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The Global Impact Of Sustainable Development On The Oil And Gas Industry
Speech to Memorial University, Newfoundland, at the invitation of the University’s President
Thursday 12 May 2004
Digging in my garden in rural Oxfordshire I would be unlikely to discover anything more interesting than at best a bit of broken Victorian china.
By contrast villagers in northern Sierra Leone not infrequently find diamonds whilst digging for their crops, and a couple of weeks ago I was in Northern Somalia where the desert potentially appeared to be full of precious and sem-precious stones.
The point that I make is that mineral wealth is random across the world and minerals can only be worked where they are found.
The finding and working of such minerals can have dramatic impacts on history.
One of the principal reasons for the success Britain, a comparatively small European island country was at the key moment of civilisation’s discovery of steam power and the steam engine, Britain had access to seemingly unlimited quantities of coal, and the ability to make seemingly unlimited quantities of iron and steel.
Today the mineral more precious than rubies or emeralds or diamonds is oil.
Black gold.
And after oil – gas.
Natural gas.
Why?
As the steam engine was to civilisation in the 17th and 18th centuries, so is the motor car and truck today.
As importantly, as supplies of coal dwindle, anf as there are increasing environmental concerns about the burning of coal in power stations more and more electricity across the world is being generated by means of oil or natural gas.
For those parts of the world with out access to regular supplies of electricity, life is bleak indeed.
We here all take a regular supply of electricity for granted.
A few weeks ago, I was in Sierra Leone for the opening of the UN Special Court on War Crimes. Freetown has regular supplies of electricity; outside of the capital there is barely any electricity supply whatsoever.
Not only does this mean that there is no power to drive machinery, no electric light - people have to get up with the dawn and go to bed with the dusk - there is no air conditioning; there is no refrigeration; food cannot be kept fresh; fish caught in the sea can only be stored for more than day by smoking it. In truth, a life without electricity, particularly for city dwellers, is a primitive existence.
In the 1960’s and 70’s, in what one UK Prime Minister described as the “white hot heat of the technological revolution”, there was the hope that the world need not be dependent on oil, that nuclear power would provide cheap, safe, almost limitless quantities of electricity generation.
When I was appointed a Minister for Energy in Mrs. Thatcher’s last Government with the task of helping to privatise the UK Electricity industry, I was also given responsibility for the nuclear industry and I asked the House of Commons Library to dig out for me many of the speeches of politicians and editorials from the newspapers at the time of the commissioning of earlier nuclear power stations in the UK. These editorials and speeches had a touching faith in the ability of science to unquestioningly contribute to the betterment of mankind and civilisation and they had an unerring belief that nuclear power could become a cheap environmentally friendly source of power generation. After all, nuclear power does not generate CO2 or SO2 emissions.
However, all those politicians, scientists and science journalists forty or fifty years ago, had made one serious, overwhelmingly, miscalculation with regard to nuclear power. At no time had they properly costed into their equations the cost either of the storage or disposal of nuclear waste, or the costs of decommissioning nuclear power stations.
As a consequence, oil and gas are going to be incredibly important commodities and potential sources of wealth to those countries that possess oil and gas, and
Similarly a cause of apprehension and concern to those countries that don’t possess reserves of oil and gas.
Today these concerns are very real. Central bankers around the world have been voicing anxieties about the inflationary impact of higher oil prices.
Central bankers around the world have been voicing anxieties about the inflationary impact of higher oil prices. It is an indication as to how inflationary oil prices have become that when I was preparing the notes for this lecture, I wrote “The price of crude oil has risen to nearly $40 a barrel in New York – its highest price since October 1990”. In fact, today, only a matter of days later, the ‘Financial Times’ of London reports “Oil prices moved beyond $40 a barrel yesterday; the highest for 13 years, amid fears that economic growth was stimulating an increase in oil demand that producers were struggling to fulfil. This led to a warning by the International Energy Agency, the energy monitor of the organisation for economic co-operation and development, that further investment in oil exploration and refining was needed to sustain higher consumption.”
Oil prices have risen by 22% this year alone.
Alan Greenspan, the Chairman of the US Federal Reserve – and let us not forget that the United States today is certainly the strongest economy in the world – and probably the strongest economy in the history of civilisation –
Greenspan observed that the ‘dramatic’ rise of oil and gas futures was
“ . . and economic event that can significantly affect the long term path of the US economy”.
The International Energy Agency has warned that higher oil prices could wipe 0.5% of the economic growth in the Euro zone this year and 0.3% of growth in the US – in other words, the major economies of the world would be going backwards.
Little wonder the newspaper headlines in the “Financial Times” cry out that
“ . . oil price rises spark global fears on inflation”.
And
“Prime Minster rattled as oil nears $40 a barrel.
