Mexico’s oil reforms: transparency now or never?

A few weeks ago we released the Spanish translation of Oil contracts: how to read and understand them, which we hope will bring some degree of clarity to the subject for our friends in Latin America and elsewhere. The publication is timely, coming just as one of the region’s most important petroleum producers, Mexico, pushes through reforms to end the 76-year monopoly of its national champion, Pemex.

It’s telling that much of the feedback we have received on the Spanish book so far comes from Mexico, because the reforms offer a potential leap forward for oil contract transparency. It would be a shame if this opportunity were missed.

The constitutional reform bill says that legislation implementing the reforms will regulate the “inclusion of transparency clauses in contracts that allow any interested person to consult them”, while also calling for external audits of costs and revenues and disclosure of payments for services received (Transitory Article Nine). And according to the Atlantic Council, the government has indicated that citizens will be able to audit all fiscal flows between the government and companies.

If the laws implementing the reform retain these transparency provisions, it could be a game changer for many of us in the contract transparency movement. Our work tends to focus on countries with large private sector contracts – places like Iraq or Libya, Nigeria or Azerbaijan where private companies enter into contracts with state-owned firms. Environments in which a state-owned giant controls everything, like Saudi Arabia and the Gulf states, or like Mexico until a few months ago, tend to be information poor and pretty much immune to the influence of civil society.

With any luck, the oil reforms in Mexico will make our work more actionable there. The reforms enshrined in the Mexican constitution in December lay the groundwork for a new contractual regime, and with new contracts comes a new opportunity for transparency – that’s where we hope Contratos petroleros. Cómo leerlos y entenderlos finds its niche. We think the book will add to the sense of urgency in the transparency community in Mexico, with an eye on the new commercial opportunities there.

This isn’t so much about Pemex’s stalwart fields like Cantarell and Ku-Maloob-Zaap, which contribute more than half of Mexico’s oil production, and which the state company will probably get to keep. It’s about the deep offshore and shale deposits Pemex has yet failed to exploit. Once implementing laws are passed and licenses allocated, billions of dollars in private money will flow in. Surging deepwater production in the US Gulf of Mexico offers a hint of what may lie under Mexican waters, while the shale-rich states of Tamaulipas, Coahuila and Nuevo León also seem to beckon. Half of the Eagle Ford shale deposit, for example, is Mexican; the other half, in Texas, is already producing more than a million barrels per day.

History may not be much of a guide, though, to understanding how these reforms and the resulting commercial feeding frenzy might play out. What’s happening in Mexico right now is pretty much without precedent. A hundred years of history are dotted with oil industries nationalized: think of OPEC and resource nationalism in the Arab world in the 60s and 70s, and before that Mexico itself in 1938. There aren’t many cases of national monopolies suddenly opening up and letting private players in. The Russian firesale privatizations of Gazprom and Rosneft in the early 90s don’t offer much insight, since the entire political-economic system around them was in collapse. Neither do the partial flotations of other state oil companies offer many clues, like Colombia’s Ecopetrol and Brazil’s Petrobras, the latter of which attracted $25 billion in private sector bids in 2012. For all Pemex’s structural reforms, its CEO will still serve at the pleasure of the Mexican president and the company will remain wholly state-owned.

We’ve also never seen reforms happen so incredibly fast. Last August it was still a mystery to most people what the reforms might look like. It sufficed for The Economist to call Pemex ‘unfixable‘, lament the company’s overtaxation by the government and its poor investment decisions that compounded the need for reform. Fast forward to December and the Mexican Congress was putting the finishing touches on amendments to three articles of the constitution, shortly before enshrining them in law with the approval of a majority of Mexico’s 31 states. That was phase one. Phase two, which we’re now in the middle of, includes the passage of implementing laws during the legislative session that runs from January to June 2014. At the same time Pemex will seek to retain some or all of its existing exploration and production areas to form its asset base in the so-called ’round zero’, followed by the first competitive auctions for license areas, occurring a year or so after implementing legislation is passed, probably in mid-2015.

Just how fast is that? Think about it this way: in Nigeria, the first draft of the reformist Petroleum Industry Bill came out in 2008. Six years of bitter debate later, the law has yet to pass.

Of course, Mexico’s political environment is very different from Nigeria’s. Reform at that speed is possible partly because the stars have aligned for President Enrique Peña Nieto’s governing party PRI, which pushed the reform through with the help of PRI governors in 20 of 31 states and with the PAN party, PRI’s main partner in pushing the reforms, controlling a further six states.

The next couple of months will tell us a lot about how ‘open’ Mexico’s future oil sector will be in transparency terms. Many in Mexico are skeptical about official overtures to good governance, suggesting they may be more about the Peña Nieto government’s reputation management abroad than meaningful reform at home. And indeed, we won’t know the details of the disclosures called for in the reform bill until the government passes implementing legislation. But if these provisions are backed up in the new oil law, civil society may have more data to work with than in the past.

We hope the Spanish contracts book serves as a call to action for those with a stake in what contracts the Mexican government eventually makes available. We’ll be keeping an eye on developments there and welcome collaboration on work in Mexico going forward. Until then, feel free to circulate the publication and send any feedback to amrit.naresh@openoil.net.

Big Data decoding Big Oil: Nigerian corporate networks

Last month in Lagos, we brought together activists from the tech and oil worlds for a hackathon on the extractive industries of Nigeria. A hackathon, in the lexicon of computer geekery, is what happens when people pool their research, programming, hacking skills to solve a problem or investigate a particular subject, sometimes over a period of several days. Alongside stacks of empty pizza boxes and coffee pots, hackathons often produce a program or application that aims to be usable by a broader community around the field.

This hackathon was part of the Next Generation Governance initiative, which I began to describe in our first post on the subject a while back. It was a one day event at the Co-Creation Hub Nigeria, one of Africa’s leading tech innovation centers alongside Kenya’s iHub and Egypt’s icecairo, which we leveraged to create two web applications. The first is a network visualization of the corporate supply chain in the Nigerian oil industry, which you can see a prototype for here. The second is a map of the oil sector’s physical facilities, with a focus on infrastructure in the Niger delta, which you can see the initial results of here (see Johnny West’s previous post on the map).

It’s old news that Nigeria’s oil sector needs new ideas. Much of Nigeria’s roughly $50 billion in oil revenues is scuppered away through corruption and misadministration, and the government is missing out on potentially tens of billions more. Increasing internet literacy among Nigeria’s booming population offers an opportunity, if not to overhaul the industry, at least to increase citizen engagement around oil and galvanize people to learn more about the sector through open data systems. Internet hubs in Lagos teeming with young, socially conscious tecchies suggest that this sort of engagement may be possible for the first time. Anyone with a web connection can now learn about how the industry is structured and governed. As such the hackathon presented an opportunity for otherwise unengaged Nigerians both to add to that information ecosystem and, by helping develop these applications, learn more about how the oil sector works.

So what exactly does the corporate network show?

The network aims to demystify the corporate players in the Nigerian oil sector by showing their relationships to one another: to begin with, their ownership structures and the contracts they share. Too often when talking about oil, people refer to Exxon doing this or BP doing that. That’s fine in a broader sense, and it’s very effective when you’re an activist trying to rally support around a cause: it’s the kind of broad brush-stroking people with a personal stake in the matter can respond to. But this relegates the fight to one against an idea – the big bad oil industry – when it should be against a particular set of actors responsible for a specific piece of malpractice, no matter the sector they are from. Even in cases where nothing has gone wrong, if you’re a community advocate working from an office in Port Harcourt, it’s better to know who exactly is drilling your backyard rather than wrestling the specter of anonymous Big Oil.

Take a company most people have never heard of, Nigeria LNG Limited – a liquefied natural gas producer with facilities on Bonny Island. As the network shows, the company is a joint venture between Total LNG Nigeria Limited, Shell Gas BV, Eni International BV, and the Nigerian National Petroleum Corporation (NNPC). We see that laterally, there are at least four parties involved in the company’s decisions, three of which are local subsidiaries of multinational corporations. This means that vertically, there are many more parties indirectly involved.

