Oil, Profits, and Peace: Does Business Have a Role in Peacemaking?

April 12, 2007

Oil, Profits, and Peace: Does Business Have a Role in Peacemaking?

Introduction

JOANNE MYERS: Good afternoon. I'm Joanne Myers, Director of Public Affairs Programs, and on behalf of the Carnegie Council I'd like to thank you all for joining us on this rainy afternoon, and especially to thank Jill for arriving just a little while ago from Washington, D.C.

Today she will be discussing her book, Oil, Profits, and Peace: Does Business Have a Role in Peacemaking? The focus of her discussion will be on the links between oil and conflict, and how oil companies can affect positive change and play a role in conflict resolution.

Conflict over control of valuable oil supplies has been a persistent feature of international affairs since the beginning of the 20th century. As oil becomes scarcer, the frequency and severity of such conflict is likely to increase, especially as the center of world oil production gradually drifts towards developing nations which are unstable. Accordingly, it might be beneficial to think about how oil companies and business-related enterprises can play a positive role and contribute to the lives of people in reducing conflict and in eradicating poverty associated with their operations in countries where they are extracting oil and other resources.

Until recently, oil companies saw the socioeconomic consequences of their operations in developing countries as being beyond their control. However, with mounting activist pressure at home, growing interest in corporate social responsibility, and the spiraling cost of conflict in production areas, the oil industry is now playing an increasingly important role in how a country's oil and gas are extracted, how its people fare, and ultimately where the revenues go.

In Oil, Profits, and Peace, our guest this afternoon spotlights three oil-dependent countries—Angola, Azerbaijan, and Sudan—that have had very different experiences with conflict and the oil industry. Drawing on her years of field experience and new data from corporations, NGOs, and hundreds of personal interviews, our guest explores the links between oil and conflict and changing notions about the forms of corporate responsibility.

Jill Shankleman is a former Senior Fellow at the United States Institute of Peace. A sociologist by training, Jill began her early research in Tanzania working in the coffee industry. Gradually, she began work on governmental policy and legislation designed to help corporations understand environmental management. This eventually led her to working on issues of corporate social responsibility in the oil and gas industries. Among the countries she has worked in are the former Soviet Union, Angola, Algeria, Indonesia, China, Bolivia, and South Africa. Currently she is working for MIGA [Multilateral Investment Guarantee Agency], which is the political risk insurance arm of the World Bank that serves to assist private-sector clients to better manage environmental and social aspects of their business.

Please join me in giving a warm welcome to our guest this afternoon, Jill Shankleman. Thank you.

Remarks

JILL SHANKLEMAN: Thank you very much for coming along on this miserable afternoon.

You're a new audience for me. Most of the time I've been spending in the United States recently has been either in Washington in the policy world or in Houston, so I'm really looking forward to the discussion and the debate.

Joanne has given me a great introduction. But just to reiterate where I am coming from in writing this book, I have been working in the private sector most of my career as a consultant. I've done work with businesses and with governments. Initially it was on environmental issues, but for the last ten years it has been on the social impacts of private-sector activity; on how investments, particularly large industrial projects, such as oilfields, chemical plants, and mines, affect people in the immediate neighborhood and how they affect the country more widely, both positively and negatively; and then, looking at how those impacts affect the companies, both in terms of the stability of their operations and in terms of their reputation.

I am not an academic, so I came to the task of writing this book really very much in a consultancy frame of mind: What are the problems? What are the potential solutions? What do the scholars tell us? What can we learn from experience about how companies can face these issues? So the book consolidates a lot of what I have learned and concluded from the consultancy work, but courtesy of ten months at USIP.

What I do in the book is look particularly at how the international oil industry works, at the implications of oil production for producing countries, and especially focusing on the links with conflict and peace, and then I look at the potential for oil companies to contribute to peacemaking. I am using the word "peacemaking" incredibly widely, at the most general level, to include conflict prevention and creating conditions for stability and peace.

I spent some time looking at direct interventions. There is some discussion of that in the case study on Sudan, where one of the oil companies got a former Swedish diplomat to try to play a role in north/south peacemaking. I came to the conclusion, as I think everyone else does who has looked at this, that this is a complete rabbit role and not one to go down.