Perhaps it is not surprising, given that the stakes are so high, given the value of oil and gas, that in recent times this has been an industry where there have been many countries synonymous with scandal and corruption.
I don’t mean the difficulties being experienced by Shell in the UK, that seemingly for years having overstated their oil reserves. I mean long term systematic corruption and malpractice.
Let me give some examples of systemic corruption and malpractice.
In Kazakhstan, one saw over $1 billion of money unaccounted from the Kazakh-gate scandal and a massive Presidential “secret fund”.
Kazakhstan, incidentally, is a country where nearly 40% of the population are classified as living in poverty and overall the number of people in poverty has doubled since independence.
What happened?
Well, Kazakhstan, a former Soviet Republic and geo-political lynch pin in Central Asia, possesses some of the largest oil and gas reserves in the world.
Chevron’s 1993 purchase of a half-share in Kazakhstan’s massive Tengis field, made Chevron an early entrant into Kazakhstan’s post-Soviet economy.
Tengis is believed to be the world’s fifth largest deposit for crude oil. One retired Chevron executive termed it a “geologist’s dream”.
Once it became clear how enormous the reserves were at Tengis, other European and American companies became increasingly desperate to get involved, yet only one other company, Mobil, now Exxon Mobil, succeeded in purchasing a share. Apparently it did so without taking any part in any formal bidding process.
How did they land the deal?
Well, I suspect the full details will never be known. Suffice it to say that two US citizens subsequently became subject to criminal proceedings in the US, for their involvement in these matters
- former Mobil executive J. Bryan Williams III, and independent merchant banker James Giffin
Williams pleaded guilty in June 2003 to evading taxes of more than US$7 million in reported income, including a $2 million kickback he received in connection with Mobil’s business in Kazakhstan. It later transpired that the President of Kazakhstan had managed to divert $1 billion to a secret Swiss bank account.
To this day, Kazakhstan’s political leaders have never made clear where all this $1 billion went, nor have they explained why the President of Kazakhstan decided he was the most appropriate person to control a huge slice of Kazakhstan’s oil money out of sight of Parliament or public, nor exactly how this unusual approach to money managements fits within the framework of Kazakhstan’s laws.
A huge court case in France recently provided unprecedented details of the French oil company, Elf’s, (now Total) opaque, and anti-competitive “African strategy”. The trial of 37 former senior executives of the now defunct Elf, for “misuse of company assets” to the tune of hundreds of millions of dollars, ended in Paris in mid-November 2003 with the conviction of 30 of the accused. The 600-page indictment listed allegations of corrupt behaviour by top Elf officials, including siphoning off commissions into secret bank accounts, buying multi-million dollar properties, expensive jewellery, and embezzling money for divorce and alimony fees.
But the Elf scandal, as with Mobil Exxon, was not just another corporate fraud scandal.
What one sees with the oil and gas industry so often is a conspiracy between a small oligarchy of powerful people in the producer country, together with directors and executives of oil companies elsewhere in the world, a conspiracy against the interests of the poor, the poor of the oil-producing countries.
Congo Brazzaville is one of the poorest countries in the world which has been gripped by conflict. In 2002, Congolese church leaders wrote, in an open letter to their President :
“the Congolese people do not know much about how much our country receives from this black gold, and even less how the revenues are managed. What it does know, is that the price of oil is measured not in barrels or dollars, but in suffering, misery, successive wars, blood, displacement of people, exile, unemployment, late payment of salaries, non-payment of pensions”.
The indictment in the Elf case alleged that the Elf directors and executives abused a system whereby the company paid African decision-makers from offshore accounts to maintain the company’s powerful market position in several countries.
I could go on to give many further examples - Equatorial Guinea, Nauru and Nigeria. Nigeria, incidentally by 1998, notwithstanding having received some $280 billion in oil revenue, Nigerians are now poorer than when the oil boom began in 1974, and in addition,t he country is now saddled with debts of some $30 billion. But the time is limited. Let me give one last example – Angola.
Nowhere in the world have the devastating effects of revenue misappropriation and state corruption been more starkly illustrated than in Angola, where sadly, one in four children will not live to see the age of 5.
One in four is also the ratio of money that disappears from the State budget every year.
The two figures are related – whilst most Angolans suffer from devastating poverty, oil income has enable some top officials of the ruling AMPLA party to become very very rich very quickly.
As one Angolan journalist has put it:
“The Workers’ Party has become the Millionaires’ Party”.
It has become clear that the continuing lack of disclosure of basic payments to the Angolan state by international oil companies means that by default the oil companies are complicit in the looting of state resources in Angola.
