"We declare our first goal to be for every person to be dynamically involved in the process of freeing himself or herself from every form of domination or oppression so that each man or woman will have the opportunity to develop as a whole person in relationship with others".

- Papua New Guinea National Goals and Directive Principles

Tuesday, 26 October 2010

LNG and the Resource Curse

When ExxonMobil Begins Drilling for Gas in Papua New Guinea, Will the Country Fall Victim to the Dreaded Resource Curse?

Reports have emerged that ExxonMobil (XOM) will begin drilling for natural gas in Papua New Guinea.

The company’s operations are expected to bring $30 billion -- more than double its current GDP -- over 30 years, but many are wondering if Papua New Guinea, named one of the world’s most corrupt countries by Transparency International, will be able to avoid the so-called “Resource Curse.”

The Resource Curse is the paradox that occurs when a country finds itself sitting atop vast riches in the form of minerals, precious metals, and so forth, but finds itself pushed deeper into poverty and societal disrepair.

According to the Christian Science Monitor, Juan Pablo PĂ©rez Alfonso, one time Venezuelan oil minister, likened oil to “the devil’s excrement”. Sheikh Ahmed Yamani, his Saudi Arabian counterpart, reportedly once said, “I wish we had found water.”

Case in point: According to The New York Times, the chief of Kili, a local Papua New Guinea town, received $120,000 for land the authorities will use to shore up infrastructure surrounding ExxonMobil’s arrival.

However, in a sort of microeconomic example of the Resource Curse, he revealed that he had given most of the money away to his 10 wives, used some of it to buy 48 pigs, which he used as a dowry to woo another bride, and spent the rest on 15 cases of beer.

“All the money is now gone,” he said. “But I’m very happy about the company, ExxonMobil. Before, I had nothing. But because of the money, I was able to buy pigs and get married again.”

John Ghazvinian, the author of Untapped: The Scramble for Africa's Oil, and a visting fellow at the University of Pennsylvania, points to Africa as a prime example of the tribulations of the Resource Curse.

“Since 1990 alone, the petroleum industry has invested more than $20 billion in exploration and production activity in Africa,” he wrote. “A further $50 billion will be spent between now and the end of the decade, the largest investment in the continent's history.”

But, he noted, “Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil.”

Ghazvinian explained that “oil exports inflate the value of a country's currency, making its other exports uncompetitive. At the same time, workers flock to booming petroleum businesses, which saps other sectors of the economy.”

“Your country becomes import-dependent,” he said. “That decimates a country's agriculture and traditional industries.”

A 2000 paper [PDF] written by Thorvaldur Gylfason for the Centre for Economic Policy Research shows that, among OPEC countries, from 1965 to 1998, “gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%.”

Why does this happen? And what can be done in the future to head off the Resource Curse?

In an interview with Minyanville, James Paul, executive director of the Global Policy Forum, shed some light on the issue:

“There have been a number of initiatives that have been proposed by NGOs in recent years to deal with natural resource-related issues. There’s a whole host of ideas out there. It really boils down to corruption, in most cases.”

Paul says:

“Realize that these are some of the world’s largest companies -- ExxonMobil, Chevron (CVX), BHP Billiton (BHP). And they’re almost always larger in terms of revenues than the countries that they are operating in; that has an enormous capacity to corrupt people. Mines, for example, are hugely valuable. So if a company gives a government official $1 million, that’s nothing to the company, but for the official, it’s enough to retire on, in great comfort.”

Paul also points out “natural resources are getting scarcer and scarcer. To get them, you have to do more and more outrageous things. Increasing scarcity leads to more and more irresponsible acts. There’s a desperation to get this stuff which feeds the maw of the whole industrial and economic system that relies on it. You can increase extraction up to a certain point, but most of what’s easy to get has already been taken.”

What’s more, the Resource Curse exists not only in far-flung lands, but right here in the United States.

Take Massey Energy (MEE), and the Resource Curse created in West Virginia by the coal giant’s corrupt ways and the people it affected -- not least, the miners who died in a methane explosion while working in Massey’s Upper Big Branch mine last April.

In the aftermath of the tragedy, many focused on the company’s less-than-stellar safety record -- 124 citations and orders up to that point in 2010 alone, and 3,011 through 2009.

Attorney Brett Emison, of Lexington, Missouri’s Langdon & Emison called Massey’s recent history “a story great novels are made of,” and, in fact, it truly is. Massey CEO Don Blankenship’s successful attempt to “buy” a West Virginia Supreme Court judge was the basis for John Grisham's 2008 legal thriller, The Appeal.

In 2002, a West Virginia jury awarded the now-defunct Harman Coal $50 million after finding Massey liable for “fraudulent misrepresentation, concealment, and tortious interference” related to a canceled coal-delivery contract that put Harman out of business.

Massey appealed the ruling.

Two years later, the case was headed to the West Virginia Supreme Court of Appeals. While waiting for the case to be heard, West Virginia’s judicial elections were underway, and a lawyer named Brent Benjamin was running against incumbent justice Warren McGraw, whom Blankenship considered anti-business and believed would uphold the lower court’s ruling against Massey.

Blankenship formed a group called “And for the Sake of the Kids,” which raised $3 million for Benjamin’s campaign -- more money than any other group, including Benjamin’s own campaign committee -- and proceeded to paint McGraw as a radical, liberal liar who was soft on crime.

Surprise! McGraw was defeated and the new Justice Benjamin -- now West Virginia’s chief justice -- twice cast the deciding vote to throw out the judgment that had awarded $50 million to Harman Coal, after refusing to recuse himself from the case, as requested by Harman’s President Hugh Caperton. (In a related note, Justice Elliott "Spike" Maynard, who was also on the panel hearing the case, recused himself after photographs of him and Blankenship vacationing together in the French Riviera were made public.)

“Massey operates with impunity,” Emison (who was not involved with the case) told Minyanville. “They go ahead and ignore regulations because when they’re called into the courtroom and lose a case, they know they can buy their way out of it.”

Certainly, other mining companies like Peabody Energy (BTU), Arch Coal (ACI), Consol Energy (CNX), and Alpha Natural Resources (ANR) see their fair share of problems -- extracting coal from the earth is a tough business. But Massey seems to exist in a league of its own.

On June 8, 2009, in a 5-4 ruling, the United States Supreme Court found that Justice Benjamin’s failure to recuse himself from the Harman case violated the Fourteenth Amendment of the Constitution, depriving Harman Coal’s right to due process.

“The really surprising thing here is that it was a 5-4 decision,” Emison said. “That means four Supreme Court justices said there’s nothing wrong with buying a judge. Chief Justice Roberts basically said it really wasn’t a big deal.”

In an editorial, the New York Times agreed, writing that the idea that there were four dissenting opinions at all was “alarming” and noted that “Chief Justice Roberts is fond of likening a judge’s role to that of a baseball umpire. It is hard to imagine that professional baseball or its fans would trust the fairness of an umpire who accepted $3 million from one of the teams.”

Will Papua New Guinea fall victim to the Resource Curse or will it take after a country like Bostwana, which was able to avoid it, due in large part to relatively good governance and sound institutions?

The town administrator of Komo, Papua New Guinea, told a reporter that the area “was a lawless place until last year.” But, he says, “The government is coming back now. When ExxonMobil came here, it was the light at the end of the tunnel.”

In this case, perhaps the best we should hope for is that Papua New Guinea doesn’t follow West Virginia’s lead

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