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Donors put spotlight on petro cash

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As Cambodia begins to explore its oil and gas reserves in the uncontested zone of

the Gulf of Thailand, experts are warning that without a fundamental reform in the

role of the state, it is unlikely that the Kingdom, or its citizens, will ever realize

their maximum benefit.

Many observers fear the government will be unable to effectively harness predicted oil revenues.

"Oil money comes in and strengthens the hand of an already centralized government,"

said Ian Gary, policy advisor for extractive industries at Oxfam America after an

April 11 seminar. "This creates problems with responsibility - a government

is more responsible to the people if it is dependent on them for cash, but when oil

covers the government budget there is no need for tax."

According to a World Bank paper on oil and gas, if only two or three oil companies

contribute the majority of government income, it is easier for the government to

avoid accounting for such revenues transparently. By not disclosing the amount or

sources of income, it becomes easier to divert profits away from the treasury as

questions are less likely to be asked, the paper said.

"Civil society is already thinking about how we can ensure revenue goes into

state coffers not to corrupt pockets," said Kov Phyrum, a researcher at the

Economic Institute of Cambodia (EIC). "We already have very weak governance

in Cambodia, the anti-corruption law is not passed. We are very worried about corruption."

As most taxpayers in the country have not contributed to the fiscal revenue from

oil, the government may feel less pressure to account for how it spends this money,

and less obliged to ensure that oil revenues are used to maximize public welfare,

the World Bank paper said.

"There is a strong correlation between oil wealth and increased military spending,"

said Gary. "Oil wealth adds stress to political spending. In developing country

systems where political system is fragile, oil can add a lot of stress."

Today, no firm estimates of potential oil production are available: Cambodia's reserves

are not yet proven. But a December 2005 UNDP study of Cambodia's nascent extraction

industry claims that the Kingdom may be able to produce 200 to 250 thousand barrels

of oil a day at full production. Cambodia may have up to two billion barrels of oil

and ten trillion cubic feet of natural gas, the study said. The oil, valued at only

$50 a barrel in the study, would be worth $100 billion. The gas, valued at $5 per

cubic foot, would be worth $50 billion.

"If production were spread out over 20 to 25 years the annual sales value of

the oil and gas would be $6 billion to $7.5 billion," said the UNDP study. "Current

GDP is about 4 billion. Thus, over time, the contribution of oil and gas could be

quite large."

On April 16, China Petrotech Holdings Ltd, estimated that more than 250 million barrels

of oil and nearly a half-trillion cubic feet of natural gas could be under Cambodian

territorial waters in one of the country's six off shore exploration blocks.

The Cambodian National Petroleum Authority (CNPA) denies the accuracy of such assessments,

said one senior CNPA official speaking on condition of anonymity.

"It is simply not true," said the CNPA official. "There is no way

of knowing how much oil we have - the extraction companies don't know at this stage."

It is critical that the Cambodian government fully disclose all information on its

oil and gas reserves as early on as possible, said Gary.

"Unfortunately, secrecy regarding the sale and marketing of oil and contracts

is a hallmark of the industry," he said. "You have to encourage people

to ask questions as this brings information into the public arena - production figures,

revenue figures. Then you can start to build accountability."

At the moment, civil society knows "just a bit more than nothing," about

Cambodia's oil and gas reserves, said Sok Hach, president of the EIC.

What they do know is that a huge inflow of cash into a tiny economy needs to be handled

carefully if the majority of citizen's are to benefit, said the EIC's Phyrum.

"Relying on oil and gas is not sustainable," he said. "We must use

the money to diversify the economy to provide more jobs for people. The oil and gas

industry is not labor intensive, it's capital intensive, and it only employs some

skilled workers, it doesn't generate jobs. The question is how to use the money to

diversify the economy, create jobs, and encourage economic growth."

According to a study by economist Terry Lynn Karl, "Oil and Development,"

high hopes that oil wealth will bring jobs, food, schools, healthcare, agricultural

support and housing are common.

But a number of studies have found that the greater the proportion of GDP, government

revenue, or total exports comes from mineral resources, the slower the rate of economic

growth. Experts say oil revenues slow down economic growth through their negative

impact on institutional quality - defined as rule of law, accountability, government

effectiveness, control of corruption, and political stability.

"There is a common pattern [of development] in oil rich countries," said

Gary. "You see weak government capacity to manage and allocate the windfall,

a concentration of resources at the center, an absence of counter pressures such

as an independent judiciary or a free press, an increase in military spending, a

greater disconnect between government and citizens. Ultimately, this creates the

conditions for civil war."

As petrodollars fail to keep pace with demand, oil-based governments often rely increasingly

on repression to keep themselves in power, said the Lynn Karl study. High oil revenues

have tended to impede democratization and have sustained a long line of authoritarian

rulers, from the Iran's Shah Mohammad Reza Pahlavi to Nigeria's General Sani Abacha

to Saddam Hussein.

"These regimes prohibit the types of organizations that provide a voice for

the poor, create an informed civil society, and permit their people to influence

the management and allocation of oil wealth," the study said. "Furthermore,

dependence on oil tends to impede democratization, and it may even erode democratic

rule where it previously existed."

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