Petroleum production, paradox of plenty

IMAGINE winning a million-dollar lottery but instead of rolling around in opulence and glamor for eternity, you plunge into perpetual poverty.

Oil has been referred to as “the black gold”. It is a priceless resource with a huge impact on a nation’s economic, environmental and social structure. The discovery of oil is capable of altering the dreams of many a country at national and community level. Upon the discovery of oil and gas, developing countries usually look to foreign investment from developed countries. By so doing they risk undermining their permanent sovereignty but proceed nonetheless because a developing country that has just struck oil often lacks the expertise, technology and financial capacity to run a capital intensive oil and gas extraction and production project.

The discovery of oil and gas, therefore, frequently forces sovereign states to enter into host government agreements with capable multinational corporations. These agreements may take the form of service agreements, joint-venture agreements or production sharing agreements. Properly managed, the oil industry is capable of spawning a host of advantages, including but not limited to, lucrative employment opportunities for local communities, attraction of public and private international project financing institutions, transfer of expertise and skills to the local people, more revenue and development of infrastructure.

However, in other countries the very discovery of this black gold has led to the collapse of the economic, social and political fabric.

This strange phenomenon is known as the “resource curse” or “the paradox of plenty”. This theory basically denotes that countries that are rich in natural resources tend to have poor economic growth, higher poverty levels, political conflict and decaying social structures as compared to countries with little or no natural resources.

Venezuela is the perfect embodiment of the resource curse. Despite having the largest oil reserves in the world (over 300 billion barrels in reserves), the majority of its people continue to wallow in abject poverty.

Oil wells have also been in the middle of conflict as recently observed in Mozambique and as witnessed, not too long ago, in Syria and Iraq where ISIS successfully assumed control over oil fields and started producing oil for trade on international markets.

Other notable examples of oil driven conflict include the Baku-Tbilisi-Ceyhan (BTC) crude pipeline bombing in the skirmishes between Armenia and Azerbaijan as well as the sabotaging of the Royal-Dutch Shell Company’s pipelines by insurgents in Nigeria.

In countries like Nigeria and Ghana the curse has reared its ugly head in the form of devastating environmental impact with a huge economic effect on the local people. In the Nigerian communities of Goi, Oruma and Ikot Ada Udo as well as the western region of Ghana, local residents have complained of serious air and water pollution which has suffocated their traditional economic activities like fishing and farming. This is not surprising because oil extraction can turn into an environmental curse due to oil spills, gas flaring or hydraulic fracturing (fracking) resulting in air and water pollution. To the host communities, the discovery of oil has become a curse instead of a blessing, which should not be the case.

The resource case has also been linked to the “Dutch disease”. This emanates from the situation in the Netherlands around 1959 where the discovery and subsequent exploitation of oil and gas led to currency appreciation and a crumbling of other sectors of the economy as they could not co-exist with the powerful and valuable black gold.

Gloom, however, is not always the case. Progressive models have led to proper development and utilisation of the resource. Countries like Norway and Canada have successfully circumvented all these negative impacts associated with the discovery of oil through efficient, transparent and effective economic planning.

The Saudi Arabian government owned company, Saudi Aramco, is arguably the most profitable company in the world. World class infrastructure is ubiquitous in the oil rich United Arab Emirates. These models can be replicated to the extent there are positives and lessons to be learnt. One of the steps that may be incorporated is the idea of effective Environmental Impact Assessments at inception of investment ideas.

Environmental Impact Assessments At every stage of oil and gas exploration, exploitation and production it is always important to factor in public participation through Environmental Impact Assessment procedures (“EIAs”). EIAs are an international environmental law practice that emerged through instruments like the Rio Declaration, ESPOO, the UNCLOS convention and the Aarhus Convention. Cases like the Pulp Mills arbitration between Argentina and Uruguay have inducted this principle into customary international law. In terms of this principle, the public must be informed and consulted concerning proposed activities that may have a significant impact on their livelihood.

On the investor’s part, due diligence helps to mitigate the effects of the activity or may be used as a defence in future litigation. This has become even more important in light of the advancement in jurisprudence by the Dutch and English courts in cases such as the Akpan v Royal Dutch Shell plc/ SPDC (Nigeria) and The Bodo Community v The Shell Petroleum Development Company of Nigeria Ltd. In these cases, it was held that an investor can be sued in its home-country (Netherlands/UK) by local communities (Nigerians) on the basis of the law of the host state (Nigeria). Shell has since agreed to pay hefty compensation packages of around £55m to compensate aggrieved Nigerians from the affected Bodo community. For the government, EIA may be a portrayal of democracy, good governance and fulfilment of state responsibility, while for the concerned citizens it signifies empowerment of their voices.

It is commendable to note that Zimbabwe has also domesticated this principle in its legislative framework. Section 73 of the Constitution of Zimbabwe provides for the constitutional right to environmental protection which is in line with the Paris Agreement. Further, the Mines and Minerals Act (s159) as well as the Environmental Management Act (s99ff ) contain provisions that provide for the procedure and requirements of proper EIA. The framework already exists and simply needs to be complied with.

It should never be the case that the discovery of the rich black gold spells doom and suffering for the people of a host state. The so-called curse can be avoided by a coming together of all stakeholders. All other sectors of the economy can still function viably. The discovery of oil, if that be the case, should be a blessing and not a curse.

◆ Takudzwa is a lawyer. He is currently studying towards an LLM degree in Oil, Gas and Mining Law at an energy University in the United Kingdom. He writes in his personal capacity and can be contacted on tkmuteve@gmail.com or Takudzwa Takunda Mutevedzi on LinkedIn.