Is Transparency theTicket for Developing Country Oil Deals?

Abstract: Oil riches have been a curse to most developing countries. Can new financial transparency practices turn that around?

Analysis: Africa is fast becoming a key supplier of oil to the United States, which already imports 17 percent of its petroleum from the continent's sub-Saharan region. Forecasts call for nearly a quarter of U.S. imports to come from there in 10 years. We may see upwards of a $50 billion investment in African oilfields in the next few years. And more than $200 billion in oil revenues are projected to enrich the developing countries that produce the oil.

Well--maybe not enrich. In Africa and other countries throughout the developing world, oil wealth has proved to be a disaster. Nigeria, the U.S.'s fifth-largest supplier of crude oil, is $31 billion in debt. Angola is overrun with poverty and violence--except for pockets of extreme wealth. If things go the way they have in the past, the new revenues would serve only to make things worse for an impoverished African population.

Are Things Already Changing?
Now new African fields are developing. In Chad, a new pipeline carries oil across Cameroon for export. São Tomé, a small island nation, sits atop a vast untapped reservoir; the world is watching as the country cools down from an attempted coup and development proceeds. But both of these countries appear at present not destined for the kind of disasters that have befallen Nigeria and Angola.

From all over the world, financial institutions and groups from diverse points on the political spectrum have taken an interest in seeing that oil money benefits, not bankrupts, developing countries. Chad and São Tomé have come along just in time to watch and see if these growing influences can take the curse off oil revenues.

Chad appears to have an orderly way prepared for oil revenue to flow to the benefit of its people. With early leadership from ExxonMobil, the Government of Chad, the World Bank, and later partners ChevronTexaco and Petronas (Malaysia), the deals were made public and laws were passed making business finances open. (See: Can Everybody Win in Chad? Rigzone, August 1.) Chad is, to use the new magic word relating to international oil deals, transparent.

The Watchers
Progress in Chad and the new São Tomé development will take place under the scrutiny of organizations driven by the idea that money earned in these new fields should not be allowed to line the pockets of only a few. Organizations of this type have been around for a long time--environmentalists, human rights watchers, international relief organizations--and their influence has been considerable. Now there seems to be a new focus on helping developing countries help themselves. And a new organization formed in the U.K. is leading that movement: The Extractive Industries Transparency Initiative (EITI).

EITI was introduced by U.K. Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg in September 2002. Its aim is to increase transparency regarding payments by companies to governments and government-linked entities as well as spending by host country governments. EITI is administered by the Department for International Development (DFID), an arm of the U.K. government. Over the past year, it has created a model voluntary compact to disclose payments. Delegates--some 140 from EITI member countries, oil companies, and interested parties (nongovernmental organizations or NGOs)--reviewed the model in February. A revised version was presented June 17. Titled "Statement of Principles and Agreed Actions," the model has been designed to increase the openness--or transparency--with which developing nations conduct their business and governmental financial transactions. DFID considers the model ready for use and recommends countries begin to use it in pilot programs to disclose oil revenues.

Where Are the Teeth?
The Statement of Principles and Agreed Actions drew support from most of the oil company delegates, a big reason being that following the principles and actions is voluntary.

Andrew P. Swiger, Chairman of ExxonMobil International, said, "ExxonMobil supports transparency that applies universally to all companies attempting to do business within a country, allows for protection of proprietary information and does not violate the laws of host countries or breach contractual obligations. In contrast to the various mandatory disclosure initiatives proposed to date, we believe that the EITI has the potential to meet these reasonable and necessary criteria for support. Thus, we are here today to continue our engagement in the process and to advance the dialogue."

"For any transparency initiative," he stated further, "involvement by host governments is critical for the initiative to produce information that is meaningful with respect to a country's fiscal and balance of payments accounts. For EITI, involvement must be at the design and development stages as well as its implementation. Host governments must be involved before companies can make meaningful commitments to act."

Mandatory Transparency?
A voluntary initiative is not good enough for many EITI member organizations who believe some sort of regulation with teeth in it will be necessary to bring true financial transparency into being. The Publish What You Pay (PWYP) coalition, a group with over 130 NGOs from 35 countries, says "financial transparency is a necessary condition for good governance of mineral revenues for successful growth and poverty reduction in many of the world's poorest countries." The PWYP coalition calls for a regulatory requirement for oil, mining, and gas companies to disclose their net payments to governments on a country-by-country basis through stock market rules and international accounting standards. The coalition says "Such a requirement will override individual confidentiality agreements without bringing companies into conflict with host governments." Other coalition members have suggested conditions be placed on bilateral and multilateral development assistance, resource-backed loans from banks, and export credit agency funding.

A powerful bloc of other such organizations has been brought in under the DFID tent. Many of them also want mandatory publication of revenues. They include the following: The African Network for Environmental and Economic Justice, The Angolan Civil Society, The Catholic Agency for Overseas Development, Catholic Relief Services, CARE International, Global Witness, Human Rights Watch, Open Society Institute, Save the Children Fund, Transparency International, Transparency Kazakhstan, and Trend Information Analytical Agency of Azerbaijan.

Where the Money Is
The NGOs gained a powerful ally when U.K.-based ISIS Asset Management presented a joint statement on behalf of itself and 36 other top international investment houses managing almost $3 trillion in assets. The statement said in part: "…we believe it is in the interest of the companies to operate in a business environment that is characterized by stability, transparency and respect for the rule of law. These factors are essential to securing economic prosperity and social cohesion, which, in turn, enable the companies in which we invest to prosper. However, they are frequently undermined by poor standards of governance and [poor standards of] transparency."

"We are concerned," the statement continued, "that extractive companies are particularly exposed to the risks posed by operating in these environments. Companies that make legitimate, but undisclosed, payments to governments may be accused of contributing to the conditions under which corruption can thrive. This is a significant business risk, making companies vulnerable to accusations of complicity in corrupt behaviour, impairing their local and global 'licence to operate', rendering them vulnerable to local conflict and insecurity, and possibly compromising their long-term commercial prospects in these markets."

Can Transparency Happen?
Transparency will ultimately depend on multinational oil companies publishing what they pay and governments revealing what they spend. Whether that can happen as a result of a voluntary initiative such as EITI, whether the financial community will tip the scale, or whether laws and regulations will ultimately be required are important questions to consider. In Chad, the government, ExxonMobil, and the World Bank worked out a plan during a long period of negotiation and then published it. São Tomé appears to be the next opportunity to try out voluntary transparency. Certainly with increasing public attention directed to the plight of Africa, it seems a logical next step. And who knows? Jawboning by the organizations that favor mandatory transparency may prove just as effective as mandatory provisions.