With government revenues in 2001 of just $390 million and expenses of almost $600
million, the fictional Mr Micawber would have predicted misery for Cambodia. Luckily,
for the umpteenth year in a row, loans and grants balanced the country's books. Dickens'
characters should have been so fortunate.
May 2002: A fuel barge burns on the Tonle Sap river in Phnom Penh. Observers are keen that the country's oil and gas reserves offshore do not disappear into thin air, as has happened in many other countries. The CNPA believes there are billions of dollars worth of oil and gas in Cambodia's section of the Gulf of Thailand.
Of course, such generosity won't continue forever, and finding a way out of this
predicament will be hard. The country has few comparative advantages, one reason
it is focused on tourism, with all its inherent vulnerabilities. In short, it all
presents a conundrum-how best to fix things, given that the resources to do so are
The government believes that excellent news lies just around the corner. It says
that exploitation of its oil and natural gas reserves in the uncontested zone of
the Gulf of Thailand could soon earn the Treasury up to $500 million a year.
Te Duong Tara, the director-general of the Cambodian National Petroleum Authority
(CNPA), says that with luck Block A in the Gulf should be generating revenue by 2006.
The country will likely have to wait a little longer for annual half-billion dollar
revenue flows, because oil firms are entitled to deduct the cost of their operations
after calculating royalty revenue (but before profit split or income tax). But, says
a confident Tara, such large sums should come.
He talks of the money going into important infrastructure projects, such as roads,
power plants and industry. All this, in theory, would generate jobs, boost the economy
and go a long way towards bringing down the country's high poverty rate. He feels
the potential to be unlocked in the Gulf could kick-start the economy.
"We have a very big plan," he says. That plan involves several infrastructure
projects: a gas pipeline from the wellhead to the shore at Sihanoukville, three gas-powered
electricity plants, each with 90 kilowatts capacity, and a transmission line to Phnom
Penh. All could be completed by 2007, provided the zone proves commercially viable.
"By 2005 we can confirm sufficient commercial resources-but we are not waiting
or wasting time," he says. "We keep a very low profile. I work [on infrastructure
planning] with the Japanese company Sumitomo; I work with German company Siemens;
I work with a lot of companies. But we keep our fingers crossed."
And once the country's generating capacity is boosted, Tara predicts that power will
be much cheaper than at present.
"Now we have expensive power-Vietnam costs only five cents [a kilowatt hour];
Thailand only seven cents. But we are almost 25 cents," says Tara. "That
is one of the reasons why there is no investment in Cambodia."
He is right about that, and in theory it all sounds good. However, recent research
shows that when it comes to oil and gas, what sounds like theoretical good news often
proves the opposite. The truth is that developing countries that exploit such resources
often end up with higher rates of poverty and greater social ills.
The research comes not just from NGOs such as Global Witness and Christian Aid, but
also from such allegedly sober institutions as the World Bank and the International
Monetary Fund (IMF). Further work by the eminent US economist Professor Jeffrey Sachs,
who visited Cambodia last year, found much the same.
The reasons behind that anomaly are numerous, but revolve around the problems brought
on by secrecy, corruption, poor governance and a lack of accountability. Cambodia
has these shortcomings in abundance.
There have been recent international moves to ensure that developing nations and
companies that exploit their reserves are more open about the revenues and payments
such business brings.
The Western program is called the Extractive Industries Transparency Initiative (EITI),
which was launched in June by UK Prime Minister Tony Blair at a conference in London.
It followed calls from billionaire financier George Soros, numerous fund managers,
and a coalition of international NGOs for more openness and accountability in the
exploitation of developing countries' natural resources.
There is no doubt that Cambodia could well use hundreds of millions of dollars of
extra revenue a year, but there are other problems besides the obvious one of corruption.
Such a huge inflow of cash into a tiny economy needs to be handled extremely carefully
if the majority is to benefit.
Even relatively large economies can suffer: Holland's crashed in the 1960s when natural
gas was discovered offshore. A massive influx of cash from sales of gas destabilized
the economy, and led to the problem being christened 'Dutch Disease'.
The ailment has since afflicted other countries, including Norway, where rampant
inflation and a contraction in the manufacturing industry were the result in the
Norway recovered only after the government and trades unions came together and agreed
to establish an oil trust fund. The fund's purpose was to hold back some oil revenue
for future generations, which at the same time removed the excess cash.
