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WORKING PAPER
† Executive Secretary of the International Advisory Group for the Chad-Cameroon Petroleum Development and Pipeline Project (IAG) 2001–2009 ‡ Program Management Officer of the IAG (2002–2009)
The North‐South Institute
CHAD, THE CHALLENGE OF DEVELOPMENT: POLICY IMPLICATIONS OF THE CHAD‐CAMEROON PETROLEUM PROJECT
Jacques Gérin† and Céline Houdin‡ [December 23rd, 2010]
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ABSTRACT
In the prelude to the current scramble for natural resources in Africa, several leading global oil companies and the World Bank (WB) got engaged in 2000 in a large oil extraction and export project in Chad, with a pipeline built across Cameroon to the Atlantic. The revenue management system then adopted by Chad under WB advice, designed to ensure the Chadian gains from this project would effectively support development could not entirely resist policy interests and domestic pressures to spend the proceeds in other ways than pre-accorded, including for security. The World Bank eventually pulled away from this venture but the human and social development impact of Chadian-determined uses of these resources has marked progress over comparable situations elsewhere.
The lessons brought by this case, even after all its particularities are accounted for, are most significant and counter-intuitive. First, a country will develop its natural resources whether it is “institutionally ready” to administer the benefits or not. Second, sustainable social and environmental practices play a crucial role in the long-term success of energy projects, serving the interests of the promoters and of the host populations. Third, revenue governance criteria are useful but if overly strict or externally imposed, cannot survive changing bargaining strengths and external conditions. Fourth, even under authoritarian regimes, natural resources’ revenues can improve social and economic conditions when compared to the situation before their exploitation.
The corollary for multilateral agencies and other development actors is that they will need to adapt to this new reality where developing countries might still need advice with revenue management but their own perception of their preferences will have to be taken much more seriously than before.
Key words: Chad, Cameroon, World Bank, International Advisory Group, CSOs, oil project, development, resource curse, extractive energy sector, revenue management
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RÉSUMÉ
Prélude à la ruée actuelle vers les ressources naturelles africaines, plusieurs compagnies pétrolières influentes et la Banque Mondiale (BM) s’engagèrent en 2000 dans un vaste projet d’extraction et d’exportation de pétrole au Tchad incluant la construction d’un oléoduc pour traverser le Cameroun jusqu’à l’Atlantique. Le système de gestion des revenus alors adopté par le Tchad sur les conseils de la BM et conçu pour s’assurer que les bénéfices tirés par le Tchad de ce projet serviraient effectivement son développement, ne put résister complètement aux intérêts politiques et aux pressions nationales grandissantes en faveur de l’utilisation de ces recettes à des fins autres que celles qui avaient été convenues préalablement, notamment dans la sécurité. La Banque Mondiale se retira finalement de ce projet mais l’impact sur le développement humain et social de l’utilisation « pré-déterminée » de ces ressources par le Tchad a marqué un progrès par rapport à d’autres situations semblables ailleurs dans le monde.
Les enseignements à tirer de cette expérience, tout en tenant compte de ses spécificités, sont significatifs et paradoxaux. Premièrement, un pays exploitera ses ressources naturelles, qu’il soit prêt ou non sur le plan institutionnel à en gérer les bénéfices. Deuxièmement, l’adoption de pratiques sociales et environnementales durables joue un rôle déterminant dans le succès à long terme des projets énergétiques, ceci dans l’intérêt des promoteurs et des populations hôtes. Troisièmement, les critères de gouvernance des revenus sont utiles mais s’ils s’avèrent trop stricts ou imposés par l’extérieur ils ne peuvent pas survivre aux changements dans les rapports de force et dans les conditions extérieures. Quatrièmement, même sous des régimes autoritaires, les recettes tirées des ressources naturelles sont susceptibles d’améliorer les conditions sociales et économiques par rapport à la situation qui prévalait avant leur exploitation.
Le corollaire pour les agences multilatérales et les autres acteurs du développement est qu’ils devront s’adapter à cette nouvelle réalité qui veut que les pays en développement aient encore besoin de conseils en matière de gestion des revenus, mais que leur propre perception de leurs préférences doit désormais être davantage prise en compte.
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Index 1. INTRODUCTION ..................................................................................................................... 1
2. THE SETTING ......................................................................................................................... 2
2.1. The Oil Project ................................................................................................................. 2
2.2. The Context ..................................................................................................................... 4
2.3. The Principal Players ....................................................................................................... 6
3. ISSUES .................................................................................................................................. 12
3.1. Significant Factors ......................................................................................................... 12
3.2. Consortium Performance ............................................................................................... 14
3.3. Chad and the Oil Revenue Management Law .............................................................. 16
3.4. The World Bank’s Management of its Investment ......................................................... 23
3.5. The Role of China .......................................................................................................... 24
4. LESSONS LEARNED – POLICY IMPLICATIONS ................................................................ 25
5. CONCLUSION ....................................................................................................................... 30
Figure 1: The initial flow of oil revenues (Law 001) – The revenue labyrinth. ............................... 17 Box 1 : A Brief History of Chad – Conflicts ...................................................................................... 7 Box 2 : The Chinese Alternative .................................................................................................... 24 Table 1: Total Oil Payments to Chad 2003-mid 2010 ................................................................... 20 Table 2: Chad HDI Evolution ......................................................................................................... 22
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1. INTRODUCTION
On 6 June 2000, the Board of Directors of the World Bank Group (the Bank) took a
momentous decision and a calculated risk. The Bank agreed to provide financial and
institutional support for a set of projects to develop oil fields in Chad, one of the poorest
and least politically stable countries of Africa, build a pipeline across Cameroon to the
Atlantic coast and install an offshore terminal to export Chadian oil. The Bank took this
decision with three fundamental conditions:
- The Consortium developing the oil project would abide by the Bank’s strict
social and environmental safeguard policies;
- Chad would manage its revenues from the project in a transparent way and would
invest in priority poverty-alleviation sectors;
- The Bank would, in addition to providing financial support to the petroleum
development and pipeline project, fund three capacity-building projects (two in
Chad, one in Cameroon) to help these countries manage the impact of this mega-
project, and in Chad’s case, manage its oil sector.
The active participation of the World Bank raised the policy and institutional stakes
considerably, drawing attention to this project like no other before it and making it
different from the many oil developments occurring at any time in Africa and elsewhere.
Determined to put an end to the “oil curse” syndrome, the Bank wanted to make sure that
project revenues would serve development and poverty alleviation objectives in Chad.
The project, whose production life was estimated at 25 to 30 years, is still in the
initial phase. But enough has already happened to support some analysis and to allow
some lessons to be drawn from it.
This paper, based on experience with the International Advisory Group1 which for
nine years was a privileged observer of the project, seeks to highlight some of its special
1 In February 2001, the ninth World Bank president, James D. Wolfensohn, in consultation with the governments of Chad and Cameroon, appointed six individuals as the International Advisory Group (IAG) to advise him and the two governments on all non-technical aspects of the Chad-Cameroon Petroleum Development and Pipeline Project implementation: its social and environmental impact, capacity building, the management and use of oil revenues in Chad, and governance issues, including human rights. From 2001 to the end of 2009, the IAG ran an average of two field missions a year in both countries meeting with all interested parties from affected populations to government officials.
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features – in particular, the strategic relationships between the main actors; to identify
some lessons learned; and to propose policy implications to be considered in future
circumstances.
Section 2 lays out the setting: context, facts and figures of the project. Section 3
analyzes some of the issues related to the main actors (Consortium, Government of Chad,
World Bank), with a reference to the role of China. Section 4 explores some lessons and
policy implications derived from this experience. Section 5 is the Conclusion.