Let’s follow this ownership and decision-making chain up, starting with Total LNG Nigeria Limited. This JV partner is registered in the United States. The network tells us that it is owned by the French-registered Total Gaz & Electricite Holdings France, which is a subsidiary of Elf Aquitaine SA, which is itself a subsidiary of Total SA. So we see from the network that to get from Nigeria LNG Limited’s production facilities in the Niger Delta to the ultimate owners of one of its JV partners in France, we must follow the ownership chain through four companies in three jurisdictions. It is therefore not enough simply to say that “Total” is involved in these or those activities in Nigeria – as the network shows, it is these specific corporate entities, ultimately controlled by Total SA in France, that may be held accountable for the actions of the local producer Nigeria LNG Limited.

What can you do with this sort of data?

The network application is still in its early stages, but we’re continuing to develop it to make it more accessible. Even in its current form, though, it can help facilitate investigations into specific companies. The goal is not to provide immediate solutions to problems, but to help journalists and activists, governments and companies start asking the right questions. It is interesting to note, for example, that Total LNG Nigeria Limited receives just a single mention on the Total Nigeria website despite its involvement in a joint venture – Nigeria LNG Limited – which has employed some 18,000 Nigerians indirectly.

Or to see that the Chinese company Sinopec’s $7.3 billion acquisition of the Canadian Addax Petroleum Corporation, which made international headlines a few years ago, actually took place through Sinopec’s indirect wholly owned subsidiary, Mirror Lake Oil and Gas Company Limited. This doesn’t imply dirty dealing, but serves as further evidence of the strategy companies use to make money flows harder to trace and regulate by spreading their activities over a complex web of subsidiaries. It almost goes without saying that Mirror Lake does not even have a website. (Incidentally, searches through the global corporate registry OpenCorporates reveal Mirror Lake to be a company with an inactive Canadian registration; following that trail to the Canadian corporate registry, we found that the British Virgin Islands imported the company’s registration in April 2010 – about a year after the Addax purchase. Searches for Mirror Lake on the Virgin Islands’ Registry of Corporate Affairs website yielded no results, suggesting the company is effectively untracked in the public domain.)

While the network interface still needs some refining to make companies’ assets explicitly clear, even at this stage it gives us some view of the dominant position of Conoil Producing Limited among indigenous Nigerian producers, with significant stakes in at least four concession areas, in partnership with major international producers like Addax Petroleum Corporation and Total Exploration and Production Nigeria Limited. With further development, we aim for the network to enable comparison of different indigenous producers by filtering search results by company type. Once we integrate records we have pulled from the Nigerian Corporate Affairs Commission, users will also be able to see who the actual shareholders of these indigenous companies are.

So these are still early days. In the coming weeks we aim for the network to surface information more clearly and intuitively, to allow users to start asking relevant questions about the companies and individuals plying their trade in Nigerian oil and, ultimately, use the network as a launching pad for scaled-up journalistic investigations. Stay tuned for more updates from our end.

 

What does an oil well look like from space?

This is what a small oil well in the Niger Delta looks like from space. Strange, isn’t it? We can’t see the rig, and in fact the most prominent feature from above is the produced water reservoir. It is a satellite well feeding into this gathering station, known as the “Ogabe Base” – which is run by Total in concession OML 58 which looks like this. The base has dozens of feeder wells and has been going for a long time – here is a Total corporate brochure about it.

So, the broader point is, there may be ways to map the physical infrastructure of extractive industries using publicly available satellite imagery. Mapathons are already working on issues like the emergency response to Hayan in the Philippines, and Open Street Maps have run projects to develop advanced mapping in areas which might not normally get it, such as the shanty town of Kibera on the edge of Nairobi.

Now it is time to look at applications in and around extractives governance.

This composite picture was produced by a crowd online at a hackathon in about two hours. It needs cleaning up, and is clearly only the start of a large job if we want to map the whole of the Niger Delta. But it also, in our humble view, proves that it is possible.

Who cares, might be the next question? What would such a physical infrastructure map actually tell us?

Well like a lot of things the answer is, it depends. In this case, we know it can interact already with this data set of oil spills, compiled by the Nigerian government. And this dataset which we found of the country’s oil concession areas – the entire physical space carved up into allocations by contract to various companies. Put all those things together and you can start to build a map which can really show patterns and issues around oil spills in a much more precise and granular way. No one layer can do it by itself – the spill points, the concession areas, or the infrastructure. It is a question of putting them all together in the open data space.

The next thing it can do is to provide a skeleton framework for activists on the ground to fill in, and complete a more comprehensive map of all features in any given concession area. This would be hard to do from scratch, but becomes viable with an initial “sketch from space”. We have a couple of Nigerian colleagues in Lagos and Port Harcourt interested in this right now, some journalists and others a community-level civil society organisation.

They may find other applications – what about putting this layer against a geo-spatial data set of security incidents for example, were one available? That might say a lot about the insecurity and conflict we hear about in the Delta. What about time series which map these industries against local patterns of community development, to acquire new data around issues like prior and informed consent and resettlement? IKV Pax Christi already demonstrated what was possible some years ago when they got hold of satellite images which clearly showed that tens of thousands of people had been systematically moved from the path of the oilfields being created in Tarjath, in what was then Sudan, a piece of research which is still playing out in the Swedish court system in terms of what the oil company, Lundin, knew when around what were clearly large scale human rights abuses.

What about other issues of governance? Corruption, for example? Would any correlations stand out if we mapped a country’s small mining license and production against electoral districts? Local administrative fiefdoms? Let’s find out!

I was going to say “the sky is the limit”, but clearly it isn’t. The sky is the start!

Category: Blogs, OpenOil blogs · Tags:

Call for contributions: next generation oil governance

OpenOil is launching a project to map the corporate supply chain in the oil sector, combining Big Data techniques and collaboration with domain experts on the ground. We are piloting this approach in Nigeria and invite you to join us.

An article from the Petroleum Economist last week was a reminder of just how much supply chain has mattered for shale oil and gas development in the United States, and this is true everywhere. Project development depends on the nature of the service companies and other entities up and down the supply chain. But the taxonomy of this industry is an undercovered part of the value chain in extractives governance.

This is the first of three blogs we’ll be posting as the Next Generation Governance initiative progresses, and we’re interested in your ongoing feedback. If you’re working on corporate supply chain issues in the oil sector, we want to know what you’re doing, whether you are in Nigeria or elsewhere.

Our approach is designed to be compatible with the new global standard of the Extractive Industries Transparency Initiative (EITI), which includes company disclosure of beneficial ownership as a core recommendation for implementing countries, of which there are currently 39. We are also exploring the possibility of geo-mapping contract areas by coordinates, which EITI requires in its country reports, to see what connections might be drawn between a contract area and social or environmental issues, for example.

But our main focus at this early stage is on supply chains. Here’s how the project works. Preliminary public domain data scrapes have found references to hundreds of companies operating in the Nigerian oil sector, from the upstream, midstream and downstream sectors, including service, finance and transport companies. So far we’ve found, for example, that the ownership network of the service company Tuboscope Vetco Nigeria Limited goes six levels and three countries deep. We’ve also noted the presence of many maritime companies, hinting at the growing importance of Nigeria’s offshore oil sector.

Now that we have the raw data, we need to do two things. First, in the next couple of weeks, see if we can cross-fertilize with other public domain data sets, such as media scrapes and research documents, to see if we can establish relationships between those companies – who owns who, who has a contract with who, who serves on the board of which company. And second, to work with global and local domain experts to confirm or reject the leads offered by the pattern seeking on the raw data.

Ultimately, we aim to put in place a process which can be maintained and extended by interested parties in-country, to keep an up-to-date guide to who’s who in the Nigerian industry.

