BERLIN, Tuesday, November 11 – OpenOil and its partners on Monday launched the world’s first comprehensive archive of oil contracts. Some 385 host government contracts from 54 countries are now available with one click.
The repository includes contracts which govern oil production in many countries where disclosure has largely been unknown, such as Algeria, Angola, Chad, China, Egypt, India, Israel, Kazakhstan, Syria, Tajikistan, Tunisia, Ukraine and Yemen. All contracts had previously been put in public domain but were scattered across scores of websites and buried in corporate filings. PWYP Canada outline how corporate disclosures were mined in a release announcing the project’s joint findings.
Over 100 contracts in the repository were filed by oil companies to Canadian and US financial regulators. In an effort funded by the Shuttleworth Foundation, the OpenOil team led by Don Hubert and its partners, PWYP Canada and the African Network for Centers of Investigative Journalism (ANCIR), unearthed them by text mining several million documents across the regulator websites going back as far as 1995.
“It is time to turn the way we look at contract transparency on its head”, said Johnny West, Director of OpenOil. “Instead of thinking of a small number of published contracts which is gradually increasing, we should map the total universe of contracts signed by governments, and work backwards from there. The repository is a small step towards contract disclosure as standard practice.”
Along with the repository itself, OpenOil has proposed a draft convention to name contract files so they can be easily exchanged between hundreds of organisations working on governance of the extractive industries.
“All contracts that govern publicly owned natural resources – and the livelihoods of hundreds of millions of people – should be open to everyone to examine,” said Helen Turvey, Executive Director of the Shuttleworth Foundation. “This curation is important not just for its immediate practical value. It proposes a system-level approach under an open data standard, both of which are key to real transformation.”
The newly exposed contracts are particularly promising in Africa, where projects from Angola, Chad and Tanzania are among those newly brought to light.
“Our network of more than one dozen newsrooms across Africa are constantly grappling to understand how the oil economy operates at a political, financial and other level,” said Khadija Sharife, investigations editor at ANCIR. “These newly unearthed contracts from countries like Angola, Egypt and Chad will be invaluable for investigations.
The repository includes contracts relating to other developments in the global oil industry, such as coal bed methane projects in China, offshore gas in India, and Israel’s rapid transition to major gas producer in the Eastern Mediterranean. Contracts from Egypt, Yemen, Algeria, Kurdistan and Syria also shed rare light on the Middle Eastern oil economy.
OpenOil collected the contracts as part of a broader initiative to publish financial models of oil projects in Chad, Cambodia and Kurdistan, scheduled for later in the month. A three-day hackathon to mine corporate disclosures for richer information about oil reserves, production and costs will take place in Berlin in January with OpenCorporates, ContentMine and the Natural Resource Governance Institute.
OpenOil publishes open data on the world’s extractive industries, including sourced maps of multinational affiliate structures. Its book How to Read and Understand Oil Contracts is at over 100,000 downloads, and it has published 19 country-level reference guides in five languages.
Shuttleworth Foundation invests in social innovators who are open at heart, have a fresh perspective on addressing challenges and have a very clear idea of their role in bringing about positive change.
PWYP-Canada is the Canadian coalition of Publish What You Pay, a global network of over 800 civil society organizations united in their call for oil, gas and mining revenues to form the basis for development and improve the lives of citizens in resource-rich countries.
The African Network of Centers for Investigative Reporting is a coalition of the continent’s best muckraking newsrooms and centers.
For more information contact:
at johnny dot west at openoil dot net
How Can Economic Modeling Improve Extractive Sector Governance?
Who is Building Economic Models?
Although economic modeling has not been a significant part of the debate on greater transparency in the extractive sector, these techniques are at the heart of behind-the-scenes decision-making for both companies and governments.
For companies, project economic models are routinely used for formulating negotiating positions and making investment decisions. These economic models (often called discounted cash flow models) allow companies to generate two core metrics such as “net present value” and “internal rate of return” in order to compare the value of one project against another. According to the a 2011 survey by the Society of Petroleum Evaluation Engineers, 89% of respondents used discounted cash flow models as their principal method for valuing projects.
Economic models are also widely used by governments seeking to more effectively manage the extractive sector. A good overview of the various uses for modeling from a government perspective can be found in the very useful new book on Administering Fiscal Regimes for Extractive Industries written for the IMF by UK tax expert Jack Calder (unfortunately not freely available). From this volume and the wider literature on economic models, five common uses can be identified.
1. Fiscal Regime Design and Revision: When designing fiscal regimes and establishing general contract terms, governments are engaged in a balancing act of attracting inward investment while at the same time maximizing revenue generation. Economic models are commonly used to assess the impact of proposed taxes under varying production, price and expense scenarios.
2. Support for Contract Negotiations: A similar but more specialized use of economic models is in direct support for contract negotiations. Companies normally come to the negotiating table with detailed models to bolster their negotiating positions. Increasingly, resource rich developing countries are developing their own economic models in an attempt to level the playing field.
3. Monitoring Incoming Revenues: Governments, particularly Ministries of Finance, develop economic models in order to evaluate incoming revenues in order to ensure that the results, taking into account real production volumes, market prices and actual company expenses, are consistent with the policy expectations when the fiscal terms were set.
4. Risk Assessment for Tax Audits: Revenue inflows are also assessed for the more specialized purpose of aiding risks assessment by tax authorities. Differences between model projects and actual revenue can highlight issues worthy of further investigation including, where appropriate, subsequent audits.
