Tag Archives: oil

Moving beyond CSR: Oil Companies and Economic Development

Posted on 4 June, 2012 by | Comments Off

Local business leaders at the Centro de Apoio Empresarial, Angola (Photo: Jornal de Angole/Jesus Silva)

How can multinational companies have a positive impact on developing countries? While the private sector’s traditional view has been similar to Milton Friedman’s argument that businesses do enough by providing goods and services to society, some companies are recognizing that they can increase their profits by engaging in development-focused business practices and investments. In particular, integrating local small and medium sized enterprises (SMEs) into corporate supply chains has both lasting economic growth impacts for developing nations and commercial benefits for corporations.

As mentioned before in this blog, multinational food and beverage companies like SABMiller and PepsiCo are already using local sourcing to cut down on costs and promote sustainable development. But how else is the business community becoming more “locally-conscious”?

The oil and extraction sector is also seeing the benefits of investing locally. Chevron has adopted the “local-content development” model into many of its world-wide operations. After 27-years of civil war ended in Angola, the government sought to revitalize its human capital by requiring oil companies to hire Angolans and source from locally run businesses. Yet local businesses lacked the necessary know-how to implement the activities the oil industry needed.

To address this capacity deficit, Chevron cooperated with other oil companies, NGOs, and the Angolan Ministry of Petroleum to help build develop local talent. The Centro de Apoio Empresarial, an enterprise development center, was established with the goal of creating a functioning and sustainable market of local SMES to meet the needs of the oil industry by improving the capacity of Angolan enterprises to serve as suppliers.  This socio-economic initiative not only helped build the local economy by creating more than 3,000 jobs for Angolans, it also helped oil companies sustain and expand their operations in the country.  Similarly, Total is aggressively building local-talent in Yemen and Nigeria as a way of sustainably enhancing skills and building industrial capacity in its operating countries. Total set up its own training centers in both nations, focusing on gas technologies and hands-on practical training. Leading international oil companies, therefore, are deliberately investing in local talent as part of a corporate strategy to expand their businesses and thus increase profits.

While skeptics see such social investments purely as a CSR/good advertising scheme for companies to increase sales, leading multinationals are challenging this notion. As more oil-rich nations, such as Brazil and Ghana, implement local content legislations, multinational companies will be legally required to integrate local employees and SMEs into their supply chains. As opposed to seeing this as a challenge, the private sector should view this as an opportunity for them to have a life-changing impact on the local economy by enhancing local talent and also improving their own bottom line over the long term.

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Posted in Global

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Beating the Drums of War and the Latest Oil Conflict in Africa

Posted on 27 April, 2012 by | Comments Off

A worker inspects a damaged oil pump in Heglig. (Photo: Reuters/Mohamed Nureldin Abdallah)

Sudan and South Sudan took one step back from an all out war on Friday when South Sudanese President, Salva Kiir, agreed to withdraw military forces from the contested oil-producing town of Heglig, which was occupied by South Sudanese forces after fighting on April 3rd. Heglig is claimed by both Sudan and South Sudan and remains one of the many unresolved issues since South Sudan became the newest independent country in June 2011.

The dispute over Heglig is part of a larger conflict between the two countries over borders, as well as other unresolved issues such as the transportation of oil from South Sudan to the Port of sudan, the status of the 500,000 South Sudanese living in the north, claims of state support to ethnic militias by both countries, and, most recently, Sudan’s aerial bombardment of several towns inside South Sudan.

There are no winners in war — just different levels of losers. The latest flare up should not be considered an isolated event but rather part of a several decades long civil war, now involving two independent countries. However, the current dispute is somewhat different in that both sides are attempting to ensure maximum economic destruction. This conflict is all about oil and the potential revenues it generates in an otherwise poor and underdeveloped part of the continent.

The latest incident started in January 2012 when South Sudan completely shut down oil production after an ongoing dispute with Sudan over the cost of transporting the crude from landlocked South Sudan to the Port of Sudan in the north via pipelines. Sudan was demanding $35 a barrel — more than a third of the final price on the world market  – while independent experts suggest the fee should be between 50 cents and $3.50. In addition, it became public knowledge that Sudan was clandestinely siphoning off oil for their own refineries, which the Sudanese government has since argued was taken as “payment in kind” for its pipeline services. Sudan and its southern neighbor have been locked in negotiations over how to split South Sudan’s oil revenues since the Comprehensive Peace Agreement, which dictated a 50/50 revenue split, expired in 2011.

South Sudan’s actions drew popular support at home but are not sustainable over the long term. 98% of South Sudan’s revenues come from the export of oil. The government and Parliament of South Sudan quickly passed an austerity budget. But perhaps austerity is the wrong word — given that there are numerous reports that the government’s budget is 1/3 larger than the previous budget.

