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A volatile, high-octane blend

A volatile, high-octane blend


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

and 1989.

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

worst offenders."

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.

Local issues

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

government's stake.

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

in transparency.

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.


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