5. Budget Forecasting and Revenue Management: For many resource rich developing countries, extractive sector revenues constitute a major portion of overall revenue. Forward-looking economic models, based on hypothetical scenarios, are used to generate potential revenue forecasts to be used both in longer-term budget planning and also as a way to anticipate revenue management challenges.
The reasons for economic modeling listed above all assume a high degree of technical expertise. They build on extensive knowledge of the sector and the specific fiscal regime. We believe that economic models can also provide a good entry point for understanding the economic implications of contract terms that are in the public domain but not well understood. Thus we suggest an additional purpose:
6. Understand Economic Implications of Contract Terms: Contract monitoring workshops are often a first step in introducing new audiences to contract fiscal terms. This approach generates a bottom up perspective based on an analysis of individual fiscal instruments (i.e. signature bonuses, royalty rates, cost recovery limits, production-sharing splits, corporate income tax, and government participation). Economic models, when combined with a user-friendly dashboard, can provide a valuable top down perspective revealing the interrelationship between various fiscal instruments.
Building Off Existing Efforts?
An industry exists for developing extractive sector economic models. Take the petroleum sector for example. Models are developed by consultants (e.g. Daniel Johnston or Pedro Van Meurs) and larger firms (e.g. Wood Mackenzie or IHS). Other companies including Palantir, Ceasar, and Petrocash sell generic models that clients can develop and adapt to their specific circumstances. Resource rich developing countries often draw directly on this kind of expertise, often with funding through organizations like the World Bank.
One modeling effort of particular interest to resource rich developing countries is the FARI model developed by the Fiscal Affairs Department at the IMF. The model was initially developed to assist in fiscal regime design and allow for comparisons among contracts and countries. It has since been expanded to assess the full economic impact of projects. FARI is unusual in that it was designed from the outset to accommodate both mining and petroleum sectors.
The broad range of actors engaged in economic modeling of extractive sector projects might suggest that the tool can be easily adapted to serve the wider interest of extractive sector good governance. Unfortunately there are two recurring challenges with existing modeling efforts: they are normally confidential with extremely restricted access, and they are usually custom-built at the level of a country, a sector or even a specific project.
Problem 1 – Restricted Access
For those interested in strengthened transparency in the extractive sector this story will sound remarkably familiar. As was traditionally the case with revenue data or extractive sector contracts, economic models are nearly always confidential.
Companies view their project economics models as proprietary and never make them available for public scrutiny. The same seems to be true for governments. Even among developing countries with strong transparency credentials we know of no examples where revenue projection models have been made available for public scrutiny. And the same approach to transparency seems to characterize international development institutions including the IMF and World Bank. Although the results generated by these models are sometimes included in public reports, the models themselves are closely guarded. The only exceptions to confidentiality seem to come from CSOs, with public models recently published for Timor Leste and Uganda.
Confidentiality undermines the utility of economic modeling far beyond the obvious problem of excluding those outside of government. It also constitutes a major barrier within government circles. Knowledge is power, and power is often not shared. An underappreciated benefit of contract disclosure is ensuring easy access across all relevant government ministries to documents that are often closely guarded. The same challenges of limited access exist for economic models and the input data on which they are based. Confidentiality also stands in the way of peer review undermining the reliability of the results and obscuring the visibility of potentially flawed assumptions.
There should be a presumption that all models developed with public funds (donor or developing country) should be open rather than closed. What would this mean in practice? The principle of transparency in extractive sector good governance is now widely accepted. Our definition of a meaningful implementation, in this context, is that economic models should be accessible, at the very least, to EITI Multi-Stakeholder groups.
As has been the case in the past, commercial sensitivity will be raised as a reason why this cannot be done. But where contracts have been disclosed, the bulk of the necessary information should already be in the public domain. This includes not only fiscal terms and tax laws, but also production volumes and price data (required by the 2013 EITI Standard). The exception may be company-specific cost data. But this is not a reason to keep models confidential. Specific cost data can be replaced by information already in the public domain or industry averages.
Problem 2 – No Cumulative Learning
The underlying objective of project economic models is the same. A series of inputs (e.g. production volumes, sale price, production costs and fiscal terms) are manipulated in order to generate a series of outputs (e.g. project profits, government take, the company rate of return). And there are clear industry norms on how this should be done (See Upstream Petroleum by Kasriel and Wood and Guidelines for Economic Evaluation of Mineral Projects). But there are many different ways to design spreadsheets, structure input data, perform calculations and convey results. In spite of the common underlying purpose and logic, therefore, custom-built models look and function very differently.
These differences between custom-built models are a major barrier expanding the use of modeling, as there is little if any cumulative learning. The problem is much larger than one approach used in the petroleum sector and another for mining. It is not uncommon for donors to fund multiple models focused on the same project, each built to custom specifications allowing no interoperability. Training on one model provides no insight into the operation of another.
From the perspective of model developers, the custom-build approach makes good sense, and may even generate a competitive advantage. But for resource rich developing countries, the outcome is highly counter-productive. At the outset, a new model looks promising and is accompanied by extensive documentation and training sessions for officials. The early utility declines rapidly however because the model is seldom shared with the right people, because input data is not updated, and because attention is diverted when a newer model is commissioned.
For economic modeling to play a greater role in extractive sector good governance, design should be driven by the needs of analysts in developing countries, inside and outside government. This suggests a move away from custom-built models and towards open-source software combined with openly accessible data.
