If you have "no place to go," come here!

How To Rob an African Nation

FrenchDoc's picture

Cross-posted from The Global Sociology Blog.

What happens when a small island African country discovers oil in its territorial waters? (Via Der Spiegel) In a perfect world, it should be the way out of poverty and to development and higher living standards for all. But this is not a perfect world. And this is not a hypothetical situation. It is the story of what happened to Sao Tome and Principe (See the BBC country profile for Sao Tome and Principe for general background information on this country.).

And it is a textbook example of how power differentials and resource curse combine to create a situation where a few will benefit tremendously and the many will be left in the same abject poverty as they were before and where transnational corporations and richer and more powerful countries can throw their weight around with the help of corrupt officials.

Sao Tome As usual, when a small peripheral country discovers a valuable natural resource to exploit, it can easily turn into a resource curse situation. For the people there, the discovery of oil deposits means possibly the end of poverty and dependency on foreign aid and international loans. But then, rich (US) and less rich (Nigeria, China) countries in need of oil of course got interested in the potential bonanza, along with foreign corporations. The precendents are not encouraging though, so, how did Sao Tome deal with its new found source of income?

"A wealth of natural resources isn't always good for a poor country. It's called the "paradox of plenty," and unfortunate examples proliferate in São Tomé's immediate neighborhood. One is Nigeria, a major oil producer ruled by the corrupt regime of President Olusegun Obasanjo until 2007. Then there's Equatorial Guinea, whose brutal dictator Teodoro Obiang Nguema keeps his people in poverty; and Gabon, where the upper class has almost completely squandered the country's oil wealth; and, of course, Angola, still suffering from the effects of its long civil war.

When São Toméan President Fradique Melo de Menezes took office in 2001, he vowed to keep his country free of such problems. Fradique is a short, muscular man with a large moustache -- a cacao merchant who everyone calls by his first name. He impressed the international community when he spoke of wanting to use the oil wealth to help his country.

Fradique turned to Jeffrey Sachs of New York's Columbia University, the famous American expert on development aid, for advice and support. Sachs has advised governments around the world, and he has written a book called "The End of Poverty." He saw an opportunity to turn São Tomé into a model case, and he took his best teams to investigate the country firsthand. Their goals were to help all São Toméans share in the new wealth while avoiding the error of depending entirely on oil. It was to be a country without violent conflicts.

And thanks to Sachs, São Tomé has a new oil law that may be the best of its kind in the world. It requires oil revenues to be deposited directly into an account with the Federal Reserve Bank in New York. Only a small share of that money can be reinserted into the budget; the remainder has to be saved for the future. Control of the oil itself belongs to a commission made of São Toméans from across the country's political spectrum.

That, at least, is how it should work."

I guess they should be grateful that Sachs did not sell them the shock therapy that got so successful with Russia (I'm being sarcastic, of course, Sachs has somewhat changed his perspective on development).

So what's wrong then? For one, the commission in charge of overseeing the oil dealing does not exist. And the oil contracts that were supposed to be made public have not been seen by anyone so far.

The political leadership in Sao Tome understood very quickly that, after 9/11, the United States would be looking for alternative sources of oil outside of the Middle East and away from Saudi Arabia. 13% of US oil imports now come from Sub-Saharan Africa, to be increased to 25% in the years to come.

But again, when you're a small and poor country, even oil cannot offset the power differential with other countries and foreign corporations and the lack of influence over business and regional affairs:

"The history of São Tomé and Príncipe is a long tale of foreign intervention. When the Portuguese discovered the islands in the 15th century, they were uninhabited. Portuguese ships brought slaves here from Africa with the intention of shipping them to America. The slaves planted sugarcane, and later coffee and cacao. Not much changed -- for centuries -- until a dictatorship in Lisbon was ousted in a 1974 military coup. The Portuguese quickly granted independence to their last remaining colonies, including São Tomé and Príncipe, where 100,000 black Africans and other mixed-race people suddenly had their own nation.

Thirty-three years later, the island still struggles. Despite the $600 million (€380 million) in aid the country has received since independence, the standard of living continues to fall. According to the World Bank, more than 50 percent of the population counts as "poor."

