is deeply imbedded in public imagination in many parts of the world. Recent events – such as Brazil’s Petrobras scandal, which has drawn in political leaders all the way up to the country’s president – have done little to dispel those views. And it’s one of the leading causes of mistrust in the industry.

But it actually has implications beyond trust. It is an enormously costly problem that creates operational and supply chain inefficiencies, can result in huge fines and compliance costs in the aftermath of a scandal, and can cripple a company financially. In the five months from September 2014 to February 2015, Petrobras saw its shares plummet by 60% in response to the corruption scandal.

Corruption scandals also make it more difficult for countries to access both private and public capital. This impairs economic growth, sometimes severely – and again reinforces a lack of trust in an industry that some see as serving only a privileged few.

It doesn’t have to be this way. The energy industry has, in many instances, taken a leadership role in international anti-corruption activities. Fluor Corporation’s work with the Forum’s Partnering against Corruption Initiative is one example, as is Mexico’s CFE partnership with Transparencia Mexicana. And then there is the active participation of many oil and gas companies with the Extractive Industries Transparency Initiative, which is helping to formulate standards for transparency around the revenues that countries receive from the extractive sector.

The industry could take these voluntary initiatives one step further and help create an international industry watchdog to improve reporting and verify claims of corruption among its members. Public trust in the industry is low. These types of steps would send a very clear message that the industry is not the problem, but it can be part of the solution.

Making the industry work for all

By Valérie Marcel, Associate Fellow, Energy, Environment and Resources, Chatham House

When most people think of the oil and gas industry, this is what they picture: predatory organizations working hand in hand with the elite to take advantage of poor and often naive local communities, and ensure these people don’t get their fair share of rewards from resource extraction and development.

In fact, research from the Harvard Kennedy School found that the biggest underlying cause of conflict between local communities and oil and gas companies was the question of how the benefits of the project would be distributed.

Rightly so, communities expect real economic benefits. And while in many cases these expectations are met – to the extent projects bring jobs and growth – there is no denying that the common perception is that the ruling elite and oil companies share the windfalls, leaving little for the communities.

Unlike the trust challenges relating to environmental performance and transparency, where the solutions are universal, this issue requires a more granular approach, taking into consideration the different circumstances of affected communities. That said, there are a few strategies that could be effective almost everywhere.

One of those strategies involves access to information. The Harvard study showed that many people feel they are not well informed or being consulted when it comes to decisions that will affect them and their community. Some mining companies are already addressing this, and have shifted from a one-way flow of information from companies to communities towards a higher standard requiring free, prior and informed consent. This higher standard of community engagement generates more positive long-term outcomes and could be adopted for onshore projects across the oil and gas industry.

Oil and gas companies should also develop industry-wide standards for ethical lobbying, to counter perceptions of collusion with governments. An independent industry organization could help ensure these standards are being adhered to.

And the industry can and should do more to make sure local communities see the benefits of the projects. One approach, which worked well to secure greater local support of projects in the Niger Delta, is to set up a community trust. More can be done to ensure the benefits of the oil and gas industry are more widely felt, and this will help to address the root causes of the trust deficit.

The three whitepapers on this topic are available here.