SAJC Cluster 1 Lecture 9 Notes (Extractive Industries)

St Andrew’s Junior College H2 Cluster 1: Development, Economy and Environment (Topic 1.1) H2_Cluster 1_Lecture 9_2024/pg 1 Lecture 9 Managing Resources (III): Extractive Industries KEY QUESTION: How do we manage the extraction of non-renewable resources by the extractive industries? With the completion of this lecture, attached readings and tutorial, you should be able to discuss: - the characteristics of extractive industries - variations in economic, environmental and social impacts of extractive industries between places - varying success of strategies to manage impacts of extractive industries on places Lecture Outline 9.1 Introduction: What are extractive industries? 9.2 Characteristics of extractive industries 9.2.1 Extraction of non-renewable and locationally specific resources 9.2.2 Capital and technology intensive 9.2.3 Dominated by large private and state-owned firms 9.3 Variations in impacts of extractive industries between places 9.3.1 Economic impacts 9.3.2 Environmental impacts 9.3.3 Social impacts 9.4 Strategies to manage impacts of extractive industries on places 9.4.1 Economic diversification and prudent investment 9.4.2 Transparency and accountability 9.4.3 Regulation and enforcement 9.4.4 Rehabilitation and restoration 9.5 Concluding remarks: Why do strategies work better in some places than in others? The well-known Deepwater Horizon oil spill happened in 2010. The rig explosion, which killed 11 workers and sent oil spewing into the Gulf of Mexico for 87 days, triggered one of the worst environmental disasters in US history. BP, one of the world’s largest energy companies, is accountable for this event.

St Andrew’s Junior College H2 Cluster 1: Development, Economy and Environment (Topic 1.1) H2_Cluster 1_Lecture 9_2024/pg 2 Glossary of Terms (These terms will be re-introduced to you in more detail in Topic 1.2 in subsequent lectures) Production Circuit: An interconnected series of functions, operations and transactions through which a specific commodity, good or service is produced, distributed and consumed. Every economic activity can be thought of as a production circuit Production Network: The full mesh of relationships (such as between the different suppliers, business owners, consumers, etc) that lies behind any economic activity. Global Production Network (GPN): The production network very likely takes on a global characteristic, involving relationships among firms all over the world. A global production network (GPN) often results, leading to the eventual production of goods or services. Transnational Corporation (TNC): A firm with the power to coordinate and control operations in more than one country, even if it does not own them. State-owned Enterprise (SOE): A public enterprises that is directly owned and managed by the state. 9.1 Introduction: What are extractive industries? Everything we use to communicate, move, stay warm, stay cool, sit, sleep, cook and refrigerate comes from the … raw material that humans extract from the earth each year. (Emel et al, 2002) Minerals … [excluding oil] account for a small share of world production and trade. Nonetheless, their supply is essential for the sustainable development of a modern economy. They are basic, essential and strategic raw materials … No modern economy can function without adequate, affordable and secure access to raw materials. (UNCTAD, 2007) • The extractive industry consists of any operations that remove metals, mineral and aggregates from the earth. In a very real sense, the extractive industries represent the ‘beginning of the beginning’: the initial stage in the basic production circuit1 and in the web of global production networks2 that make up the global economy. Fig. 1 The basic production circuit (More on this concept in Topic 1.2) • The basis of the extractive industries is the notion of the natural resource: materials created and stored in nature through complex biophysical processes over vast periods of time. • As Fig. 2 shows, the extractive industries fall into three broad categories based upon the kind of minerals involved. For illustrative purposes in this lecture, we refer to (crude) oil and gas mostly. 1 See glossary 2 See glossary

St Andrew’s Junior College H2 Cluster 1: Development, Economy and Environment (Topic 1.1) H2_Cluster 1_Lecture 9_2024/pg 3 Fig.2 Classification of extractive industries • Fig. 3 outlines the basic production circuit for extractive industries. At the most general level it is a relatively straightforward sequence of stages from exploration through to final consumption (although in fact it is a highly complex and contested process; see later sections). Fig. 3 The basic extractive industry production circuit 9.2 Characteristics of extractive industries 9.2.1 Extraction of non-renewable and locationally specific resources • The resources that form the basis of the extractive industries (energy materials like oil, as well as ferrous and non-ferrous minerals like iron ore and copper) are, effectively, non-renewable. They are fixed in overall quantity, at least under known technological conditions. The more we use today, the less will be available for tomorrow. (See again, Lect 5, for a review.) • Quite apart from their finiteness, extractive resources are locationally specific. They are where they are. Their formation is to do with specific geologic (for example, near tectonic plate boundaries) and environmental conditions that are unique to certain places. For example, diamonds are found in only about 35 countries within Kimberlite rocks formed under ve ry high heat and pressure, and (crude) oil more often found in deserts and arctic areas. • They have to be exploited, at least initially, where they occur, although later stages of refining might well be located elsewhere.

St Andrew’s Junior College H2 Cluster 1: Development, Economy and Environment (Topic 1.1) H2_Cluster 1_Lecture 9_2024/pg 4 9.2.2 Capital and technology intensive • The core of the extractive industries, as Fig. 3 earlier shows, is the sequence of stages from exploration through development, extraction, processing and distribution to consumption. Each of these poses immense technological challenges. • In general, highly expensive, sophisticated technologies have to be employed at all stages of the production circuit. For example: o Building a large base-metals mine can cost over a billion dollars; o The magnitude of investments in the oil and gas industry is even greater; o Constructing a pipeline, developing an oil deposit or revitalising an ailing, underinvested mineral industry can run into many billions of dollars. • Capital intensity is extremely high while labour intensity is low. These industries employ few workers relative to their size. o For example, the biggest non-state oil company in the world, ExxonMobil, employs around 80,000 workers. The biggest metal mining company, BHP Billiton, employs 42,000. o In comparison, the retailer Wal-Mart employs 2,100,000 workers while the automobile company Toyota employs more than 300,000. o The difference is especially dramatic if we compare sales per worker: ExxonMobil $4.83 million; BHP Billiton $1.43 million; Wal-Mart $180,000; Toyota $730,000. • Firms in the extractive industries face three closely related technological challenge, largely because they are dealing with ‘depleting assets’: (1) Finding new sources of supply o Once an oil well dries up or a copper mine becomes exhausted, it cannot be regenerated. New sources of supply must continuously be sought as existing sources become exhausted and/or too expensive to exploit at prevailing market prices. o This is not