By James Sisco, ENODO Global

Oil and gas companies operating in Peru face significant challenges when engaging with local populations. Long-standing social tensions, environmental concerns and constant shifts in regional and national political landscapes are common issues faced by companies operating throughout the country.

Adding to this complexity are external pressures from political activists, non-government organizations (NGOs), environmental groups and even foreign governments. These actors attempt to influence individuals and communities through messages and propaganda, oftentimes negatively affecting companies and their operations. The impact of these actions are ultimately realized through increased costs for additional physical and technical security and lost revenue due to production delays or stoppages from protests, riots and violence.

Companies must therefore address and manage social conflicts with the communities surrounding operational sites—where the majority of the threats emanate—to mitigate risk and safeguard production.

The political, religious and ethnic conditions experienced in Peru are similar to those found in other Latin American countries. With a relatively homogeneous religious composition and a peaceful but ethnically diverse society, many assume that Peru offers a conducive environment to conduct business. However, that is not the case.

Between 2013 and 2014, protests and unrest have caused project delays and divestment in oil and gas exploration by 30% and in mining by 11%. And in its most recent report, the Peruvian Human Rights Ombudsman (Defensoría del Pueblo) recorded 210 social conflicts for the month of December 2014. This included 160 (76%) active conflicts, with the remaining 50 in a situation of “latency.”

Furthermore, it is estimated that 90% of the 140 environmental conflicts registered in January alone were related to mining and energy. It is no coincidence that Peru’s largest mining center in south-central Peru, Apurimac, experienced the greatest number of social conflicts during December with 24. Apurimac accounts for about 20% of Peru’s mining portfolio and mining concessions cover 57.7% of its land.

Data and events on the ground suggest that Peru is beset with serious social tensions and conflicts. A portion of the blame can be attributed to the national government’s inability to strike a balance between creating a favorable environment for foreign investment, while appeasing the demands of Peru’s indigenous populations.

Previous governments have demonstrated an inability or unwillingness to protect private sector investments from population-centric threats. The current government has 15 months remaining in its term and actively avoids situations that may entangle it in social conflicts that could jeopardize its future election prospects. As an example, in February, Peru’s President Ollanta Humala replaced Energy and Mines Minister Eleodoro Mayorga with Rosa Maria Ortiz, the sixth energy minister since 2011, due to protests against Pluspetrol’s exploration of natural gas in the Amazonian Loreto region. The government’s lack of resolve when dealing with social conflicts over natural resources provides fertile ground for grievances to manifest into violence and allows nefarious actors significant room to maneuver.

One instructive example for extractive companies is the Conga mine project. As a result of local opposition and violence, Newmont Mining and Buenaventura’s US $4.8 billion project—one of Peru’s largest projects to date—continues to be on hold due to unresolved social conflict. Construction of Newmont’s Conga gold and copper project was suspended in late 2011 due to violent protests from the indigenous populations in Cajamarca, Peru. The protests were supported by Cajamarca’s Governor Gregorio Santos, environmental NGOs and radical groups, such as leftist Chavistas who focused on environmental issues to disrupt the project. The groups stirred unrest by disseminating false information and negative messages regarding water contamination within the communities surrounding the site. Protests and riots ensued and the Peruvian government was required to intervene and declare a state of emergency.

Newmont and its partners were forced to halt the project even though it had undergone extensive reviews by government agencies and was approved by the Peruvian Ministry of Mines and Energy after a thorough environmental impact assessment that took three years to complete. This example demonstrates how Peruvian communities, guided by external forces, were able to negatively impact a large project that would have provided substantial revenue and benefits to the local community.

Oil and gas companies with onshore operations in Peru can expect to face similar difficulties, if they are not already. While the majority of companies accept and understand the damaging impact of failed community relations on their operations, many are unsure how to manage them. Many companies retain the services of local Peruvian firms that specialize in community engagement or conflict resolution.

There are numerous firms in Lima that specialize in corporate social responsibility (CSR) and advertise knowledge and insights into indigenous populations and conflict resolution. However, the majority of these firms fail to identify the “true” local grievances. They rely on NGOs and activists to obtain information, and then create engagement strategies built around the client’s engagement platforms and requirements, not the communities. Companies that have established CSR divisions have typically adopted similar concepts into their approach and company philosophy. The majority of companies fail to properly design and execute effective CSR initiatives that address community needs. Moreover, attempts to mitigate financial losses through CSR initiatives have proven ineffective and have achieved mixed results at best.

CSR was originally designed for multinationals doing business in emerging markets to conduct corporate philanthropy. Traditional CSR initiatives focused on charitable donations for local projects, frequently provided to NGOs operating in the region, to meet a social purpose and allow companies to highlight the CSR dollars spent on annual shareholder reports and in meetings with government leaders. Although generally well intentioned, this approach fails to create an environment on the ground where the community directly benefits from the company’s activities. Additionally, the traditional CSR approach is in most cases separated from the operational aspects of the project. Therefore, there is no ability to understand the true drivers of instability and directly impact the issues that underpin social conflicts in the communities where companies are operating. More importantly, traditional CSR fails to align community and corporate objectives, which when achieved can significantly reduce disruptions and stoppages to operations.

Fortunately, a new model to replace CSR is emerging that is referred to as “shared value.” Shared value is a management principle that creates an opportunity for businesses to solve social problems and simultaneously benefit the community and the business. It is defined as “policies and operating practices that enhance the competitiveness of a company while advancing the economic and social conditions in the communities in which it operates.” The concept is based on the idea of embedding societal values into the company’s entire value chain and shareholder value.

Although shared values is in its nascent stage, it is already finding ways into business models. It includes social impacts and societal problems along with sustainability objectives in investment, trade, and business platforms. However, realizing the full potential of the shared value approach requires leaders and managers to develop new skills and knowledge—including an understanding of societal needs and the ability to collaborate with community leaders, NGOs and other actors in the region.

Extraction industry companies in Peru continually grapple with social discord due to the dynamic and constantly evolving social, political, and economic conditions across the country. Fortunately, the social tensions that pose the greatest challenges for business operations and the fundamental issues that drive unrest are understandable and tend to remain static. However, the ability to uncover the identities that underpin behaviors, beliefs, and action is no trivial matter and requires specific skills sets and a methodical approach and process. But when done properly, and applied within the shared value framework, it mitigates violence, delivers benefits to the community and ultimately saves money.

Through tailored engagement strategies and development initiatives companies are able to more effectively communicate the benefits of their projects to the local communities and stakeholders. The combination of more effective strategies and targeted communication plans influences those in favor of the project moving forward, while countering the negative and erroneous messages being distributed by Chavistas and others opposing the project for their own purposes. Oil and gas companies in Peru can significantly reduce the negative impacts of poor community relations by embracing the shared value model.

James Sisco is president of ENODO Global.