Is a Generic Public Model Needed?
Can existing modeling efforts overcome the problems of confidentiality and a lack of cumulative learning? Unfortunately for the most part the answer seems to be no. Most efforts by companies and consultants, even when working in the public policy space, have based their business model on confidentiality. Their economic interests are directly in conflict with greater openness and broader utility.
The IMF FARI model may be an exception. Designed to accommodate both petroleum and mining sectors, it addresses at least part of the cumulative learning problem. And although the model currently remains confidential, there have been indications in the last six months that the IMF may be considering making a version of the model, excluding confidential data, more widely available. NRGI recently reiterated the call for the FARI model to be released into the public domain.
Given the importance of the FARI model in fiscal regime design for resources rich developing countries, putting FARI in the public domain is an obvious next step. If the model is made public, it will be possible to assess whether FARI is a good starting point for an open source model. There are reasons however to be skeptical. By the IMF’s own admission, use of the model requires “strong economics and Excel skills.” “Unwieldy” would probably be a fair characterization, particularly when multiple projects and jurisdictions are added.
This overview of the existing landscape of economic modeling in the extractive sector suggests the there would be value in developing an open-source economic model complemented by open-source data. Initial thoughts on how that might be done will be the subject of our next article.
More contract disclosure will not necessarily result in greater understanding of the economic implications of fiscal terms. The terms only become meaningful when their interactions are understood alongside relevant national tax laws and regulations. So to make real sense of the economic implications, the fiscal terms must be considered under varying scenarios of production, price and costs. In other words, they must be modeled. Economic modeling is currently considered an advanced and esoteric pursuit, but we believe that this can be turned on its head: methodologically sound models starting from a pedagogical viewpoint can actually be the entry point to understanding the economic implications of extractives contracts. And, to put the converse case, the transparency community will not succeed in spreading public understanding of what these contracts mean unless this modeling does take place because in the case of complex extractives projects “you don’t know what you’ve got until its modeled”.
The norm of contract transparency is gaining ground and more contracts governing extractive sector projects are becoming public – through several channels. Some governments have disclosed contracts as a matter of policy. International lenders, including the International Finance Corporation, are encouraging contract disclosure. Smaller, publicly listed companies have long been required to disclose contracts in the United States and Canada if those contracts could affect their share price. And, of course, sometimes contracts end up in circulation after having been informally disclosed, as is the case with the recent Statoil contract amendment in Tanzania. Many of these contracts can be found on sites including resourcecontracts.
Increased information in the public domain can only be a good thing. But more information does not necessarily mean more understanding. In fact, there is a risk it can result in more confusion, as Michael Jarvis of the World Bank pointed out in a blog post last year.
In the petroleum sector, public “model” contracts are commonly available. But what is often missing is not the general structure of the contract but the economic terms. Against this background, and coming from a low base of what we might call “contract literacy”, the first response to publication of contracts has been to focus on royalty rates, income tax rates, and possibly the level of government equity participation.
But what do such headline terms really tell us by themselves? Not much.
From Contract Terms to Fiscal Regimes
First, percentages only count against a “tax base.” If a contract contains a 10% royalty, the real question is: 10% of what?
Is it 10% of the final sale price, and is the sale price linked to an existing international benchmark?
Does the contract allow sales to affiliated companies where the agreed price might be well below market value? If so, is any formula used to establish an “arms length formula” to calculate a notional market value for tax purposes anyway?
Is the royalty assessed on a “net-back” price where deductions for transportation and other fees are deducted before the 10% is assessed?
It quickly becomes clear the 10% royalty alone does not tell us very much at all.
Second, individual terms are like inert chemical elements. We only understand that “compound” that is the contract as a whole when we put them together and watch how they “react” to each other. Tough terms in one part of the contract can easily be offset by big concessions in another. This means reading the fine print in the main contract as well as the annexes. Take just one example: are royalty payments allowed as a deductible cost against taxable income? Sometimes yes, sometimes no. But the difference matters. When a 10 percent royalty is deductible and the income tax rate is 40 percent, the effective tax rate is considerably lower than the stated 40%. In terms of the sums involved in these contracts, that’s big money, enough to spark a public debate if it were explicit. But if it sits quietly as the impact of one term on another inside an obscure contract it can pass unnoticed.
Third, most contracts are only the final part of the economic picture. They are built on top of other legislation such as corporate income tax laws and broader foreign investment laws. So the contract’s positioning in this larger body of national laws and regulations must be understood. And it is often not just a question of drawing on current legislation. Contract stabilization clauses can mean the tax law back when the contract was signed is relevant, irrespective of subsequent changes. We therefore also need a timeline of all legislation and regulation in force at all stages in the long lifetime of these projects, as Jack Calder points out in the IMF’s new handbook on fiscal administration of extractives.
So the main contract terms are just a first step. We must also consider, at the very least, the tax base, the interaction of the terms, and the broader skein of regulations and laws. Combined, these three elements represent the overall “fiscal regime” governing a project.
From Static Analysis to Scenario Modeling
Even then, the real economic implications can only be understood in the context of overall project economics.
Of course, full knowledge is only possible when a project is over and the books are closed. But no one wants to wait for, potentially, decades. Politicians need policy options. Publics need answers. The solution is to model a range of future hypotheticals in terms of production, price and project costs.