2. THE SETTING
Oil exploration started in Chad in 1969, with commercial quantities of oil reserves
confirmed in 1975. The permanent political instability of the country2 and region and the
huge investment required to get Chad’s oil to market deterred serious development of any
potential resource during that period.
However, in the late 1980s and early 1990s, the situation changed. The return of
peace to the country, the rising price of oil and the United States of America’s (USA)
increasing interest in diversifying its sources of oil led to renewed interest in Chad’s
potential.
When significant oil reserves were confirmed in the Doba Basin in southern Chad in
1993, Exxon began exploring sources of financing and options for exporting the
landlocked Doba oil to international markets. Approaches were made to the World Bank
Group for financing support from the International Finance Corporation (IFC) as well as
for the Bank’s “political” support.
2.1. The Oil Project
The initial project consisted of developing three oil fields (Komé, Bolobo and
Miandoum) in the Doba region of southwestern Chad. These fields would be linked by a
1,070-kilometre buried pipeline through Cameroon to an export facility, a marine
terminal in the Gulf of Guinea, as illustrated in the two maps below, reproduced from the
Project Environmental Management Plan. 2 A civil war that started in 1979 caused a halt in exploration in 1981.
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The three fields were expected to yield an average of 225,000 barrels per day (bpd),
with a total recoverable of approximately 1 billion barrels of crude oil over a 25- to 30-
year operating period. The estimated construction costs to develop the three fields and the
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export system (pipeline and marine facilities) were $3.5 billion, by far the largest private
investment in sub-Saharan Africa at that time.3
The project is being developed by a Consortium of ExxonMobil (USA), Chevron
(USA), and Petronas (Malaysia), with ExxonMobil (also known as Esso Exploration and
Production Chad Incorporated, EEPCI or Esso) as the Operator.
2.2. The Context
The decision to proceed with the oil project came at a time of rare political calm in
Chad’s turbulent history. President Déby having seized power by force in 1990, had
presided in 1994 over a constitutional assembly that included all political parties and had
been elected in 1996 in what was, despite some “serious irregularities”4, Chad’s first
pluralistic presidential election.
There was an opportunity to focus on development of this very poor country and on
trying to achieve the international development targets5, especially since President Déby
was prepared to accept stringent conditions on the use of oil revenues. Reasonable (if
debated) hope existed that the revenues from this commercial oil project could be used to
further the development of Chad and the well-being of its people through investments in
identified priority sectors.
Despite these positive factors, there remained great concern among the Parliamentary
opposition and non-governmental organisations (NGOs) in Chad, torn between their
desire to see the resource wealth unlocked and their concern that the Government could
not be trusted to manage those revenues properly or honestly.
Even with the best of intentions, Chad had a long way to go to have the necessary
administration in place to manage such rapid and dramatic change. The pre-oil budget for
all public expenditures (excluding foreign aid) was around $450 million. In a country of
3 All financial figures in this paper are in US dollars. 4 Source: US State Department. 2009. “Background Note: Chad.” Washington, DC: Bureau of African Affairs, July. Available at <http://www.state.gov/r/pa/ei/bgn/37992.htm>. 5 Those targets would soon become the Millennium Development Goals (MDG) officially adopted by the world leaders and some international organisations on 8 September 2000 through the signing of the United Nations Millennium Declaration following the 3 days Millennium Summit.
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an estimated 8.4 million people (in the year 2000) spread over a territory of 1.2 million
square kilometres, that was an expenditure of $53 per person.
The relative calm in Chad was to be broken with the explosion of the crisis in Darfur
in 2003, the arrival of refugees in eastern Chad, and the internal tensions within the ruling
Zaghawa ethnic clan erupting into a multi-faceted rebellion in 2005.
There were, in addition, key foreign players:
- France, the former colonial power, has always maintained close links with Chad.
The two countries signed a bilateral military and defence co-operation agreement
in 1976 and a protocol authorizing French military troops to settle and train in
Chad in 1990. France provides Chad with logistical and intelligence support.
President Déby benefited from this support in 2006 and again in February 2008
to repulse a rebel attack on N’Djamena. Economic and commercial relations
between the two partners are strong. France supported the oil project even after a
French company (Elf) pulled out of the first oil Consortium in 1999.
- The European Union (EU) provides important budget and project support to
Chad, including the rehabilitation of the national road network. The EU is
heavily involved in supporting political reconciliation and played a key role in
facilitating the Government’s and the political opposition parties’ signing of the
13 August 2007 Agreement to strengthen the democratization process in Chad.
- By the late 1990s, the United States was seeking to diversify its sources of
energy, since the low prices of the ’80s and early ’90s had driven a huge increase
in its oil imports. African sources became more and more desirable. This interest
in African oil was enhanced greatly after the events of September 2001.
ExxonMobil’s project thus appeared to coincide with the national interest. Chad
is also one of the Sahelian countries receiving military training and support in the
fight against terrorism.
- During that same period, a Chinese presence began to emerge in Africa, leading
to various reactions in some Western countries and international institutions. The
World Bank, whose initial reaction was critical, has since worked with China on
developing common approaches to some key issues. China has invested in
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developing oil fields in Sudan: their production represents approximately 6% of
China’s annual imports of oil over in the period 2001-2010. China would
eventually come to play a notable role in Chad’s oil fortunes.
2.3. The Principal Players
The Government of Chad
Since 1990, the Government of Chad has been headed by President Idriss Déby Itno.
After taking power by force of arms in December 1990 and being elected President
in 1996, Déby was elected for a second term in 2001 – the limit under the Constitution. In
2005, he organized a referendum that amended the Constitution and abolished the two-
term limit of presidential mandates in exchange for the promise of increased power to the
regions and communities through local elections. In 2006, he returned to power in
elections that were boycotted by the Parliamentary opposition and where the other
candidates were members of his own Government coalition or totally unknown.
Beginning in 2003, the deterioration of the situation in Darfur led to a flood of
refugees into Chad, embittering relations with Sudan. The armed rebellion began anew,
reinforced by the events of 2005 and the breach of the presidential two-term limit. This
was a disparate, clan-based, divided rebellion, supported and armed by Sudan, with no
other avowed goal than to wrest the presidency from Déby. This goal was made more
attractive by the arrival of oil revenues, which were first repatriated in the country in July
2004. Both Chad and Sudan supported rebellions against the other regime. Between 2006
and 2009, multiple agreements were signed between the two countries and broken before
the ink had dried. A 2010 bilateral agreement that was developed without third-party
intervention and that was based on a more realistic assessment of the two countries’
respective situations might have a better chance of surviving. A successful agreement
would bring significant change to this troubled region.
What distinguishes Chad from its neighbours and from other oil producers is this: the
country had recognized that it had to accept conditions and controls over its use of oil
revenues in order to attract private investors and international financial institutions (IFIs)
to help develop the oil resource. As a result an amended Concession Agreement was
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signed with the oil Consortium in 1998 and the Oil Revenue Management Law
001/PR/99 was promulgated by President Déby on 11 January 1999 to meet the
requirements of the World Bank Group.
The Government of Cameroon
Cameroon’s contribution to the oil project is to offer its landlocked neighbour a route
to transport the crude: a pipeline of some 900 kilometres through the country and storage
and off-loading facilities in its territorial waters with the inherent social and
environmental risks. In return Cameroon receives fiscal and non-fiscal revenues: a fixed
levy per barrel of oil flowing through, dividends from its participation in the company
that owns and operates the pipeline in Cameroon (the Cameroon Oil Transportation
Company, COTCO) and income, business and other taxes. The anticipated revenue,
estimated at $20 million to $25 million per year, was considered to be small in terms of
Box 1 : A Brief History of Chad – Conflicts
8th–19th century Gradual inflows of population: Arabic tribes from the north, Africans from the south. Changing supremacy of one clan over the others.
