"'Curse of oil' highlights fragility of African states"

By Michael Peel and Nicholas Shaxson
Financial Times - 24 Mar 2004

The "curse of oil" has returned to west Africa. Three of the region's new oil producers are learning a lesson that has been drummed into developing countries for decades: natural resources bring blessings, and a corrosive political culture as well.

In the past month, the dictatorship in Equatorial Guinea has claimed it was the target of a mercenary coup plot. In the neighbouring island state of São Tomé and Príncipe, the government - briefly overthrown last year by rebels who said oil was one of their reasons for acting - has narrowly avoided collapse over a controversial oil trading deal. In Mauritania excitement over imminent oil production is matched by instability.

Such localised troubles reflect a wider concern: many of Africa's emerging petro-states suffer from the same poor governance that characterises their resource-rich but impoverished and conflict-prone predecessors, Nigeria and Angola.

"You are dealing with unstable states with extremely weak civil societies," says Alex Vines, head of the Africa programme at the London-based Royal Institute of International Affairs. "That is conducive to unaccountable governments, which are suddenly enjoying vast oil wealth."

The issue is assuming urgency as strategists in the US and elsewhere pay more attention to African oil, seen as a strategically important complement to Middle Eastern supplies.

Equatorial Guinea is sub-Saharan Africa's third-largest oil producer, with an output running at more than 350,000 barrels a day. São Tomé and Príncipe is due soon to announce the results of an auction of blocks in a zone that is being developed jointly with Nigeria and has estimated reserves of billions of barrels. More than 800m barrels of reserves have been discovered after light exploration in Mauritania.

The development prognosis for the emerging producers is far from clear. IMF and World Bank studies have shown that oil-dependent nations have performed worse than resource-poor countries in terms of economic growth, corruption, conflict, infant mortality and basic literacy.

At a macro-economic level, the huge influx of foreign exchange from oil inflates real exchange rates and makes non-oil sectors uncompetitive. Oil price volatility is also a problem. Price rises encourage governments to expand bureaucracies and increase public-sector pay, neither of which tend to be cut as prices fall.

A related problem is corruption. Last year, the African operations manager of Elf, the formerly state controlled French oil group, was jailed for diverting €45m (£30m) of company funds - most of which he said was for African dignitaries.

Concerns about transparency in Equatorial Guinea were raised by President Teodoro Obiang Nguema's description of the country's oil revenues as "a state secret". ExxonMobil, the country's largest producer, confirmed last year it had paid money for taxes and legal fees into a US bank. Asked about US media reports that Mr Nguema was the sole signatory of the account, the company told the Financial Times it neither knew nor expected to know such information. It said it was common for such payments to be made to the treasury accounts of governments and that such accounts were often in banks located in the US. It said the payments were in keeping with contracts it signed.

David Murray from the UK chapter of Transparency International, the anti-corruption body, says: "Mechanisms [to protect the country from corruption] need to be put in place right at the beginning, not as an afterthought when things have gone wrong."

One attempt to address these concerns is the UK government's Extractive Industries Transparency Initiative, under which countries and oil companies are supposed to publish more detailed information about oil revenues. But the programme, announced in 2002, has proved slow to get going.

Other reforms include that connected toa World Bank-backed pipeline project to take oil from Chad to a seaport in Cameroon. This project imposes conditions on how the Chad government can spend oil revenues, although many activists are sceptical about how much impact the controls will have in practice.