We are working with two global level technology partners: with OpenCorporates to map the beneficial ownership structures, and with the Open Knowledge Foundation to layer the other types of relationships on top of that. We are also in contact with potential Nigerian partners on the ground.

All this scraping, scrumping and dataset hunting will culminate in a ‘data expedition‘ on the weekend of November 30, which you can participate in from anywhere in the world. We’ll bring together oil experts, global governance activists and tecchies – people with interest and experience working with data – to start applying these datasets to the real world.

The data ‘explorers’, as the School of Data who pioneered the method calls them, will start drawing connections between datasets to discover what stories this data can tell. We will see what the data can teach us about companies or individuals in the news recently, and may dive into a deeper investigation of one or two entities which seem particularly interesting.

Most important to us, though, is that the project galvanizes civil society in its efforts to improve governance of the oil sector, in Nigeria and elsewhere. So we invite you to join us no matter where you are. If you are interested in learning more about the project or relating your experience working on supply chain issues, email project coordinator Amrit Naresh at amrit.naresh@openoil.net.

Category: Africa, Blogs, Companies, EITI, Nigeria, OpenOil blogs · Tags:

OpenOil is looking for partners to analyse oil contracts around the world

Are you looking for a way into promoting transparency and public understanding of your country’s oil and gas contracts? At OpenOil we are looking for partners to work with across the world to take the conversation around contracts to the next level by beginning to examine oil contracts country by country, working with model contracts.

We would like to identify by Friday October 19th partners in five countries who we will work with over the next few months to produce a joint preliminary of model contracts. OpenOil will contribute professional technical advice to enable country-level partners to formulate a list of questions to be addressed to government on those model contracts. We will then jointly publish the questions in English and any relevant national language.

If you or your organisation would like to work on this with us, please fill in the form here by then. We guarantee to work with partners in five countries to publish such analysis by March 1, 2014. See below for more detail.

What Are Model Contracts and What We Want to Do With Them? 

Only a few countries have already published their final signed contracts. But many more have published “model contracts” which give the general structure and language, and many of the terms. These are industry documents in fact published to give oil companies an idea of the likely agreements to be signed, so that they can determine whether they would like to bid or not.

Model contracts have limitations. They do not contain the all-important financial terms, and you can never be certain that any particular clause or article has been retained in the same form in the final signed contract – the government and companies may have negotiated changes.

But they do represent a general structure to the contracts. And that allows the public in oil producing countries to begin work on understanding contracts, which lie right at the heart of the industry, by getting an idea of the structure of their country’s contracts.

What we basically want to achieve is that each country gets more specific and moves away from a general, theoretical debate of “why should contracts be published” to “what are the specific questions around these contracts in this country” such as “What bonuses are due to be paid at the start of commercial production?” or “How much money the contract specifies to be spent on social projects in areas where Petroleum is produced?”

This process itself should answer one of the main objections put forward by those who oppose contract transparency – what public use or understanding could come of it? Analysis of the model contract also familiarises people with the basics of understanding and reading their country’s oil sector contracts.

OpenOil and the Center for Public Integrity pioneered this approach in Mozambique this summer, when it jointly publishing a list of questions on the Mozambique model contract of the 4th licensing round, which closed in 2010 with an award of the Lower Zambesi area to the Norwegian company DNO. The letter was addressed to Esperanca Bias, Mozambique’s Minister of Resources, on the occasion of Mozambique’s accession to the EITI mechanism, and as a result the minister was asked about the confidentiality of Mozambique’s contracts at a press conference at the EITI summit in Sydney, Australia.

This is only the start. We know that either model or signed contracts for the following countries are currently publicly available: Afghanistan, Angola, Azerbaijan, Bangladesh, Brazil, Burkina Faso, Cambodia, Colombia, Congo, Cyprus, DRC, Ecuador, Equatorial Guinea, Ethiopia, Ghana, India, Iraq, Jordan, Kenya, Liberia, Libya, Mauritania, Mexico, Mongolia, Mozambique, Nicaragua, Peru, Senegal, Sierra Leone, Tanzania, East Timor, Trinidad and Tobago, Turkmenistan, Uganda.  

Category: Blogs, OpenOil blogs, Uncategorized · Tags:

The price of oil: bad news for the Middle East (Jazeera)

The oil markets are feverish again because of events in Syria, Egypt and Libya. There is talk of $150 per barrel and dire predictions about what that all means for the future.

But let’s take all that with a pinch of salt. First, because markets are uncaring beasts and if past experience is anything to go by, have already factored in a strike in Syria. Nassim Nicholas Taleb relates in his latest book “Antifragile” how one of his mentors, “Fat Tony”, made his fortune because he bet on  oil prices actually dropping in 1991 when the US went to war against Saddam Hussein for the first time. And he was right. Prices had doubled from about $18 per barrel the previous summer, when Saddam invaded Kuwait, to nearly $40 by the time the fighting started. Once the missiles started to fly, the war had already been factored in and prices dropped.

In fact, there is a stronger case that, beyond a crisis-spike, oil prices might drop over the medium- to long-term because of deeper trends. Last year, the US increased crude output by the largest amount in recorded historybecause of shale oil production. North Dakota overtook Alaska and California as the second-highest oil-producing state. Demand in the rich countries has been static for over a decade, and although it is rising in Asia, India and China are now making serious inroads into cutting fossil fuel subsidies that have kept prices artificially low in the world’s two largest growing economies.

Plus, they, as well as other developing countries, have learned the trick European governments developed after the oil crisis of 1973 – when the wholesale price of petrol and other fuel products look like they’re going to go down after a geopolitical crisis, don’t allow it! Tax the retail price to a new equilibrium and pick up a nice little earner virtually cost-free.

So market, schmarket. Oil, now at $115 per barrel, could be headed for $150, or for $80, or for $80 through a spike of $150. The roller-coaster continues. The TV business news segments continue to feature suited analysts earnestly spouting scenarios against a wall of screens and a sea of numbers.

The real news for the peoples of the Middle East is: It’s bad news, whichever scenario plays out.

The autocracies of the region, scared by the Arab Spring, have locked themselves into a dependence on historically high prices just to achieve what economists call “fiscal break-even”, the oil price they need to be able to cover their budgets. Saudi Arabia famously threw $130bn at public services in 2011 to forestall unrest, and this year has a fiscal break-even of $98 per barrel, compared to just $74 three years ago. Previous efforts at developing the private sector have been quietly abandoned and the latest attempt at a social contract has involved hiring large numbers of young Saudis into civil service jobs of questionable value.

Continued high prices would keep that situation going, albeit precariously. Governments would stumble on with a mixture of repression and patronage networks, with poverty, discontent and extremism lurking at the edges.

Low prices on the other hand, would lay the fragility bare. As budgets plummet, services and jobs would be cut and unrest would rise – in conditions far less benign than 2011. An “Arab Spring 2.0″ might harness rage without the hope of its predecessor, and with the spectre of sectarian divisions hanging in the air.

Which brings us to Saudi Arabia and Iran. There’s been plenty of ink spilt on their regional rivalry and how it is playing out in multiple theatres from Afghanistan to the Levant. But as we consider Syria and the tragic rise of sectarian killing again in Iraq in the last few months, it is hard not to be drawn to the fact that for both countries ideological meddling in the conflicts of the region could have at least the serendipitous effect of raising the oil price – and easing the pressure at home.

The world has experienced two prolonged price crashes in recent history, in 1986 and 1998. Both times it was effective working agreement between Iran and Saudi Arabia which brought oil producers relief in the form of capping production to hold the price up.

This time, the governments of both countries are caught by the fiscal break-even. Both need to produce as much oil as they can themselves while maintaining a high global price, which can best be ensured by someone else, somewhere else, producing less. Iran’s case is complicated by US sanctions, its need for foreign investment to bring production up in ageing fields, and the politicisation of the industry under the presidency of Mahmoud Ahmadinejad.