This inevitably means speculating. In fact, once contracts have been disclosed and the broader tax analysis has been completed, the fiscal terms are the most stable part of any model. Other inputs include estimates of the overall resource base, year-by-year production, future prices, and expenses including exploration, development, and operating costs.
As many of these inputs are often based on educated guesses, economic modeling does not provide a very reliable way of projecting future revenues. But modeling a broad range of scenarios does provide a good sense of how a fiscal regime will work in whatever future scenario ultimately unfolds.
Modeling as an Essential Component of Sector Good Governance
Economic models are in widespread use in behind-the-scenes decision-making by companies and governments. All too often, governments rely on the company’s model during a contract negotiation. Curiously, economic models are not yet part of the extractive sector transparency agenda. In part, this is because the models themselves are almost never publicly accessible. But we suspect that it is also because economic modeling based on elaborate spreadsheets is seen as technical and esoteric – beyond the reach of many of those interested in better management of the extractive sector.
We want to change this. In our next post, we will review the common uses for project economic modeling in the extractive sector as well as some of the private and public organizations that build models. In the current environment, the characterization of models as highly technical and esoteric certainly rings true. These models are forbidding rather than user friendly.
It is easy to build models that are intelligible only to a very few technical experts. But we contend that this complexity is not inherent to modeling. Rather it is because, not surprisingly, existing models have been built by economists for economists.
There’s no doubt that it is easy to get lost when you combine 100+ page contracts with a model spread across multiple sheets in an Excel file. But if we make pedagogy a leading requirement in model design, it should be possible for models to be the best way to see the forest of extractive economics rather than just lots of trees.
Modeling needs to be mainstreamed. Currently, fiscal regime analysis is the precursor to building project models. We want to test the opposite hypothesis: that models can empower, and provide the best entry point to understand the economic implications of contract terms that are increasingly in the public domain but not often well understood.
In fact, we suggest there really is no alternative. Because when it comes to understanding the economic implications of extractive sector contracts, “you don’t know what you’ve got until its modeled.”
The decision to try and map BP’s global network was based on the fact that the company makes many public filings. We didn’t really appreciate quite how many until we had finished.
In the UK jurisdiction alone, the BP network we constructed shows 182 affiliate companies. Of these, the 26 which were second tier companies made 157 filings in 2012 and 143 in 2011. The group probably then submits something in the region of 600 to 800 filings a year in the United Kingdom alone. Then we were able to access filings in probably a dozen other jurisdictions.
All in all, the BP group probably averages between 50 and 100 A4 pages of public disclosures per day to public authorities around the world, under normal conditions. That is, not counting investigations, legal proceedings, or any other event-driven process.
We didn’t know that when we started because we were at the start of the learning curve. So we signed up to the Companies House filings service, at a pound a time, and started pulling records.
We had come to the project ever so slightly armed with some ideas of where to look. Because of its profile, there are stacks of books about BP. We set ourselves a BP Primer out of three of them: Tom Bergin’s Spills and Spin, John Browne’s autobiography Beyond Business, clearly the founding declaration of the man to rehabilitate his reputation after his 2007 downfall, and the Evolution of a Corporate Idealist, by Christine Bader, mostly an account of her time at BP working on corporate social responsibility.
Through these we understood broad trends within the company in the past twenty years which we hoped to find traces of in the corporate hierarchies. Bergin, who had held the energy beat at Thomson Reuters for years and had huge experience and clearly great access, offered several major themes. Browne’s rampant acquisition strategy of the 1990s and all the Amoco and Castrol entities that must have adhered to the group. Since BP had moved aggressively into commodity trading suggested there should be prominent corporate investment and trading vehicles. As to individual theatres of operations, would there be any affiliates clearly linked to BP’s play with TNK in Russia, for example, or its expanded presence in Libya post rehabilitation of Muammar Gaddafi in 2004-5? Also, given that many of the vertically integrated companies seemed to manage retail operations in very atomised fashion, would we see companies that were essentially a group of petrol stations in Dorset, and another one for Cumbria?
We quickly found a huge variation of size and activity between one company and another. Some seemed not to have any turnover at all, while others, such as BP Exploration Company, reported a profit of 840 million pounds in 2012. So we began to identify which affiliates seemed to be the “monsters” – BP Global Investments, BP International, BP Holdings North America – and home in on them.
Each of these companies were showing direct subsidiaries in a list at the end of their annual accounts. So we began to build lists of these affiliates and, if they were in a jurisdiction we could reach online, to pull their filings too, to see if they in turn had any subsidiaries. As we found each new company, we recorded its jurisdiction of incorporation, full legal name and number of incorporation, and then stored all documents in directories which combined these into one string.
This was a key understanding from OpenCorporates – the need to identify individual company structures. Not “BP”, or “BP Global Investments” but “BP Global Investments Limited, incorporated in the UK on March 4th, 1932, company number 00263889”.
The entire play in the way multinationals operate is in the interplay between the group as a co-ordinated whole, making a decision about how to invest in exploration in the Arctic, how to react to the US shale gas boom, or how to allocate this year’s profits, on the one hand, and the fact that this unified strategy is played out across over a thousand affiliate companies who each exist as a separate legal “person”. The company naturally seeks to maximise advantage across jurisdictions by combining these different legal persons in the most profitable and least liable way for any given business problem. But even if the group does act with one mind, the price of being able to maintain the affiliate structure as separate legal persons is a bare minimum of autonomous reporting by each of them.
