The Oil Curse
This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities). – Why was the World Bank’s participation in the Chad-Cameroon pipeline critical? While the Bank’s share of the $4. 1billion was small, almost 10%, its participation in the deal was critical. Because the World Bank had other loans to Chad, Exxon Mobile and the other oil companies believed that the World Bank’s participation would lower their political risks, for Chad would be unlikely to jeopardize its relationship with the World Bank. 3- Does the World Bank have a right to demand that sovereign countries like Chad spend their oil revenues in ways the World Bank deems appropriate?
Transparency International a nongovernmental organization that annually conducts surveys of corruption ranks Chad’s government as one of the most corrupt in Africa. Facilitating corruption was the lack of accountability and transparency in the use of oil revenues by many governments. And the revenues generated by the pipeline would provide sufficient temptation: Over its estimated 25-year life, the project is expected to yield $2 billion for Chad and $500 million for Cameroon.
Given these circumstances, the World Bank has the right to demand Chad’s government assurances that the revenues from the oil field would be devoted to alleviating the country’s poverty. So to gain the World Bank’s approval for the loan, Chad agreed to enact the Petroleum Revenue Management Law. 4- If the World Bank and Chad’s government fail to settle their dispute over amendments to the Petroleum Revenue Management Law, What should the consortium do? Should they make funds available to Chad’s government in defiance of the World Bank’s wishes?
Chad’s government began to suffer budget difficulties. In December 2005 Chad’s National Assembly voted to amend the petroleum Revenue Management Law. The new amendments abolished special fund that would preserve oil revenues for the benefit of future generations. In addition, the legislation doubled the percentage of oil revenues that the country could spend without outside oversight to 30 percent. the World Bank acted swiftly in response to this legislation, which it viewed as abandoning Chad’s obligations under the agreement.
In January 2006, it suspended all new grants and loans to Chad and cut off additional disbursements under existing projects with Chad. The World Bank’s action affected some 124$ million in undisbursed fund in eight bank-funded projects with Chad. The Exxon-led consortium was now caught in the middle. It decided to withhold all revenues until the dispute between the World Bank and Chad’s government was resolved. However, President Deby announced that if the consortium failed to deliver the funds to Chad’s government, he would demand that oil production cease in Doba.
Ultimately, the consortium could lose it rights to operate in the country. However, if the consortium delivered the funds to Deby government, it faced the wrath of the World Bank and various activist groups like transparency international. Given these circumstances, and in my opinion Exxon-led consortium should mediate between Chad’s government and the World Bank to settle the dispute in order not to lose its rights to operate in the country and not to face the wrath of the World Bank. – Subsequent to the signing of the pipeline agreement, world oil prices have increased substantially. Given the abject poverty of Chad, should the oil companies offer to increase the royalties paid to chad’s government once its dispute with the World Bank is settled? Royalties/Royalty Oil refer to The government’s percentage of proceeds from oil Production, these will vary from country to country. Chad’s Government receives, in cash, 12. 5 percent of the sale price of oil produced From the Doba ? lds, after transportation costs and a quality discount have been deducted. In some cases, royalties are a percentage of production that is then sold by the government. Royalties can be charged on gross production without regard To the pro? tability of the operation. So it is unlikely that the oil companies will offer to increase the royalties paid to Chad’s government unless this increase in payments will be sort of pressure on the Chad’s government to settle its dispute with the World Bank.