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Are falling oil prices bullish for corruption?
Feb 10 2015 Alison Taylor
As oil prices plunge and energy company profits vanish, corruption risks
are likely to proliferate. Some companies may be tempted to cut costs by
cutting corners on corruption risk management. Despite the painful
operating environment, this is no time to reduce spending in such a critical
area. Scrimping on anti­corruption is a false economy. Additionally, tighter
revenue projections may cause oil companies to pressure their overseas
units for income, which could well exacerbate pre­existing corruption risks.
Energy prices have dropped 60 percent since June, and oil companies are
carving up budgets. Most are bent on maintaining shareholder dividends – described by Shell as an "iconic item" – while
slicing away at investment plans, exploration spending and new ventures. Smaller oil companies look vulnerable to
acquisition. The underlying logic is, in part, to cut supply in the hope of buoying prices, but there’s no certain time frame
for an oil price recovery. With strategic initiatives in abeyance, salaries frozen, and jobs being culled by the thousands,
compliance and corporate responsibility 'cost centers' are likely to find themselves under significant budgetary pressure.
Still, cuts in these areas would be mistaken. More than ever, oil companies will need robust anti­corruption, due
diligence, and social engagement.
Behind all the headlines and dramatic forecasts about pricing and demand, seismic shifts are taking place in the energy
industry. Big Oil's relationship with the investment community has become strained. Axa IM, one of Europe's biggest
asset managers, recently warned that working in fossil fuels can put a company’s reputation at risk. Amid a fast­growing
divestment campaign that aims to emulate the anti­Apartheid movement of the 1970s and 1980s, pension funds,
insurance companies, endowments, and other responsible investment vehicles are reviewing their portfolios. Institutions
are mulling whether it would be better to withdraw their funds altogether or maintain the stakes so they can lobby for
environmental, social, and governance transformation in the energy industry.
Change is palpable
On the same day Shell was announcing $15 billion in cuts, the oil giant was embracing a resolution from 150 activist
stakeholders to revisit its business model in light of potential climate change. Such US independents as Anadarko and
Hess may soon face comparable shareholder pressure. In this context, Big Oil's emphasis on dividend maintenance and
investor retention makes perfect sense.

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Meanwhile, fundamental social shifts are taking place in the world's petro states, the traditional theaters of operation for
oil companies. While the rest of the world enjoys the equivalent of a massive round of quantitative easing, kleptocrats in
the oil states are watching their economic power bases dissolve – and with them, national social contracts. The resource
curse may have prevented economic diversification while undermining development and competitiveness, but it has also
allowed governments to maintain stability without embracing meaningful democratic engagement. No longer.
In Nigeria, the murderous rampages of Boko Haram have combined with falling oil prices to bring the excesses of the
ruling class into sharp relief, just weeks before elections are to be held. The social disruption and job losses in formerly
booming oil towns is mirrored by growing activism among Brazil's populace, protesting rising bus fares for the third time
in three years. The Venezuelan state's ability to supply basic goods to the public has disintegrated, and its president
roams the world pleading debt forgiveness as mothers queue all night to buy milk. In Russia, oligopolistic state
structures are under fierce pressure from the combined effects of falling oil prices and Western sanctions, and power
players like the chairman of Alfa Group are starting to break ranks. Iraq's prime minister has warned that Baghdad lacks
the money to contain ISIS. In the Persian Gulf, plans for both reform and economic development are endangered.
Anti­corruption opportunities
Falling oil prices and the volatility and frustration they unleash may, however, ultimately boost the global anti­corruption
movement. Parastatals (government­run entities) will find it more difficult to hide fraud, mismanagement, bribes, and
kickbacks behind cash influxes from the national wells. Fuel subsidies will buy less popular support. Greater hardship for
ordinary people will drive their disillusionment with self­interested regimes and might even put some regimes on the
block. Demands for disclosure of offshore ownership, new rules for tax havens, and the pursuit of thieving dictators will
become louder. All the while, this era of radical transparency, with its unprecedented information flows, will give
campaigners the means they need to follow the money and move to seize stolen assets. As the corruption cases against
Equatorial Guinea's second vice president, Teodorin Obiang, and former Nigerian state governor James Ibori have
shown, the ruling classes in oil polities make excellent targets.
In the short term, a state of social chaos and heightened security risk will become the new normal. As power structures
grow more fluid, key political stakeholders may be removed or exposed at any moment. (Politicians know a fall from
grace can swiftly be followed by a turn in court on corruption charges, though as former Egyptian president Hosni
Mubarak's case shows, the exigencies of political risk can take many twists and turns.) Still, anti­corruption investigators
have been cooperating better across national boundaries, and globalized Western regulators can now follow up on
"local" corruption probes.
Companies under pressure
The oil companies are on the spot. Reductions in corporate revenue projections will increase pressure on their overseas
business teams to find fresh revenue sources. Management pressure to maintain forecasts may well exacerbate pre­
existing corruption risks. Overseas teams will be less willing to risk delay by declining to pay up, at least on relatively

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Alison Taylor is the director of Energy and Extractives at BSR (Business for Social Responsibility). She focuses on
transparency, corruption, stakeholder engagement, social responsibility, and organizational change.
small bribes.
"Falling oil prices are likely to heighten demands for bribes on the supply side, as state officials seek to ‘get it while they
can,’” Richard Bistrong, a former Federal Bureau of Investigation (FBI) cooperator and anti­bribery blogger, said. "At the
same time, the corporate side will see added performance pressure to complete existing deals." Bistrong fears we will
see budgetary pressure to cut compliance spending just as upper management is opting to ask fewer questions about
how deals are getting done in the field.
Indeed, anti­corruption campaigners have long targeted oil companies on the basis that industry norms include opaque
bidding, heavy subcontracting, high­risk environments, and significant government interaction. In parallel, the corporate
responsibility movement has pushed extractives companies to engage with local communities, provide services, and
compensate for social and environmental damage. As a result, oil and energy companies have been ahead of the
general corporate curve in implementing programs in anti­corruption, social development, and risk management.
As oil prices plunge and profit margins vanish, some companies may be tempted to cut corners on regulatory, social,
and governance risk management. Despite the painful operating environment, this is no time to reduce spending in such
critical areas. As members of communities affected by energy extraction, local officeholders and investors face
unusually intense risk. Meanwhile, ongoing regulatory investigations into major energy companies show that scrimping
on anti­corruption is a false economy. It is vital to everyone that the oil industry maintain its social contract.