It was as if the BP group is a superorganism and its affiliates were the constituent organisms included in the whole, like individual ants or coral. None of those companies had any purpose or would even survive without being integrated into the colony. Nevertheless, each of them has a unique footprint and what we were doing was studying the traces of their uniqueness, their “genetic code”, to see if significant information was stored there which could tell us something about the internal functioning of the colony.
We kept tabs day by day on this grinding process of building the network by attrition. By the end of the first week we had found about 400 companies. That seemed like a lot of companies, although we knew from an earlier study that in 2010 BP was thought to have had about 1500 companies. So we thought, gosh, well since we understand which files to pull down and where to look within them, it might only take another two weeks, three weeks max.
The team was made up of smart people with no domain experience. Part necessity and part choice. The necessity was that we were on a tight budget and couldn’t afford people who had experience of corporate accounting, for example, or international tax structures, even if we could have persuaded them to stare at annual accounts until they went cross-eyed. The choice was, this was an ideal group for the proposition that anyone with some brains and determination to rub together could grok enough of the basics to build these corporate maps. As well as Anton Rühling and myself, who belong to OpenOil, Claire, Avner and Miguel were grad students based in Berlin. They were intrigued by the hypothesis, clearly had a solid basis of research skills and it didn’t harm that two of them came from countries where hydrocarbons were either already a major feature of the political economy (Venezuela) or might shortly be about to become one (Israel).
Then we had a couple of breakthroughs.
Sixty years after Shell and BP first struck oil in the Niger Delta, multinational companies still produce more petroleum than local Nigerian companies do. But the long, fitful process of indigenizing the industry – a national priority since the 1970s – has finally, unmistakably, taken hold.
In Port Harcourt, the steamy Delta oil hub, I saw more filling stations with local brand names than international ones: shiny signs emblazoned with Conoil and Oando logos, to name just two. Local companies are more prevalent than before in the upstream as well: the most recent NEITI report includes information on 23 indigenous producers and nine international ones. It’s safe to say that indigenization is the biggest trend in the Nigerian oil sector today. Now, the oil governance movement must adapt to this new reality.
Many questions remain unanswered about how local companies handle environmental issues and security. There are also concerns about the transparency of the various licenses awarded in oil blocks where local companies are moving in as foreign companies divest.
Higher ‘local content’ has obvious benefits, from jobs and skills building to local reinvestment of revenues with multiplier effects in other areas of the economy – as well as the hard to define but essential sense of local ownership of a vital national resource. But in governance terms, what works (and doesn’t work) when dealing with multinational companies may not always apply to locally run firms. Foreign firms often have decades-old reputations to defend in international consumer markets; many are bound by membership in industry associations that assess compliance with international health, safety and environmental standards. Local companies are rarely subject to the same scrutiny.
One industry analyst I spoke to in Port Harcourt said that environmental protection in oil areas could become more challenging as more locally-operated fields come online. Nigeria has modern laws regulating industry environmental standards for local companies and foreign ones alike, but these laws tend to be weakly enforced. Perhaps the biggest incentive for companies to operate responsibly is the reputational risk of not doing so: for all the true stories about big international producers polluting the creeks and mangrove forests of the Delta, Shell itself is among the most proactive companies in reporting its own oil spills in Nigeria. Whether or not this is a cynical effort to play nice with the environmental lobby back home in the Netherlands and UK, the outcome, in the form of detailed reporting on the location and size of new oil spills, has been positive.
If the laws won’t enforce it, how can Nigerians get a collective commitment from local companies to adhere to global environmental best practice? One solution may be beefing up the national oil and gas associations to set environmental standards. The Nigerian Association of Petroleum Explorationists is more of a business club than a standard-setter; the Petroleum Technology Association of Nigeria is mainly a local content promoter. A robust system of checks and balances through an industry association with the remit of monitoring environmental compliance – I have to reference the Norwegians here – would go a long way towards environmental responsibility being something normal, not exceptional, about companies doing business in Nigeria.
This is not to pretend that international companies have all done a great job. In fact, their own environmental failures in Nigeria have contributed to the recent surge in indigenization. The militancy in the Niger Delta that peaked in 2007-8 – and which compelled some international firms to sell their assets to local firms – grew out of a marginalized population angry that local communities are deprived of the benefits of their oil, yet must cope with the mess. Local companies have moved in as international producers sell risky, attack-prone onshore assets and focus on safer offshore plays.
The question remains, though, how local operators deal with security issues in the Delta. The euphemism is that as locals they “know” the scene and can handle conflict better. But will that really matter if they add to the mess in the swamps? How exactly do they handle conflict? If the strategy is to fund counterinsurgent militias and thugs to intimidate fractious communities, as Shell has, it is no improvement.
Finally, the allocation of new contracts that come out of the indigenization process must be subject to the same transparency standards as the contracts they replace. A lot of oil acreage has come on the market in recent years, and as a rule, local companies have snatched it up. The new commercial opportunities have brought in a range of new players, and when put under the microscope not all of them look pretty.