There are conspiracy theories upon conspiracy theories. Are Saudi money and Iranian intelligence facing each other down in Syria, Iraq and elsewhere because of the fragility of the oil markets? Or is Russia, whose fiscal break-even this year is $125? It seems unlikely. But you would have to be willfully naive to dismiss the fact that each regime is under stress to feed its patronage networks and each would benefit directly, and materially, from the failure of the other. Call it, then, an unconscious conspiracy of self-interest to promote conflict, in Syria, through Syria, and elsewhere.

Category: Blogs, Middle East, OpenOil blogs · Tags:

Could al-Qaeda have helped Yemen kick its oil habit (Jazeera)

Had the thwarted al-Qaeda in the Arabian Peninsula (AQAP) attack on Yemen’s oil industry succeeded, its impact would have been immense. This country of 25 million people now suffers greater dependency on oil exports than its neighbour Saudi Arabia, although it produces 50 times less. A generation ago, when Yemen didn’t know it had oil, the country’s biggest source of foreign exchange was Yemenis themselves, the two million worked across the Gulf and sent remittances home.

That broad source of income played into politics then, underpinning Yemen’s democratic experiment in the early 1990s, just as the rise of the petro-economy did later in entrenching Ali Abdullah Saleh’sauthoritarianism, which led to the current political crisis. There’s hardly any oil left, but judging by current efforts to diversify, nobody will find any other way to develop the Yemeni economy until the last drop has gone.

Yemen would have done better if it had never discovered oil, or had left it in the ground.

It might have seemed different in the 1980s, when the American Hunt Oil came prospecting. Yemen has always been a poor nation in the Gulf, the only country in the Arabian Peninsula not to have found ample reserves of black gold. An influx of cash then seemed to promise Yemen the same fate, to a greater or lesser degree, as the rest of the region – gleaming urban landscapes and universal services, at least for the citizens. Yemenis might have gone from being guest workers to having guest workers of their own.

In fact, they were caught in the worst of all worlds. There wasn’t enough oil to generate that kind of economic development. But there was just enough to generate a few billion dollars a year for the political elite to mismanage, pay for an expansive security state, and create an economy now firmly based onrent seeking.

The politics of Yemen changed. From the 1960s the two Yemens had seen ideological struggles, which engaged the rest of the Arab world, between the Imamate of North Yemen, the Marxists of South Yemen, and then the ascendancy of Saleh’s General People’s Congress, followed by the reunification of the country.

But even if the structures surrounding Saleh’s rule were authoritarian, he started out as a flexible leader, adapting to ever-shifting forces in tribal alliances and the politics of the region. He had to be. He didn’t have enough patronage to be able to impose his rule in the early years, he had to co-opt and cajole and negotiate.

It is no coincidence, by the way, that the other rulers in the Arab world, known for their “moderation”, such as Hussein and Abdullah in Jordan and Hassan and Mohammed in Morocco, faced the same political economy. They may or may not have been “liberal” by personal conviction but the obsession in Western media coverage of these countries on whether King Hussein liked fast cars or King Mohammed speaks fluent English totally misses the point.

Their “moderation” or “liberalism” simply reflected the hands they had been dealt as rulers. They were not in a position to be self-sustaining regimes. They needed friends, both in the region and within their own societies, and the large expatriate classes represented a kind of proto-middle class, ideal from a political point of view because it was largely politically in absentia.

And so it was with Saleh and Yemen. Reunited Yemen held free elections in 1993 that were ground-breaking in the Arab world, and although the country faced huge problems, it escaped the worst forms of tyranny at a time when much more of the world was ruled by dictatorship than today.

Oil transforms politics

Then oil rose up. Scaled production began in the early 1990s at about 200,000 barrels a day. It peaked at 450,000 barrels a day in 2001 and has been declining ever since. But current production levels are enough to account now for over 70 percent of government income, and over 90 percent of the country’s exports. On paper, the discovery of oil took the Yemeni economy to a different league.

GDP per capita was about $300 in 1995 and has now risen to nearly $1,500. But progress in things which matter to ordinary people has been far spottier. Poverty has increased in both relative and absolute terms in the last 20 years, as has GINI, the measure of economic inequality. Unemployment has nearly doubled, even just as a percentage, and that’s if you were to believe official figures, which nobody does.Malnutrition is widespread.

Of course, Yemen had a political and social elite before oil. But it scaled up and became intricately connected to the new source of wealth. One insider told me on a visit recently that the international oil companies present were widely suspected to be making direct payments to Yemen’s nebulous armed forces and security establishments “for their protection” – a story we have seen play out with Shell in the Niger Delta.

Gas deals which seemed to value the country’s resources at rock bottom prices were not formally investigated, and an activist who openly questioned them fled for his life to Singapore.

Oil yielded enough money to fight over, but not enough to bring any benefit to the population once the elite had taken its share. The decline in production has been predicted for so long that grand plans to diversify the economy, involving an endless round of initiatives and loans and aid talk, have been going for nearly a decade now. With no real results.

On the political front, the rising pressure to democratise was to some extent encouraged by falling oil revenues, although for a time the effects of declining production were kept in check by the rise in the world price of crude from $20 per barrel in 2003 to a new normal of around $100 per barrel by 2010 . By the time protesters went onto the streets in 2011, some of Saleh’s most important allies were also willing to abandon him because he wasn’t bringing home the goods.

Most experts now give the oil industry five to ten years at best. But lack of progress in diversifying the economy will continue as long as the oil is pumping. Political and business elites will remain focused on extracting the last drop of rent.

Nothing could ever have justified the human cost of an al-Qaeda attack, or the economic consequences of such violent disruption. But it is a tragic irony that, had it succeeded, an attack could have sped up the end of two decades of arrested development in Yemen, brought on by an industry which has never been worth the fuss.

The economy of a country of 25 million people now depends on an oil industry which produces a litre and a half of crude per person per day. It’s time for the country to run on something else.

Category: Blogs, Middle East, OpenOil blogs, Yemen · Tags:

Energy Sector Reforms in Mexico: A Catch 22

Whatever changes Mexico’s energy sector will take, they will be radical compared to the status quo. At least this is what one might think, having followed Mexico`s energy reform debate since 2008 and president Nieto’s announcements following his ascent to power in December 2012. The wind of change to Mexico’s heavy crude is blowing.

I doubt that. A lot. And having put some thought to what the options are for Mexico`s production impasse, I finally concluded that the options are very slim. The energy industry is in a political Catch-22 situation, allowing for no substantial reform. There is such a great need for reform to revive the sector that there might be some change. But not enough to attract investment on the grand scale needed.

Since 2004 Mexico’s oil and gas industry output has nose-dived, and with it, its exports to the U.S.. Varying by grade, Mexico’s production of heavy crude oil fell by an astonishing 46 percent from 2004 to 2012 (mainly due to steep production declines of the Cantarell field). At the same time, exports to the US fell by 34 percent, decreasing Mexico’s share of total U.S. crude oil imports to 11 percent in 2012 from 16 percent in 2003.

More worrying note for Mexico, however, this decrease in production has come about with an increasing per capita consumption of energy over the last decades and some specialists estimate that Mexico’s energy demand and production will cross between 2018 and 2000, if no sector reforms happen. A dismal future taking the fact that one third of Mexico’s budget is currently financed through its oil and gas income.

No wonder that Mexico`s Congress enacted energy reform legislation which allowed foreign companies to participate in the oil sector through service contracts (Under a service contract the right to explore and take ownership of the oil once it is extracted, does not transfer to the IOC – more information on contract types here). To counter this downward trend in production, however, this is not enough.

In order to overhaul more than 60 years of state control over the energy sector, Nieto would have to amend the constitution to allow at least partial foreign ownership of Mexican oil. Articles 25, 27 and 28 are in play, of which article 27 is regarded as the most contentious one as it prohibits concession agreements.

Earlier this year he openly floated the idea of selling a minority stake in Mexico`s state-owned oil giant Pemex, a partial privatization à la Brazil’s Petrobras. But is questionable how radical his reform propositions will be in the face of immense popular opposition and possible disagreements within Congress which would need to approve constitutional level reform by a two-thirds majority.