There are four particular experiences that led me to write the book as I did.

First of all, in the late 1990s I was interviewing senior officials from the Angolan government, particularly from the health and education ministries. It was part of the first social impact assessment that one of the oil companies that was investing in Angola was doing. These officials were part of a very small Angolan elite, and they all recognized that essentially their ministries were not providing services. There was minimal education provision in the country. There was minimal health provision.

They had plans, they knew what was needed, but they didn't have any resources. They all knew that Angola was beginning to produce more and more oil and that this would yield up some resources that could be spent on providing these services, but they had no idea at all of how much money was likely to come into the government or when it was likely to come.

I found it quite extraordinary at that stage. There was I, a kind of reasonably new-to-the-game oil industry consultant, and I had an idea of when the money was going to come. But they didn't know anything. Essentially, they were completely disempowered from making an effective case within the political system for share of resources. So information on revenues was known only at the very highest levels of the MPLA [the political party that rules Angola] and the presidency. Now, in Angola the flow of information has improved somewhat since then, but not hugely. There is still very tight control of information and of budgets.

Next, over 2001-2003 I was working in Azerbaijan on the very early stages of planning two huge international pipelines, 1,700 kilometers of steel parallel pipelines carrying oil and gas from the Caspian through Azerbaijan, Georgia, Turkey. My job involved talking to really lots of people in each of those countries, but I will concentrate on Azerbaijan to start understanding the potential impacts of these pipelines.

Two things that I heard then really surprised and worried me. First of all, there was a small but persistent argument being made by a group of NGOs that the oil companies building the pipelines had both the power and the responsibility to pressurize the government of Azerbaijan to resolve the Nagorno-Karabakh dispute. This seemed to me to really misunderstand the power relationship between the oil companies and the government, as well as the interests of the business. But I also consistently heard from individuals at all levels of Azari society that the real benefit of oil for Azerbaijan was that it gave an opportunity to finally resolve this conflict by beating the Armenians and winning back Nagorno-Karabakh.

Other researchers have found similar results. In Washington, D.C. two weeks ago, I was talking to a young Azari woman I had just met socially who had come over to the States when she was nine years old. I recounted this to her with some trepidation. She said, "Yes, of course that's what we want." So I though there was a itching there to be unpicked analytically.

As Azerbaijan's military spending ratchets up—in 2005 it accounted for 25 percent of the state's budget, and the budget is going up because the oil is beginning to be produced now—there remains in my view a very real risk that this unresolved conflict, which is now really far from the eyes of the international community, could open up again.

Then, when I arrived in D.C. to start the fellowship with USIP in the autumn of 2003, there was still down there a very widely articulated view that Iraq's oil wealth would contribute powerfully and positively to the goal of creating a stable, democratic market economy in Iraq. I was really very taken aback by that. It ran counter to the findings of a large number of economists and political scientists that, in contrast, oil wealth would likely make this much more difficult to achieve.

As we now know, the question of dividing up Iraq's oil revenues and controlling the rights to exploration and production concessions has bedeviled Iraq's political settlement. There have been some encouraging signs in the last few weeks, but the experience of Sudan, which is the only case I know of where revenue sharing formed a key element in the peace agreement, shows that there is really huge resistance, even when you can get a formula on paper, to actually implementing revenue sharing. So that experience in Washington drove quite a lot of what I wrote.

But then, the other trigger is that I wanted to report on what I do see as having been a very significant change that has happened in parts of the oil industry over the last few years in terms of corporate social responsibility. There is some really good work, in my view, being done by some companies in the industry, and they have been active alongside governments and NGOs in launching initiatives, such as the Extractive Industries Transparency Initiative, such as the Voluntary Principles on Security and Human Rights, and in changing the ways in which they conduct their operations to focus on avoiding environmental destruction and going out and actively consulting with communities. So there were some good stories that I wanted to recount.

But the adoption of higher standards is far from universal, and I wanted to explore improved systems of local impact management; if more reached the levels of the best, how would that fit into the broader oil-and-conflict picture.

