Introduction to the resource curse Asia-Pacific regional workshop

1. Introduction to the resource curseAsia-Pacific regional workshop Willy H Olsen Advisor to INTSOK, Norwegian Oil and Gas Foundation Member of the Governing Board, Revenue Watch Institute Bali 7th August 2007

2. You are making an impact! • Civil society has during the last decade been a driving force for change • The political agenda • The oil companies’ strategy • The financial institutions’ policy • Environment • Human rights • Corruption • Oil revenue transparency

3. The challenge is still enormous • More than one billion people live on less than a dollar a day • 70% in Africa • Laos, Cambodia, Burma and North Korea fall into the “bottom billion” group • They are in the conflict trap • More than 70% have recently been through a civil war – or are still in one • And in the natural resource trap • More than 30% of the poorest people live in countries where resource wealth dominates the economy • And where autocracies tend to outgrow democracies Source: Paul Collier, The Bottom Billion

4. The resource curse will not go away • Escalating global demand for natural resources, higher prices and fierce competition is deepening the challenge • The problem of the resource curse is likely to become even more entrenched and prominent in this environment • Autocratic leaders will have fewer incentives to forge compromises with domestic opponents • They will no longer have to yield to international pressure

5. We have seen successes • Norway • Chile • Botswana • Trinidad What is required to turn the tide? • Good governance, transparency and participation are essentially prerequisites • Extractive industries can be an engine of development • It will require • Capacity to monitor companies and enforce laws • Rights of assembly • Freedom of information • Other basic civil and political liberties

6. Most resource rich are at the bottomof the governance list United Kingdom Malaysia Norway Governance Indicator Kuwait Mexico Weak Governance Strong governance Source: World Bank

7. Why is good governance an issue?

8. West Africa has produced 35 billion barrels of oil worth $1 trillion over last 40 years • Oil producing countries are no better off than non oil producing countries

9. “By past experience, you could wish nothing worse upon a developing country than an oil find... • No longer needing to rely on taxes, they become less answerable to their people • Oil has proved an addiction for the rulers • Financial Times editorial, 8 October 2003

10. The regions natural resources has been an attraction for generations….

11. Oil has historic roots in the region • Oil seepages were reported from the Dutch East Indies for hundreds of year before commercial exploitation • “Earth oil” was used in traditional medicine • The first commercial discovery was made in 1885 in a concession awarded to Aelilko Jan Zijlker, manager of a tobacco plantation by the Sultan of Langkat • He called the company Royal Dutch • Dutch King William IIIallowed use of “Royal Dutch” after the first oil discovery

12. Burma became Britain’s oil source • Burmah Oil was created based on oil in Burma in 1896 by Scottish merchants • They transformed small “oil industry” in Burmese villages, building a refinery in Rangoon • Supplying India and the British navy with oil • Burmah Oil was the first British NOC – worked closely with the Royal Navy for years until BP emerged in Iran • Burmah collapsed in the 1990s and the remains ended in BP’s hands

13. Intense rivalry between companiesand countries • By the turn of the century, oil had been discovered in North and South Sumatra, Central and Eastern Java and East Kalimantan • Refineries had been established in each area. • The attractiveness of the region, resulted battles between companies and countries • The Dutch Government kept US companies out of Indonesia for years • Britain kept all others out of Burma

14. The region created two of theworld’s most famous oil men • Marcus Samuel • The founder of Shell • His success was based on discoveries in Borneo • Henri Deterding • The founder of Royal Dutch • His success was based on discoveries in Sumatra The two merged and controlled oil in Asia and Russia

15. Where are we now?

16. Big Oil is still the leading force • The major oil companies have dominated the development of the oil and gas sector in Asia Pacific for some 100 years • The international oil companies have the financial strength • They have the technology increasingly required in the region as it moves away from easy oil and gas

17. NOCs are becoming more aggressive • The region’s national oil companies have a varied background and history • ONGC established in 1956 replacing the oil and gas commission • Pertamina established in 1968 - pioneered the production sharing contracts • Several were established in the 1970s to secure supplies of oil and gas • Others were former communist ministries • The NOCs are now expanding outside their home country – competing with IOCs