The conservative National Action Party (PAN), the main opposition party to Nieto’s Institutional Revolutionary Party (PRI), already suggested a radical proposal including a reform of all the relevant articles of th constitution, and a proposal to make the country`s energy regulatory bodies autonomous. At the other end of the political spectrum, the leftist Party of Democratic Revolution (PRD) vows total opposition to any reform.

Mexicans generally are not happy about giving foreign companies a share of the oil pie. A new poll by the Center de Investigación y Docencia Económicas (CIDE), shows that 65 percent of Mexicans are against opening up Pemex.

In the face of this opposition room for manoeuvre is small, however much Mexico`s politicians might yearn for it. Some analysts don´t even believe that production sharing agreements will take hold. For instance Daniel Kerner stated in an interview with Reuters that the most ambitious Nieto could get are risk contracts, a tiny change from a service contract in which a third party shares risks and rewards related to results instead of receiving a flat fee. PRI’s party president, Cesar Camacho, has said in a recent interview that Nieto will propose production-sharing contracts for new exploration areas, but ruled out the idea of any concession agreements.

The dilemma is that if the government wants to attract investors, change might need to be radical. That means that even if the government implements some less radical changes, it might not be enough to bring in the investors.

What’s in it for foreign investors?

Exxon, Chevron and the Spanish oil producer Repsol SA are among the companies that have expressed interest in Mexico`s oil fields.

Yet what awaits them might not necessarily be the best operational environment. The country’s proven and probable reserves have fallen from a combined 31.5 billion barrels in 2007 to just 26 billion as of last year. The industry’s infrastructure hasn`t been updated for years, and there are still quesstions over a massive explosion that destroyed parts of Pemex`s headquarters in Mexico City in January 2013. When it comes to investment in existing and new infrastructure Pemex spent about $19 billion across its business – less than half the total amount budgeted for investment by Petrobas.

Category: Blogs, Latin America, Uncategorized · Tags:

So what stops Kenya publishing its contracts?

The World Bank has just recommended among other things that Kenya should publish its oil and gas contracts. The government could modify the terms of its contracts, said the consultants from Challenge Energy, to allow publication and create greater transparency.

Great! Except… the copies of the model contract we find show no obligation to keep the contract confidential in the first place! So by framing the issue as one where the government must – and should – modify the agreement to allow publication, the World Bank is, perversely, reinforcing a concept of currently prevailing confidentiality that has no basis in the model agreements.

This might seem like a fine distinction. But in the debate around transparency we frequently find “if only” statements, of which the least that can be said is that they are not helpful. We’d love to publish, if only we could, it’s just that the contract, our partners, other undisclosed circumstances don’t allow us to…

Down the East African coast, Mozambique’s mining minister Esperanza Bias  in May said that of course all efforts should be made to create transparency. But it shouldn’t be understood that this will include publishing the contracts, she added in a press conference at, of all places, the EITI summit in Sydney, because “business is business”. That conveniently ignored the fact that Mozambique’s model agreements also do not prevent publication. Like many modern petroleum contracts, obligations of confidentiality are subject to requirements under applicable law – in this case the law of Mozambique. In other words, if Mozambique’s parliament passed a law requiring publication, that requirement on the government would release it from any contractual obligation not to publish.

With Kenya the case is even less distinct. In two versions of the model agreement that we have found, including this one published by the University of Dundee, the clause around confidentiality states only (clause 37.1) that “All the information which the contractor may supply to the Government under this contract shall be supplied at the expense of the contractor and the Government shall keep that information confidential”. Information supplied by the contractor. It is highly questionable whether the contract itself, signed by both parties, normally containing no commercially proprietary information belonging to the contractor, would count as supplied by the contractor.

Secondly, clause 37.2 states: “Notwithstanding sub-clause 37 (1), the Minister may use any information supplied, for the purpose of preparing and publishing reports and returns required by law”. In other words, even if you were to accept that the contract itself fell under a category of information supplied by the contractor, if law required either party, then this obligation would be waived. In the case of the Kenyan model agreement the applicable law pertaining to the whole contract is Kenyan law itself. Therefore we reach a situation similar to Mozambique – there is nothing in the contract which would prevent the Kenyan government publishing the contracts if parliament passes a law saying they should. They would not need to negotiate this with the oil companies.

The only remaining question is whether the signed agreements contain the same provisions as the model agreements. We cannot know for sure – since of course the signed contracts are secret, which is the whole debate! But the fact that two separate versions of the model agreement prepared a decade apart contain exactly the same clause on confidentiality would suggest it is unlikely these particular clauses have been changed from the model.

These might seem like lawyerly word games with little relevance for the nascent industry, or the huge expectations it is arousing, or the millions of Kenyans hoping for a better life from their coming oil and gas industry. But it isn’t.

One interpretation, the World Bank’s, says Kenya should publish the contracts at some time in the future when they have been able to modify the agreement, for which they would certainly need to negotiate with the companies. We are in a world of wishes and plans and if-onlys. This is further reinforced by more statements by the consultant proposing that “Kenya publish new and existing production sharing contracts only to the extent permissible under the applicable confidentiality provisions.” So what are the restrictions then under the confidentiality provisions?

The other says they could publish today if they wanted. Or, if they really wanted to play safe, they could pass a law in parliament making it law. In either case, the prerogative to do this already rests with the Kenyan government, which needs no approval from its commercial partners.

It’s a big difference.

Below is the entire text of the confidentiality clause, just for the record…

**

37. CONFIDENTIALITY

(1) All the information which the contractor may supply to the Government under this contract shall be supplied at the expense of the contractor and the Government shall keep that information confidential, and shall not disclose it other than to a person employed by or on behalf of the Government, except with the consent of the contractor which consent shall not unreasonably withheld.
(2) Notwithstanding sub-clause 37 (1), the Minister may use any information supplied, for the purpose of preparing and publishing reports and returns required by law, and for the purpose of preparing and publishing reports and surveys of a general nature.
(3) The Minister may publish any information which relates to a surrendered area at any time after the surrender, and in any other case, three (3) years after the information was received unless the Minister determines, after representations by the contractor, that a longer period shall apply.
(4) The Government shall not disclose, without the written consent of the contractor, to any person, other than a person employed by or on behalf of the Government, know-how and proprietary technology which the contractor may supply to the Minister.

Category: Africa, Blogs, OpenOil blogs · Tags:

Briefing 1 of 5: South Sudan’s extractive industries in ten minutes

OpenOil and Cordaid are publishing a series of policy briefs about the oil, gas and mining industries of South Sudan, Colombia, DR Congo, Guatemala and Nigeria. The briefs are written for the people directly involved and aim to improve the quality of the public debate about the industries. The first policy brief is on South Sudan. Download it here. 

We view these briefings as natural contributors to the transparency movement around the extractive industries of these countries, and hope that they help open a more public discussion around the key issues affecting citizens of these countries and other stakeholders around the world.

The briefings are designed as quick reads covering the range of social, political, economic and environmental issues these industries impact, and are separated into three key areas: Five Features, Five Major Players and Five Unanswered Questions. They seek to make information digestible while illuminating major industry trends.

We aim to reach people in these countries and around the world who are engaged in the industry, or in governance or transparency activism around it, who may want to gain a broader understanding of how it works and who exactly is involved. How, for example, the theft of oil has spurred development of a vast parallel economy in Nigeria. Or details of the confrontation between indigenous peoples and international mining companies in Guatemala. We hope readers will include those in the public and private sectors, journalists and civil servants, local activists and business communities: anyone looking to gain more nuanced understanding of the industries that fuel our world.

As more information on these industries makes it into the public domain, the chance exists to begin to build understanding around them. Public suspicion of the extractive industries remains high around the world, largely because of their secrecy. So these briefings include maps, graphs and data-driven visualizations to draw connections between local geography and national political economy. They contain links and references to other online resources, and we encourage readers to use the briefings as a launch pad to explore each country’s industry in greater depth.