Contracts called Strategic Alliance Agreements (SAAs) are one example. One of the biggest gaps in the reporting of the Nigeria Extractive Industries Transparency Initiative (NEITI), the local chapter of the international transparency benchmark, has been its non-inclusion of SAAs. The best known of these contracts are the ones entered into by Seven Energy and Atlantic Energy, who took on operator status for the the state-owned NPDC after the Shell Petroleum Development Company divested from several oil blocks between 2010 and 2012. Both firms were co-founded by Nigerian business tycoon Kola Aluko – Seven Energy as a local subsidiary of Septa Energy (UK), and Atlantic Energy as a local private company. The disclosures made by suspended central bank governor Sanusi Lamido Sanusi included concerns that the government may have been deprived of some $6 billion through these SAAs.
More transparent license allocation is needed in all aspects of the indigenization of the industry – not just the allocation of production licenses, which are already awarded based on competitive bidding, but also the allocation of SAAs and other contracts under newly open acreage. Who exactly is being awarded these contracts, and what are their technical qualifications? Is the success of new operators based more on their performance or their political or social connections? These questions must be asked as standard protocol for all new producer or operator agreements in the country.
Many Nigerians are proud of the accelerating indigenization of their industry, and rightly so. But without governance mechanisms in place that recognize the difference between local and foreign-run firms, the Nigerian oil sector as a whole risks repeating many of the failures of the past.
The other night on a flight from Port Harcourt to Lagos, I saw what a gas flare looks like from the sky. Against a black backdrop, I counted flares by the dozens – giant, violent looking plumes of burning gas illuminating the night sky. I was struck by the darkness between the flares: I saw no electric lights, save for a few faintly glowing clusters, as I flew across a region that sustains upwards of 31 million people.
In this I felt a great paradox: an activity, gas flaring, through which nearly a quarter of Nigeria’s associated natural gas is burned off and billions of dollars in potential revenues are lost; while beneath and between these flares, millions of people move through the night in near or complete darkness. If there is a better image to illustrate Nigeria’s energy woes, I have not seen it.
Nigerians I’ve met take a sanguine approach to life generally, happy by default, but a simmering discontent emerges when topics like energy, poverty and corruption in their country come up. Last week a friend in Port Harcourt wanted to invite me over to his apartment for a drink, but we moved at the last minute to a hotel bar because he hadn’t had time to stop to pick up generator fuel. As he told me, his flat had no power and he would have to borrow electricity, again, from a neighbor with a bigger generator when he got home that night. This guy was not starving, homeless or jobless, his friends and family were healthy – but as he talked I sensed in him anger, deep frustration that had festered over the years, a sense that something had been stolen from him but he could not make the thieves pay. For my friend and others like him, the salient question seemed to be: I live in one of the biggest oil producing countries in the world, so why the hell can’t I expect the lights to work when I come home?
Well, the lights do work if you’ve bought your weekly generator fuel, but if you haven’t you will probably be out of luck. A 2010 Harvard paper estimated that more than 30% of Nigeria’s electricity comes from dirty and inefficient private generators. The amount of gas flared, according to the same study, equals what would be needed to power all of sub-Saharan Africa for a year. This paradox – that Nigerians have irregular access to electricity while so much potential energy simply goes up in smoke – is one that has people’s blood boiling.
In Port Harcourt I was lucky enough to see how people in the Delta cope with these issues, and what they are doing on the ground to make things better. In the Old Township, in a building where Ken Saro-Wiwa had his office, the martyred activist’s friends and family have set up an art gallery to showcase regional work and capture the experience of life in the Delta. Much has changed since Saro-Wiwa’s Movement for the Survival of the Ogoni People came on the scene in the early 1990s. Mobile technology and social media have made it possible for videos like this to convey how communities in the region are treated when they get in the way of commercial or political opportunity. Web applications, like this one on oil spills, are adding to a growing set of resources that help people identify where exactly a problem has occurred and who is responsible. We hope our own web app will soon help shed light on which companies are operating where, and how much these projects earn.
In other ways, though, things remain the same. I spent one afternoon in Port Harcourt sitting in on a lunch debate with a group of friends, some business people and academics, which reminded me uncannily of the 1960s social group described in Chimamanda Ngozi Adichie’s novel about the Biafran War, Half of a Yellow Sun. Afternoons full of arguments, analyses and sophisticated jokes, and bellies full of palm wine and jollof rice. In the book, though, despite the debaters’ best efforts, the war still came. The paradox at the heart of Nigeria’s energy troubles may eventually ameliorate – more people are at least aware of it, now, who weren’t before – but I wonder sometimes what happens when that collective frustration boils over.
Will we see another bloody civil war? No: different times, different problems. But the human consequences of mismanagement in the oil industry are real, and to me, the resentment among people in Port Harcourt was tangible. Will the strivings of all the activists and social entrepreneurs I met there eventually bear fruit, in the form of a more efficient oil sector whose benefits are more equitable? If so, it’s fair to say that people looking out the window on night flights through the Delta will see far fewer gas flares, and a little more light.
As I mentioned before, we had no particular reason to seek to map BP in particular. We were simply conducting an experiment into how much could be known about a major multinational from its own public filings.
In trying to keep track of oil and mining industries, there are two particular issues that could be addressed by corporate network maps.
The first issue is corrupt access to natural resources: when dodgy companies muscle in on lucrative oil and mining concessions because they are politically connected. This has happened in many African countries, Nigeria and Angola for example. But such companies are normally identified because they lack any serious industry profile or access to capital. Whatever anyone might think about BP, it clearly does not fall into that category.