The IMF's resident representative in Cambodia, Robert Hagemann, cautions that the
current debate on oil and gas reserves is speculative since it is not yet clear just
how much money could be generated. But if talk of billions of dollars proves correct,
the government will have a significant task on its hands.
"The biggest problem for Cambodia in the production and the exploitation of
a huge supply relative to the economy is the infamous Dutch Disease," says Hagemann.
"That is what they are going to have to worry about, and that is a big enough
challenge in and of itself."
One year ago, Phnom Penh signed exploration deals with two oil multinationals: US
firm ChevronTexaco and Japan's Mitsui Oil Exploration Company (MOECO). LG-Caltex,
a 50:50 joint venture between South Korea's LG Group and ChevronTexaco, has since
bought a 15 percent stake in the field from ChevronTexaco.
One of the CNPA's favorite hand-outs is a March 11 story from the South Korean bureau
of Dow Jones, which notes that the oil and gas consortium expects profits of "at
least" $20 billion in its offshore oil and gas field.
In any deal one would expect the government to earn far more than that over the life
of the field. But not everyone is convinced: some observers feel the profit figure
is too high. For its part, ChevronTexaco says it is much too early to be estimating
investment levels, let alone profit figures.
But whatever the government eventually earns from the find-be it millions, hundreds
of millions, or billions of dollars-the key is to ensure all the money earned actually
finds its way into government coffers and is either properly spent or placed in a
fund. That is vital if the government is to move towards reducing its oft-stated
overall goal of reducing poverty.
And, says Hagemann, if those high-end figures turn out to be accurate, the impact
could be dramatic.
"Obviously, that sort of number would change the medium-term outlook for the
country-it could," Hagemann says. "But one has to have information, and
this is not an area in which we have looked."
International research makes it clear that if there is potential for good, there
is equally the potential for damage unless the government takes certain key steps
to avoid the problems.
Earlier this year, the UK-based NGO Christian Aid released a report warning that
developing nations that exploit lucrative natural resources-particularly oil-often
see an increase in poverty rates. The reason is that weak governance and lack of
accountability lead to massive increases in corruption, the theft of state assets,
and sometimes civil war and instability.
The report, Fuelling poverty: Oil, war and corruption, examined the evidence from
three oil-producing nations: Angola, Kazakhstan, and The Sudan. It found that the
populations of all three were significantly worse off with the exploitation of oil,
whose effect it describes as a curse.
It notes also that this curse afflicts not only those countries perceived as poor
and weak. Several other nations rich in oil-including, surprisingly, Gulf states
such as Saudi Arabia, Kuwait and Bahrain-saw their economies contract between 1970
The charity quotes research from Professor Sachs, who investigated the relationship
between 97 countries that rely heavily on exporting a natural resource, and those
countries' economic performances.
He found that the more a country depends on those resources, the lower its growth
rate. A key finding was that countries which rely on oil rather than other natural
resources were among the worst-performers.
Sachs updated his study in 2001. He noted that one consequence of exploiting such
resources is that it feeds huge amounts of cash into what are often quite small economies.
The result is inflation and a rise in the value of the local currency, which lowers
exports and increases imports. A further consequence is that it damages other local
industries that are not in the oil game.
As Christian Aid points out, the supposed benefits of oil contain a "central
paradox-that wealth derived from natural resources does not lead to economic growth.
Oil, as the most sought-after and politically most significant, is also one of the
The NGO examined Nigeria as a case in point. The West African country, which has
the continent's largest oil reserves, started pumping oil in the 1960s. Resultant
mismanagement and corruption has led to a huge rise in poverty rates. The World Bank's
office in Nigeria says the number of people living below the poverty line (less than
US$ 1 a day), climbed from 27 percent in 1980 to 66 percent in 1996.
The report makes clear that these ills are avoidable, but states that countries with
weak governance, corruption and a lack of accountability are the worst afflicted.
"This report shows that for many developing countries, oil reserves are more
likely to prove a curse than a blessing," the report notes. It adds that research
from sources such as the World Bank, the International Monetary Fund (IMF), and the
NGO's own studies, showed that poor countries which are dependent on oil revenues
have a higher incidence of the following four ills:
- greater poverty for most of the population.