No matter where you are, you can take action only if you are informed. It is our belief that, with better access to information, people can engage with issues around the extractive industries on a level which enables real, mature and informed public discussion. We hope that while reading the briefings you will agree.

For more information about the extractives programs of OpenOil and Cordaid, please contact:

Amrit Naresh, Research Associate: amrit.naresh@openoil.net

Jeroen de Zeeuw, Programme Manager: Jeroen.de.Zeeuw@cordaid.nl

Could al-Qaeda have helped Yemen kick its oil habit (Jazeera)

 

Had the thwarted al-Qaeda in the Arabian Peninsula (AQAP) attack on Yemen’s oil industry succeeded, its impact would have been immense. This country of 25 million people now suffers greater dependency on oil exports than its neighbour Saudi Arabia, although it produces 50 times less. A generation ago, when Yemen didn’t know it had oil, the country’s biggest source of foreign exchange was Yemenis themselves, the two million worked across the Gulf and sent remittances home.

That broad source of income played into politics then, underpinning Yemen’s democratic experiment in the early 1990s, just as the rise of the petro-economy did later in entrenching Ali Abdullah Saleh’sauthoritarianism, which led to the current political crisis. There’s hardly any oil left, but judging by current efforts to diversify, nobody will find any other way to develop the Yemeni economy until the last drop has gone.

Yemen would have done better if it had never discovered oil, or had left it in the ground.

It might have seemed different in the 1980s, when the American Hunt Oil came prospecting. Yemen has always been a poor nation in the Gulf, the only country in the Arabian Peninsula not to have found ample reserves of black gold. An influx of cash then seemed to promise Yemen the same fate, to a greater or lesser degree, as the rest of the region – gleaming urban landscapes and universal services, at least for the citizens. Yemenis might have gone from being guest workers to having guest workers of their own.

In fact, they were caught in the worst of all worlds. There wasn’t enough oil to generate that kind of economic development. But there was just enough to generate a few billion dollars a year for the political elite to mismanage, pay for an expansive security state, and create an economy now firmly based onrent seeking.

The politics of Yemen changed. From the 1960s the two Yemens had seen ideological struggles, which engaged the rest of the Arab world, between the Imamate of North Yemen, the Marxists of South Yemen, and then the ascendancy of Saleh’s General People’s Congress, followed by the reunification of the country.

But even if the structures surrounding Saleh’s rule were authoritarian, he started out as a flexible leader, adapting to ever-shifting forces in tribal alliances and the politics of the region. He had to be. He didn’t have enough patronage to be able to impose his rule in the early years, he had to co-opt and cajole and negotiate.

It is no coincidence, by the way, that the other rulers in the Arab world, known for their “moderation”, such as Hussein and Abdullah in Jordan and Hassan and Mohammed in Morocco, faced the same political economy. They may or may not have been “liberal” by personal conviction but the obsession in Western media coverage of these countries on whether King Hussein liked fast cars or King Mohammed speaks fluent English totally misses the point.

Their “moderation” or “liberalism” simply reflected the hands they had been dealt as rulers. They were not in a position to be self-sustaining regimes. They needed friends, both in the region and within their own societies, and the large expatriate classes represented a kind of proto-middle class, ideal from a political point of view because it was largely politically in absentia.

And so it was with Saleh and Yemen. Reunited Yemen held free elections in 1993 that were ground-breaking in the Arab world, and although the country faced huge problems, it escaped the worst forms of tyranny at a time when much more of the world was ruled by dictatorship than today.

Oil transforms politics

Then oil rose up. Scaled production began in the early 1990s at about 200,000 barrels a day. It peaked at 450,000 barrels a day in 2001 and has been declining ever since. But current production levels are enough to account now for over 70 percent of government income, and over 90 percent of the country’s exports. On paper, the discovery of oil took the Yemeni economy to a different league.

GDP per capita was about $300 in 1995 and has now risen to nearly $1,500. But progress in things which matter to ordinary people has been far spottier. Poverty has increased in both relative and absolute terms in the last 20 years, as has GINI, the measure of economic inequality. Unemployment has nearly doubled, even just as a percentage, and that’s if you were to believe official figures, which nobody does.Malnutrition is widespread.

Of course, Yemen had a political and social elite before oil. But it scaled up and became intricately connected to the new source of wealth. One insider told me on a visit recently that the international oil companies present were widely suspected to be making direct payments to Yemen’s nebulous armed forces and security establishments “for their protection” – a story we have seen play out with Shell in the Niger Delta.

Gas deals which seemed to value the country’s resources at rock bottom prices were not formally investigated, and an activist who openly questioned them fled for his life to Singapore.

Oil yielded enough money to fight over, but not enough to bring any benefit to the population once the elite had taken its share. The decline in production has been predicted for so long that grand plans to diversify the economy, involving an endless round of initiatives and loans and aid talk, have been going for nearly a decade now. With no real results.

On the political front, the rising pressure to democratise was to some extent encouraged by falling oil revenues, although for a time the effects of declining production were kept in check by the rise in the world price of crude from $20 per barrel in 2003 to a new normal of around $100 per barrel by 2010 . By the time protesters went onto the streets in 2011, some of Saleh’s most important allies were also willing to abandon him because he wasn’t bringing home the goods.

Most experts now give the oil industry five to ten years at best. But lack of progress in diversifying the economy will continue as long as the oil is pumping. Political and business elites will remain focused on extracting the last drop of rent.

Nothing could ever have justified the human cost of an al-Qaeda attack, or the economic consequences of such violent disruption. But it is a tragic irony that, had it succeeded, an attack could have sped up the end of two decades of arrested development in Yemen, brought on by an industry which has never been worth the fuss.

The economy of a country of 25 million people now depends on an oil industry which produces a litre and a half of crude per person per day. It’s time for the country to run on something else.

Category: Blogs, Middle East, OpenOil blogs · Tags:

Libya: oil and revolution – a tale of two generations

Young people started Libya’s revolution, young people fought and young people finished it. Now, almost two years after Tripoli’s liberation, their role in this new nation they helped create is unclear.

Some of them have started radio stations to bring a little more exposure to the outside world. Others are active in a bustling civil society, trying to make politics more accessible for the youth. And some have launched new businesses to try their luck in the suddenly free-for-all economy.

Trying to get a handle on the petroleum sector is also a priority. It might not be as cool as western radio or youth activism, but learning about a business that contributes 70 percent of GDP still counts for something. On my visit to the country last month, I ran three workshops explaining oil contracts in Tripoli, Misrata and Benghazi. Most of the people attending were under 30. Misrata, where a few grizzled veteran petroleum engineers showed up alongside students and young journalists, was a notable exception.

There, in Misrata, the yawning generational gap between Libya’s young people and its more established working force became clear to me.

To illustrate, let’s try on two different pairs of shoes. You’re a 23 year old Libyan who just risked his life to help end Gaddafi’s rule. Now you find yourself entering adulthood with the world thrust open for you. Libya is suddenly a dynamic place – you fought to make it that way – and now you want to take advantage.

Or you’re a 50 year old Libyan who has spent most of his working life in a stale economic environment, trapped in a state-planned kleptocracy. On the subject of politics or strategic sectors like petroleum you’ve kept your mouth shut for a long time – didn’t want to end up in Abu Salim prison, did you. But now you can say whatever you want, about whomever you want, to whomever you want, and chances are there is someone else out there who will back you up. A new dawn has risen.

You can see why neither of these characters wants to give up a chance to wield influence he never had before. In Misrata I saw young and old spar on issues ranging from what the structure of an ideal Libyan oil industry would look like, to what time we should start and end the workshop on a Thursday. The young workshoppers would ask questions about how other more stable and democratic countries managed their petroleum sectors, and how Libya might follow suit. The elders of the group more often relayed stories about how working under Gaddafi’s iron fist could stunt development and limit an ambitious person’s career.