1850–1945 French colonization 1945–1960 Gradual emergence of the Chad state 1960 Independence 1965–1990 Political instability: coups, rebellions 1 December 1990 Idriss Déby enters N’Djamena and takes power by force of arms 1994 Establishment of Constitutional Assembly 1996 First pluralist presidential elections – Déby elected President 2001 Re-election of Déby 2003 Darfur crisis in Sudan spills over into Chad 2005 - Referendum abolishing two-term limit on presidential mandate.
- Resuming of rebellions with support from Sudan. - Re-election of Déby without democratic opposition.
2008 Rebel groups arrival in N’Djamena in February; they damage the capital before being repulsed. A state of emergency is proclaimed.
2010 Bilateral peace accord with Sudan
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Cameroon’s economy and public expenditures: no constraints were put on the
Government’s use of these revenues.
During negotiations, Cameroon had opted for a fixed tariff paid in US dollars (USD)
based on throughput instead of on the price of oil. With volumes less than expected, a
deteriorating USD against the euro and the FCFA (franc de la communauté financière
africaine – a currency used in a number of African countries) and a great spike in the
price of oil, this conservative decision was to be bitterly regretted by the Government.
This major and very public project provided Cameroon with an opportunity to learn
about managing large-scale projects that would hopefully be reflected in the several
energy projects that are being planned in that country.
The Consortium
The Consortium – initially Exxon, Elf and Shell, and then in 2000, ExxonMobil
(40% share, project operator), Petronas (35% share), and Chevron (25% share)6 – had
two major hurdles to overcome in order to develop these landlocked oil fields in southern
Chad:
- To raise enough investor money to develop the fields and build the 1,070-
kilometre pipeline and the marine terminal required to get the oil to market – an
estimated initial investment of $3.5 billion;
- To obtain a minimum assurance of contractual and political stability, which the
Consortium sought through the financial and political support of the World Bank
Group.
To achieve this goal, the Consortium was prepared to abide by the World Bank
Group’s stringent Social and Environmental Safeguard Policies. It did so essentially by
developing a high-quality Environmental Management Plan (EMP) in compliance with
those safeguards and by empowering a strong and competent internal team to ensure
conformity with this plan.
6 When the first Convention Agreement was signed between the Republic of Chad and a Consortium of oil companies in 1988, the latter consisted of Exxon (40% share), Shell (40% share), and Elf (20% share), with the Exxon affiliate designated as the Operator. In November 1999, Shell (Netherlands) and Elf (France) left the Consortium; they were replaced in April 2000 by Petronas and Chevron, which joined ExxonMobil in the final Consortium.
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The World Bank Group
The financial participation of the World Bank Group consisted of the following
loans:
- Two International Bank for Reconstruction and Development (IBRD) loans to
Chad ($39.5 million) and Cameroon ($53.4 million) to enable them to purchase
shares in the two companies operating the oil pipeline in Chad and in Cameroon;
- Two International Development Association (IDA) capacity-building project
loans for Chad ($17.5 million and $23.7 million) and one for Cameroon
($5.77 million);
- Commercial loans to the Consortium from the International Finance Corporation
(IFC), the lead lender ($200 million), which brought in other commercial
lenders.7
But equally or even more important to the Consortium was the full involvement of
the World Bank Group as a party to the project agreements and thus a “guarantor” of the
project.
This decision placed the Bank at the centre of a debate that involved international
and national NGOs in Chad and Cameroon in addition to debates within the Bank and
concerns raised by some members of its Board:
- Was it appropriate for the Bank to provide support to a commercial resource
extraction project, especially in the sensitive oil sector?
- Was it appropriate to support a project of that magnitude in a country that was so
short of institutional and technical ability and experience – a high risk
environment?
- Was it not obvious that once the oil started flowing and revenues accruing, Chad
would have the means of flouting whatever agreement had been reached?
7 In addition to the equity of the partners, project financing also included the following:
- Export Credit Agencies of France (COFACE, $200 million), US (US EXIM Bank, $200 million) and Africa (African Ex-Im Bank, $500 million);
- The European Investment Bank (EIB), which provided a $41.5-million loan to Chad; - Commercial arranging banks: ABN-Amro and Crédit Agricole Indosuez.
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By pressing hard for support, World Bank president James Wolfensohn wanted to
demonstrate that revenues from non-renewable resources could be used to help
sustainable long-term development and improve the well-being of populations and that
the “oil curse” was not inevitable. The fact that Chad was prepared to accept revenue
management conditions – limits to its sovereignty that few other countries would even
consider – created a unique opportunity to test the hypothesis. And if the Bank stayed
away from such major structuring projects because they were controversial it would be
giving up on important opportunities to do good.
While several directors representing European countries expressed reservations and
provoked a strong debate at the Board, the project was eventually adopted unanimously
(with one abstention) with clear support from the United States and France.
Civil Society Organisations
Civil Society Organisations (CSOs), consisting of human rights associations, NGOs,
and labour unions, have played a significant role throughout the life of this project at the
national and international levels.
International NGOs were among the first to warn the World Bank against investing
in an oil project, especially in countries such as Chad and Cameroon both of which have
low institutional capacities and high rankings on the Transparency International list of
perceived corruption. These NGOs provided support to the national organisations in both
countries and remained critics of the project and its implementation throughout the
process. Two critical papers – Bottom of the Barrel: Africa’s Oil Boom and the Poor
published by Catholic Relief Services (CRS) in 2003 and Chad’s Oil: Miracle or
Mirage? Following the Money in Africa’s Newest Petro-State published in 2005 by CRS
and the Bank Information Center – provide good descriptions of the international NGOs’
positions.
CSOs in Chad, mostly regrouped under two umbrella organisations – Commission
permanente pétrole N’Djaména (Permanent oil commission N’Djamena, CPPN) and
Commission permanente pétrole locale (Permanent local oil coalition, CPPL) – were
persistent critics, often along with the Parliamentary opposition, and played a key role
throughout the process:
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- At the early stages and along with the international NGOs, the national CSOs
campaigned successfully to have compensation paid for occupation of land
increased tenfold and more from the legislative requirements in both Chad and
Cameroon. For instance, the rate proposed for destruction of a mango tree, set by
law at $5.96, was raised to as much as $1,635 for productive trees largely as a
result of NGO pressure (and convincing fieldwork by Esso experts).
- From the beginning of the construction phase in October 2000, the CSOs worked
closely with villagers and were instrumental in bringing concerns of affected
populations to the fore persistently and consistently, and with genuine successes.
In this respect, CSOs were a privileged interlocutor of the International Advisory
Group. For example, they exposed the practice of the Chefs de canton (the first
level authority in a canton) who were taking a 10% levy from compensation paid
to people, a practice that intervention by President Déby managed to curtail but
was not able to stop completely.
- CSOs achieved an impressive level of professional monitoring of project
activities. One organisation, the Groupe de Recherches Alternatives et de
Monitoring du projet Pétrole Tchad-Cameroun (Alternative Research and
Monitoring Group of the Chad-Cameroon Oil Project, GRAMP-TC), was created
specifically to monitor the project in Chad.
- CSOs contributed much to the preparation of a Regional Development Plan,
which would have served as a guide to investments in the oil-producing region
but was never ratified by the Government.
