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Corruption Risk in the Oil & Gas Sector

Corruption Risk in the Oil & Gas Sector

The spread of the Oil & Gas sector across the globe and the criticality of the operational/contractual relationships with governments, venture partners, vendors and contractors, mean compliance with anti-corruption regulation require considerable attention from senior management of Oil & Gas firms.

Corruption risk is becoming a serious issue for global business and the Oil & Gas sector has incurred the maximum penalties. According to an international civil society organization - Transparency International “companies in the Oil and Gas sector are being perceived to be more likely to bribe than those in other sectors; it was in the bottom 25% of 19 sectors”.

Fluctuating commodity prices and an increasing energy demand combined with restrictions in accessing reserves and improvement in technologies have resulted in an enhancement in Oil & Gas exploration activities, reinvestment in capital projects and more M & A functions. The constant requirement for growth is driving the Oil & Gas sector to venture into markets that would have been considered as expensive and risky before. Since, the commercial and operational risk profiles of Oil & Gas firms undergo a transformation, due importance has to be given to identifying and managing corruption risk.

In addition to overseeing corruption risk is the development in anti-corruption legislation with an international reach. This movement is projected to persist as nations across the globe aim at complying with anti-bribery and anti-corruption (ABAC) legislation.

Though ABAC enforcement regulations have covered a number of sectors, the Oil & Gas sector has witnessed several highly sensitive cases. It does not mean that the Oil & Gas firms are more corrupt, but there are specific attributes which increase risk.

Operating in Emerging Markets

As the availability of natural resources in developed markets diminishes, there is a need to function in nations which are perceived to be corrupt. Volatile political climate along with the controls required to negate corruption can make these places extremely risk. For instance, Africa, Latin America, Asia and the Middle East are all vital markets for Oil & Gas growth. Most often, nations from these regions tend to have lower rankings on Transparency International’s Corruption Perceptions Index, which indicates that there is perceived to be a significant amount of corruption. Again, functioning in various diverse regions is challenging with regards to executing business policies/procedures - cultural variations and technological barriers. In a given nation, Oil & Gas stakeholders would be used to a particular style of functioning and therefore may overlook international policies and implement business functions that could be corrupt.

Liaising With Government Agencies

Most of the organizations in the Oil & Gas industry are wholly/partially state-owned firms. It is possible for the employees of the Oil & Gas firms to be looked as international officials as per the bribery and corruption legislation globally. The functioning of emerging markets is usually bureaucratic and it is common to liaise with government officials for business operations which could result in bribes being paid.

Depending on Third Parties

Oil & Gas firms frequently rely on third parties to oversee operations. As per the FCPA in the US and several other global anti-corruption legislation, “firms could be liable for corrupt payment made to government personnel by third parties”. According to the UK Bribery Act, “the company will be liable for an associated person’s bribery if it is intended to obtain or retain business, or a business advantage, for the company”. Monitoring the working of third parties could be challenging.

- Jess Potts
Published on:
April 30, 2015
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