So what I try to do in the book is basically explain the basic political economy of oil, kind of oil political economy 1.01; I try to present a simple model for understanding the risks of violent conflict in oil-producing areas and for what companies can do to reduce these risks; and then I explore this model through three country case studies and draw conclusions for the sector as a whole as well as in relation to each of the countries. I am going to talk more now about the general model than about the specific countries, because there is not really time, but we could discuss the countries in the discussion.

So what are the key points I am making?

  • The starting point in understanding oil production and conflict risks lies in the profit in oil, the difference between the cost of producing a barrel of oil and the market price. When, as over the last few years, global demand rises faster than global production, this profit is huge. As those of you in the oil industry know, cost data is difficult to find, but even a generous estimate might be a cost of $10 a barrel. We know it is far less in the Middle East. We know it is more, for example, in the Alberta oil sands. But let's take $10, compare it to a market price today of $50-$60, and you can see what the profit is.
  • The second key point is that in most cases it is governments who own subsurface oil resources, and so governments are the main beneficiaries of these profits. Through a variety of mechanisms—taxes, royalties, production shares—governments typically receive (and this is based on a World Bank study) at least 45 percent and as much as 90-95 percent of the profits from oil production. So if we look at that $40-50 profit, say half of it upwards goes straight to the governments.

    Note than in 2006 Angola was producing—well, I won't go through numbers.


So the hidden story of oil, I think hidden from many people, is that it is the governments who are the big winners. I quote in the book a journalist's estimate that in 2006 the government of Nigeria was in receipt of $2 million an hour in oil revenues as its share just from one company there. This was validated by an interview by a journalist, who happens to be my brother. I had sent him off on the trail and then he had researched it independently, but it is validated in an interview he did with the then-finance minister.

Now, outside the Middle East the main ways in which governments realize these profits from oil is by selling concessions to international oil companies. So these companies have to compete for access to oil resources. This competition really ranges right from the Exxons of this world through a whole host of middle- and small-size companies, and, increasingly, state oil companies from Asia and Latin America, that are competing with the Western companies for these licenses.

In times of high demand for oil, and therefore high demand for oil concessions, governments have a real choice over which companies they will let in, meaning that the Western oil companies are facing very strong competition, and, I think important for our discussion today, they have less and less leverage to dictate terms, either financial or in terms of governance.

For those of you who are familiar with it, I think it is worth noting that the Chad experience, where essentially Exxon and the World Bank dictated to the government of Chad, at least initially, how oil revenues were going to be used, in my view just could not be replicated under current market conditions, because the government just would go straight to another company. At that time, there wasn't anyone else who would go in and develop those oilfields. So, in a very deliberate strategy to mitigate their risks from conflict, Exxon brought in other partners, particularly the World Bank. But that is not going to happen again until or unless demand drops.

And then, we have to recognize that the rapid growth of China's economy is important in two ways. It is driving global demand, and it is this demand that is leading any country with a geology that suggests oil might be found there to invite in exploration companies. At the last count, at least half the countries in sub-Saharan Africa were offering oil exploration concessions. This includes countries with ongoing or recent conflicts, such as Côte d'Ivoire, Liberia, and Sierra Leone. And the growth of demand for oil in China also means that Chinese state oil companies are operating internationally, and they are doing exploration-and-production deals, and they are providing very fierce competition to the Western companies all over.

Why do these government oil revenues matter? Well, as demonstrated by the work of economists and political scientists, like Paul Collier at Oxford and Michael Ross at UCLA, resource-rich countries have a higher propensity to conflict than others, and this is largely related to these revenues. These revenues present very formidable economic and political challenges.
In terms of economics, dependence on resource revenues makes government spending programs very vulnerable to revenue volatility, and hence inefficiency. This is again something the World Bank has done a lot of documentation on.

There is a huge temptation to spend on "white elephant" projects. I guess Turkmenistan would be the best example of all.

And the phenomenon of "Dutch disease" means that the oil revenues can actually damage the rest of the economy by raising the value of the currency and reducing competitiveness. These economic failures—especially in oil economies the particular failure to create employment for young men, particularly demobilized combatants in post-conflict environments—is really profoundly destabilizing.

