Introduction to Extractive Industries

According to the World Bank, about 3.5 billion people live in countries rich in oil, gas, or minerals and these natural resources play a dominant role in 81 countries. Africa alone is home to about 30% of the world’s mineral reserves, 10% of the world’s oil, and 8% of the world’s natural gas.

Extractive industries (EI) operate at multiple scales and use a variety of methods. For mineral extraction, EI includes small-scale and Artisanal Mining as well as large-scale industrial mining operations. For oil and gas extraction, methods may include conventional oil extraction on-shore or off-shore, as well as unconventional methods, such as fracking, coal bed methane, or underground coal gasification.

EI can create jobs directly and indirectly and generate significant revenue. Revenue from the oil, gas, and mining industries has tremendous potential to become a financial base for infrastructure development, social service delivery, and to lift people out of poverty.  Effective governance and oversight of EI may help ensure that these benefits of resource development are realized, and that the resources are extracted in a sustainable manner.

These pages provide information for auditors who are new to EI, including links to additional resources by the World Bank, the Extractive Industries Transparency Initiative, and audit organizations such as AFROSAI-E (African Organization of Supreme Audit Institutions – English).

What are Extractive Industries?

Extractive industries involve the removal of raw materials from the earth to be used by consumers. These raw materials are processed into products that are used in a wide variety of sectors, including energy, transportation, and manufacturing. The WGEI has defined the scope of its work to include oil, gas, and mining activities.

Oil and Gas: According to the International Human Resources Development Corporation (IHRDC)—an oil and gas industry training company—oil and gas provide the world's 7 billion people with 60 percent of their daily energy needs. These resources, known as fossil fuels, originated from the decomposition of organic material compressed over millions of years. Oil and gas resources are located both onshore and offshore.

Figure: Oil and Natural Gas Formation

Mining: Minerals extracted from the ground are critical in many sectors of the world economy, including manufacturing, construction, medicine, and agriculture. For example, metals such as iron, copper, and nickel are often used in home construction, vehicles, and electronic devices. Minerals such as antimony, lithium, and potash are used in medications. Phosphate is used as a fertilizer, and fluorite is found in consumer products, such as ceramics and toothpaste.

Economic and social benefits of extractive industries can be significant.

According to IHRDC, world energy markets are continually expanding, and companies spend billions of dollars annually to maintain and increase their oil and gas production. Over 200 countries have invited companies to negotiate for the right to explore their lands or territorial waters, hoping that they will find and produce oil and gas, create local jobs, and provide billions of dollars in national revenues. According to the World Bank, wealth on the scale experienced in some resource-rich states can generate significant positive development outcomes. Even for states with modest petroleum or mineral deposits, the outcomes from resource development and corresponding investment could be transformative.

For context, in the first decade of the 21st century, investments in mining were estimated at about US$80 billion, with much of this destined for iron ore and copper. According to the International Energy Agency, investments in fossil fuel supply reached US$450 billion in 2017.

Many have noted that EI development outcomes are frequently less robust and beneficial than expected.

For lower-income countries, revenues from exploiting resource wealth s could exceed official aid flows substantially. In principle, such revenues could unlock the constraints of foreign exchange, savings, and public finance and support a broad range of social and physical infrastructure priorities common to developing states, according to the World Bank’s EI Source Book.

Extractive industries can have major adverse impacts and may pose challenges for governments.

The EI sectors can have major adverse environmental and social impacts. In the past, these issues have not always been well recognized or addressed by governments, but good practice has improved greatly since the end of the 20th century, according to the EI Source Book.

Wealth on the scale experienced in some resource-rich states can generate significant positive development outcomes.

Many have noted that development outcomes in the EI sector are frequently less robust and beneficial than expected. Moreover, the outcomes can become highly damaging to the resource-rich state. Resource-rich developing states typically underperform economically relative to their peers that are not resource rich. Further, they may experience environmental degradation and have more social and political instability and violent conflict. Taken together, factors such as these have led some to describe the outcomes as the “resource curse” or the “paradox of plenty.”

Avoiding or reducing these impacts depends on appropriate legal instruments, adequate enforcement, and fiscal structures that incentivize good behavior by investors, while recognizing the costs involved and internalizing them.