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A negotiation challenge

April 8, 2012

News reports from East Africa bring regular confirmation of substantial oil and gas deposits. Kenya, South Sudan, Uganda, Tanzania and Ethiopia are all beneficiaries of recent finds, producing understandable hopes for investment and prosperity.

Yet the challenges for those who will negotiate contracts to realize these benefits are many. Some – such as lack of local skills and infrastructure – will be familiar to oil and gas development companies. Others, such as cronyism and pressures for bribery, are also sadly familiar. But the level of political instability is probably extreme even by the standards of this industry. And the extent of competition for development contracts, combined with the intrusion by regulatory authorities and NGOs, continues to make life harder for the established US and European oil firms.

Western firms have been the source of most of the recent discoveries, placing them in prime position to win the resulting contracts. Yet any negotiator will find they are in a difficult position, especially if they weigh the short term goal of winning the contract against its longer term consequences for their company.

Consider for a moment some of the key stakeholders in this game. The political leadership in most of the region perceives power as a route to amassing personal and family wealth. They tend to favor particular tribes or supporters when it comes to wealth distribution. These actions create high levels of instability and fertile ground for armed opposition movements – certain to grow when there is so much additional wealth to fight over and certainly not averse to attacking oil and gas installations or those who work at them. Disparities in national income are also likely to inflame regional and cross-border conflicts, which might range from obstacles to transportation to all-out war.

As if these local considerations are not enough, there are also the international factors to consider. Domestic and international regulatory authorities, especially in the US and the UK, will presumably be watching closely to ensure that bribery and corruption play no part in contract awards. Alongside them, a range of NGOs will be only too eager to reveal any perceived mis-step by the oil and gas giants (especially if they are from the West). And behind the scenes are the government-backed firms from China, already upset that they did not undertake much of the discovery work and now anxious to win large chunks of development. Alongside them there are large international players such as Russia’s Gazprom, which also plays under a somewhat different rule book.

So as a negotiator, what would you do? Establishing a sustainable project would suggest you should push for an ethical agreement – free of corruption, ensuring balanced benefits for the local population, engaging regional authorities on which success depends. Clearly you do not want to win the contract only to find that development work is constantly undermined by conflicts, disputes and adverse publicity. Yet your noble instincts must be undermined by the knowledge that key decision makers are unlikely to share your personal or corporate values and that if you are not willing to satisfy their personal ambitions, your competition will.

An extreme situation? Perhaps. but as I have highlighted in other recent blogs, the growth of business opportunities in emerging and unfamiliar markets is becoming increasingly the norm. That means contract and negotiation professionals must start preparing their knowledge and refining their skills to grapple with such complex scenarios. So now is a good time to start. What approach would you take in this situation?

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