Durable extractive contracts balance the legitimate interests of host governments, investors, and communities, with due account taken, where relevant, of the specific rights of affected indigenous peoples recognised under applicable international and/or national law.
12. The extraction of non-renewable resources is a process of asset depletion. Both host governments and investors have a common objective to maximise the overall value that can be obtained from the exploitation of finite resources. But, beyond obtaining revenues and getting a fair share of the financial benefits to secure a reward for ownership of resources, host governments pursue multi-layered objectives aimed to secure broader benefits to support the achievement of development priorities for the national economy.
13. Local communities should benefit from opportunities which arise through extractive projects such as employment, provision of services and supplies, access to infrastructure, and other community development outcomes.
14. Investors should be rewarded for the contributions made in terms of commitment (against alternatives) of capital, technical and managerial expertise, proprietary technology, operational experience and integrated solutions, all of which require significant investments, risks taken and enduring over time to explore, develop, produce and commercialise the resource.
15. A balanced situation that recognises all of (a) the host countries’ interest to develop its resources in pursuit of multi-layered development objectives; (b) communities’ interest to optimise local benefits; and (c) investors’ need to be rewarded for the risks incurred and the allocation of financial and organisational resources is essential for extractives contracts to be sustainable in the long term.
16. Contracts that maintain an alignment of interests throughout the life-cycle of the project are more likely to be durable. The framework for a successful project should reflect a balance of risks and rewards for the parties. The outcome is then mutually beneficial, with governments, investors and communities sharing the risks and rewards and enjoying a more sustainable long-term relationship.
17. The feasibility of a project should account for the additional costs linked to adverse social or environmental impacts over the life-cycle of that project, and for the costs associated with the optimisation of socio-economic benefits through suitable means agreed by the parties. It is critical to ensure the social and environmental elements are integrated into the negotiations and reflected in the agreement.
18. Uncertainty and actual or perceived risks are present at all stages of an extractive project’s life-cycle, from exploration through development to production, processing and marketing, decommissioning/closure and rehabilitation. The nature and degree of risks vary at different times during the life-cycle of the project and are context dependent, industry and project specific. Uncertainty on the geological potential diminishes as more information is acquired on the quantity, quality, accessibility of the resource and the costs of extracting it by host governments and investors. Risks that resources are not present, uncertainty regarding the volume and technical quality of any discoveries and market risks related to price and costs, including initial capital costs of development, are outside of either party’s control. There is also uncertainty about the future economics, markets, and politics that will affect the project. By the time production starts, sunk costs associated with substantial capital investment expose investors to political (expropriation, tax and other policy changes) and economic risks, given the long payback period before revenues are generated and the investment recovered. Meanwhile, uncertainties inherent in the economics of resource extraction (recovery factor, reservoir or deposit performance, project cost, price) persist. Actual or perceived environmental and social risks are as important as other risks and are influenced by many factors, including the operating environment and local community context. If there is not a clear recognition of the need to ensure actual social benefits at the national and community level, irrespective of expected or actual financial benefits, the project may be at risk.
19. Perceptions of risk and opportunities by different stakeholders may initially vary between them and do so again at different stages of the project. It is therefore very important that common understanding is built and maintained so that risks and opportunities are recognised and fully appreciated. Sharing critical information about the actual and perceived risks of the project and engaging with the community to understand and address their concerns to find appropriate solutions is essential to build a trustful relationship and ensure the social licence to operate for both governments and investors.