The Resources Slump: Slash & Burn

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After several years of headlong expansion, big oil and mining companies are pulling up abruptly. Soaring commodity prices have slumped across the board since July. Together with the impact of the credit crunch on project finance, this drop has forced scores of extractive companies to cut back on new investments and scale down production at many existing operations.

After several years of headlong expansion, big oil and mining companies are pulling up abruptly. Soaring commodity prices, which during the past year have broken records in markets from crude oil to copper, have slumped across the board since July. Together with the impact of the credit crunch on project finance, this drop has forced scores of extractive companies to cut back on new investments and scale down production at many existing operations. Shell, for example, recently deferred indefinitely a multi-billion dollar expansion of its Canadian oil sands project, while major mining companies are reviewing billions of dollars more of planned investment for next year.

Companies focused intently on cutting costs may be tempted to treat management of socio-political and sustainability issues as a luxury which they can live without while projects are on hold. Clearly, legal requirements in this area need to be met: complying with environmental regulations for mothballed facilities, for example. But is there any sense in going beyond this - for example investing in community projects or stakeholder engagement programmes - while other investment is frozen? In fact, while waste should be cut back in this area as elsewhere, strategically protecting key relationships during this period actually may be more important to companies' long term success than any short term cash savings...

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