When oil deposits were detected in the '90s, the first businessman to show up was a South African of German descent named Christian Hellinger, who had made his fortune with Angolan diamonds. On arrival he allegedly gave each cabinet minister a generator. Soon he acquired the nickname "King of São Tomé." He moved his air freight company here and was the first to prospect for oil.

Hellinger brought a company to São Tomé that has meant nothing but trouble ever since. The small Louisiana-born firm, now based in Houston, is called ERHC (for Environmental Remediation Holding Corporation). At the time it specialized in disposing oil-industry waste and had no understanding whatsoever of oil production. But ERHC convinced the government to sign a contract in 1997. For $5 million (€3.8 million) the company was granted exclusive rights to market and exploit all of Sao Tome's oil reserves for the next 25 years. The non-governmental organization Global Witness later called this "one of the most egregious deals of all time."

The country made agreements with other companies, including ExxonMobil, but they were apparently just as bad. In the meantime, President Fradique has had some of the agreements renegotiated, but ERHC, now owned by an influential Nigerian, still earns is share from concessions and new oil finds.

São Tomé's second problem was always its powerful neighbor Nigeria, which wasn't about to allow the tiny nation to cash in on oil in its own front yard. Nigeria challenged the maritime border between the two countries and strong-armed São Tomé into an agreement for a "Joint Development Zone," in which 40 percent of the proceeds from oil production would go to São Tomé, and 60 percent to Nigeria.

When the two countries auctioned off the first drilling licenses in 2003 and 2004, things didn't go the way São Toméans might have expected. Most of the major oil companies stayed away, except when it came to the most promising sector in the oil zone, known as Block 1, for which a consortium of Chevron and ExxonMobil secured the drilling licenses at a price of $123 million (€78 million). Nevertheless, it was a momentous day for São Tomé. Its 40 percent share, $49 million (€31 million), roughly equalled the country's annual budget.

But Nigeria held back the money, using its control of the cash to force São Tomé to grant licenses to certain small companies in the next bidding round -- companies owned by Nigerian businesspeople with close ties to the country's politicians. São Tomé's attorney general later uncovered this scheme."

But is there any oil, actually? After all, seismic data are not always clear-cut?

"The first test drillings were indeed a disappointment. Chevron found oil at a depth of about 1,700 meters (5,577 feet), but in such small amounts and of such poor quality that it was "not commercially viable."

The search for oil doesn't always lead to clear results. Promising seismic data is no guarantee that there is really as much oil as anticipated. It's a little like poker: You have a good idea and you place your bets, and with luck you might win. Finding new oil has become more difficult. Companies are drilling deeper and deeper, and as the price of oil increases, deeper drilling becomes more worthwhile.

The Chinese are now drilling in Block 2, while the Americans drill Block 3. Addax, a Swiss-Canadian firm, is so convinced that oil can be found that it has purchased exploration rights in all four blocks. It acquired Exxon's share of Block 1 in the fall of 2007 for just under $78 million (€49 million). The company's representative, an American named Tim Martinson, says it's important to remain optimistic in this business, and that "some form of production" will definitely materialize, but hardly before 2015.

And Fradique? He has long stopped talking about his ambitious goals. There are rumors that his relationship with the Jeffrey Sachs team has cooled."

I'd be curious to know whether Sachs and his team were paid, and how much for their consulting. What happens if there isn't as much oil as hoped for? And I mean what happens to the country, not Exxon or Chevron. The government has invested pretty much everything on the possibility of oil revenues? Moreover, even if significant oil deposits do materialize, the government does not have the expertise to manage oil production, which is why it had to sell exploration and drilling rights to private transnational corporations. These are big enough to dictate their wishes to the small country and they can pack up at any time if the deposits are not profitable.

And even if there is no oil, the drilling itself will probably kill the local fishery industry: the water turns red when the companies drill and fishermen think that can't be too good for the fish.

A perfect illustration of dependency theory.

There should be global regulations protecting small countries against larger ones and transnational corporations when it comes to trade and economic dealings.

No votes yet