The older people in attendance did not necessarily look backward, but they did seem to resist what they perceived to be radical ideas about reforming the oil industry, because they were unrealistic. Young people seemed more amenable to the cause, but of course they were also clueless compared to their older counterparts about how such a vast and complex industry works. To me it seemed like the young felt they were ready to pick up the torch and run with it but the older generation was loath to let it go.

Influencing the new Libya doesn’t have to be a zero sum game, of course. I think there is enough space in this nation of 6.4 million for everyone who wants to get involved to do so. The mature workforce should continue plying its trade and also learn about and try out new ideas. At the same time, young leaders should be able to voice their political concerns through formal structures endorsed and supported by the state. These leadership structures do not yet exist, though, and what form they might eventually take is not clear.

Regional rivalries and competing militias with differing agendas mean the struggle for legitimacy can sometimes turn violent. Most people in cities stay in after dark. Many households keep a closet or two of guns they stocked up on during the revolution, just in case. There are probably as many young people involved in the post-revolutionary clamor on the streets as there are young entrepreneurs launching radio stations and start-ups.

The only thing clear so far is that Gaddafi and his goons’ way of doing business is finished. Libya is not in danger, as its neighbor, Egypt, seems to be, of having new power structures give way to the old status quo. Senior positions in the new government, and in the oil management, are filled by fresh faces – a law passed in May banning Gaddafi-era officials from holding office made sure of that.

The new oil minister, Abdulbari Al Arusi, is an engineer who was vocal enough during the Gaddafi years that he served eight years of a life sentence in Abu Salim, an unhappy home to many political prisoners. Nuri Abusahmain, the new president of the General National Congress, Libya’s proto-parliament, is an ethnic Amazigh, a Berber minority that was systematically excluded from politics during the four decades of dictatorship. In a speech after his election to the post, Abusahmain distanced himself from any political or regional affiliation and declared himself independent.

This is pretty refreshing stuff. But what interests me most is how the mindset of today’s young people influences Libya’s future, and what avenues they might pursue to make that influence felt. Especially when we’re talking about oil. Exposure to different ways of doing business around the world, whether it’s Norway, Brazil or Botswana, could inject new thinking into Libya’s oil management. Al Arusi has spearheaded a move to review Libya’s oil contracts and possibly draft new oil legislation. That’s a start. But what about looking at how money from oil best trickles down to the average citizen? The focus, during the Gaddafi years and even now, in the call to review contracts, seems to be on how to maximize the government ‘take’ of revenues and give foreign multinationals the toughest break. How about a more concerted focus on reforming what is done with the money after the government has got it?

Few seem to be talking about that in Libya at the moment. Maybe a new generation of leaders will start to shift the mentality that for so long has kept this kind of thinking quiet.

Category: Blogs, Contracts, Libya, OpenOil blogs · Tags:

Egypt: when is a subsidy not a subsidy?

Energy subsidies are without doubt one of the main problems of Egypt`s ailing economy. Officially accounting for 20 percent of Egypt’s budget, the government has proposed a long list of subsidy reforms (the latest being a smart card reform) as it struggles along to pay its bills – or not at all with the Egyptian General Petroleum Corporation (EGPC) currently owing up to $20bn to oil companies and banks.
If that would not be enough, there are two reasons why Egypt`s subsidy bill has not only eaten up a staggering $17 bn ($120bn), but probably a lot more.

1. They just got the methodology wrong

If the government would account for the opportunity costs (sometimes also referred to as economic costs) of energy subsidies, it’s subsidy bill would be at least 50 percent higher than the official figure.

Opportunity costs have long been a part of the academic discourse and deemed crucial by economists like Bassam Fattouh. They are basically all the money that the Egyptian government loses by not selling fuel at the international market price, but below.
For instance, out of its production sharing agreements with international companies, the EGPC gets oil and gas which it could sell on the international market. Instead, however, it provides it at a cheaper price for the domestic market. Exactly, this difference between the profit that the EGPC could have made from selling the fuel internationally and selling it domestically at a subsidised price instead is the opportunity cost.

In order to capture this opportunity costs, economists have usually use the so-called price gap approach. Using this approach, the International Energy Agency estimates that Egypt`s subsidy bill was at around $24 bn ($7 bn higher than the current budget estimate) in 2011. And setting a political signal of the importance of subsidy reforms, the IMF has recently published an estimate of around $22bn in energy subsidies in Egypt for 2010 alone (the IMF also accounts for post-tax subsidies
which means the costs that the Egyptian government pays for not taxing fuel “efficiently” as to account for negative externalities as pollution and so on).

2. Budget records are convoluted opening channels for corruption and hidden subsidy costs

During an interview Samir Radwan, former minister of finance, told me that many costs of the government are recorded badly or simply the wrong way making it impossible to track the true costs of energy subsidies:

“When I started to look at the budget file, I realized that it is not simply about the amount of energy subsidies. There is an amazing labyrinth of relations between different ministries and different entities of the government that wherever you try to pull a threat, you find yourself entangled in a ball of spaghetti. […] within this spaghetti some of the costs of subsidies just get lost. Official figures are not credible. On what basis does the government want to reform subsidies?”

And just to give an impression about the entanglement, Radwan outlined how the budget records, for instance, the provision of subsidised fuel to the Ministry of Electricity:

“When the General Authority of Petroleum, an arm of the Ministry of Petroleum, provides fuel [natural gas] to the Ministry of Electricity, its sells it at the subsidised price. The Ministry of Electricity, in turn, collects revenues from electricity sales and pays them to the Ministry of Finance which issues a bond to the Ministry of Electricity. The weird thing is that the subsidies are recorded as an expenditure at the General Authority of Petroleum. Something I have never seen in any other country. It would be more the correct, however, if the General Authority of Petroleum would sell fuel at the market price and then account for the subsidies as loss.”

And by the way, Radwan does not seem to be the only one who discovered that the government records subsidies in an obscure way. A paper by Vincent Castel, principal coordinator at the African Development Bank, for instance, reads: “…Energy subsidies are not reported clearly and accurately…”. Castel even states that the official figures do not cover electricity subsidies properly.

Another interesting aspect of this administrative convolution is, of course, that also a whole bunch of other government expenditures are recorded badly, particularly pensions according to Radwan, opening up possibilities for corruption on an unknown scale:

“Half of the petroleum ministry is in prison, not only because of supplying gas to Israel.”

The main question of course is then, how the government is going to undertake a fuel subsidy reform, if it is not even able to track its own subsidy records – even it is actually interested in doing so.

But that is another story.

Category: Africa, Blogs, Egypt, Subsidies · Tags:

The EITI and Zombie Transparency: what next for Azerbaijan?

One of my favourite catchphrases thrown around last week at the sixth EITI global conference was ‘zombie transparency’. Not a reference to jetlagged scenes over EITI Board meetings, as suggested by one Board member, but to the danger of implementing countries sleep-walking through the box-ticking exercises required by the standard, while contributing little to meaningful reform. The reformed standard finalised this week is a crucial attempt to keep the EITI at the avant-garde of the governance agenda and to remain relevant in the eyes of all of its stakeholders. So is Azerbaijan guilty of being a transparency ‘zombie’? And what do disappointing results for accountability in the country mean for its ongoing relationship with the initiative?

Azerbaijan has been involved with the EITI since the outset, taking part in a pilot in 2002 along with Ghana and Nigeria. Achieving compliant status in 2009, Azerbaijan has been seen as a ‘poster child’ for the initiative, despite little acknowledgment of the initiative beyond a small group of experts within the country.

