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Beneath the Surface: The Case for Oversight of Extractive Industry Suppliers

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Large oil, gas and mining projects are usually associated with a few big names such as Shell, Exxon, Rio Tinto, Gazprom and Codelco. These are rights holders—companies that receive licenses from host governments to extract resources. Typically, however, lower-profile companies do much of the work to take natural resources out of the ground. These are suppliers—companies that provide the goods and services that make extraction happen. They range in size from multibillion-dollar international conglomerates to specialized or local firms that may only have a handful of employees. 

This report makes the case for greater oversight of extractive industry suppliers. It explains the economic significance of extractive industry suppliers and identifies the main stakeholders involved in supplier governance. It considers policy areas where the impacts of poor supplier governance play out and reviews how governments, rights holders, state-owned enterprises (SOEs) and suppliers are beginning to share information on the economic impacts of suppliers, how these disclosures feature in global transparency and reporting initiatives and what more can be done.

Key messages:

  • Between 2008 and 2017 companies holding rights to extract oil, gas and minerals spent, on average, just under a trillion dollars a year on suppliers. Though this figure will shrink in 2020 as a result of the coronavirus pandemic, spending on suppliers will remain one of the major financial flows from extractive industry projects.
  • Without effective internal management systems and strong external oversight, weak governance of suppliers can lead to:
    o   Cost overruns that undermine company profits and government revenues
    o   Suboptimal taxation of supplier profits, resulting in lost tax revenues
    o   Local procurement systems that fail to deliver the intended economic benefits to host countries or communities
    o   Corruption risks including bribery, favoritism and state capture
  • Transparency can help improve supplier oversight. In particular, the private sector, state-owned enterprises and host governments should publicly report on procurement processes, supplier identities, spending on suppliers and supplier taxation.
  • A number of global reporting standards and ad hoc disclosure practices set valuable precedent that extractive industry stakeholders can build upon to advance supplier transparency. Engaging supplier companies in discussions about transparency will be essential.
  • Together, the coronavirus pandemic, declines in commodity prices and the global economic downturn present major disruptions for supplier firms and will likely precipitate structural change of many supplier markets. This creates urgent incentives for governments and the private sector to improve supply chain resilience and keep production costs low, while making sure that procurement decision making continues to contribute toward a social license to operate. Given these high stakes, it is imperative that governments, the private sector and civil society improve oversight of the roles that supplier firms play in extractive industry projects.

Image credit: Sebastian Pichler