The International Monetary Fund’s 2002 Consultation Report on Angola said the following:
“Frequent dialogue with the authorities and significant technical assistance in recent years, has yielded little progress in the key areas of governance and fiscal transparency. There is virtually no public information on fiscal and external public borrowing. The State-owned oil company manages the country’s oil-related receipts through a web of opaque off-shore accounts: the Central Bank and other public companies suffer from poor internal controls and large operational deficits and the weakness of basic economic data hampers the design and monitoring of a macro-economic programme. It would be very difficult for Angola to formulate a meaningful poverty reduction strategy without addressing these and other transparency and government-related problems.”
For those of us who are concerned that by 2015 the world should meet the Millennium Development Goals we are concerned about poverty and poverty reduction.
What the IMF and other observers have made clear in the case of Angola and other countries is that there will not be meaningful poverty reduction even in those countries that are blessed with oil and gas reserves, unless there is proper transparency and proper governance.
For example, had oil companies been required to publish what they pay to the Angolan Government, Angola’s missing oil money would have come to light sooner, as would the need for a more joined up approach to domestic capacity building and accountability by the international community.
Unless these are now implemented, Angola’s oil money is likely to remain as out of reach for the Angolan people as the oil platforms themselves.
Revenues from oil, gas and mining companies in the form of taxes, royalties, signature bonuses, and other payments, should be an important engine for economic growth and social development in developing and transition countries.
However, the lack of accountability and transparency in these revenues can exacerbate poor governance and lead to corruption, conflict and poverty.
The extraction of oil and gas and minerals from the ground underpins modern lifestyle.
The world depends on predictable supplies.
Around the world there are millions of jobs in the oil and gas sector. Some 3.5 billion people live in countries dependent upon their natural resource wealth for improving their standards of living.
They are directly affected by the way that revenues are used.
Sadly, as the brief examples I have given demonstrate, history has shown that the discovery and exploitation of these highly valued and highly valuable resources does not automatically translate into economic growth and sustainable development.
This prompts a number of questions.
How can we balance investment for future generations with development needs today?
How do we ensure proper financial scrutiny and accountability?
Most importantly, how can we avoid misappropriation of resources?
Transparency is essential.
Transparency is essential to improve development and the prospects of achieving the Millennium Development Goals for global poverty reduction.
We all know that when there is corruption, it is always the poor who suffer most.
We need to use transparency in revenue and financial management to enable people to hold Governments to account and to build public trust.
Increased transparency will also help to create the appropriate climate for attracting foreign investment and encouraging an enterprise culture.
Governments need to create this favourable environment but oil and gas companies also have an interest in promoting transparency.
Transparency should help companies to reduce reputational risk, to address the concerns of shareholders and to help manage risks of long-term investments.
Transparency is a positive contribution to development as it increases the probability the oil and gas revenues will be used for poverty reduction.
It was as against this background and to tackle these problems that the G8 Summit in Evian agreed an action plan to provide a framework for collective action, not only by the most prosperous G8 economies, but through the whole world.
It is of course not just the G8 nations who are determined to tackle corruption and improve transparency – these are also key objectives of the New Partnership for African Development (NEPAD), an initiative led by South Africa, Nigeria and Senegal.
The intention is that by setting a framework for action the proceeds from mining and energy industries can be used for development. This desire for great transparency has already led to the
“Publish what you Pay” and
“Publish what you Earn” initiatives.
The Evian Summit in June 2003 set out in an action plan on fighting corruption and improving transparency, which included piloting on a voluntary basis
- improved disclosure of revenue flows and payments;
- action plans for establishing high standards of transparency for all budget flows and for the awarding of contracts;
- help with capacity building; and
- encouragement of the IMF and World Bank engagement in technical support.
As a consequence of what is now known as the Extractive Industries Transparency Initiative (EITI), the organisers are now having follow-up discussions with a whole number of countries, including Azerbaijan, Ghana, Trinidad and Tobago, DRC, Indonesia and Nigeria.
There are however, tensions.
There are tensions between Governments who believe that compliance and co-operation with this initiative should be voluntary, and those NGOs who believe that a voluntary approach will only be effective where there is already a commitment to transparency and integrity.
So, for example, Transparency International’s opinion of the EITI is that
“We are concerned that in countries where the diversion of revenues into the personal wealth of elites is seen as a perquisite of power, and where is consequently extreme poverty among the general population, the necessary commitment to openness will simply not materialise. As a consequence we find it difficult to believe that anything other than a mandatory approach can succeed except in a minority of situations and call for this not to be excluded as a future option.”
The “Publish what you Pay” coalition – a coalition of a large number of respected NGOs, observed “A voluntary approach is unlikely to deliver results in those countries where revenue transparency is needed most and where corruption associated with revenues from the extractive industries in of the greatest concern.”