- In Chad and in Cameroon, CSOs eventually entered into a structured and
ongoing dialogue with the oil Consortium and in Cameroon with the (reluctant)
participation of the Government. The dialogue is a means of dealing
systematically with problems affecting populations, mostly related to
compensation claims. Despite frustrations and difficulties the CSOs have held
firm to that constructive work. However, in June 2010 the Cameroon NGOs
walked away from the platform as outstanding issues were not being settled.
- CSOs drew international attention to the fragile human rights situation in Chad.
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Given Chad’s history, the question of human rights was at the forefront of opposition
to the project, which was seen as a means of enriching the State without protecting its
people. The ups and downs of the security situation, more than the project itself, have
been the cause of emergency rule and curtailment of rights. Security issues and repeated
thefts from the oil facilities served as pretexts for sometimes excessive and arbitrary
government action (e.g. arrests, travel restrictions in the oil field area, public humiliation
of heads of families, death threats against NGO representatives, etc).
A fundamental difference between international and national NGOs was that the
opposition in Chad, including within Parliament, was not to oil development – “our
birthright, our source of wealth” – but to the Government and its handling of project-
related issues. Ironically, the project became an important source of support and profile
for the CSOs, particularly in Chad, as its international prominence offered protection
from the harassment to which they were commonly subjected.
3. ISSUES
3.1. Significant Factors
The issues discussed in this section were greatly influenced by three factors that were
unanticipated at the planning and decision time and which had an impact on project
implementation: lower production levels, higher oil revenues for Chad in the very first
years of the project operation phase and most importantly, the deteriorating security
situation in Chad.
Lower production levels
Instead of the planned output of 225,000 barrels per day (bpd) from the three original
oil fields, production reached 220,000 bpd only briefly in 2004, then averaged just over
170,000 bpd for the year 2005 and was down to 119,500 bpd in 2009 despite the
development of new fields brought in from 2005. For the first six months of 2010,
production was up to 125,000 bpd.
The first consequence was of course that revenues to Chad and Cameroon (and the
Consortium) were less than they would have been had production reached its planned
levels. In the case of Cameroon, revenues were less because the country levies a tariff
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based on transit volume, not on value. As for Chad, the rise in the price of oil on the
international markets throughout the period of 2003 to 2008 more than offset the lost
volume and as we will see below, enabled the country to receive much more money than
expected.8
Another consequence of the low production profile was that the Consortium
launched an infill drilling campaign9 in the three original fields and developed new oil
fields in the area to try to reach the initial objectives. These measures carried major
economic, environmental and social impacts. Chad used the opportunity of these changes
to renegotiate elements of its Agreement with the Consortium and raise the level of the
royalty from 12.5% in the 1998 Convention to 14.25% in a new 2004 Convention.
But higher revenues for Chad
By mid-2010, after seven years of production, Chad had received a total of
approximately $5.7 billion10 when the base case scenario on which the project had been
approved would have yielded approximately $2 billion in revenues for the country over
the 25-year production period.
This windfall permitted the Government to pay its public service and military staff
their salaries and pensions and to raise salaries substantially. The oil revenue also paid for
considerable investment in schools, clinics, roads and much else, as well as for a high
level of security expenses.
Yet it was too much, too quickly to ensure proper management of these funds when
the absorption capacity of the beneficiary ministries was so low. The Government did set
aside some of the extraordinary revenue received in 2008 – which would come in handy
when oil prices fell at the end of that same year with dramatic consequences to the 2009
budget. But that surplus was used in large measure for reconstruction in N’Djamena after
the destruction wrought by the rebel offensive of February 2008.
8 World oil prices in recent years have been higher and more volatile than expected in the early days of the Project. It took a year for the price of a barrel to double and reach $147.27 in July 2008 but only six months to fall down to $34.36 in February 2009. In the year from October 2009, the price fluctuated between 70 and 80 dollars. 9 Additional wells drilled within a field. 10 Source: Esso Exploration and Production Chad Inc. 2010. Chad Export Project. Project Update No 28. Mid-Year Report 2010.
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Indeed, Chad was not prepared administratively or “psychologically” to deal with
such volatility of oil prices and its magnified impact on its national budget.
And deteriorating security
When the decision was taken in 2000 to proceed with the project, there was no
Darfur crisis, no refugees from Sudan in Chad and no overt hostilities between the two
countries. Internal dissension, including armed skirmishes, was latent.
Between 2003 and 2005 however, all these factors exploded, becoming both a reason
and a pretext for investment in hardware, salaries and “payoffs” to the military.
The situation also had a number of other repercussions on Chad and its people: a
growing climate of insecurity, the postponement of community-level elections and, after
the February 2008 advance of the rebel groups into the capital city, the proclamation of a
state of emergency and the curtailment of rights.
3.2. Consortium Performance
Implementing the safeguards
The Consortium, having accepted the contractual obligation to observe the Social
and Environmental Safeguard Policies of the World Bank, did live up quite well to this
commitment though there have been serious land occupation issues and some long-
standing unresolved claims over compensation. The construction of the project’s main
infrastructure was completed a full year ahead of schedule, in July 2003. On 29 October
2004, the project lenders declared that the project had been built properly and that it
could produce crude oil according to plan. The World Bank’s environmental and socio-
economic monitor – the External Compliance Monitoring Group (ECMG) – issued a
certificate attesting that the project had complied with the Environmental Management
Plan (EMP). This milestone served as a practical demonstration that a large infrastructure
investment of this kind could actually be undertaken under stringent environmental and
social rules which, far from being a burden, could save time and money by avoiding
disasters.
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Dealing with low production
The Consortium was however faced early on with the realization that the three Doba
original oil fields (Komé, Bolobo and Miandoum) were not as productive as anticipated:
highly challenging geological and oil formation conditions required more wells and a
series of additional production support measures to maintain the output of crude oil.
The main impact of the lower production has been in the oil region, where the
drilling of wells is still ongoing. Instead of the planned 287 wells in the three initial
fields, official figures published by Esso in its 2009 annual progress report mentioned a
total of 570 oil wells and 55 water injection wells drilled and brought online so far in the
three original fields and four satellite fields (Nya, Moundouli, Maikeri and Timbré).
Drillings of additional wells continued through 2010. This has resulted in a higher density
of wells in the original fields and the expansion of the oil field to broader territory.11
The number of wells far exceeds the initial plans, which were the basis for the Doba
Project’s EMP. This additional drilling and the infrastructure needed to collect the oil and
to supply electricity to the wells is consuming more land than originally anticipated. This
reality brought the Consortium to the limit of its obligations and to debates with World
Bank/International Finance Corporation (IFC) monitors until a formal Land Use
Mitigation Action Plan (LUMAP) was adopted in April 2007 to ensure adequate
protection and compensation to farmers who are the main land users.
Had the price of oil not risen to unexpected heights, these additional investments
(nearly $2 billion since January 2007 according to the oil operator) would have ruined the
economics of the project for the Consortium – and for Chad.
The Consortium is confident that despite reduced flow rate, the total recoverable oil
in the Doba basin remains that of the original estimate: some 900 million to 1 billion
barrels. The production profile has simply been flattened out from the expected early
peak to a more steady level.
11 In January 2009, Esso informed the International Advisory Group that the number of wells in the Komé-Bolobo-Miandoum fields alone was expected to reach about 800 by 2012. For further details see International Advisory Group, Chad Cameroon Petroleum Development and Pipeline Project. 2009. “Report of Mission to Chad and Cameroon, January 11-31, 2009.” Montreal: IAG, March 12.