However, these economic challenges, the macro challenges of managing oil wealth, are pretty well understood, and I think you can see there is some evidence that governments are getting more serious about addressing these.

So amongst the countries I looked at, in both Azerbaijan and Sudan there are oil-saving mechanisms that have been put in place to try to smooth out the impacts of fluctuating revenues on government. But it hasn't been done yet. It has just, since I wrote, been done to some extent in Angola. And it hasn't been done in southern Sudan, which we should probably consider as a separate oil economy on its own.

Politically, what are the problems?

Well, there is very compelling evidence of the damaging effects of oil revenues on governance. One aspect of this is the way in which oil revenues insulate governments from the need to act in the ways that are acceptable to their citizens. They don't need to invest in human capital and efficient public administration because the state doesn't need to rely on taxes levied on individuals and businesses. So in Washington, D.C., you know, "no taxation without representation"; in oil states, the flip side, "no representation without taxation."

Look at Angola, which, five years after the war ended, has still not set a date for elections. They just don't need it.

And the oil revenues create massive incentives for corruption when, as in most developing countries, the deals under which companies operate, the concession contracts that companies have, are not publicly tendered in many cases and they are not publicly disclosed in many places.

Also, at the political level oil revenues provide the means for pursuing violent conflict and internal repression. They provide the cash to buy the arms. This was the case in Angola's war, especially in the 1990s when the Cold War powers were no longer providing finance, but, to the horror of both the Americans and the Russians, the two Angolan sides carried on fighting.

And oil has provided the revenue enabling the government of Sudan both to pursue the second tranche of the north/south war and the war in Darfur. Though the Nagorno-Karabakh war between Azerbaijan and Armenia wasn't financed by oil, as I mentioned, there are real concerns that this could change in the next few years unless a peace deal is brokered.

The other key political effect of government revenues from oil is that they break open and intensify social fissures wherever oil resources are located in a part of the country that has a distinct identity, be it ethnic, religious, or national, and this often gives rise to secession politics.

This distinct identity doesn't have to be a strong identity at the outset. I like to consider the case of Scotland, where the Scottish Nationalist Movement—and I apologize if there are any Scots here—was a joke, it was an eccentricity, before the oil and gas in the North Sea offshore Scotland was discovered. But we have had the most significant constitutional change in the United Kingdom for 300 years that gives Scotland now a very high degree of autonomy, and there is very real pressure for full independence.

For people living in oil-producing areas, the revenues create a very powerful incentive for separatism from the rest of the country, with local ethnic or religious aspects of identity dominating national identity.

These political impacts of oil revenues are much less well understood than the economic issues, especially the risks of subnational conflicts.

There is the Extractive Industries Transparency Initiative as a major effort that tries to address the governance risks of oil revenues through the power of public information. This is, in my view, important, it is essential, but it is very slow to get buy-in from the governments of oil states.

Transparency is going to be even slower to yield results. Of the three countries I have looked at, Azerbaijan is making some progress on EITI. There is more and more information available on what revenues are coming in, how much is going into the oil fund, how they are going to be used—I'm not sure quite how accurate it all is—but in terms of exercising control over that for development purposes, I think there are very big question marks. Angola and Sudan just aren't engaged in this at all.

In addition to these macro-level economic and political risks, the second route by which oil production can contribute to violent conflict is when production causes major disruption to the environment and to the people living nearby and creates grievances. This is a real potential issue when oil resources are onshore, as in Sudan for example, or Chad or northern Angola, where onshore exploration is starting up.

Developing an oilfield involves bringing in thousands of people and lots of equipment. It involves constructing roads and housing. It takes up land. It leads to an influx of outsiders, people working on the project and migrants seeking opportunities.

And, as well as bringing change that is often welcomed by many in the community, it commonly brings an increase in crime and disorder, prostitution, local inflation, pricing those who aren't part of the usually well-paid oil economy out of the local market for housing, and even food, for example.

It can bring into areas poorly controlled local security forces whose presence makes local communities less, rather than more, secure.

