Shell, BG, and keeping the lights on in Tunisia
What it would be really interesting to know is: how far is Tunisia’s government aware today that it will shortly have a new business partner in keeping the lights on in the country?
The announcement that Shell is acquiring the BG Group is certainly global business news. A result of falling oil prices and higher costs, the pressure on some companies with less capital and the highest profile example of consolidation that market analysts in London, New York and who knows where else have been predicting for months now.
But it’s also interesting to think of it from the viewpoint of the hundreds of millions of people whose lives have just been touched by the deal. The people who are not shareholders but whose connection to both companies has led to the coining of the word “stakeholder” in governance parlance, precisely because the connection is indirect, sometimes even fuzzy, but no less real.
At one level, there’s the general interconnectness of the globalised world thing. So Tunisia, for example, where BG Group’s production of 60 percent of domestic gas will be handed over to Shell. Egypt, where a few weeks ago BG announced a multi-billion dollar plan to increase gas production, and before that was a lead party to difficult negotiations around back payment of billions of dollars to foreign companies by the state oil company EGPC. Offshore and deep offshore exploration plays in Myanmar, Kenya, India, China and Brazil, where BG says its pre-salt holdings should eventually add 2.6 million barrels a day equivalent of new capacity – big enough to be countable in global debates around carbon emissions.
This is the nature of global business. And in theory there should be no impact straightaway on these operations since they are governed by contracts and laws which are already in place.
But we talk a lot in the governance world about the asymmetry of information in extractive industries. This is often thought of in terms of direct negotiations with governments, and wrangles over tax payments such as Zambia and Timor Leste are going through right now.
It applies just as much to the furious pace of deal making between global businesses thousands of miles away from operations, in boardrooms where the government isn’t at the table at all. It is sobering to reflect on what information decision makers like Tunisia’s President Essebsi and Prime Minister Essid may have had when about Shell’s bid for the BG Group.
Of course it’s not as if the Tunisian government doesn’t have other pressing issues: its fragile democracy, the still desperate economy, thousands of its citizens gone to join IS in Syria and some of them now launching attacks at home. This isn’t in any sense to point a finger at the Tunisian government. And we have no data either way about what consultations either company has had with its government partners around the world. But try even to imagine the possibility that a deal with this kind of domestic impact could be sudden news to the government in Germany, or Australia, or Spain. It’s a kind of thought experiment on the concept of asymmetry of information. That’s what it looks like in the flesh.
And there are two big practical governance questions around this deal – actionable, if you like.
The first is capital gains tax or its equivalent. According to Ernst and Young, Brazil, China, Colombia, Egypt, Myanmar and Tanzania are among jurisdictions where a capital gains tax or its equivalent might be levied on this deal since it involves at least an implicit valuation of assets being transferred. In these countries it’s a workflow issue – but are the civil services and governments geared up for it? For others, it may be a policy debate. Tunisia, in this context, might want to reflect on the fact that (according to a first reading of the Ernst and Young guide) its fiscal regime does not allow it to realise any share of gains in the value of assets which produce 60 percent of the gas it needs to feed its power plants. In Uruguay, it will depend on whether the BG Group has been operating as a locally incorporated subsidiary or not.
The second “workflow” issue is ringfencing, or its opposite, consolidation – provisions in the law that allow a company to deduct expenses in one contract area against taxable profits in another. In China, for example, Shell may be able to write down future exploration expenses in BG-held assets against its own profits in other fields. That may be true in other countries too.
Governance focuses on management of direct relations between companies and governments, different arms of government, and, increasingly, on whether civil society is free to poke around, investigate, and voice dissent. These are all right and proper.
But the global market is the elephant in the room. Relations between one private company and another, and between both of them and their shareholders and financiers, are critical to the way it all plays out. Even if knock-on effects are often delayed and indirect, we need to do far more to sift developments in the global marketplace, deal by deal, for how they affect the political economy, and therefore the governance structures, of scores of countries in the Global South.
Let’s start with this one.