Blessed by oil

Conference highlights some lessons on avoiding the “resource curse”

By Hor Hab, Economics Today

The time for Cambodia to exploit its oil and gas resources is drawing nearer as national energy officials have announced that production of oil and gas will start in 2011.

“We will produce the first oil products for Cambodia in 2011 to reduce the import of oil,” Te Duong Tara, Director General of Cambodian National Petroleum Authority (CNPA) told VOA Khmer during a conference on oil and gas in late March.

This could be good news for the country because it will mean large revenues will be added to national accounts, which, government officials say, will be used to finance public investment programs.

Estimates of the size of the reserves vary, but run as high as 2 billion barrels of oil and 10 trillion cubic feet of natural gas, according to a joint study by UNDP and Harvard University.

Initial figures, tabulated when the price of oil was US $60 per barrel, predicted the oil deposits alone would net the government about US $1.7 billion per annum. But the price of oil has since peaked to an all-time high of close to US $120 in late April.

In the meantime, concern is mounting that oil will be a curse rather than an economic and political blessing for Cambodia. A growing chorus of voices among the public, NGOs, analysts and economists worry that the newfound resource will lead Cambodia down the same woeful path as Nigeria, Venezuela and other developing nations that seem unable or unwilling to use wealth from oil to boost their economies.

A number of factors have contributed to the so-called “resource curse” in other oil producing nations.

Many suffer from “Dutch disease,” an economic phenomenon in which the real exchange rate appreciates as oil revenues flood the economy and cause wages to increase and other economic sectors to lose competitiveness. This, in turns, generates an even greater economic dependence on oil and leaves the oil producing countries vulnerable to fluctuations in oil prices.

The main symptoms of “Dutch disease” are currency appreciation, uncontrolled inflation, declines in agricultural and manufacturing outputs, and bottlenecks for skilled labor, infrastructure, utilities and real estate, conference delegates noted.

Government mismanagement, volatility of revenues from oil and political corruption brought on by easy windfalls also had a hand in the “resource curse.”

Due to the experiences of some of the world’s other oil producing nations, Cambodia’s ongoing problems with corruption and its lack of experience managing a resource as potentially lucrative as oil and gas, analysts routinely predict that Cambodia will be unable to manage and control oil and gas revenues.

Such worries have sparked the ire of the government, especially Prime Minister Hun Sen.

But a recent three-day conference shifted the focus away from nations that have been plagued by the “resource cure.” Instead, it pinpointed the lessons to be learned from oil producing nations such as Norway, Timor-Leste and Indonesia that have managed to turn the resource into a blessing rather than a curse.

Success stories

“Norway was amongst the poor countries of Europe after the Second World War,” noted Merete Fjeld Brattested, Ambassador of Norway to the Kingdom of Cambodia and one of several Norwegians representatives to share expertise on best practices in managing oil and gas revenues at the conference.

But when oil and gas was discovered off the coast of Norway in the mid-1960s, she continued, the country was in many ways blessed by nature and its economy grew dramatically.

One of the most important aspects of oil management is to convert “black gold into human gold,” said Michael Hopkins, chairman and CEO of MHC International Ltd, a UK-based corporate and social research company.

A massive injection of revenues from future oil wealth into human skills development would help to boost non-oil sectors to internationally competitive standards, he added.

Conference delegates also advocated for the implementation of the Extractive Industry Transparency Initiative (EITI) and the creation of a special fund for oil and gas revenues.

“For transparency, we publish what goes into the fund and publish what is taken out,” said Manuel de Lemos, Director, Secretary of State for National Resources for Timor-Leste, referring to his country’s Petroleum Fund. Its accounts are independently audited, he added.

So far, the Government of Cambodia has not said it will comply with the EITI. But the government has set its sights on long-term benefits rather than short-term gains, said Deputy Prime Minister Sok An in the conference’s keynote address.

To avoid the resource curse, he added, multiparty collaboration between the Cambodian National Petroleum Authority and key industry players is necessary. “It needs the cooperation of all other stakeholders, be they government ministries or government agencies, donors, civil society or the media,” concluded Deputy Prime Minister Sok An.

Why Implement EITI?

The EITI promises its members an improved investment climate, strengthened accountability and good governance over the exploitation of natural resources. In return for membership, countries are expected to publish detailed reports of revenue received from oil and other extractive industries.

At any time, the government reports could be checked against company records to uncover discrepancies between what companies report being paid for contracts and what governments said they paid.

Currently, EITI consists of 22 candidate countries, including Timor-Leste. Until September 2007, Norway has given financial and political support to the initiative. But the country will implement the EITI principles fully, said a Norwegian minister in a press release last year.

The initiative is supported by a coalition of companies, civil society groups, industry associations, institutional investors, international organizations and governments, including the G8.

Joining the EITI is a clear signal to investors and international financial institutions that governments are committed to greater transparency, which is critical because extractive industries are capital intensive and long-term stability is critical to generating a return on investments, according to analysts.

EITI also makes government more accountable by increasing the amount of information available in the public domain about extractive industries, thereby allowing civil society to keep a close watch on what governments are up to.

The conference, entitled “Fuelling Poverty Reduction with Oil and Gas Revenues-Comparative Country Experiences,” was held March 26-28 and organized and sponsored by CNPA, Cambodia’s Supreme Economic Council, the Norwegian Government and UNDP Cambodia. It drew about 500 participants, including senior policymakers, high-ranking officials, global energy experts, media and students.


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