18. Aabar Petroleum Anardarko Anzon Apache Arc Austral Baraka Beach BHP Billington Cairn Camar Resources Canoro Cooper Energy Continental Energy Cosmos Oil Cue Energy EMP Essar Gail GFI Hess Horizon Idemitsui Incremental Resources Inpex Indian Oil Corp Itochu Jana Corporation Japex Kufpec Lapindo Loon Energy Markmore Medco Mitsui Mitra Mosaic Oil A new group of explorer moving in • MOGE • Nexus • Niko Resources • Nippon Oil • Oil Search • OMV • Origin Energy • Otto Energy • Petrobangla • Petromin • Petron • Premier • Range Resources • Reliance • Roc Oil • Salamander Energy • Santos • Satria Energindo • Satria Wijaya Kusuma • Soco • Sound Energy SK Energy • Swift Energy • Tara Resources • Teikoku Oil • Tepco • Todd Exploration • Valient International • Vital Resources • Woodwide • Woodside

19. The regions reserves are small Share ofglobaloil reserves Share ofglobalgas reserves Europe/FSU Middle East Middle East Asia Pacific Africa North America Latin America

20. But companies invest like never before Investments in new offshore projects 2008 – 2011 Indonesia Malaysia Billion dollars Nigeria Australia Angola China * SEA : Australia, China, Indonesia, Malaysia

21. Lack of democracy no obstacle Natural gas exports are Burma’s largestsource of foreign exchange earnings Several NOCs are at the front Billion cubic meters Source: BP’s statistical review of world energy

22. Economic growth needs energy

23. Securing energysupplies Security of supply is on top of the agenda • Asia Pacific’s new challenge is to secure enough energy to meet the fast growing demand • The region is still discovering new resources in challenging environments and deeper waters • Countries like Timor Leste and Papua New Guinea are increasingly exposed to risk of resource curse

24. Politics and oil go hand in hand

25. Strengthening links between countries • The Asian countries offer billion dollar investments in infrastructure for attractive oil and gas assets • China, India and Korea are grabbing assets all over the world • Paying well above what IOCs are willing to offer – entering deals of limited interest to most IOCs President Roh Moo-hyunof Korea meetsPresident Olusegun Obasanjo

26. Driven by the need to secure energy Share of global oil consumption Share of global gas consumption AsiaPacific NorthAmerica NorthAmerica EuropeFSU EuropeFSU Middle East Africa Latin America

27. High Malaysia Venezuela Bolivia China Australia Indonesia Thailand Vietnam Philippines Nigeria India Russia Iran Russia Kazakhstan Angola Libya Timor Leste National interest Algeria Bangladesh Commercial interests High “Resource nationalism” not a major factor in Asia Pacific

28. Economic growth needs raw material

29. Symbols of wealth – but often only symbols • Gold and diamonds are a symbol of wealth, but mining in developing countries has done little to reduce poverty • Mining has been closely linked to conflict • Mineral-dependent developing countries are as likely to suffer from corruption and poor governance as the oil and gas dependent • And the mining companies have often caused lasting damage to communities and to the environment

30. Civil society scrutiny can work • The Norwegian Petroleum Fund has withdrawn its investments in several mining companies due to their behavior after strong civil society engagement • DRD Gold Limited, the owner of Emperor Mines Limited, which runs a gold mine in Papua New Guinea and disposes tailings into the river • Freeport McMoRan Copper and Gold Inc, operating one of the world’s largest copper mines in New Guinea in Indonesia. • The pressure is now on to exclude Barrick Gold for its operations in the Philippines

31. Competition is becoming tougher • Mining activity is dominated by multinational companies, from the United States, Canada, South Africa, Australia and the UK • They have the capacity to carry out large-scale operations. • New aggressive giants are emerging from Russia, Brazil and China • A large number of mining ‘juniors’ are prepared to take on higher risks, operating in an area of political instability, often far less transparent than the big companies • The mining industry is again making large profits, pursuing the few world-class assets left

32. The miners find the region tough 65 mining regions are included and most Asia-Pacific countries are among the bottom 20 Source: Fraser Institute’s annual mining survey 2007

33. The new issue on the top of the agenda

34. The climate issue will become critical • Energy fuels the regions – and especially China’s relentless economic growth • China’s carbon dioxide emissions in will surpass those of the United States • Coal delivers 80% of the China’s electricity • 500 new coal fired plants planned How will the region react to the climate issue? Illustration: The Economist

35. Lets return to the resource curse and look at the Asia – Pacific region…

36. The dream for many… • The petroleum sector should be • Source of Government revenues • Engine of growth • Supply industrial raw material • Creating multiplier effects in the society • And not leave harmful environmental footprints