- increased corruption.
- a higher likelihood of war or civil strife.
- unrepresentative government.
The higher a country's dependency-in other words the more an economy relies on oil
as a percentage of exports-the greater the risks.
Cambodia's problems go further than corruption and the theft of state assets. Others
include the following: the system of awarding government contracts is generally opaque;
the government's own laws are often not followed when deals are approved; the workings
of the budget are secretive; the people involved are unaccountable to the public;
and governance is weak.
Equally important, oil and gas exploration obviously involves dealing with the oil
industry, which has earned a reputation internationally for being unscrupulous and
indifferent to criticism.
Oil and gas reserves are under the control of the CNPA. It was established in 1998
in a move that removed the department from the Ministry of Industry, Mines and Energy
(MIME) and transferred its control directly to the Council of Ministers (CoM).
The reason, says one well-placed source who prefers to remain anonymous, is that
the government realized oil and gas had tremendous potential to generate revenue,
and so decided to place it under the direct control of the CoM, and thereby the Prime
Minister and his right-hand man, Senior Minister Sok An.
And although the industry has not yet generated much income-the companies are still
conducting exploratory drilling-the source says that if and when there is a big strike,
"the money will flow like water".
"Oil can help the country, but management of the revenue is key," he says.
"If you get the money and don't handle it properly, you can destroy the country."
The CNPA's Tara insists the real reason behind shifting the CNPA to the Council of
Ministers was to ensure that the number of steps required between MIME and Hun Sen
was cut from seven to three. That, he says, saves the companies time and money, and
makes them more inclined to come here in the first place.
"If you delay just one day in oil operations, you could cost the company $100,000,"
he says. "So I asked the Prime Minister: please help make us more efficient.
I prepare [a proposal], Sok An signs, the Prime Minister decides."
But like many government bodies, the CNPA works in a secretive and non-transparent
manner. The contracts signed between the government and oil companies are not publicly
available. And, says the anonymous source, it is not clear where the millions of
dollars in signature bonuses-the money oil companies pay when a deal is struck-actually
Tara did not address the topic of signature bonuses. All he will say is that the
Block A deal was "the most transparent"-so much so that ChevronTexaco paid
for the government's lawyer, and the contract was tied up in two weeks. All details,
naturally, remain secret, a danger that the multilaterals and other are aware is
bad for the country.
The IMF's Hagemann says that at last year's donor meeting, the Fund called on the
government to "give serious consideration to adopting or abiding by" the
Publish What You Pay (PWYP) campaign, a proposal from Soros and a coalition of NGOs.
But, he says, none of the other participants echoed that.
UK-based NGO, Global Witness (GW), has been at the forefront of PWYP, which calls
on companies to be open about all such payments. GW's Simon Taylor, who carried out
much of the NGO's research in Angola, says the issue of signature bonuses is central
to any discussion of accountability.
Taylor says the fact that there is uncertainty on the signature bonuses sets a worrying
precedent for future revenue flows. He points out that in Angola, the signature bonus
paid six years ago on Lot 17 in the offshore field was $7 million. Five years later
the Angolan government took in $870 million in signature bonuses from just three
other lots. Most of that money disappeared.
"The point is that when you start getting cash flows like that, you could imagine
getting bonuses in the order of the entire Cambodian budget," Taylor says. "If
you don't get it right with [bonuses], then what is going to happen with the rest
of [the revenue]?"
The government is certainly banking on the sector being a substantial revenue spinner.
In an interview with the Cambodian Business Times in December 2002, Senior Minister
Sok An, who heads the CoM and is the chairman of the CNPA, said the government expected
the industry would provide a "good contribution" to the country's development.
Talk of a dollar value was conspicuous only by its absence, but the answer depends
predominantly on how much natural gas-and to a lesser degree, oil-the country can
claim. The country's offshore reserves are divided between what is clearly Cambodian,
and the so-called Overlapping Claims Area (OCA) that Phnom Penh and Bangkok have
been discussing for years.
The CNPA estimates there are five trillion cubic feet (tcf) of natural gas in the
uncontested area, with around twice that amount in the OCA. Reserves of oil or gas
in the onshore zone are unclear, although Japanese exploration in the mid-1990s showed
that there were 'provable reserves' near the Tonle Sap.