Meanwhile, whilst the EITI team are further pursuing this initiative with organisations such as the World Bank, there are countervailing concerns being raised by the business community. These concerns are perhaps most succinctly summarised in a recent article in the “Financial Times” by Sir Mark Moody-Stuart, who is Chairman of the UK company Anglo American plc. He said “How do you translate a country’s mineral and oil wealth into economic wealth in a way that reduces poverty, protects the environment and upholds social stability? This is a critical complex question, faced by resource-rich countries across the developing world”. “Currently”, said Sir Mark Moody-Stuart, “ before the World Bank Group are the conclusions of the review of its involvement in the extractive sector conducted by Emil Salim”
It is Salim’s final recommendations that the World Bank is considering.
Moody-Stuart expressed the concern that some of these could harm the very countries they seek to help.; that they would “ . . limit the World Bank’s ability to leverage higher standards and thereby help countries translate their resources into a blessing”.
Sir Mark set out a number of specific concerns; for example, the World Bank’s proposals
“ . . would limit (World Bank’s) involvement in mining and oil projects whatever their characteristics, for example, (the Report) recommends supporting projects in a country only after comprehensive governance criteria are met. Encouraging better governance is clearly important but constraining the World Bank’s involvement before standards are met could mean that the poorest countries find it more difficult to take the first steps towards exploiting their natural resources effectively and thereby starting on a path towards poverty reduction and better standards of governance. Meanwhile, those countries that can attract sufficient private investment to exploit their minerals and oil without the World Bank’s assistance will do so, and the Bank will be less able to influence Governments and companies to develop these resources in the right way.”
Sir Mark was also concerned by “ . the Report’s proposal that the Bank phase out investments in oil by 2008 . . those least developed countries that depend on the Bank’s assistance to develop their . . oil as well as shape their overall energy policies may have to forego important economic opportunities. Meanwhile other countries will continue to exploit their oil through private investment but with the Bank exerting less influence on standards.”
And lastly, Sir Mark observed that “Another potentially counter-productive proposal is that extractive projects should require the “free, prior and informed consent” of local communities. Without doubt the rights of local and indigenous peoples need to be carefully protected. But requiring that all elements of a community are able to show benefit raises the bar to a level that if observed in developed countries would mean no road or major development would ever happen. Wholly accountable Governments may thereby be prevented from undertaking projects key to their national development. In short, driven by the laudable desire to ensure that the Bank supports only projects guaranteed to have positive impact, the Report’s recommendations could actually limit the World Bank’s ability to help countries exploit their natural resources successfully and responsibly.”
I think on this last point Sir Mark is being a little hyper-sensitive. I think it is difficult to compare the view say of my constituents on the building of a new motorway or infrastructure development in the UK, where there are already statutory and transparent planning processes, ability for public enquiries, and various ways in whcvih people can make their views known, with situations in developing countries, where frequently communities find that they have few rights or remedies against central Governments granting without reference or consultation with local communities, exploration and extraction rights to foreign companies of whom they know little, and from whom there is no guarantee of any necessary return to those communities.
Given the scandals in the oil industry of the last decade, it is clear that action has to be taken to ensure far greater transparency and accountability. That is in everyone’s interests.
Hopefully initiatives such as the Extractive Industries Transparency Initiative will have the full backing of the UN and UN Resolutions. I think that for those countries, particularly developing countries that are dependent on donor aid from elsewhere, it will be difficult for them other than to cooperate with such an initiative.
As Mark Moody-Stuart’s observations make clear, it may not be easy finding the right balance to maximise the engagement and leverage of the World Bank and international community with national Governments and the oil and gas industries locally.
However, in any event it must be right that if national Governments are obliged to come clean on their income from natural resources, that local communities will have a much better prospect of ensuring that appropriate policies are pursued in the countries concerned.
Article One of the UN General Assembly Resolution No. 1803 entitled “Permanent Sovereignty over Natural Resources” states very clearly that the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the wellbeing of the state concerned” – people cannot have sovereignty over their resources if they are not privy to the deals made to exploit those resources. Assisting the transparency of revenues through promoting a strategy of double disclosure book-keeping is in keeping with the spirit and intent of this and other UN Resolutions.
Oil and gas are a great blessing.
Oil and gas have the potential to help drag out of poverty those countries that have been blessed with these natural resources.
It is a tragedy that today as I speak so many of the countries that are rich in oil and gas still see such a large proportion of their peoples living in poverty. That is a situation that cannot continue.
The world community has collectively decided to take action.
Politicians like myself must ensure that in the welter of new international initiatives such as the Commission for Africa, or the distraction of major issues of the day, such as the war in Iraq, that this essential work in making transparent and accountable the extractive industries is not lost.
Our responsibility is to make globalisation work for the poor and to help eliminate world poverty.
The oil and gas industries have the potential to make an enormous contribution to ensuring that by 2015 far fewer people then live in poverty than do today.
It is our collective task on behalf of the poor, who often may not have a voice, to hold all those accountable for their actions.
The poor of the world are entitled to demand
- if not now, when;
- if not us, who.
Tony Baldry
May 2004
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