16
Relations with the Government
The relations between the Consortium and the Government were marked by two
major factors:
- The inadequate social and environmental monitoring by the Government agency,
which never had the professional resources to do an adequate job and was left to
wither and disappear once the World Bank capacity-building funding terminated
in 2007. Environmental protection was clearly not the Government’s top priority
and monitoring was left to Esso’s own resources and to supervision provided
periodically by the IFC and its appointed monitoring body – the ECMG, with the
International Advisory Group (IAG) as observer and advisor.
- A long list of legal disputes – some valid (such as determination of point of sale
of the oil), many an attempt to establish Chad in a stronger position as owner of
the resource and others meant to grab as much as possible from the rich company
– became a permanent state of affairs and led to several modifications to the
initial Convention, generally to Chad’s advantage. Price buoyancy and the
landlord’s advantage once the investment had been sunk contributed largely to
Chad’s negotiating position.
3.3. Chad and the Oil Revenue Management Law
For Chad, with minimal institutional capacity and infrastructure and few skilled
technicians, the ExxonMobil–World Bank combination was a chance of a lifetime, not to
be missed. Thus in January 1999, the National Assembly adopted an Oil Revenue
Management Law (Law 001/PR/99)12, which the President proudly proclaimed as “my
law.”
The law’s unique characteristics, designed to safeguard the integrity of the oil
revenues and their allocation to development and poverty-alleviation sectors, included the
following:
12 Also referred to as Law 001 in this paper.
17
- Royalties and dividends to be paid into an escrow account in a London-based
bank;
- 10% to be set aside in a Fund for Future Generations (FFG);
- 85% of balance to be allocated to nine “priority sectors,” including 5% of
royalties to the oil-producing region;
- The remaining 15% available to the Treasury for general Government expenses;
- Provision for revision after five years’ application. (See details in Figure 1.)
Borrower account Account Bank in London
Direct revenues Royalties and
dividends
Indirect revenues Income, business, and
customs taxes
Transit account Account Bank in London
Debt servicing
GROSS REVENUES TO CHAD
90% Central Bank in Chad
10% Fund for Future Generations
(Deposit account at international bank)
5% of royalties for the development of the
oil region
15% of royalties 15% of dividends
For current Government
expenses
80% of royalties 85% of dividends
For priority sectors
Chad Treasury
Figure 1: The initial flow of oil revenues (Law 001) – The revenue labyrinth.
18
The law also created a Collège de Contrôle et de Suivi des Ressources Pétrolières
(Oil Resources Control and Monitoring Group, CCSRP), an independent public oversight
body with a majority of non-Government members to review, approve and verify the
allocation of all revenues subject to Law 001.
Prepared with the assistance of the World Bank and adopted by Chad as a condition
of the Bank’s participation, Law 001 was the pillar of an unprecedented revenue
management framework upon which rested Chad’s commitment and that of its partners to
use the oil revenues for purposes of development.
As mentioned earlier, “first oil” flowed through the pipeline in July 2003, a full year
ahead of schedule. Esso paid its first royalties to the London account in November 2003,
once the oil was sold at the offshore export vessel. But due to the complexity of the
internal transfer mechanisms to the regional bank (BEAC) and the Chad treasury as well
as the country’s lateness in completing the necessary arrangements, oil funds only
became available to Chad eight months later, in July 2004.
Once the money started flowing in, the pressures of unpaid salaries and pensions for
the public service and the military became impossible to resist. As early as 2005
President Déby began to alert his partners, in particular the World Bank, to the need for
“greater flexibility” to address what he considered the most urgent matters.
In December 2005, contrary to the advice of the World Bank, the National Assembly
adopted Law 002/PR/06, which modified the regime established by Law 001/PR/99.
Essentially, this new law eliminates the Fund for Future Generations (“All our
investments are for future generations and we have a crying need for money now”),
increases to 30% the ratio of revenues allocated to general budget expenditures, expands
the number of eligible sectors for priority funding, including Security as a priority sector
and changes the composition of the CCSRP. Law 002 also extends its provisions to all oil
produced in Chad: not only the original three fields of Komé, Bolobo and Miandoum
covered by Law 001, but new fields developed by the Consortium or others.
In January 2006, even before President Déby had ratified Law 002, the World Bank,
now under president Paul Wolfowitz, retaliated by suspending all program disbursements
in Chad and freezing the oil revenues in escrow in London. But in April, after Chad
19
threatened to shut down the pipeline, the World Bank signed an agreement in principle
that essentially recognized the prescriptions of Law 002 (while excluding Security from
priority sectors) and left for further discussion the allocation of revenues for
development.
In June of that year, Idriss Déby was re-elected for a third term in an election
boycotted by all opposition parties. The following month, Chad and the Bank signed a
Memorandum of Understanding (MOU) specifying that, for the year 2007, 70% of all
revenues (oil and non-oil) would go to development investments (priority sectors).
Indeed, in 2007 Chad managed to allocate 50 to 55% of greatly enhanced revenues to
the agreed development sectors, though there was concern about the “quality” (costs and
relevance) of some of those investments.
In July 2008, oil prices reached a peak, providing Chad with windfall revenues (see
Table 1). In September, the World Bank, under president Robert Zoellick, arguing that
Chad had not respected the 2006 MOU, demanded early repayment of the balance of its
loans including, unusually, those from the International Development Association (IDA).
Chad, flush with oil revenues, obliged. The World Bank no longer had any ties to the oil
project in Chad, except through the International Finance Corporation, which still had
commercial loans outstanding and a responsibility to monitor project compliance with the
Environmental Management Plan. The World Bank, however, stated its readiness to
continue “development projects” with Chad. By December oil prices hit new lows,
dramatically affecting Chad revenues in 2009.
Those events in the first five years of oil revenues can lead to a variety of
interpretations:
- That the initial Oil Revenue Management Law was never given a chance, since
Chad amended it after slightly more than a year of actual revenues;
- That the original system, “imposed” by the World Bank, was too rigid and
begged modification, and that the Bank’s extreme reaction in January 2006 only
exposed its inherent weakness when it gave in to all of Chad’s demands by April;
- That putting aside an amount for the future in a country where everything is in
need today was probably a good but misplaced concept;
20
- That sceptics’ worst fears were confirmed: once the oil started flowing, Chad
would be free to do as it pleased, in spite of any agreements.
But it can also be said that Chad is one of the few countries to have placed its rent
from mineral extraction under any kind of legislative restriction and transparency; that
Chad has expanded the reach of the regime from the three original fields to all oil
extracted in the country; and that, despite failings, misallocations and sometimes a lack of
transparency, oil money is actually going to roads, schools, clinics and agriculture, which
does not happen everywhere.
Oil revenues
The base case of the project was that Chad would receive about $1.7 billion in
royalties, tax revenues and dividends based on a projected oil price of $15.25/barrel,
during the approximately 25-year production period. In fact, the Consortium reports that
it paid Chad around $5.7 billion in oil revenues from 2003 to mid-2010, greatly
exceeding initial projections. (See Table 1.)
Chad’s Oil Revenue (in millions of US dollars)
2003 2004 2005 2003–2005 2006 2007 2008 2009 1S2010 Project
to date
Royalties on crude oil sales1, 4 398.8 284.2 317.0 555.0 159.0 199.0 1913.0
Pipeline-related income 22.6 9.6 10.0 9.0 5.0 2.0 58.2
Corporate income tax6 4.1 461.8 869.0 1132.0 421.0 505.0 3392.9
Fees, permits and duties2, 5 86.5 21.8 24.0 175.0 39.0 30.0 376.3
Project total3 46.0 166.0 300.0 512.0 777.4 1220.0 1871.0 624.0 736.0 5740.4
Table 1: Total Oil Payments to Chad 2003-mid 2010 Notes: 1. Cash payment royalties paid by all Consortium members. 2. Corporate income tax amount includes payments made by Consortium members and TOTCO (the Tchad Oil Transportation Company). 3. Project to Date has been restated to exclude amounts previously reported for services provided by government-run entities, such as utilities, hospitals, and telecommunication services. 4. 2008 Royalty on Crude Oil Sales includes MOU pre-payment for dead stock ballast. 5. 2008 Fees, Permits, Duties, Etc amount includes new payments for Statistical Export Taxes, corrected due to overstatement of $3 million in previous issue. 6. In addition, because of historically high market prices for crude oil, in 2006 the project began paying a corporate income tax.