But there is a second issue: whether complex corporate structures allow multinationals to engage in “aggressive” tax planning and use a technique known as transfer pricing to shift profits from, countries where they are operating, to low or no tax jurisdictions such as Mauritius or the Cayman Islands. This might be completely legal or at least open to interpretation. The question here is more whether, if governments in say, Africa, were able to see the whole corporate chain of the companies operating they might adjust their own taxation policies in light of that, or subject billions of dollars of tax-deductible costs submitted to their tax authorities to audit, or at least more rigorous examination.
That might sound abstract but I recently spent a morning in the headquarters of a national mining agency of a small African country meeting a “tax task force” from several different ministries and government agencies. Their job was to see if they could get more tax out of existing mining contracts and one thing that puzzled them was why the royalties they were seeing from iron ore production were so low. Even on paper, the government was only due 3% of the value of the iron ore. But what confounded them was why the company was submitting payments which seemed to be considerably less than 3% of the world market price. Well who are they selling it to, we asked. It turned out to be a processing company in China they were affiliated to. Oil, gas and mining operations need to buy in hundreds of millions of dollars worth of goods and services to make the oil flow. What if they buy services in high from affiliated companies? And sell their commodities low, to other affiliated companies? Any tax stream sitting in the middle, such as a royalty or profit tax imposed by in a small corner of Africa for example, will be squeezed because the base from which it is calculated has just been eroded.
These are the issues which lay behind the stories about Starbucks and Google not having paid any profit taxes in the United Kingdom because they haven’t earned any profits there, despite operating sizeable businesses for over a decade. In these cases it seems as though profits shifted to Ireland, with a 12 percent corporate tax rate, because the UK operations were paying extensively for intellectual property provided by Starbucks and Google affiliates in Ireland. The nature of goods and services being swapped between oil and mining companies might be very different but the principle is the same. Make as little profit as possible in high tax jurisdictions and as much as possible in low tax jurisdictions.
In this sense, the idea that we live in a global free market is a myth. According to the best estimates more than half of the goods and services that pass across international borders every day are between affiliated companies – who may or may not be swapping those goods at market prices. Because it is such a major feature of world trade, transfer pricing is supposed to be regulated and there are complex agreements and pre-agreements and systems in place around the world, sometimes down to the level of individual enterprises reaching a specific understanding with a tax authority on how it will report its own transfer pricing. But it was clear that morning in that rainy West African capital that very little of the knowledge and techniques to capture exactly who was doing business with who was available even to senior civil servants.
And they are not alone. The auditor-general’s office of a southern African country conducting its first audit of national agencies and state-owned companies in the mining sector also did not know who they were doing business with – as in, the precise legal entities who held contracts. The line ministry of a Central Asian country wondered about how to read accounts for costs submitted by a multinational from dozens of different suppliers. If you want to nerd out on the complexity of oil cost accounting, an Ernst and Young audit commissioned by the government of Uganda made it on to the Internet. It lists over 200 local and international companies supplying Woodside Petroleum, the concessionaire. But the thing to understand is that this is atypically simple: the contracts were for very early stage costs in developing a field that was not going to produce for at least another decade and the sums under review were less than $100 million, which might almost be counted as peanuts in early stage oil and gas development these days.
Of these two issues, the Bad Guy issue and the Sharp Accounting issue, the Bad Guy issue is the best known and the most directly emotive.
It could in fact be called the founding paradigm of the transparency movement. It’s the African president’s son who walks into a branch of Riggs Bank in Washington DC with two million dollars in cash. Or who has 15 Rolls Royces in Paris or 17 apartments in Monaco registered in other people’s names. The people who, if there were an underworld edition of Hello!, would dominate the multi-page spreads.
The Sharp Accounting issue on the other hand is grey and mundane – and involves much, much bigger sums of money. Raymond Baker, who founded the US watchdog Global Financial Integrity, estimates that illicit financial flows out of the developing countries into the rich world total perhaps a trillion dollars a year. But of this maybe only five percent is bribe money and corruption associated with government officials. Another 30 percent might be criminal funds. But the other two thirds is money earned in standard business operations to make, buy and sell standard goods. It’s just that the money is not reported, or not reported for what it is, capital flight hidden in the terms of trade. Kofi Annan’s Africa Progress Panel estimated that Africa missed out on about $40 billion in taxes from these flows each year – roughly equal to the in-flow of aid to the continent.
And Sharp Accounting is an issue we might expect to be connected to the legal structures of the multinationals. After all, at some level one assumes the point of corporate accountants, the high fliers at least, not the amiable plodders who approve your and my expenses or tell us off for our sloppy paperwork, but who only think in millions and can make money evanesce around the world faster than you can say Thomas Piketty is that they are sharp. And occasionally the mask slips. A colleague, for instance, was recently poring through job ads for corporate accounting (because that’s the kind of thing we do) and found one which listed as a job responsibility “maximise tax deductible cost recovery”. Not “maximise the accuracy of cost recovery” as in, make sure everyone gets receipts, but just make the figure as big as possible.
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 firstname.lastname@example.org.
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.
When Chris lent across the table and said “We need to map one of the Supermajors. My candidate is BP”, I was struck by a number of thoughts at once. First, perhaps aided by a couple of beers, was: how cool is that? Second was, how could a small team of people in one room in Berlin possibly do that? Third was, what if they come after us?
