Pipe Dreams: How Would Cambodia Manage an Oil Boom

Sihanoukville – Surrounded by ramshackle shipping crates and mud puddles, the booty stacked on concrete blocks in the center of this dingy port facility looks more like scrap metal than anything worthy of protection.

The hundreds of dusty metal pipes lie in piles behind a flimsy yellow rope and a chain-link fence, guarded by a white-helmeted security officer with a grim scowl and a pistol on his hip.

But these pipes may hold the key to a windfall that could bring in more money than every single sector of the Cambodian economy combined, including tourism, the garment industry and agriculture.

In the coming weeks, US oil giant Chevron will ferry them hundreds of kilometers offshore in the Gulf of Thailand, and use them to reconfirm what many already believe to be true: Cambodia is sitting on a billion-dollar gold mine. Black gold to be exact.

No one knows for sure how much oil and gas lie off the coast. But estimates based on seismology, comparison with oil plots in neighboring Thailand and Vietnam, and initial data collected when Chevron struck oil last year, appear to show sizeable reservoirs.

In Chevron’s “Block A” alone, the first of six demarcated offshore zones, the government share of oil and gas revenues are expected to top between $700 million to a $1 billion a year. By some estimates-according to the UN Development Program-it’s not unreasonable to believe that in the coming years, revenue from offshore gas and oil deposits could triple Cambodia’s GDP. And that’s not even counting the disputed zones between Thailand and Cambodia, which could be the richest of all.

“I think that the oil and gas in the overlapping area is 10 times bigger than the oil [in] Block A,” says Men Den, director of the Petroleum Exploration and Production Divisions of the Cambodian National Petroleum Authority.

All told, it’s a staggering prospect for a nation that has relied on foreign aid to sustain itself for more than 25 years. And its impact will likely be nothing short of transformative.

“Revenue from the oil and gas sector could go a long way to positive social and economic development,” says Warwick Brown, a natural resource specialist at Oxfam America.

The oil, said another development expert, “could allow them to make investments in infrastructure. It could help them diversify the economy, develop schools and resources to help them compete in the region and the world economy. It could help them to pay civil servants decent salaries.”

What development experts won’t say on the record for fear of offending the government is that the oil could actually make Cambodia worse off. In fact, many worry it could actually reverse more than a decade of poverty alleviation and transform Cambodia into a full-scale kleptocracy.

That concern at first might seem counterintuitive. But there’s a long list of developing nations that have been destabilized and corrupted by what development experts call the “resource curse.”

Evidence suggests that for many of the last 35 years, per capita incomes in countries blessed with a dominant, non-renewable resource grew two to three times slower than those of resource-deficient countries, according to the UNDP.

Nigeria is the textbook case of what can go wrong. It raked in more than $450 billion in oil money over the last 35 years. Yet 60 percent of population lives on less than $1 a day and the country is carrying a $30 billion debt.

And that’s not even the worst of it. Experience shows that if it’s handled incorrectly, Cambodia’s offshore oil and gas reserves could even threaten its hard-earned peace. World commodity markets are extremely volatile. Relying on one primary commodity drives a nation’s risk of conflict over a five year period from a mere 0.5 percent to a stunning 23 percent, according to studies conducted by the World Bank and cited by the UNDP.

In the tiny West African Sao Tome islands, the discovery of oil prompted a coup attempt in 2003. In Angola, Sierra Leone, and the Democratic Republic of Congo, the oil boom, along with diamonds, has helped fuel revolution-both with the promise of victor’s spoils and money to fuel the conflicts.

The oil wealth often leads to an increase in “economic predation,” the exploitation of the resources through bribes, hostage taking and protection. Rebel groups have also been known to sell off future rights of areas they hope to capture to companies in advance, and use the money to arm themselves. In Sierra Leone, for instance, rebels sold the rights to diamond mines.

“The most powerful risk factor is that countries that have a substantial share of their income [GDP] coming from the export of primary commodities are radically more at risk of conflict,” a January 2006 paper issued by British think-tank the Overseas Development Institute explains. The study defines that substantial share as 25 percent. Cambodia’s oil revenue could account for three times that.

The good news is that some developing nations, such as Thailand and Malaysia, have managed to avoid the curse. Indonesia reduced its poverty rate by 86 percent and tripled its per capita income between 1975 and 1990, according to the UNDP.

In recent years, development experts have learned more about the resource curse and designed ways to overcome it.

“Cambodia has the opportunity to learn and build upon these examples,” says Oxfam’s Brown.

Government officials have so far indicated that they are aware of the problem.

“Oil and gas in Cambodia can either be an opportunity or a threat,” Prime Minister Hun Sen told government officials, investors and diplomats in January at the Cambodia Economic Forum. “We must ensure Cambodia enjoys an oil blessing and is not plagued by an oil curse.”

The government should use oil revenues, Hun Sen said, to “enhance long-term economic growth and social equality.”

But so far, developments on the economic front have far outstripped any discussion of how to ensure that they do not ruin the nation. And the government has yet to take any concrete actions to inoculate itself against the resource curse.