CNPA Chairman Sok An is a senior member of the ruling Cambodian People's Party (CPP).
In the run-up to the July 27 general election, each party was given the opportunity
to discuss the problem of corruption.
CPP Central Committee member, Bun Uy, said his party, which is widely blamed for
much of the corruption, was absolutely against graft and strongly supported punishment
for such criminal acts. He said the ruling party would focus on good governance as
its centerpiece for stamping out corruption.
"[The CPP] ... plans to embrace any anti-corruption measures introduced on an
international scale," he told the Cambodian people in the June 28 TV and radio
GW's Simon Taylor says if that is the case, then the government "has to sign
up" to the EITI. He says the fact that the G8-the grouping of the world's seven
largest economies plus Russia-has already subscribed to it, shows it is credible.
"Tell the Cambodian government they should come to the EITI process-this is
the global process that is addressing this," he says.
Sok An referred all questions on oil and gas to Tara, who admits that the revenue
collection system needs reform. However, he says, none of the money will go through
the CNPA; instead it will all go directly to the Ministry of Economy and Finance
The IMF is involved in trying to improve the government's handling of revenue. Hageman
says the issue of non-transparency of contracts has come up before in areas other
than oil and gas. The Fund's latest country report notes that the government should
consider making public all financial terms of contracts to ensure they generate the
correct amount of revenue.
It recommends that those deals should go through a competitive bidding procedure,
and urges that the government consider a number of measures, including making public
all bidding information once the contract has been awarded.
And there are more potential contracts out there, particularly once Cambodia and
Thailand resolve their dispute over who owns what in the Gulf's Overlapping Claims
Area. Both countries have allocated the OCA to other oil and gas firms, and once
the government-to-government discussions are completed, the government-to-company
talks will begin.
Past experience suggests that will not be a transparent process either. Tara maintains
that ChevronTexaco is an honest and transparent company. Other US firms, such as
ExxonMobil, for example, stand accused by the US Justice Department of involvement
in a huge bribery scandal in Kazakhstan.
Malin Ros, a representative for ChevronTexaco in Cambodia, told the Post by email
that the company "really cannot comment" on the Dow Jones report as it
was not the source of the information.
"We don't stand by the numbers," she wrote in a short emailed response.
"It is far, far too early to speculate on investment levels, let alone profits.
At such an early stage of exploration we can be sure that such predictions will be
The company, she concluded, "has nothing to say at [the] moment". A promised
interview with Malin did not materialize, and numerous follow-up phone calls and
emails went unanswered.
However, LG-Caltex, a joint venture between ChevronTexaco and South Korea's LG Group,
told Reuters in March this year that, "a preliminary study estimated 400 million
barrels of crude oil and three trillion cubic feet of gas" in Block A.
In a statement, LG-Caltex said it expected to earn around $600 million from its 15
percent stake. That would value the consortium's share of the revenue from the reserves
at $4 billion. Given that all details on the deal reached with the government are
secret, it is impossible to know how much the Treasury would earn from that-but it
would likely be far more than the consortium.
What Hagemann says the IMF would like to see "as a minimum" is that the
government abides by its own laws on awarding concessions. One of those provisions,
in government order No. 30, is that the Ministry of Economy and Finance (MEF) examine
or approve all contracts. That has not always happened.
"I am not sure what the precise language is, but [the ministry is] certainly
not to be circumvented," Hagemann says, adding that it is important the government
is transparent when it comes to dealing with the lease or sale of state assets.
"Transparency requires that the state budget [and] the impact on the budget
of any contract that involves state assets be taken into account," he says.
"And that is something we are going to be looking for in the future-a substantial
improvement in the process through which public state assets are auctioned off or
put to use."
He says the Fund has put in print that it would recommend not only oversight of such
contracts, but that all are published.
"There might be lawyers who would say there are legal-commercial reasons for
protecting the confidentiality of the company. That doesn't mean there shouldn't
be some oversight-a committee sworn to secrecy," he suggests. "After all,
the government requires trust and faith in its institutions, and it seems to me perfectly
reasonable that there should be some oversight."
One of the recommendations in the Christian Aid report is that nations establish
a capital fund to absorb some of the revenue. That has two distinct benefits: some
money is saved for future generations, and at the same time the damaging rush of
cash into a small economy is tempered.
