The allocation of benefits from a petroleum development project can be a significant factor in the commercial success or failure of the project for both the foreign investor and the host government.
In recent decades, host governments and foreign investors have developed a much greater understanding of each others' needs and motivations. Host governments have come to understand that they are competing for foreign investors' capital and that to attract that capital, they must allow foreign investors to earn a profit commensurate with the risk they are taking, whether that risk is geologic, commercial or political. Similarly, foreign investors have come to understand that host governments need both money and technical assistance for the development of their domestic economies and that short-term gain from unrealistic contract terms can be outweighed by long-term damage from adversarial relationships.
Petroleum activities in the developing world are now more than ever a joint undertaking by host governments and foreign investors for their mutual benefit.
Unfortunately, benefits to host governments at the national level may not lead to benefits for those most immediately affected by petroleum development. These include local and regional governments in the area affected by the development, individuals living on the land affected by the development and individuals and communities affected economically by the development. The grievances of affected groups may not arise because of petroleum development, but petroleum development is often a lightening rod for the expression of those grievances.
Foreign investors and host governments have reacted to the problem of extending benefits of petroleum development to affected individuals and communities in a variety of ways. Some of the traditional means of extending benefits to local communities include construction of infrastructure such as roads, hospitals and schools by foreign investors, reservation of jobs for local residents, mandatory "buy local" requirements that encourage the development of local industry and training programs to provide local residents with technical skills. More significant steps, such as assigning some of the financial benefits of petroleum development directly to regional and local governments, or establishing trust funds to provide revenues in the future for local populations, have been considered or taken by some host governments.
These steps are generally supported by foreign investors, who often bear the brunt of local communities' 1. The author would like to thank Kit Armstrong of Chevron Texaco and Terry Meriage from Occidental Petroleum Corporation, who shared some of their thoughts and experiences with the author. Al