Critics of South Sudan’s actions in January, the last time the country cut off its oil exports, often state that the Southern response was not well thought out, but perhaps this was the opening for the SPLA army incursion into Heglig. By taking over Hegling in March, 2012, South Sudan deprived Sudan of 50% of their current oil production of 50,000 barrels of oil per day. Given Sudan’s international isolation and continuing economic deterioration the two sides are trying to resolve their remaining issues through a war of economic attrition.

Part of the key role of the state is to provide for the security, education, and health of its citizens. Although South Sudan’s recent withdrawal of troops is a commendable step towards de-escalating the current conflict, the issues of oil revenues, which both countries are so dependent on, remain unresolved. Neither state can afford or sustain an economic war of attrition and while the international community steps up its efforts to find a peaceful solution, time is not on the side of peace.

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Posted in Africa

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Managing Ghana’s oil wealth

Posted on 7 November, 2011 by | Comments Off

Photo: http://neftegaz.ru

There is much to reflect and build upon as Ghana approaches its one year anniversary as an oil producing nation. Development of the industry has been a whirlwind as production started only three and a half years after the discovery of offshore oil in 2007. New oil-rich fields have been discovered in addition to the Jubilee Field that started it all, and production currently stands at about 80,000 barrels per day.

Although there are obvious concerns about the management of oil revenues, job creation for Ghanaians, environmental issues, and the important laws that have yet to be passed or amended (such as the Local Content Bill and Petroleum Income Tax amendment), Ghana has taken steps in the right direction.

Perhaps the most encouraging development of the industry is civil society’s growing participation to ensure that oil wealth benefits the nation. Ghana has a history of vibrant civil society and it is no wonder that over the past few years various NGOs and the private sector have pulled together to make sure the Ghanaian public plays an active role in monitoring their government’s actions.

The passing of the Petroleum Revenue Management Bill was a huge feat for civil society because all of the transparency provisions it advocated for were eventually incorporated into the law. This includes the establishment of the Public Interest and Accountability Committee (PIAC), an independent watchdog for the oil industry.

A recent seminar in Kumasi organized by the Center for Social Impact Studies was the first in a series of education programs designed to encourage Ghanaian graduates to participate in their country’s budding oil industry. The CeSIS is urging government to facilitate more cooperation between oil sector stakeholders and academic institutions so that Ghana’s college graduates can obtain petroleum sector jobs and become drivers of their country’s development.

In the 2011 Ibrahim Index of Africa Governance, Ghana ranks 4th of 53 countries in terms of participation and human rights. For the participation sub-category, Ghana scored thirty points higher than the African average. Although the Ibrahim Index highlights general civil society activity, the work being done in the oil and gas sector undoubtedly contributes to this high ranking.

The Ibrahim Index scores are promising figures to note as Ghana’s oil production grows and more money is pumped into the economy, for active civil society is a sign of democratic progress and creates more government accountability. As petroleum revenue increases so does the need for transparency. The World Bank estimates that Ghana could receive an average of $1 billion annually through 2029, and this leaves a lot of room for either crucial development or devastating backsliding.

One of the major challenges facing civil society and the private sector is technical knowledge of the petroleum industry and how it operates. Industry-related laws, contracts with foreign oil companies, and the logistics of production are complex issues – but understanding the complexities is a must if civil society is to hold the government accountable. For example, once oil contracts are disclosed, monitoring depends first and foremost on the ability to understand contract terms and language. If you have ever read an oil contract you know that it is hard for even a college graduate to comprehend the legal framework and jargon.

In April Ghana’s Civil Society Platform on Oil and Gas released the “Readiness Report Card,” a report assessing the capability of government to manage the oil sector. Civil society was given a “C” in terms of its performance. Participation was applauded, but the need for capacity-building was stressed. The report pointed out that while many public forums have been held, including radio and TV discussions and debates, they were largely uninformed.

CIPE is partnering with Ghana’s Institute of Economic Affairs (IEA) to help build the technical skills needed to effectively monitor government’s management of the oil industry. Much of the work is focused on developing assessment indicators for the management of oil contracts, revenue and expenditure, which will provide PIAC and other civil society and private sector actors with the necessary tools to monitor the government’s actions.

The challenges that lay ahead for Ghana’s successful management of its newly found oil and gas industry are far more numerous and complex than have been mentioned here, but the commitment of civil society to ensure that citizens benefit from petroleum wealth is a great encouragement. While this commitment should be commended, there is much more to be done as the vigilance of Ghanaian civil society and the private sector is paramount in ensuring the nation becomes a leader in ethical and transparent management of extractive industries.