If you read, there has been quite a lot in the press in the last couple of years about the oil sands projects in Fort McMurray, Alberta. You will find startling descriptions of many of these effects taking place today there, barring the out-of-control security forces. And in the book I quote Daniel Yergin's very vivid description of the effects of an oil find at Pithole Creek, Pennsylvania, in the late 1860s. So these things happen worldwide. It's the sort of Gold Rush scenario.

I would argue that the combination of a failure to manage the economic and political issues associated with oil revenues and local grievances plus the oil resources where they are in geographical areas with a distinct identity present the biggest risk of all. The Niger Delta shows how this can unfold into a situation where everyone loses.

Over the last ten years or so, as I mentioned, there has been a major change in attitude by companies towards these local impacts, and for a variety of reasons, including primarily enlightened self-interest, the goal of avoiding the chaos of the Niger Delta, some oil companies and their bankers are putting huge efforts into identifying and avoiding this kind of negative environmental and social impact. So doing the impact assessment and litigation plans for a major oil project is often now a multimillion-dollar, multi-year activity in its own right.

The evidence to date suggests that many, though not all, of the local problems can be avoided. But such careful attention to impact mitigation is not yet general practice. I think it was done very well on the BTC pipelines in Azerbaijan, it hasn't really been an issue yet in Angola because most of the oilfields have been offshore, there were some partial efforts at good environmental social management in Sudan, but it is by no means general yet.

So how can the conflict risks, the macro and the local, be reduced? I think there is an emerging and credible consensus on the basic solutions, although they are much easier to describe than to implement.

  • There needs to be transparency in all aspects of revenue management. I believe there needs to be disclosure of the terms of contracts under which exploration is carried out, transparency on the payments by companies to governments and the governments' receipts and use of the money. The purpose of this is to try to reduce the space for corruption and empower citizens to demand investment in development.

  • There need to be economic measures to insulate the non-oil economy from the damaging consequences of oil wealth—for example, by steadying the flow of revenues into the economy, focusing on controlling inflation, and legal and institutional reform to create a climate that makes other kinds of business possible (protecting property rights, cutting red tape, et cetera). Reform to create an investment climate for business is particularly important and particularly difficult in oil-rich states.

  • Less widely recognized, until as in Sudan, Nigeria, or Iraq it becomes a central component of conflict and political stalemate, is the necessity for mutually agreed rules for subnational revenue allocation before oil production starts—in essence, what share do the producing areas get?

  • And finally, limiting the conflict risks associated with oil production requires commitment by companies and government to avoid creating local grievances. So intense efforts are needed to avoid causing environmental damage and social dislocation and to make sure that local people gain from the presence of the industry, that they have a stake in its continued operation, especially through jobs on the operation or in its supply chain. Typically, people think about building the old clinical school, and that really doesn't cut it for most communities at all.


Then there are a whole lot of arguments, which I won't get into now, that actually this won't go far enough and you have to move to bypassing governments and direct distribution of revenue. But if there are formidable political obstacles to persuading the governments that receive oil revenues to move towards transparency, just think about how difficult it would be to get them to bypass this at all.

So where do the oil companies fit in? I suggest that companies could contribute more to reducing the conflict risks that are associated directly through local impacts or indirectly through revenues. It requires four principal steps:

  • They do need to take responsibility for contributing to conflict prevention by minimizing the risks of exacerbating tension or conflict through the systematic application of high environmental and social standards. They need to recognize the risks that their operations could generate conflict. They need to build it into their impact assessments.
  • They need to, in shorthand, apply the World Bank Environmental and Social Standards, apply the Voluntary Principles in Security and Human Rights. I think there is a need for much more collaboration within the industry to develop their own standards and guidelines and training and to incorporate these standards as far as they can into their contracts with governments, concession partners, and contractors. Companies have a bit more leverage at the beginning than they do at the end, so the more that can be built in the early days the better.
  • They need to recognize the risks of conflict presented by oil revenues and seek to exercise influence in favor of revenue transparency, effective macroeconomic management, and agreed-upon rules for revenue allocation. The best way they can do this is going to really vary from country to country and company to company, but it is along the lines of constructive engagement. It's the only route they've got. There are strategies that people have tried, which I have discussed a bit in the book, and there are some things that can be done.
  • I think companies need to involve other organizations with an interest in conflict prevention as stakeholders in projects that carry high risks of exacerbating conflict. And, as I mentioned briefly with Chad-Cameroon, one way to do this is to structure projects so that you get as many other organizations involved as possible, like bringing in the World Bank through looking for IFC finance or not paying the government's share of the concession up-front so they have to borrow from the Bank. There is experience in each of these.