Source: Esso Exploration and Production Chad Inc. Chad/Cameroon Petroleum Development Project Update Reports (www.essochad.com)
21
An important pending question is whether Chad is an “oil-rich country” or whether
its oil resources are fairly limited. ExxonMobil has given up its remaining exploration
rights as it does not see significant prospects. China National Petroleum Corporation
(CNPC) is going to exploit oil from the Bongor basin, but so far only for domestic
Chadian consumption as feed to a refinery CNPC is building near N’Djamena.
The Government has always been encouraged to think of limited resources; the price
slump in 2008–2009 had a huge impact on an oil-sensitive budget. But after the dizzy and
unexpected revenues of 2007 and 2008 it was very difficult to think in terms of prudence
and austerity.
What has that money accomplished?
The initial investment of oil revenues was directed in a disproportionate amount to
rehabilitating and constructing national roads – not a luxury in a country that at that time
had about only 400 kilometres of paved roads. This decision was largely motivated by the
notion that road building was the easiest way to ensure quick disbursement of funds. But
it meant that rehabilitating rural roads, which would have had greater impact on farmers’
ability to go to market and thus improve the rural economy, was not given the priority it
deserved.
The next priorities were schools and clinics. Again, this decision met a real need in a
country that had so little, but planning was not always done for the personnel and
material resources required to operate the facilities once they were built. Major upgrading
was achieved in the capital, N’Djamena, and in the cities of the producing region.
The World Bank’s Independent Evaluation Group (IEG) estimated that for the year
2007, 60% of total Government expenditures of $1.55 billion went to priority sectors.
Thirty percent of these expenditures went to infrastructure; 52% to health, education, and
rural development; and 18% to other priority sectors.13
Public servants (and the military) were paid and given major salary increases. The
security situation became a reason and a pretext for substantial military expenditures.
13 Source: World Bank, Independent Evaluation Group. 2009. Report No 50315. Table 4.
22
On the other hand, some priority sectors, mainly agriculture and herding, did not
receive the attention they deserved as the real source of wealth for the population. Initial
investments in those sectors came as late as 2007.
When measured against the objective of reaching the Millennium Development
Goals, the result is mixed: for one thing, there is a lack of data to measure adequately and
the time frame of three to four years is too short to provide trends. As shown in Table 2,
there are marginal improvements in the United Nations Development Programme Human
Development Index (HDI) and progress in school participation. But according to Chad
Government data, there has been a regression in maternal health with the Maternal
Mortality Ratio rising from 827 to 1099 maternal deaths per 100,000 live births between
2003 and 2007.
Index 2000 2007 Difference (%) HDI 0.35 0.392 + 12
Education (component of HDI)
0.274 0.334 + 22
Universal primary education
30.9 36.5 + 18
Table 2: Chad HDI Evolution Source: United Nations Development Programme
The IAG’s overall judgment at the end of its mandate was that “a brief qualitative
assessment shows that despite some not very productive investments and a lack of
attention to rural areas in favour of the major cities, public expenditure of oil revenues for
infrastructure, education, health, farming and herding is increasing and bodes well for a
positive impact on poverty and development indicators. There have been improvements
to Chadians’ living environment such as the urban landscape in N’Djamena, but not a
comparable increase in their standard of living.”14
14 International Advisory Group. Chad-Cameroon Petroleum Development and Pipeline Project. 2009.Final Report. Montreal: IAG, 3 September.
23
3.4. The World Bank’s Management of its Investment
From the start, the World Bank recognized the risks inherent to this investment: in
particular, the possibility that once the oil started flowing, the Bank would lose much of
its leverage on Chad.
Because of the context in which the World Bank–Chad negotiations took place –
with the opposition from NGOs, the concerns of some of the Bank’s own executive
directors, and the internal debates within the organisation – the Bank took a “hard line”
with Chad, and more or less dictated the terms of agreement.
Thus, from the beginning, the relations were not so much about strategic goals to be
achieved in common, but more about the power to direct.
Yet, despite the recognized challenges, the World Bank, which was central to the
existence of the project, did not manage its investment as effectively as could be. The
result was adverse consequences for the project and to its reputation:
- In addition to overly optimistic estimates of the time required to build and
upgrade Government capacity, it got off to a slow and ineffectual start to
managing the capacity-building projects;
- It mishandled the January 2006 “crisis” when Chad unilaterally amended the Oil
Revenue Management Law 001 and gave in to Chad’s demands four months
later;
- It had no continuity in its senior positions in N’Djamena, which made any
sustained strategic dialogue with Chad impossible.
As mentioned earlier, in September 2008 the Bank gave up and called for early
repayment of its loans. The Bank thus made a public declaration of failure, which was at
the very least premature and gave up any influence over the conduct of the mega-project
while offering to continue doing “development projects” with the Chad government.
With so much at stake, the haunting question is: Why did the Bank not do a better
job of managing its investment and influence?
24
3.5. The Role of China
In 2006, Chad switched recognition from Taiwan (which was an important aid
donor) to China. In return China undertook to provide substantial aid and investment.
In January 2007, the China National Petroleum Corporation (CNPC) purchased the
interests of EnCana, a Canadian oil company that had been exploring independently in
the Bongor basin and other properties. In 2009, CNPC began construction of a 311-
kilometre pipeline from Rônier oil field to a refinery it is also building at Djarmaya, near
N’Djamena.
Box 2 : The Chinese Alternative
Speculation in alternative scenarios can sometimes help provide perspective. Hence:
- If the World Bank had not provided support to the project,
- And if, therefore, ExxonMobil had not gone ahead,
Then:
- At first nothing would have happened,
- But Chad would not have let its wealth stay in the ground.
So China, already very active in neighbouring Sudan and eager for oil, might have
offered to develop the Doba fields.
The necessary export pipeline would likely not have been built through Cameroon
but rather eastward through Sudan to the existing Chinese-operated facilities in Port
Sudan and onwards to China.
As a result:
- Construction of the facilities would not have been constrained by World
Bank safeguards; people and the environment would not have been
protected even to the degree they have been;
- There would not likely have been a legislative framework to regulate the
management of oil revenues and make the process transparent;
- But Chad and Sudan would have become economic allies instead of
25
political adversaries: the region might have known peace rather than
conflict; Darfur might have been settled earlier; rebellions in both
countries would have been starved of support.
Would the people then have been, on the whole, better off?
This hypothesis is currently put to the test as CNPC is actively developing oil fields.
Current production is intended for domestic Chadian consumption, with the construction
of an oil refinery near N’Djamena. But increasing output would likely be exported to
China – via the Chad-Cameroon pipeline or via a new pipeline to Sudan?
CNPC social and environmental practices are already being contrasted unfavourably
with those of Esso.15 The Civil Society Organisations continue to be vigilant and to raise
alarms but they are now alone in facing the Government without the presence of the
World Bank or other international observers.
