It’s Time for EITI to Tackle the Energy Transition

This post is part of the "Resource Governance and the Energy Transition" series. 

Key messages:

• Stakeholders in resource-rich countries deserve timely information on the social and economic implications of fundamental changes unfolding in the extractive sector, especially those related to the energy transition.
• Even in the current constrained environment, the Extractive Industries Transparency Initiative (EITI) has existing tools that could start advancing this goal – including its current disclosure requirements, national multi-stakeholder processes, and links to companies’ existing climate reporting.
• In response to the coronavirus pandemic, the EITI board has agreed measures to enable flexibility in EITI implementation aimed at ensuring countries and companies can maintain momentum for transparency, while adapting to national and commercial realities, and meeting pressing demands for information.
• This flexibility offers a unique opportunity to increase forward-looking disclosures that shed light on the shifts in policy and practice that extractives companies and resource-rich countries are making in response to the coronavirus crisis, and their implications for longer-term energy transitions.

This week the Extractive Industries Transparency Initiative (EITI) International Board will meet virtually. The most important question on the agenda is: How can extractive sector transparency address the interrelated factors of the coronavirus pandemic, record-setting volatility of oil prices, and the global economic downturn?

One critical role that the EITI can play is to shed light on the shifts in policy and practice that extractives companies and resource-rich countries are making in response to this complex crisis, and their implications for longer-term energy transitions that have the potential to dramatically reshape the development prospects of resource-rich countries. If companies and countries are transparent about these responses as they are unfolding, this will facilitate proper oversight and public debate on potential dependency shifts, “race to the bottom” risks, and barriers to transition.

As a member of the EITI board, I believe we need to prioritize two evolving processes that could help make this happen.

1. Addressing the energy transition: transparency is mission-critical and overdue

In February, before coronavirus and negative oil prices were on the radar, the EITI board discussed a draft paper from Chatham House on EITI’s role in addressing energy transition issues. That paper was just released this week, and it offers concrete recommendations for how the initiative can respond to the changing global context for extractives governance. One of the main recommendations is that the EITI board should make a high-level policy commitment to mainstreaming transparency on climate risk and energy transition through the next EITI Standard. As a member of the working group that helped shape the 2019 EITI Standard I pushed hard for the incorporation of energy transition linkages at that time, and civil society has been calling for the EITI to address climate issues since 2015. Such mainstreaming is overdue, and making a high-level commitment now would still allow plenty of time to hammer out the details.

Some argue that energy transition matters represent “mission creep” for the initiative, but transition impacts will be perhaps the most drastic sectoral shifts that many resource-rich countries will face. If EITI data and processes aren’t helping stakeholders to understand the social and economic implications of the most fundamental changes unfolding in the extractive sector, then what is EITI’s mission?

That said, carrying out robust transparency measures takes work, especially via a multi-stakeholder process, which is one of EITI’s most valuable features for contextualizing issues in broader policy debates and on-the-ground realities. And the human and financial strains resulting from coronavirus are already making implementation even more complicated. The EITI board has a responsibility to consider these factors and should strongly consider recommendations focused on leveraging existing tools—including current EITI requirements, national multi-stakeholder groups, and companies’ existing climate reporting (e.g., TCFD)—as relatively low-cost mechanisms to facilitate analysis of energy transition implications for producer countries.

At a Chatham House roundtable earlier this year, my colleague David Manley and I presented a number of examples of how existing EITI disclosures could help answer key energy transition questions. For example, current EITI reporting requirements on state-owned enterprises’ reinvestment practices and expenditure rules could inform debates about whether increased uncertainty regarding returns on investment should shape national oil company efforts to expand exploration. At the roundtable, we also noted that a significant constraint to such analysis is that EITI data is often up to two years old, whereas energy transition considerations focus on forward-looking scenarios. An EITI innovation necessitated by the coronavirus crisis could serve as a model for a more forward-looking approach to energy transition reporting.

2. Responding to crisis: Tracking shifts in resource dependency levels, ‘race to the bottom’ risks and barriers to transition

In recognition of the significant challenges associated with the pandemic, the EITI board has agreed measures to enable flexibility in EITI implementation and reporting. These measures are aimed at ensuring countries and companies can maintain momentum for transparency, while adapting to national and commercial realities and meeting pressing demands for information on key changes unfolding in the extractive sector. Under this flexible approach, national multi-stakeholder groups may choose to deviate from the standard procedure for EITI reporting in 2020 by instead disclosing information on sector developments resulting from coronavirus, commodity price shocks, and the potential for longer-term reductions in demand for commodities. The surging challenges of the current global crisis put into sharp relief a set of long-term issues that resource-rich countries must address to adapt to energy transitions. In this respect, EITI’s flexible reporting approach could help focus attention on a number of energy transition developments that will matter immensely to citizens.

Dependency shifts. One set of highly relevant sector changes that are within the scope of flexible EITI reporting relates to delayed licensing rounds, postponed exploration and development plans, and downward revisions to budget projections based on new breakeven oil price assumptions. Such revisions could indicate that energy transition dynamics stemming from lower oil prices, reduced demand for fossil fuels, and international climate commitments are impacting a country’s finances. Depending on the timing and scale of such shifts, this could prompt citizens in some oil-producing countries to raise serious questions about over-dependence on resources and significantly adjust their expectations about what the sector will deliver for them economically.

"Race to the bottom" risks. Conversely, incentives requested by or given to companies, such as overly generous tax breaks or bailouts, force majeure relief, or reductions in environment and social protections could indicate that actors may be seeking to mitigate energy transition impacts by hastily pushing oil projects across the finish line in order to derive whatever profits and revenues they can. While such “race to the bottom” tactics might seem rational in the short term, the longer-term benefits for countries may not outweigh the social, economic and environmental costs. And it’s not just oil—many mining countries are also experiencing downturns. However, if the current circumstances accelerate a shift toward renewable energy, then increased activity around strategic minerals could impact some mining countries, again creating the related need for even greater transparency and oversight.

Barriers to transition. Sector shifts to relax regulatory enforcement, reduce oversight of state-owned enterprises, and make exceptional uses of sovereign wealth funds could reflect the practical constraints of countries grappling with limited government bandwidth and unprecedented public health needs. However, in some cases, these same shifts could also indicate risks of unscrupulous actors exploiting the chaos of the crisis for corrupt purposes and their own personal gain. Similarly, restrictions on public gatherings have proven an important tool for slowing the spread of coronavirus, but there is cause for serious concern when such restrictions become impediments to civic space. Both capture by vested interests and restrictions on civic space can create barriers to public dialogue and policy action related to the energy transition.

An opportunity for fundamental change

Not every change in government or company plans or policies in the coming months will necessarily be problematic, nor linked to significant energy transition impacts. But citizens deserve timely information about what shifts are happening so that they can evaluate these changes for themselves and understand any longer-term energy transition implications. And they must have the necessary civic space to freely debate such evolutions.

We must also remain vigilant to ensure that temporary flexibility doesn’t result in longer-term backsliding on transparency. The role that EITI actors and processes could play in shedding light on urgent sector developments, meaningfully contributing to current debates, and informing strong policy responses is more important now than ever before. Just as we have all been forced to reimagine our daily routines, my hope is that countries and companies seize this opportunity to do things differently, and better.

Erica Westenberg is the director of governance programs at the Natural Resource Governance Institute (NRGI).