But finally, what I would like to say is I am not sure that any of this is really going to be enough to handle the risks. It would be a big step forward if the companies did all of these things.

What I think is really going to be needed, though, is for companies to go beyond risk management and try to be real collaborators with government where the opportunities allow to try to develop oil projects that are explicitly development projects as well, and to look for rather more radical mechanisms, such as giving local communities an actual shareholding the project; so, rather than being beneficiaries of philanthropy, give them a real financial stake in the project working effectively. Try to pace the development of oil fields such that it is in line with the skilling-up and the development of local companies and suppliers.

I think there might just be a few places where there is a new government coming into place and the country is small enough and needy enough it might just be possible to do this kind of partnership. I think possibly East Timor might be a possibility. I think there might still be some hopes in south Sudan. I think in some of the other places which are finding oil there is some possibility of doing something rather more radical that might work a lot better for everyone long term.

JOANNE MYERS: Thank you very much.

I was just wondering. Perhaps you could give us an example where a company has exercised and shown good corporate social responsibility and has benefited the community.

JILL SHANKLEMAN: I think that actually both the BTC project in Azerbaijan and, for all the problems it has had at the macro level, Exxon's project in Chad-Cameroon. I think these were both good projects in terms of trying really hard systematically to manage the local environmental and social impact so as not to create negative impacts. They both did a lot in terms of making sure local people had jobs during the construction phase. They both do some systematic social investment, which really means getting NGOs on their behalf to work closely with communities and develop projects that communities actually want. So I think those are amongst the best examples.

Both companies in different ways have also sought to influence revenue management. In the case of Azerbaijan, it was relatively easy to do because the government of Azerbaijan very, very much wanted Western investment and they wanted to separate from the Soviet sphere of influence, so were open to this. Contrast that with Angola, for example, where the same company tried very hard to influence the government of Angola towards revenue transparency and just got told they'd be thrown out.

JOANNE MYERS:
Why was Chad so willing to invest?

JILL SHANKLEMAN:
Chad had their arm twisted. In the case of Chad, what happened is that there were commercially viable reserves. Exxon determined that the political risk because of the conflict there was too great so they needed to share that risk. They had a very clear strategy of sharing that risk with the French government, the American government, and the World Bank through export credit guarantee insurance, through inviting in the IFC, which is the private-sector bit of the World Bank, as a financier, and by ensuring that the government of Chad had to borrow the money to put up their share of the oilfields. Very often, the companies will pay for the government, will not require the government to put up its share at the beginning. It was a very smart move. So the government of Chad had to go to the World Bank, and the World Bank basically said, "We will only lend you the money if you put in place a revenue management law and system."

But as those of you who have been following Chad since know, once the oil production started, the balance of power flips, and there has been a pullback from the law. It is still, I suspect, a better situation that it would have been without, but the leverage goes when the money starts to flow.

JOANNE MYERS: Thank you very much. I'd like to open up the floor to questions.

Questions and Answers

QUESTION: You talked about countries with oil resources. Could you talk a little bit about the impact of pipelines in some of these countries?

JILL SHANKLEMAN: Yes. Given that my argument is that the biggest issue is oil revenues and the subordinate issue is local impacts, pipelines produce much less in terms of revenues, so they can be—for example, in the case of Georgia, it is a kind of nice little earner, but it is not dominating the economy. But, on the other hand, pipelines have potentially much more substantial environmental and social impacts. So much harder to manage when you are building them, but I think long term fewer of the economic and political challenges that I am discussing. But then, there is that whole issue of the geopolitical leverage that having a pipeline gives you, which is a whole other very interesting story.

QUESTION: I wonder whether you could comment about how good are contracts between oil companies and in 2007 countries like Venezuela, Russia? In Bolivia, there is this pipeline with Petrobras where the Brazilian government is an investor. How good are these contracts?

