I HAVE worked in the oil&gas industry for about 25 years. Before that, I spent years on the economics staff of Aberdeen University, specialising in energy economics.
Corruption was widespread in the industry at that time. I expected that it would be reduced as the industry developed but, in 2010, I am certain it is no less significant than it was 25 years ago. That may not be the case in the UK, but I have little doubt that corruption is still rampant in many parts of the world.
Let me give a few recent examples. I was in Algeria a few days ago for meetings with Sonatrach, the state oil&gas company, and government officials. The meetings had been postponed because the former chief executive and six of his senior staff had been arrested on corruption charges, allegedly for awarding contracts improperly.
Secondly, the International Finance Corporation and other international banks announced that they were delaying a decision on financing a $875million vessel for the Jubilee field offshore Ghana because of allegations of financial irregularities. It was claimed that one of the companies involved had paid money to a government official via a London-based consultancy firm.
I could give many more examples, but Energy’s lawyers may not like that.
So is corruption worse in the oil&gas industry than in other industries? I believe so, with the possible exception of defence equipment.
Why is that the case? I think there are two main reasons. Firstly, the industry generates large sums of money and, secondly, many of the countries involved – Ghana, Nigeria, Equatorial Guinea, and so forth – were previously very poor.
Regarding the first point, most industries operate on a cost-plus basis. In other words, sales prices – or final prices – are largely determined by the costs of production plus profit margins set by demand and supply.
That is not the case in the oil industry and, to a lesser extent, gas. The current crude-oil price of around $75 per barrel has little direct relationship with the costs of production.
Production costs in some countries, such as Saudi Arabia and elsewhere in the Middle East, for example, are still very low, and for some fields, less than $10 per barrel. There can therefore be enormous “surplus value”, to use the economics jargon.
It is true that production costs elsewhere can be much higher, such as in the North Sea. But, nevertheless, there can still be significant differences compared with the final prices, particularly if oil stays over about $60 per barrel.
A critical question is what happens to that surplus value, which can run into billions of dollars each year. It is an inevitable target for corruption in many countries.
Governments in many countries try to tax much of the surplus value so that it can be redistributed to the population in various ways. The UK and Norway are good examples of that.
But what happens in countries such as Nigeria and Equatorial Guinea?
Given their massive oil revenues, these should be very prosperous countries, according to conventional measures of economic welfare such as economic output (GDP) per head of population. In reality, however, most people are living in poverty because the oil revenues go to only a small minority, often the politicians or ruling families. That is also the case in much of the Middle East.
In such situations, it is easy for corruption to become endemic as different groups battle for a share of the surplus value – the oil revenues, in other words.
There are many ways of doing that: hidden payments for exploration licences and other permits; inflated charges for goods and services; consultancy fees, and so on. The use of middlemen is a common practice.
I worked in Papua New Guinea (PNG) for eight years as the economics adviser to the department of petroleum and energy. I served 10 ministers, of whom probably only one was 100% honest. One of his first tasks was to ask me to produce a report on how some his predecessors had become rich men during office. He did not want to do the same, but to try to prevent it happening again.
One aspect that depressed me about the situation in PNG was that some of the whiter-than-white multinationals were actively involved in the corruption, but invariably using middlemen in the belief that they themselves would not be implicated. Most of the money involved was channelled via the landowners.
A critical factor is the strength of the legislative regimes in the various countries. If they are weak, it can become very easy to get away with corruption. Even the Serious Fraud Office in the UK has a poor record for successful prosecutions, so you can imagine what the situation is like in West Africa and other developing regions.
International agencies such as the World Bank and the European Commission have strong anti-corruption policies. There are also other bodies involved, notably Transparency International. I believe they are having a beneficial impact – but, sadly, there is still a lot more to do.
Tony Mackay is MD of economists Mackay Consultants
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