4. LESSONS LEARNED – POLICY IMPLICATIONS
Several recent commentaries on the project have concluded, along with the World
Bank, that this is indeed a “failed project”, a “failed model”; that the World Bank did the
right thing by pulling out and indeed should never have opted in.16
But other assessments, such as the following, are also possible and can inform future
extractive industry projects:
1. A country will always develop its resources.
Much of the argument about the project was that Chad was unprepared in terms of
administrative capacity and political development to undertake such a project properly.
One of the main demands of national and international non-governmental organisations
was for a moratorium to delay investment until adequate conditions had been achieved.
15 Source: Bonn International Center for Conversion. 2009. Brief 41. “We were promised development and all we got is misery” – The Influence of Petroleum on Conflict Dynamics in Chad. Bonn: Bonn International Center for Conversion (BICC), December. 16 See, for instance, the following:
- Real Instituto Elcano. Artur Colom Jaén. 2010. Lessons from the Failure of Chad’s Oil Revenue Management Model (ARI). Translated from Spanish. 3 December.
- World Bank, Independent Evaluation Group. 2009. Report No. 50315. Washington, DC: World Bank Group, 20 November.
26
Is there any case of a country delaying its access to resources until it was deemed
ready to do so by the international community or in its own judgment? In the case of
Chad, the argument is put that being totally dependent on external assistance, the country
would have had no choice but to accept such a moratorium. That approach might have
worked for a time, but not for very long.
As illustrated by the “Chinese alternative” scenario, China or some other investor
would have intervened to gain access to the resource. Such involvement would most
likely not have been accompanied by the high-standard safeguards and the commitments
made on this project.
The policy implication is that it is better to have some form of governance
framework than none. Contrary to those who proclaim that “better than otherwise is not
good enough,” actions that lead to improvements even when they are not a total success,
are better than nothing.
Therefore, to achieve some progress is better than to do nothing and “Better than
Otherwise” is a legitimate policy and target.
2. Social and environmental considerations are integral to the success of energy
projects.
The requirement that the Consortium abide by the World Bank safeguards could
have been seen as a set of obstacles and constraints – indeed, the production teams on the
construction pad often saw the safeguards this way (“We’re here to build a pipeline, not
to do an environment project”). But ExxonMobil persisted – because it had a contractual
obligation to do so and because of the highly competent team it had built to enforce its
commitment. The Consortium finished building the project a full year ahead of the
original plan while complying with the high environmental and social standards set forth
in the Environmental Management Plan (EMP).
There is some evidence that ExxonMobil has seen the advantages of good practice
and is using this approach on other projects. Managers responsible for the Environmental
Management Plan have been assigned to other projects for the benefit of their Chad-
Cameroon experience.17
17 Conversations with authors.
27
The largest mining companies realized some 10 years ago that access to resources
was severely constrained by their “uneven” social and environmental record and that it
was in their own interests to improve their practices. They created a code of good practice
and an institution, the International Council on Metals and Metallurgy (ICMM), to ensure
that the code was observed.
Can that approach be contrasted with what is reported to be the Chinese performance
in Chad and elsewhere?
Rigorous social and environmental practice can make the difference between success
and failure. They certainly affect how a project will relate to its neighbours, especially
when they cohabit for decades. They serve the interests of the promoter: companies don’t
implement such practice for philanthropic reasons; they do so because it avoids conflict,
saves time and money. And they also serve the interests of the host populations and
authorities.
As climate change becomes a growing political factor for decision makers and the
world becomes ever more conscious of the impact of energy development and use, good
practitioners and developers of cleaner energy forms will gain competitive advantage.
3. Revenue Management Laws are useful.
The lesson from Chad seems to be that revenue management laws can be
manipulated at will. On those grounds, one of the partners, the World Bank, pulled out of
the project.
Indeed, these laws might be manipulated unless they are perceived to be in the
interest of the country and its decision makers.
Therefore:
- To be effective, an agreement must meet the strategic goals of the parties and not
merely pay lip service to something imposed from outside. Sovereignty may be
abridged for a time but will reclaim its due.
- Any agreement perceived to be too onerous or unfair will be modified one way or
another.
- What has been achieved during the life of the agreement between Chad and the
World Bank is significant: the investments in health, education, infrastructure,
28
and agriculture, as imperfect as they might be, are real. Given the practice in
many other countries, it can be fairly assumed they might not have occurred
without it.
- Chad has publicly committed to abide by the prescriptions of Oil Revenue
Management Law 002, regardless of the rupture with the World Bank.
As Chad continues to invest in these priority sectors even without the constraints of
the World Bank, the country will achieve far better results than other countries that do not
impose such obligations on themselves.
4. Some further steps towards development for Chad.
The return of security – and, flowing from that situation, a genuine reopening of the
parliamentary process, followed by the long-awaited communal elections – is essential to
any substantial improvement in Chad’s management of its resources and its respect for
human rights.
Chad could therefore take steps that would lead to the proclaimed goals of
development and poverty alleviation:
- Recreate an effective national agency to monitor the social and environmental
commitments of oil operators (Esso, China National Petroleum Corporation
[CNPC] and eventually, others). Interestingly, the Government took initial steps
to do just that shortly after the World Bank withdrew from the project and thus
removed any external pressure to do so. The question now is whether this
initiative will be given serious follow-up.
- Adopt the project-level regulations, essentially those of the World Bank, as
national norms. Chad could do so on the grounds of a provision in the project
agreements that any oil that flowed through the existing pipeline would have to
be produced in a way that respected the principles of the Chad-Cameroon project
EMP.
- Continue to improve its capacity to manage an oil economy and its understanding
of the oil industry.
- Pass conservative budgets, taking the volatility of oil revenues into account.
29
- In order to reduce the dependence on oil and the non-oil primary deficit, invest in
the non-oil productive sectors, mainly agriculture and herding, as it began doing
in 2007, including the development of rural hydraulic infrastructure.
- Take the necessary steps to be accepted into the Extractive Industries
Transparency Initiative (EITI) for which it is already a candidate. And as a
corollary, publish regularly the revenues received not only from the Consortium
but from all oil (and other mineral) projects.
Why would Chad do these things now if it has not done so earlier?
Chad has begun down this path such as reinstating the environmental monitoring
agency, increasing investments in productive sectors and mooting its candidacy to EITI.
Under conditions of improved security and more open democracy, popular pressures for
improved living conditions would become more effective.
5. Requirements for a successful partnership.
From the experience of the ups and downs of this project, we can draw the following
conditions:
- The partnership must be genuine: an “imposed partnership” (an oxymoron) is
unlikely to survive. The party that feels aggrieved will use different means to pay
lip service and will manage to do as it wants to the extent possible;
- It must be strategic: all parties must agree on the objectives to be achieved and
must perceive these to be in their respective interests;
- It would be helpful for parties to agree not only on general objectives, such as
“priority sectors”, but on result indicators or measurable targets, such as specific
progress towards the Millennium Development Goals (MDGs);
- The partnership should be pro-active. For instance, NGOs and the International
Advisory Group final report recommend advance investment in capacity-
building. That is unlikely to happen. But what can be done is to plan carefully
and in detail what needs to happen to achieve stated goals once a project is
approved. In the same way that Exxon and all promoters invest in advance in
preparing for rapid action once the go-ahead is given, countries and donors can
30
invest in detailed planning so that actual capacity-building investment can begin
on Day 1 of project approval.
6. Managing risk.
A high-risk/high-payoff investment must be managed accordingly.
The Bank’s determination was bold and ambitious. To achieve its goal, it relied
essentially on the revenue management framework it had advised Chad to adopt. Yet the
Bank may not have realized the extent to which Chad was lacking a public administration
structure prior to this project.
After a very slow start in 2001 while the Consortium was racing ahead, the Bank
appointed “project tsars” to drive the project – with mixed results.