JILL SHANKLEMAN: I think the change in the structure of the oil market at the moment means that everywhere governments are exercising muscle. They are either doing it very crudely and aggressively, as in Venezuela, as in Bolivia, as in Russia; or they are doing it more subtly by what the companies will call "value erosion," where the costs involved in developing oilfields or pipelines shoot up, where details of the arrangements become less and less favorable to companies. I think it is inevitable that the contracts will be challenged when the balance of power changes, as it has now done.

I think it is a very interesting point you make, because the other issue that is emerging very strongly, I think, in the mining sector is that mining contracts can get entered into during times of conflict, when it is hard for governments to get companies to come in and do deals. So these deals are extremely favorable to the companies, but they are taking on an enormous risk of trying to develop something in times of conflict. A few years after a peace settlement, those deals start looking very, very unreasonable and you get a big political pressure to change them.

QUESTION: Given the research that you have done and discovered the various ills that these high oil revenues can result in, could you speculate a little bit and talk about Venezuela and whether you think that any of these things might have an ultimate destabilizing impact on the rule of Mr. Chávez?

JILL SHANKLEMAN:
I am reluctant to go very far because I don't know Venezuela at all well. The only thing I would say is that although these revenues hugely empower whoever controls the government, in the end they do have to keep the oil production coming and they have to keep the oil going onto the market, because otherwise they undercut the source of their own power. So Chavez, the Iranians, whoever, they have potential to play games, but in the end they've got to keep pushing the oil onto the market because otherwise they have lost.

QUESTION:
Thanks very much. That was one of the most interesting presentations I've heard in a long time, and I am going to run out and buy your book wherever it's available.

My question is related to San Tome. I just wondered—first of all, can I ask you a question about San Tome? I assume you have some knowledge about San Tome and Principe. I know a few years ago, when concessions were being handed out in that area, there was a sense of optimism because the country is small, there was an opportunity for lessons learned to be applied, et cetera. From what I've seen, it seems like some of the companies are backing away from a kind of a social compact that they were going to make. Maybe that's a misperception, because I know the oil is not going to start being pumped for a few years. I just wondered, could you speculate about whether you think the social impact and the social compact between the companies and the government and the people of San Tome might work better than it has in some other African countries?

JILL SHANKLEMAN: I have been doing other things for the last eighteen months. I agree, I think there were some really, really good efforts to try to plan in advance, to try to get the legislation in place. I think there has been some backing-off.

But the thing that worries me most about San Tome is just the numbers. There are so few people there in relation to the amount of oil and the scale of the revenues, that I think, even with the best will in the world, it would be extraordinarily difficult to get it to work. So I am not optimistic. But I recognize that there have been some really good efforts to try to anticipate and prevent these problems.

QUESTION: Thank you for this wonderful subject, which has intrigued me ever since I spent my first ten years in business life in Europe during the Marshall Plan. Of course we weren't talking about oil in those days; we were talking about coal, steel, and chemicals. But we rebuilt Europe. It has a lesson here. We did it basically the right way.

The social responsibility question came up consistently, as American companies no longer were exporters but were within the market and established themselves as good citizens within that market. I think there are a lot of lessons there.

In the last part of your presentation, the last part of your book, you recommend actually the same things as the Global Compact of Secretary-General Kofi Annan, which is social responsibility in human rights and in labor relations, and especially in environmental areas. So I think there is a lot to learn from what you have just said, and the Global Compact seems to be catching on more and more.

In terms of that, it is important, as it was in Europe, to have not only an individual country thing, but a regional compact, regional development banks, regional plan for economic development. Would you agree with that?

JILL SHANKLEMAN: Yes and no.

Firstly, what a fantastic piece of work to write up and research the social responsibility of companies involved in the Marshall Plan. Oh, that was so fun! You'll probably beat me to it.

QUESTIONER: I can give you some insights.

JILL SHANKLEMAN: That would be great. Apply to USIP.

I am a bit leery of big regional development plans. But what I do think you have touched on, which is really, really important, and is something that I discuss a little bit, is how there is a real need for subnational but regional development plans around oil- or gas-producing areas.