The government has signed contracts with Chevron and is in talks on how to divide up the remaining offshore blocks with China, Japan, and Thai companies all vying for slices of the pie. Earlier this month, officials in Sihanoukville announced plans to construct a massive new port facility to service oil operators offshore.

Yet Soy Sokha, economic adviser to Cabinet Minister Sok An, said it’s far too early to begin discussing how the revenues will be used.

“We must go step by step,” he said. “It’s too early to think about using the revenue for education or public health.”

Diplomats and development experts disagree. The economic threat of such development, they say, is too ominous to treat casually.

Perhaps the largest economic factor is inflation. Currently, the industrial sector accounts for 29 percent of Cambodia’s GDP and employs 20 percent of the workforce. Mining contributes about 9 percent to GDP, according to the UNDP. Tourism was expected to contribute 7.3 percent to GDP in 2005, and Cambodia received more than 1.4 million visitors last year. The government hopes to double that to 3 million by 2010.

But a sudden influx of oil revenues could ruin those plans by causing massive inflation. That would drive down the value of foreign currency here, which could keep away tourists and reduce the competitiveness of exported commodities-like garments, and rice-on the world markets.

Creating trust funds for revenues or managing the rate at which the oil is extracted is one solution. In Botswana, the government invested billions of dollars from diamond revenues in foreign assets to avoid a spike in the value of its currency, which could have harmed exports in other industries. It also tightly controlled how much money could be spent at once on development projects.

Indonesia used some of its oil revenue to subsidize fertilizer for crops, which led to increased self-sufficiency for its farmers, and on infrastructure in rural areas which helped them develop and diversify the economy.

Unfortunately, rather than managing other industries, resource rich governments often neglect them and become dependent on the oil revenues to fill government coffers. Then when oil prices plummet-which they always eventually do because commodity markets are notoriously volatile-those governments are forced to dramatically curtail spending, which can create havoc for local firms. Or worse-they borrow large amounts of money.

That’s what happened in Nigeria, which allowed oil for a time to account for more than 90 percent of its exports and provide the government with 80 percent of its revenue. When oil prices plummeted in 1981, Nigeria went on a borrowing binge, quadrupling its debt from $9 billion in 1980 to $36 billion in 1990.

What really destroyed the country, however, was the mentality that the oil wealth created among its leaders.

Time and again, resource revenues have eroded the links between government leaders and the people they serve. Since the government is no longer dependent on taxes to finance its operations, leaders start to feel they have no obligation to the people.

The insulated, often opaque, nature of extractive industry can encourage malfeasance. Offshore drilling in poor countries produces few benefits to other sectors of the economy and is not visible. Foreign companies-like Chevron-import the raw drilling materials and export the oil. The only indication that they are operating comes in the revenues they pay to the government, which encourages corruption if there is no transparency.

In Nigeria, government officials have for years robbed the treasury blind. While the majority of the nation lives in squalor, between 1999 and 2000, the Senate president controlled 24 official vehicles, ordered eight more, spent $225,000 on garden furniture and $340,000 on furniture inside and billed the state $208,000 for Christmas gifts, one African expert told the US House of Representatives in May. One state governor is said to have diverted more than $90 million into his own private bank accounts.

While in town for a stomach stapling, another Nigerian governor was arrested in London last year for attempting to launder $3.2 million through British banks. He skipped bail and fled through Heathrow Airport, reportedly disguised as a woman.

Development experts have come to believe that transparency is key to preventing such escapades. In recent years, many have focused their efforts on convincing governments and oil companies to sign onto Extractive Industries Transparency Initiative, or EITI, a set of principals hashed out in London early in the decade. Nigeria, which is now attempting to pull itself out of the mess it created, has signed on. Other participants include Azerbaijan, Congo, Ghana, Trinidad and Tobago and many others.

Signing onto such a treaty and ensuring some degree of transparency would certainly be an easy start for Cambodia. But the other pitfalls would likely prove more problematic. Foreign economic advisers operating in Phnom Penh have long tried-with limited success-to convince the government to deal with the very structural problems that predispose a country towards the resource curse.

Corruption is endemic, transparency is a constant challenge and the National Assembly and Senate have shown little ability to exercise effective oversight on budgetary matters. “Without a fundamental shift in the role of the state,” the UNDP report warns, “It’s unlikely Cambodia will realize its potential.”

Chea Vannath, former president of the Center for Social Development, warned that if the situation doesn’t change, “the poor will become poorer and the rich will become richer.”

Only time will tell. But even a small slice of the pie would improve the lot of ordinary Cambodians. Currently, only about 15 percent of the population have access to electricity. In Cambodia the cost of electricity is the highest and consumption the lowest in the region, according to Quest Economics Database, World of Information Asia and Pacific Review World of Information.

Indonesia has corruption and it developed. Perhaps the key might lie in the balance.

President Suharto boasted while in power that he was able to “ensure corruption was conducted in an orderly fashion that was within the limits of what the market could bear.”

The question is whether Cambodian leaders are capable or even interested in exerting the will necessary to control such corruption when billions of dollars suddenly flow into its government coffers.

The answer to that question may determine whether Cambodia continues to develop, or slides back into the abyss of conflict and despair.

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