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Posted in Africa

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Ahmadinejad’s Economic Justice

Posted on 10 December, 2009 by | Comments Off

A recent article in the New York Times brought to light the growing debate in Iran about the government’s plans to phase out subsidies, as they constitute an unsustainable burden on the state budget. Subsidies have been a legacy of the 1979 Islamic Revolution which ingrained the government responsibility to “distribute the oil wealth” into the state system.

Offering unrealistically low consumer prices for energy and food products has been the Islamic government’s approach to distributing the oil wealth among the people. However, the policy has failed and it is clear that the current approach is working against the interests of lower income classes.

CONTINUE READING

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Posted in Middle East and North Africa

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Oil is no substitute for productive economy

Posted on 24 October, 2008 by | Comments Off

Out of the oil-exporting countries that have benefited greatly from the record high prices over the last few years, Venezuela is among the leaders of spending its new-found riches rapidly and in a politically motivated way. The Christian Science Monitor reports,

    With crude reaching $145 a barrel this year, [President Chávez] has been able to pour billions into social programs at home and lavish the rest abroad, sending subsidized oil from Nicaragua to New York – including up to 100,000 barrels of oil per day to Cuba, discounted by as much as 40 percent – and making pledges to invest in infrastructure, refineries, and agricultural programs everywhere in between.

But with the price of oil 55 percent less than its peak in July, continuing this largess may no longer be feasible, either internationally or domestically. A new report from Deutsche Bank implies this by showing that Venezuela needs oil prices to stay at a minimum of $95 a barrel to balance its budget.

Oil income accounts for more than half of the country’s federal budget and more than 90 percent of export earnings. At the same time, Venezuela relies heavily on imports, including most of its food, which makes it extremely vulnerable to oil price shocks. The current price dip and the risks it carries for countries like Venezuela is a reminder that oil-based fortunes can be vulnerable as a political tool and are no substitute for having a productive economy.

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Posted in Latin America and the Caribbean

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Will Trade Oil [Money] for Food

Posted on 26 August, 2008 by | 1 Comment

What would you do if you were running a country that is having to balance the benefits of high energy prices and the costs of high food prices?  Ask Saudi Arabia, which is now gearing up its efforts to buy more and more agricultural land in other countries in order to reduce the pressure on food supplies.

The approach is somewhat interesting, as the investments go into securing productive capacities in other countries, rather than strictly relying on imports or supporting [in many instances] less efficient domestic producers.  One of the reasons behind this move is that

Saudi Arabia has reduced its agricultural production with the objective of economizing water and has been seeking land in other countries on which to grow crops.

More from WSJ here. I wonder what will be the response to this from domestic producers, who have been subsidized for decades, as the money transfers are reduced. 

Also, an issue that is not mentioned in many of the pieces on this is that many countries restrict ownership of agricultural land (especially by foreign investors) - which means the number of countries in consideration for this initiative is probably going to be quite limited.

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Posted in Middle East and North Africa

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Taking Advantage of High Oil Prices

Posted on 9 May, 2008 by | 1 Comment

With oil prices sky high and some predictions that they will continue to grow to as much as $200 over the next 6 months or more - one might think that oil producing countries are celebrating.  Higher demand for resources - higher profits!  Right?

Well, it seems like some can’t really keep up,

In the past, non-OPEC producers like Russia, Mexico and Norway have increased production to meet demand.  But these nations have struggled to keep production at the levels of recent years.  Norway’s production, for example, has decreased by twenty-five percent since two thousand one. 

Russia, at one point the largest oil producer, has not been able to sustain its production levels and has seen its output decline over the past six months.  One of the reasons behind this, according to the Economist, is quite simple and predictable — a poor business climate:

“Tax is the major impediment,” says Ms Redman. The government levies an export duty of 65% at prices over $25 a barrel. Add to that various corporate, payroll and production taxes, oilmen complain, and the state creams off as much as 92% of profits. Executives at TNK-BP have argued that rising costs across the oil industry will make many investments in Russia unprofitable unless the tax regime is changed. As it is, TNK-BP accounts for a fifth of BP‘s production, but only a tenth of its profits.

Someone may argue that its simply a good strategy – keep production limited to sustain high prices.  It doesn’t make sense, however, if one takes into the account just how dependent the Russian economy is on oil and other natural resources.

The share of oil and gas in Russia’s gross domestic product has more than doubled since 1999 and now stands at above 30%, according to the Institute of Economic Analysis, a think-tank. Oil and gas account for 50% of Russian budget revenues and 65% of its exports.

Perhaps the declining production is signaling a new era in Russia.  The country has reached its natural resource potential in generating growth and now faces a dilemma – put in place real reforms to spur growth in other sectors or remain tied to oil and gas. The incentives to change the business climate are there.  The promises are there too.  Its time for the new old leader to act.

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Posted in Eurasia

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