Hagemann says having such a fund would be "very important", and that ultimately
the country will have to manage any such windfall, if that is what it will be, "in
a very careful way". He is also keen that there be an increased focus on the
country's potentially valuable natural resources.
"I think it is important that there be more public interest in natural resources
in general," Hagemann concludes. "We know there is plenty in terms of forestry,
but maybe looking offshore it is time that we start to be concerned as a community,
that if there is to be a discovery of a potentially lucrative natural resource-be
it gas or oil-that institutional arrangements be made and ready to be put in place."
Where it is
A March 11, 2003 article from Dow Jones in South Korea stated that the Block A field
in the Khmer Trench, which belongs entirely to Cambodia, has estimated reserves of
400 million barrels of oil and three trillion cubic feet (tcf) of natural gas.
The story noted that the consortium operating in the area-ChevronTexaco, Mitsui Oil
and LG-Caltex-would invest $8.5 billion to develop the field, and "expects to
generate [a] profit of at least $20 billion".
This figure does not include any of the Overlapping Claims Area (OCA)(in yellow on
the map), nor does it include the potential in onshore blocks around the Tonle Sap.
In other words, these figures, if they turn out to be accurate, represent the minimum
reserves that the country could exploit.
Consequently, the cash earned by the government could be much higher, once the OCA
is resolved with Thailand and the potential around the Tonle Sap is realized.
The CNPA's petroleum report estimates reserves of natural gas in the OCA at up to
11 tcf. Cambodia's share will depend on the split agreed between Phnom Penh and Bangkok.
It is thought that Cambodia will likely get less than half.
The revenue regime for the government is somewhat complicated, and is dependent upon
how much oil or gas is extracted each day. The faster it is pumped, the higher the
The government earns money through three different revenue streams: royalties, a
profit split between the operator and the government, and income tax.
Royalties are set at 12.5 percent. The profit split on oil and natural gas varies
slightly, but is between 40 and 67 percent. Finally, income tax is, according to
the CNPA, set at between 25 and 50 percent. But until extraction begins, it will
remain unclear how much the Treasury could earn. And even then, it will depend very
much on how well the revenue flows are monitored.
- The map shows Thai fields (in orange) to the west of the OCA, with Vietnamese fields
(in orange) to the south-east. ChevronTexaco's acreage in Block A is to the east
of the yellow disputed zone.
EITI: Who does what?
Any decent conflict involves at least two sides, in this case, the governments and
the oil firms. Pressure was put on the latter at a mid-June 2003 conference in London
to discuss the Extractive Industries Transparency Initiative (EITI).
The EITI aims to combat corruption associated with extractive industries by asking
oil and mining firms to disclose all payments they make to foreign governments when
doing business. The UK's prime minister, Tony Blair, called on oil firms to sign
up to the deal.
International fund managers, NGOs and some foreign politicians were in favor, but
the oil industry was split: several European oil giants were broadly in agreement,
but the US companies-including ChevronTexaco-came out firmly against. They said the
move would hobble them relative to companies from other nations that are less interested
Perhaps more to the point, noted Britain's The Economist newspaper, the oil firms
are worried that signing up to the voluntary protocol "would be but a brief
stepping stone to mandatory rules, which they fiercely oppose".
That much was clear in an article in the UK broadsheet The Guardian, in which the
executive vice-president of ChevronTexaco, Sam Laidlaw, said that contractual obligations
were more important than openness. That view was shared by ExxonMobil and ConocoPhillips.
Laidlaw maintained that the process must remain voluntary, a move that NGOs, among
others, oppose. They feel that mandatory rules are the only way to prevent the process
from becoming a sham.
The debate is sure to rumble on, but with NGOs and finance giants such as George
Soros weighing in on the side of disclosure, the oil firms will find the issue becoming
more prominent, not less.
Given the reluctance of numerous governments to come clean on what is a lucrative
source of corruption money, Soros told attendees that it would be better to put the
pressure on the IMF and the World Bank: why not force them to make such transparency
requirements a condition of their loans?
That seems unlikely: a World Bank strategy paper released in May recommended a purely
voluntary strategy for governments of countries that depend on natural resources.
It stated that participation would not be a condition for getting loans.