The idea that huge corporations secretly control the world is part of our Zeitgeist. Campaigners like the Occupy movement articulate it forcefully but it is far more widely present in the Culture. Just look at the number of Hollywood films that have mapped onto this meme in recent years: the Firm, Antitrust, Erin Brockovich. It’s now such a commonplace it is appearing in kids’ films – the arch villain of Lego Movie is Lord Business. These days it is only the political fringes, the committed Left or insurrectionary Right, who see it as an addressable problem and declare an intention to do anything about it. But the belief itself is quite mainstream. For most of us just muddling along I suspect it often seems like a fact of life, inert most of the time but always there. Climate change is inevitable. The Middle East will always be at war. England will never win the World Cup again. Big business rules the world.
What we wanted to do was to take the idea out of its normal barroom habitat and test it under laboratory conditions, or at least the secrecy part of the formulation. The core assertion that “big corporations rule the world” has a hard time escaping debates of definition: what does “rule” mean? Which sources yielding any data are reliable? But, we thought, the idea that Big Business operates “invisibly” should be a testable proposition. After all, companies are required to file annual accounts and returns and other disclosures in almost all countries around the world. What happens if you are deliberately “naive” enough to try and put all that together?
To cut to the chase: in three weeks, using BP’s own public filings, we managed to put together a power map” of BP which includes 1,180 company structures in 84 jurisdictions in chains of ownership up to 12 layers deep – you can play with and download the dataset at bp.openoil.net. This essay describes that process, what the data set says and doesn’t say, and what we think it means for the potential to create a new way of tracking business in its dealings around the world.
It’s worth stating at the outset there was no pressing reason to choose BP. We wanted to attempt a mapping on a full-on global concern and there is no question that BP is that. It employs about 100,000 people and its turnover, about $350 billion in 2013, ranks it as a bigger economic concern than the GDP of Colombia or the Philippines. Although it began life very much as a British company, and in fact the British government once owned a majority stake in it, BP has expanded out across the globe and with its acquisition of Amoco in 1999 has an extensive presence in the United States.
Of course, it still has high global recognition because of the Deepwater Horizon spill in the Gulf of Mexico in 2010, but the company’s history goes back over a century. Born as “Anglo-Persian” in 1909, it was one of the famous “Seven Sisters”, the original oil companies who operated as a cartel for decades and carved up the fields of the Middle East. BP was part of the consortium which ran the Iraq Petroleum Company, for example, which in the mid-20th century decided how much oil Iraq was going to produce, keeping production deliberately low for years at a time to prop up global prices.
More recently it had had been led by John Browne who at one stage was so adept at re-inventing both the company and himself that he had been up there with Richard Branson as a rock star CEO. At the end of the 90s, BP was “Beyond Petroleum”, aggressively exploring renewables while thinking about getting out of the dirty – and thin-margined – business of oil refining, out front in the financialisation of the oil markets, developing a trading arm which rivaled any major in the world, in the vanguard on transparency, suggesting it publish its contracts with Angola.
As a Brit, I have to say BP has also long held a particular interest. It is the national oil company we never had. When the North Sea was developed in the 60s and 70s, Norway built its own oil company, Statoil, to run its sector. It may have been suitably understated and self-effacing, as we have come to know and love from Scandiwegians, but Statoil was a very real assertion of what is now called “economic nationalism”. But cross over the line into the UK sector and you find the entire roster of global Big Oil. There was a brief moment in 1975 when the late Tony Benn, then Minister of Energy, created the British National Oil Corporation. But it never developed production capacity, was shunted aside under Margaret Thatcher – and later acquired by BP. Thirty years later, Norway has the Future Generations Fund currently running at $800 billion while we learned during the Deepwater crisis of 2010 that some 18 million British pensions were connected to BP stock, as though it were also the nearest thing we had to a sovereign wealth fund.
We have no particular animus towards or about BP as a company. If I am being totally honest I would have to admit that the knowledge that Deepwater Horizon still triggers enormous resentment certainly played in our selection as we thought it meant a guaranteed minimum of interest in the way this company, in particular, organises itself around the world. In the USA, even Republicans normally friendly to Big Oil love to hate BP as crass and, above all, foreign, as though it were a kind of corporate James Mason or Alan Rickman, the posh Brit baddie. And that story is far from over. There are ongoing lawsuits at state and federal level and BP’s share price is effectively hedged against liabilities which are still unknown.
But I have no reason to think BP is particularly or uniquely nefarious. Our work revolves around the “Resource Curse”, the fact that digging out large amounts of valuable stuff often ends up being bad news for societies in an amazing variety of ways. But it rarely seems useful, or right, to make it personal. A friend had worked directly for Browne and was full of respect for him, and I have come across several other BP “graduates” in our work in recent years.
I should also say that by definition we were not expecting to find any smoking guns. We were piecing together public filings, not rifling around in dustbins or sticking shredded documents back together. Whatever arrangements were made we had more respect for the small army of accountants and lawyers who were paid small fortunes to make them, than to expect anything obviously illegal.
At one level what you might expect to get out of such a mapping is fairly straightforward: a big network graph of companies criss-crossing the world. In the last couple of years, we have all become used to these kinds of visualisations, whether they are of the Iranian blogosphere, the famous Kevin Bacon paradigm in Hollywood movies (who’s acted in which films with who), or state corporations in China.
But the question is what actual use would a mapped network be, beyond the ooh-ah of seeing a huge mesh of dots and lines connecting them, or “nodes” and “edges” as our network analyst friends taught us to say.
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!
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 email@example.com.
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.
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.
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.