How oil and corruption have become so closely linked

Oil corruption

There is no obligation on companies to declare what they pay foreign governments for access to oil and governments don’t have to make the contracts public

As a new oil-fever gathers pace in Arctic countries such as Greenland the lesson from history is that where there is oil, corruption will quickly follow. Eifion Rees reports
If they don’t know what deal has been done, citizens can’t tell if it’s fair or sustainable. Too often, it’s neither.

Rumours that a deeper, darker ocean flows beneath the cold coastal waters of Greenland have triggered a scramble to drill for oil off the world’s largest island.

And if prospectors hit pay dirt – a potential 52 billion barrels of oil equivalent – then it won’t be virgin white pack ice and a pristine marine environment alone that risk becoming sullied. Reputations, business deals and politicians may be tarred and sticky too.

Because where oil is found then history tells us that corruption will follow.

Transparency International’s Corruptions Perceptions Index 2010 highlights the connection: Russia, the world’s largest producer and second largest exporter of oil, ranks 154 out of 178 countries for corruption. Its low standing spells trouble for the Russian Arctic, where oil-fever is increasing as sea ice recedes. In August, state oil company Rosneft signed a £1.9 billion deal with ExxonMobil to drill for 40 billion barrels under the South Kara Sea.

Meanwhile Mikhail Khodorkovsky, formerly head of Russian oil company Yukos languishes in jail on charges of fraud that many believe are politically motivated – Yukos is now part of Rosneft – and this week a high court battle begins between another two oil-rich oligarchs. Boris Berezovsky claims he was intimidated by Roman Abramovich into selling his shares in the oil company Sibneft for a knock-down price. Berezovsky fled Russia in 2000 after falling out with Vladimir Putin. Russia’s powerful president is also alleged to be Europe’s richest man.

Greenland does not yet feature on the corruption index – which has Iran and pre-war Libya (fourth and 17th largest oil producers in the world) tied at 146 and Iraq and Afghanistan at 175 and 176 respectively – but that will change if oil is found. Its ability to spread and taint is already well documented elsewhere in the world.

Nigeria, Venezuela and Ecuador...

Last month a report revealed the extent of damage wrought to Nigeria’s Niger Delta by 50 years of oil drilling by Shell. A succession of governments effectively relied on the company to police itself and clean up spills. Almost 80 per cent of Nigeria’s revenue comes from oil and gas, which has earned Africa’s largest oil producer an estimated $600 billion since the 1960s. Approximately 70 per cent of its people live below the poverty line.

In 2009, Shell paid £9.6m to settle a legal action accusing it of complicity in the execution in 1995 of nine Ogoni tribal leaders including playwright Ken Saro-Wiwa, who were campaigning to stop the destruction of their environment. The settlement meant it did not have to answer charges of colluding with the military dictatorship of the time to clamp down on protests and had whole army units in its pay.

A confidential 2009 cable published by Wikileaks last year also found Shell boasting that it had company spies in ‘all the relevant ministries’ of Nigeria’s government.

Huge environmental and social harm has been wrought in South America too, as governments and corporations link up to exploit vast oil reserves. When oil was discovered in Venezuela at the start of the last century, corruption worsened drastically. The world’s 11th largest producer and exporter of oil is now ranked 164th in the world for corruption.

In Ecuador it is an oil company alleging dirty dealings. Chevron-Texaco was sole operator in the country from 1964 to 1990, causing massive contamination of land and damage to human health. In February, an Ecuadorian court fined it £5.3 billion and ordered it to pay £600 million in compensation.

The US firm had initially requested the trial be held in Ecuador but has since branded its justice system corrupt and vowed to fight the charges ‘until hell freezes over’. America was the victim following the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. Compare the relative alacrity of BP’s response to that particular disaster.

The world’s largest oil reserves are controlled by national oil companies (NOCs), which – as a March 2011 report into the policies of the 44 companies that control 60 per cent of the world’s oil companies makes clear – are among the least open in terms of anti-corruption programmes. For these countries, oil and the national interest are inextricably intertwined; some may be run by corrupt leaders or dictators, but a world addicted to oil still needs to access their reserves. As a result it often becomes politically expedient to look the other way.

Tony Blair shook hands with Colonel Gaddafi in 2004 to facilitate a £550m Shell deal for exploration rights in Libya, for example – to the outrage of families of the victims of the Lockerbie bombing. Oil companies from across the world are now scrambling to return to post-Gaddafi Libya, including British firm BP and French firm Total, the two countries most supportive of the colonel’s ousting.

‘All too often corruption and lack of government accountability mean the citizens of oil-rich countries remain poor while powerful elites cash in,’ says Oliver Courtney of Global Witness, which has recently released a report on corruption in Liberia’s oil sector. ‘Companies don’t have to declare what they pay foreign governments for access to oil and governments don’t have to make the contracts public. If they don’t know what deal has been done, citizens can’t tell if it’s fair or sustainable. Too often, it’s neither.’

A new hope for transparency

One positive move towards more transparency came earlier this month, as the US joined the Extractive Industries Transparency Initiative (EITI) and also proposed legislation that would force new firms to reveal their ultimate owners to prevent foreign politicians squirreling away stolen wealth in stateside ‘shell’ companies.

EITI signatories must ensure that oil, gas and mining interests – public and private – openly declare what they pay to government in order to prevent revenues being pocketed by corrupt officials. But compliance won’t prevent questionable oil deals being brokered: with no internationally recognised government since a coup in 2009, EITI ‘candidate country’ Madagascar recently offered up its tar sands to Total for the extraction of billions of barrels of oil.

Nigeria was designated EITI compliant this year, a country in which in 2005 were identified ‘unprecedented financial discrepancies, mispaid tax and system inefficiencies. Over $800m of unresolved differences between what companies said they paid in taxes, royalties and signature bonuses, and what the governments said it received were identified.’ Transparency International still ranks Nigeria 134th out of 178 countries for corruption.

As with wider environmental issues there is a notable lack of leadership from other countries. Only 35 countries have signed up to EITI; non-signatories include Canada and the UK, both of which are held up by emerging energy powerhouses such as Brazil and India as reasons not to join themselves. It remains to be seen what difference, if any, the new US position will make.

In the meantime the rumoured sea of oil off Greenland remains elusive. The firm with drilling rights, Edinburgh-based Cairn Energy, has two more test wells to sink this year, but the signs are not promising. It may yet strike it lucky, however, in which case Greenland will be making its debut on the corruption index in the very near future.

If they don’t know what deal has been done, citizens can’t tell if it’s fair or sustainable. Too often, it’s neither.
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