Come 2010, Ghana will join the ranks of major African oil producers. Ghanaians are cock-a-hoop about the coming oil wealth. The Ghanaian government, it would seem, is preparing for this. In March, President John Atta Mills announced that his National Democratic Congress government was to review the draft oil law drawn up by the previous government and ensure that needed regulations and transparency measures were put in place.
Make no mistake about it. The oil industry is full of sharp practices. How can it not be, given the billions of dollars that are involved? A number of African countries are at the centre of the industry. Each week sees billions of dollars worth of oil being produced by oil and gas fields in sub-Saharan Africa. But in the countries blessed with this natural resource, the people are mired in poverty, violence and stagnation. Indeed, the oil industry in Africa is a murky business.
Look at Nigeria, for example, where oil wealth has failed to lift Nigerians out of poverty. Most of the $400 billion or more that Nigeria has made since it started producing oil some 40 years ago has gone towards private consumption rather than public investment.
Oil has been referred to as a resource curse. In the African countries where oil flows, their economies are in a poor shape. The problem is that the leaders, who are supposed to be the custodians of the oil wealth, are making sure that the people don’t benefit from the resource because of the pilfering of the funds that accrue from oil sales.
In this regard, the decision by the Ghanaian government to review the oil law is quite appropriate. It is equally good to note that the government is going to put all agreements into the public domain. This will give ordinary Ghanaians the chance to find out how much is being dished out as signing bonuses or rents, for instance. But given the complex nature of the industry, the opportunity for oil companies to pull a fast one on the government is always there.
Just to give you an insight into how these companies try to cheat, I’ll extensively quote Joseph Stiglitz, writing in Escaping the Resource Course. Who better to quote than a former chief economist and senior vice-president of the World Bank and the winner in 2001 of the Nobel Prize for economics?
This is what he has to say. “The prospects of cheating are very real and great, and can arise at every stage of the transaction. The government may get less for the lease than it should – there may even be attempts to restrict competition in bidding. Whatever the contract that has been signed, corporations are tempted to cheat – to pay less than they are supposed to – because the amount of money that can sometimes be made by doing so is so large.
“The occasions to cheat arise not just in developing countries. In the 1980s I worked on a case involving cheating by the major oil companies in Alaska. This oil-rich state had a mineral lease requiring the oil companies to pay it 12.5 per cent of the gross receipts, less the costs of transporting the oil out from the far-flung site at Prudhoe Bay on the Artic Circle. By overestimating their costs by just a few pennies per gallon (and multiplying those pennies by hundreds of millions of gallons) the oil companies would increase their profits enormously. They could not resist the temptation.
“They also found other ways to cheat, such as selling their oil to their own subsidiaries, recording a lower than fair market value; or using other subsidiaries to ship their oil out and then reporting a fictionally high shipping cost. Each piece of the cheating puzzle was hard to detect, and government prosecutors had to analyse thousands of transactions – at a cost of tens of millions of dollars. In the end, there was no doubt that cheating had occurred – and on a massive scale. There followed a series of settlements involving who’s who of global oil companies – including what are now BP, ExxonMobil, and ConocoPhillips – for an amount in excess of $6 billion.
“Alabama successfully brought an even more outrageous case: State of Alabama v. Exxon Mobil Corp. At suit was whether or not Exxon could deduct production costs from royalty payments as well as deduct gas used to fuel the wells. The contract clearly stated that they could not. Moreover, internal Exxon memos presented at trial suggested that they were aware of this and that they had conducted a cost-benefit analysis of the likelihood of getting caught. The court found for Alabama, awarding $11.8 billion in punitive damages and $63.6 million in unpaid royalties.
“While such possibilities exist in the United States, many more possibilities for cheating exist in countries where institutions are weaker.”
The French oil company Elf, is one major miscreant in Africa. In his book, Poisoned Wells: The Dirty Politics of African Oil, Nicholas Shaxson, notes that Elf operatives have bribed their way in Angola, Gabon and Congo in order to get the best deals for their company at the expense of the people of these countries. The point is Elf will get away with this because it is central to power in France and Gabon, where the late President Omar Bongo ruled the roost for more than 40 years, kept in power by the country’s immense oil wealth.
The Americans, too, are complicit in this regard. They have turned a blind eye to that unreconstructed dictator in Equatorial Guinea, Teodoro Obiang Nguema, while lambasting Robert Mugabe of Zimbabwe. Why? Well, Equatorial Guinea has oil, which the US desperately needs, while Zimbabwe does not have ‘black gold’.
This calls for civil society watchdog groups that will scrutinise agreements and payments. The Extractive Industries Transparency Initiative (EITI) is the instrument that can empower civil society to act. The EITI is an internationally agreed upon, voluntary standard for creating transparency in the extractive industries. At its core, the EITI requires transparency in payments made by companies and revenues received by governments relating to the exploitation of a nation’s extractive resources. But these dealings are still shrouded in secrecy by both governments and oil companies.
Africans, therefore, feel powerless because they do not have leverage on their politicians. In Western countries, where these oil companies are based, the relationship between politicians is through taxation. As long as people pay tax, they have a right to hold politicians accountable and make them pay for their indiscretions through the ballot box. Following the parliamentary expenses scandal exposed by The Daily Telegraph, we are expecting British taxpayers to make many MPs pay dearly when elections are held next year.
In oil-rich African countries, governments do not need tax from the people. They get this from oil companies and as such the politicians do not worry about being accountable to the electorate. So, it is clear that taxation and accountability go hand-in-hand. It is also clear that, because politicians are not beholden to citizens because the oil companies provide the money, oil-rich African countries end up in violent conflict, such as in Nigeria where the disaffected people of the Niger Delta are up in arms against local and federal politicians – as well as the oil companies.
The answer to this is quite straightforward, really: break the pattern of exploitation by oil companies, and minimise corruption and mismanagement on the part of governments. If not, oil-rich African countries will continue to be in the throes of social instability.
Desmond Davies is Editor of African Prospects, a monthly digital magazine. [email protected]
By Desmond Davies
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