Warning signals were sent last year when the country’s national EITI coalition released a statement pointing to the ‘stagnation’ of the EITI process in the country – frustrations abounded over unfulfilled promises on publishing of contracts and delays in decision-making processes. Alarm bells then rang in late 2012 when Revenue Watch Advisory Board Member Ilgar Mammadov was detained in Azerbaijan, marking the beginning of a spate of politically motivated arrests and harassments of civil society activists which has gathered pace over the last couple of months as September’s presidential elections draw nearer. More worryingly, speak to frustrated civil society leaders who have been involved in the process in Azerbaijan and it becomes clear that many believe that the EITI has been a lost battle for years.

The soul-searching over the last two years, battled over at (often heated) EITI Board meetings, have resulted in the reformed standard officially launched in Sydney last week at the sixth global conference. New inclusions include tighter reporting demands and stronger contextual information, license disclosure and encouragement of contract transparency and divulging beneficial ownership of assets.

The success of the new reforms in going ‘beyond transparency’, to borrow from the official conference theme, will make or break the EITI initiative. The initiative point in whether the mechanism remains ahead of the curve among a proliferation of other global governance initiatives, or whether it will have to settle with a legacy of kicking off the debate but not taking the next step. The crucial point is that this delicate balance relies on the legitimacy of the EITI in the eyes of all stakeholders.

It is on this count that Azerbaijan appears to have become a thorn in the side for the international Board.

Look carefully at the programme for this year’s event and you will see that Azerbaijan seems to play a far less prominent role than on past occasions. The one high-level government representative, head of the State Oil Fund, had to make do with moderating in one afternoon panel, and most references to one of the first implementing countries in the more high-profile panels were far from celebratory. Compare this to the Paris agenda in 2010, and we find Azerbaijan representation on high-profile panels throughout, celebrating progress to date. Of course this can be partly explained by the increasing geographical expansion as the EITI adds new member countries, which must be represented at the event. Or… was the country being hidden from sight?

All this is not to say that there are not courageous members of Azerbaijani civil society working to keep the initiative alive in a country where, despite assurances of economic diversification, oil still represents 95% of total exports. And among EITI member countries can be found plenty of countries going through complicated political transitions, not least new joiners such as Afghanistan and Iraq. But as a long-standing member, Azerbaijan should be getting some warning signals – one panel member this week rightly pointed out that ‘compliance does not mean complacency’. According to official EITI rules, any breaching of the EITI rules and criteria can be temporarily suspended until those breaches are corrected.

But what would the reaction be? While dress-downs in the international press over democratic shortcomings and heavy-handed dealing with peaceful protests this year have had frustratingly little impact on the Azerbaijani regime, the government would not take the loss of the EITI brand lightly. President Aliyev enjoys using the EITI badge to win over critics.

This is not an empty exercise of ‘NOC-bashing’, another term cropping up in Sydney. The $30 billion-strong state oil fund SOFAZ in fact broadly ticks the boxes, complies with the reporting criteria and produces neat brochures. It was ranked a middling 14th in RWI’s new governance index for sovereign wealth funds, and criticisms centre on lack of oversight of expenditures rather than the revenue collection covered by EITI.

But Azerbaijan’s score as a whole on the RWI index suffered from the introduction of a new component assessing the ‘enabling environment’. The importance of a satisfactory ‘enabling environment’ was a point repeated over and again in Sydney, as in its absence transparency is meaningless and can never reach ‘beyond transparency’ to genuine accountability. Few countries demonstrate this better than Azerbaijan. RWI’s new index assesses this environment based on over 30 measures of accountability, government effectiveness, rule of law, corruption and democracy, which places Azerbaijan in 40th place (of 58), keeping company with Sierra Leone and Iran.

The EITI Criteria require national governments to commit to work with civil society on implementation, without legal or regulatory impediments to civil society’s ability to participate freely and actively, enjoying internationally recognized rights outline in the Universal Declaration of Human Rights. Without going over old ground, concerns on this front have been raised here and here, and the chorus of concerned voices is getting louder.

Immediate de-listing on these grounds would not be in the spirit of an initiative that supports implementing countries, understanding the complicated political backdrops policy-makers have to work against. While the enabling environment is crucial to achieving genuine accountability, there is also recognition that it would be unrealistic to wait for every country to have the idea conditions in place before engagement begins. This would have meant abandoning those post-communist countries making transitions after 1990. But the suspension mechanism is there for a reason, as a last resort.

All the data in the world means nothing if that data cannot be harnessed to make the leap to increased accountability. If Azerbaijan were a new member of the initiative, we might be inclined to give a little more slack. But in order to remain legitimate in the eyes of a wide range of stakeholders (across government, civil society, the private sector and the investor community) the EITI, in the words of Bob Jenkins of the London Business School, needs to be seen as a “tough, hard-to-get standard”. Not a PR exercise. The pioneers of the EITI can quite rightly give themselves a pat on the back for making great leaps in any industry with a long tradition of obscurity. But length of service cannot be a criteria for ongoing acceptance and for the sake of the EITI’s long-term standing, any country that puts that in danger needs to be held to account.

How Saudi Arabia could end up importing oil

I was somehow surprised when Saudi Arabia’s Economy and Planning Minister Mohammed al-Jasser announced last week that their rock-bottom fuel prices, some of the lowest in the world, are after all a serious problem that needs to be dealt with. “This has become an increasingly important issue as these subsidies have become increasingly distorting to our economy. This is something we are trying to address,” is what he said at a financial conference in Riyadh, and implicitly referred to a looming economic and energy crisis if Saudi Arabia does not change its direction soon.

A first sign of this problem already emerged in 2009 when Glada Lahn and Paul Stevens from Chatham House released a report in which they estimate that Saudi Arabia could become a net importer by 2038 and face a serious fiscal deficit in less than 10 years, if it doesn’t handle its sumptuous oil reserves more carefully. This is because, as it stands, Saudi Arabia does not only consumes over one quarter of its own oil production, but is also one of the highest consumers of fossil fuels world-wide (consuming even more than the US per capita and the same amount as the UK although having only half the size of its population). And shockingly enough, in the days of photovoltaic the country still burns a big chunk of its oil to produce electricity – alone 40 percent of its electricity is produced by burning oil.

Despite these increasing signs of a crude awakening, Saudi Arabia hasn`t really acted yet and might take a long time to do so. Instead rulers have twiddled their thumbs and did the easiest they could do – they responded with more supply instead of demand reducing incentives, such as reforming subsidies. And ironically enough, while admitting that fossil fuel subsidies are now a problem, the country was not even willing to admit that it had any subsidies under the G20 reporting mechanism.

So why should it reform its subsidies exactly now and how should it go about it? On the international stage, the time for subsidy reforms could not be better. The G20 has called for energy subsidy reforms for long enough and the IMF has just released a report multiplying the level of estimated fossil-fuel subsidies world-wide and setting a determined sign to end unreasonably cheap oil. On the other hand, there are only a few examples like Iran in which reforms have been successful while a large number failed as sharp price hikes were met with angry protests ending attempts in Nigeria and Jordan just last year.

The problem that Saudi Arabia shares with these countries is that subsidies have been one of the main means through which they have managed to form a social contract with their citizenries. Yet, on top of that Saudi Arabia’s subsidy problem has been amplified by an incredibly young population, without jobs and future in a highly undiversified economy, an explosive basis for Arab-spring-type revolts against any such type of reform. About 64 percent of its population is under 30 years and face an unemployment rate of 27 percent rising to 39 percent for the 20 to 24 year olds. That’s what possibly scared off the government for long enough to change the status quo, apart from the fact that also powerful commercial and industrial entities benefit from these low prices that increase profits, particularly for exports, as the Chatham House report states.

While the government hasn’t got any official plan about how to deal with the subsidy issue yet (surprisingly), most studies, like the recent one by the IMF, suggest that fossil-fuel subsidies should be reformed with the help of targeted cash transfers or should, at least guarantee that fuel subsidies are more targeted to the poor who really need them. But how do you determine who should get cheap fuel or a targeted cash transfer and who not in a system that is already, sorry to say that, very corrupted?

It ends up with the same reform suggestion. The best would be a universal targeted cash transfer as outlined here.

Real-time visitors monitor and live stats