The Bank did not have a “Plan B” to respond to changing circumstances, such as
when Chad amended the revenue legislation – an action that was rather predictable. The
financial institution’s reactions to events tended to be improvised and driven by ill
humour as much as by strategic analysis.
The factor that had the greatest consequences may have been the Bank’s inability to
engage in a strategic dialogue with Chad in a way that recognized the interests of both
parties. The lack of a permanent high-level and strategic presence in N’Djamena while
the Bank was engaged in this high-risk project created a vacuum, with negative
consequences.
The lesson learned is therefore that resources should be adequate to the task – or the
challenge. High-risk/high-payoff projects of this nature require strategic and consistent
management from donors – as well as from operators.
5. CONCLUSION
The conditions in which this project took place were unique and unlikely to be
repeated:
- The World Bank became involved essentially through the persistent request of
the promoter – who was therefore prepared to abide by the Bank’s conditions;
31
- Chad was prepared to suspend elements of its sovereignty through the revenue
management law and the creation of the CCSRP (a mixed government-non
government body with authority over public spending);
- And at that time (in the 90s), there was a lack of alternatives for Chad (China was
not yet present to the same extent in Africa).
The question therefore, is not whether this specific experiment is replicable but
rather what can be learned from it.
First to note the positive outcomes:
- The successful application of WB safeguards to a large private sector project;
- The relatively greater transparency: oil revenues paid to and received by Chad
were published; expenditures vetted by the CCSRP and made public; Chad’s
potential membership in EITI;
- The allocation of resources to priority sectors;
- Improvements in Chad public administration (starting from a very low base);
- Chad acquired additional bargaining power (this will not be seen as positive by
those for whom Chad government is essentially bad but even poor countries gain
when their freedom of action expands);
- And wealth was created in the country! Not ideally distributed but essential for
anything else to happen.
Many things didn’t work as expected:
- Esso’s production levels were far below initial plans, which led to more intensive
and extensive occupation of lands;
- The capacity building projects: the need was underestimated at the start and the
management of the projects was not as effective as required;
- The security situation deteriorated: Darfur crisis, Sudan and rebellions;
- The allocation of oil resources was not optimal;
32
- The lack of strategic Chad-WB dialogue: conditions imposed instead of mutually
agreed; lack of joint strategic objectives; lack of effective Bank presence on a
continuing basis in N’Djamena.
Beyond the lessons learned and policy implications mentioned in Section 4, we
conclude with questions the Chad-Cameroon Petroleum Project (CCPP) can help answer
and thus inform future extractive industry projects such as those in the new African oil
producers, Ghana and Uganda.
• Is the “resource curse” avoidable and to what extent has the CCPP contributed
and might continue to contribute to poverty alleviation in Chad?
The economic aspects of a country that receives rent for its resources can be
managed by good economic policy. The more difficult aspect of the “curse” is
governance. Rapid and large wealth leads readily to a number of woes: corruption,
enrichment of elites at the expense of the population and conflict to lay hands on that
wealth.
Chad has obviously not escaped that curse completely: oil wealth appears to be one
of the main reasons motivating the rebellion. And Chad’s allocation of oil revenues has
not been optimal: high unit costs, shells (buildings without operating resources), late
investments in the productive sectors of agriculture and herding, a few “monuments” like
a soccer stadium in Doba while basic needs were still far from being met in this oil region
city and surrounding villages, and large investments in security.
But economic safeguards such as stabilisation accounts and the fixed parity of the
monetary unit (as the Central African Franc, FCFA, is tied to the Euro) have limited the
macro-economic damage associated with resource rent and the legal framework has
oriented the use of funds in the right direction. Even if a detailed quantitative assessment
of the impact of the use of oil revenues in Chad to date has not been done, there has been
and continue to be investments in public goods such as roads, schools and health facilities
to a degree not seen in other oil producers of the region.
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That has not yet given the average Chadian a taste of the hoped-for prosperity.
Country-wide conditions of abysmal poverty cannot be eradicated in 5 years even under
the best of circumstances – and circumstances have up to now been far from optimal.
Indeed, allocations to “priority sectors” aimed to improve quality of life cannot in
themselves reduce poverty unless matched by investments in productive sectors and in
wealth creation.
If Chad has held to some degree of good management in the current difficult security
circumstances, one could hope that peace and participation in international initiatives
such as the Extractive Industries Transparency Initiative (EITI) will lead to greater
transparency and effectiveness.
In April 2010, President Déby deplored that between 2005 and 2009 “almost as
much had been spent on security as on development” and expressed his hope that ending
the rebellion would change this situation.18
• What role is there for the World Bank and other International Financial
Institutions (IFIs) in the extractive energy sectors?
For many and especially the original sceptics, the withdrawal of the World Bank
from the Chad-Cameroon project in 2008 and the Bank’s public declaration of “failure”
was probably the best demonstration that time had come for the end of investment by the
Bank and other international financial institutions (IFIs) in risky energy projects.
We hope not. Energy development projects and their impacts will continue to be
amongst the most structuring investments for many years to come. It would be difficult to
understand how international financial institutions could remain aloof from this sector
and not help producing countries optimise development returns while learning to manage
the environmental and social impacts.
The report of the Extractive Industries Review19 notwithstanding, energy is a
legitimate investment sector. It is better to develop it within a set of rules and agreements,
18 Interview with Jeune Afrique, 27 April 2010. 19 Extractive Industries Review. 2003. “Striking a Better Balance: The Extractive Industries Review. Final Report.” Washington, DC: World Bank.
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such as those that came with the Bank’s participation in Chad, than without such a
framework.
With the growing presence of China, India and Brazil in energy and resource
investments and with aid projects in Africa, one might ask why countries would accept
the conditions and constraints of the World Bank and other IFIs. These multiple players
do indeed create a new context that will require dialogue rather than imposed
conditionality, one in which the traditional development institutions can still contribute
their experience, their know-how and their still important financial clout. And that is
ultimately to the benefit of all, countries and institutions.
The involvement of the whole World Bank Group in a role as determinant as in this
project may not be repeated. The concept of a “model” to serve as a pattern is unlikely to
reappear. Bank officials too readily slipped into that vocabulary, to the comfort of the
project’s critics, when this initiative was and should have been seen as an experiment.
This experiment showed the important role played by the International Finance
Corporation, who will continue to be solicited for its commercial loans, in imposing its
high environmental and social performance standards and making sure they were the
reference for the project construction and operation. The International Development
Association can also play a significant role in helping the host countries build appropriate
capacities to deal with large-scale projects.
Revenue management can also benefit from the Chad experience. The high level
competencies of the World Bank can still be put at the service of their client countries.
Those revenues could be integrated in classic public finances support programs without
recurring to the level of constraints included in Law 001.
These new partnerships will require investment in better definition of mutual goals
and interests, in clarifying roles and expectations, in determining measurable targets to be
achieved. Indeed a permanent high quality dialogue will be essential for success.
The project was always known as a high-risk experiment even before Darfur crisis,
conflicts with Sudan and rebellions were part of the equation. That so much has been
achieved despite such circumstances should be seen as anything but a failure. The
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positive legacies and important lessons of the project cannot be ignored and should serve
the development of future projects.
• Would Chad be better off if this project had not been done?
No. There would have been less disruption in people’s lives – a mega project is
terribly disruptive. And therefore possibly less discontent as life would have continued as
before. The rebellions might have been less active and less supported from outside as the
prize of power would have been much less interesting.
But none of the investments that have been made would have happened. Chad would
still be a $53 per capita country in terms of public expenditures. Surely that is not a
development objective!