37. The dream is just a dream for many • Some 50 countries are rich in hydrocarbon and mineral resources, but the potential for positive developmental impact has not been realized • Resource-rich developing countries have experienced • Low per capita growth rates • Slow progress in human development • Social and political instability and violence • And high corruption

38. PNG has not seen the benefits yet • Mining has been a dominant part of the economy • Oil and gas is growing in importance • LNG scheme on the drawing board • Oil Search generates 13% of GDP and 23% of export earnings • Economic growth has been volatile and declining since 1960 • Real GDP per capita was 50% lower in 2004 than at independence in 1975 • But some progress in the last 4 years • Rent-seeking activities are reportedly high in many areas, particularly in the resource-based sectors

39. Did Indonesia escape the resource curse? • Indonesia illustrates how a major oil producer has overcome unfavorable initial conditions and temptations to squander oil windfalls

40. Saved by the oil price collapse • Indonesia was one of the world’s poorest countries in the mid-1960s • Invested in agriculture during the oil boom in the 1970s • Economic reforms when the price collapsed in the 1980s • The share of manufactures exports rose from 7% to nearly 50% between 1983 and 1992 • The collapse of world oil prices became a blessing in disguise

41. President Suharto held office from 1967 to 1998 Pertamina – one of the worst NOCs • The national oil company Pertamina has been one of Indonesia’s problems • Made risky investments in the 1970s • Lost billions of dollars in the 1990s through corruption and inefficiencies • Pertamina built strong political alliances • It had a large number of contracts with former President Suharto’s family and associates • More than 150 contracts have now been cancelled or re-tendered

42. Facing a new reality with new reforms Oil sector Gas sector World’s largest LNG exporter Domestic consumption Focus on domestic gas use

43. Malaysia has been successful • Malaysia initiated export oriented industrial policy, welcoming foreign direct investment • The government invested in infrastructure, education and health • The petroleum sector was not allowed to drive up costs and wages in the economy, resulting in rapid non-oil industrialization • The result has been sustained economic growth, curtailed high poverty rates and reduced income inequalities

44. Petronas is a model NOC for many • Petronas is a Ministry, a regulator and a NOC • It reports directly to the Prime Minister • It is an important instrument at home and abroad • Government does not interfere in day-to-day operations • But is it a transparency model? Payment to Government 2006 Gas subsidies Billion RM

45. Philippines’ gas dream • Malampaya is the first deep water gas field in the region and will have significant impact on the country’s economy • Reducing energy import burden with some 700 mill dollars a year • 13 billion dollars in royalties over 20 years • “These enormous sums should go a very long way towards financing our plans and programs for the conquest of mass poverty and for our country’s modernization” • Prime Minister at the opening of production 2001

46. Timor Leste will become very dependent on petroleum revenues 90% of GDP by 2010 The oil fund is growing fast Institutions and objectives in place but do not match the rapid growth in revenues Building a transparent system Looking for a sustainable future • The Bayu Undan gas and condensate field is providing substantial revenues • Part of the treaty with Australia Timor Leste’s dream

47. Vietnam prefers to invest – not save • Vietnam has achieved sustained economic growth and progress in poverty reduction • Growth has outperformed most other low-income countries • IMF recommends saving the windfall oil profit, but Vietnam disagrees and will increase investments Oil production Thousandbarrels/day

48. Bangladesh dilemma – export or not • Export of natural gas has been a major political issue in Bangladesh for years • The government has been under pressure to take a decision in favor of exporting natural gas to India, but has preferred gas export in the form of electricity and fertilizers • “No exports unless we have reserves to meet domestic demand for 50 years”, has been the message • Bangladesh has seen good economic progress, but will not to prosper until the country has improved its political and economic governance

49. Chevron has found oil but how much? • And when will it begin to flow? Can Cambodia prepare itself? • Cambodia has found oil – but will it be able to handle future revenues? • Up 1 billion dollar annually are seen as the potential future revenues • The country has seen progress, but still faces difficult challenges • High rural poverty rate • Lack of access to quality health services. • Weak institutions and high level of corruption • Hydrocarbon law on the menu

50. New countries hope to join the club • Sri Lanka will offer three blocks in its maiden offshore licensing round in August • Two blocks are earmarked for Indian and Chinese NOCs • Laos has awarded the UK based Salamander Energy the first PSC • The block was operated Enterprise from 1990-98 • Nepal is hopeful that Cairn Energy will be successful • Its subsidiary Capricorn holds most of the acreage and is accelerating exploration work • Afghanistan is trying to revitalize the old oil and gas sector and has been approached by 10-12 companies