So, for example, I have been doing a lot of work on an LNG [liquified natural gas] plant in northern Angola. There is a crying need for a development plan for that wider area, and this is something where the companies and the municipal government need to collaborate. There is an underlying issue that there is still no mechanism in that country that provides the municipal or provincial government with any reliable source of revenues because it all goes to the central government. I think that is a more viable way for companies and local governments to try to collaborate.

QUESTION:
You had one figure I was a little concerned about, or maybe confused about. You said most governments receive 40-90 percent of the profits. I have never seen a royalty that was figured on profits, it was figured on the cost of production, and anything above 40 percent is huge. Did I hear you right? You were talking about profits or production?

JILL SHANKLEMAN:
It's based on the World Bank study that is referenced in the book. That said, I am not sure, and I would need to check, whether that refers only to countries with production-sharing agreements, as opposed to royalty arrangements.

QUESTIONER: The Crown royalty in Canada changes each month [inaudible].

JILL SHANKLEMAN: Yes. I think this is looking just at developing countries. If you look, for example, at Nigeria or Angola—Nigeria, in particular, I think it's over $40 a barrel—all of the extra goes to the government and they get a big share of what comes up before then. Something very similar in Angola. The ceiling is different in each of the PSAs.

QUESTION: If I heard you correctly, I believe you indicated that you thought it would be advisable for some of the governments involved to share in the revenues of the oil production within the countries. How do you reconcile that with what many people think, that a way of solving some of these problems is having free markets, such as is espoused by people like Milton Friedman?

JILL SHANKLEMAN:
That is the sort of radical solution argument that I alluded to very briefly but didn't have time to go into, where some of the free-market economists are saying that what should happen is that the revenues that accrue to the state should not go into the hands of government but should be directly distributed to the population. It is an expansion of the Alaska plan.

Quite a lot of work was done in relation to both Iraq and Nigeria about what that kind of system would look like, where you would do direct distribution, and then if the state wanted a share of it, it would have to put in place mechanisms for collecting taxes. It is a very elegant idea.

But the problem is how on earth do you get there; how do you persuade the governments that they won't take that money? And secondly, if you think about both Iraq to a considerable extent and Nigeria to an even greater extent, putting in place the actual infrastructure by which you could distribute to individuals, where individuals could do anything with that money other than spend it directly, you need a banking infrastructure. I quote some really grim experiences from the Pacific islands of direct distribution of phosphate revenues, where it all got spent, then the phosphates have come to an end and people are in really, really dire straits. So it's a wonderful solution "if only." That's my view.

QUESTION:
What has happened to revenue-sharing deals in the past, what's their situation today, and what's the nature of revenue-sharing deals that are being negotiated now?

JILL SHANKLEMAN: What subnational revenue-sharing deals?

QUESTIONER: With the oil companies and with the nationals.

JILL SHANKLEMAN: Oh, with the oil companies and nationals.

I think until this recent spate of renegotiations they have more or less stood. I mean if you look over the long period and you look at the nationalizations in the Middle East in the 1960s and 1970s, you see that was a political response to a revenue sharing that people no longer accepted. Then we had a long period of deals which have more or less stayed, with some sort of creeping bits of change here and there, depending on how the balance of power is altered. We are now in this new period, I think, with a number of countries where deals are being unpicked.

QUESTIONER: A lot of them?

JILL SHANKLEMAN: Quite a lot of them. I mean Venezuela, Bolivia, Ecuador to some extent, Russia. If you look at it broadly, you had Yukos, you've got Sakhalin, you've got the question about whether the BP-TNK deal will hold. You've got certainly concern amongst a lot of the companies in Angola about what is more politically phrased as "value erosion."

QUESTIONER: So it sounds like they aren't holding.

JILL SHANKLEMAN: I think more are holding than are not holding, but the pressure is there, and I think the terms of new deals are more in favor of the governments than the companies. But all of this is very hard to generalize about because most of the deals are not public.

JOANNE MYERS: Jill, I thank you for sharing your vast experience with us. It was really a pleasure.

JILL SHANKLEMAN: Thank you.
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