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Three steps to support good governance

The oil and gas industry should take action to improve governance and promote sustainable development in Africa

Oil not only has economic value, it has profound influence over power relations and governance in oil-rich countries.

My recent research, Resource Discovery and the Political Fortunes of National Leaders, tracks the political fortunes of 1,255 national leaders in 158 countries from 1950 to 2010. It finds that a giant oil discovery in the sixth year of an autocratic leader’s reign who entered office at the age of 55 would on average increase his or her tenure by six years. The effect is even more pronounced in Africa, where the average autocratic leader’s tenure could increase by eight years.

The research indicates oil has more political currency for autocrats than minerals, and this is fundamentally due to the structural disadvantages of oil. Oil is capital- and skill-intensive and generates little local employment in skill-deficient poor countries. It also offers very little forward and backward linkages with the local economy so the rent generated is relatively easy to appropriate.

We also observe that the political benefits for the autocratic incumbent are felt most strongly almost a decade after a giant discovery, indicating it is the sizable rent from actual production that matters rather than news of the find.

Governance implications

Extensions of tenures in themselves may not be a disadvantage provided the citizens of these nations receive good governance. Unfortunately, the evidence is stacked against the notion of a long-serving benevolent leader. In Africa, a strong correlation is observed between a leader’s tenure, poor institutional quality, weak governance and poverty.

In Africa, the average autocratic leader’s tenure could increase by eight years

The picture is depressing but could be dramatically improved if the oil industry acted responsibly and implemented steps to bring about transformative change in Africa. We are likely encountering a once-in-a-lifetime opportunity to transform the institutional and economic landscape of the continent.

Paul Collier, in his book The Plundered Planet, estimates that the known subsoil wealth (including petroleum) in Africa is about $25,000/km² compared with $130,000/km² in OECD countries. There are many reasons, including governance challenges, behind this finding but lack of physical deposits is not one of them.

A report by thinktank McKinsey Global Institute finds the vast majority of African deposits are still unknown. The expectation is that these reserves will be discovered over the next few decades as the industry redoubles exploration efforts and overcomes local governance-related constraints. A report by research group the Brookings Institution notes Africa saw an explosion of exploration activities between 2000 and 2012, with overall outlays of $100bn in the final year of the period.

Industry responsibility

So, what steps should the oil industry be taking? Greater transparency, environmental protection and support for the local economy are among the steps the industry could adopt.

Firstly, oil companies should set up industry-level reporting procedures for full or partial disclosure of commercial contracts in Africa and other developing countries without harming their commercial interests. There is very little commercial risk associated with the disclosure of contracts on deposits that are fully operational at the production stage. The industry should also work with local and international civil society organisations to eliminate corruption and promote good practice.

Strong correlation is observed between a leader’s tenure, poor institutional quality, weak governance and poverty

Secondly, the industry should take adequate steps to ensure environmental protection while working in Africa. Industry associations should issue a white paper streamlining expected standards and should conduct frequent audits to ensure that these standards are met by companies, their partners, contractors and sub-contractors.

Thirdly, companies should use local contractors where applicable. They should explore and engage in the building and upgrading infrastructure in partnership with local governments or businesses as minority equity partners where applicable. As my earlier research on mining and development demonstrates, such steps will have long-lasting effects on local economies. These steps are relatively inexpensive but could go a long way in bringing about transformative change.

Moral arguments aside, there is a business case for the industry to adopt such steps. Improved governance and low corruption would significantly reduce the lead time between deposit discovery and production, improving companies’ profit margins. It would also reduce exploration cost in nations plagued by corruption and bad government. Moreover, adopting responsible and sustainable practices would make industry stocks more attractive to a growing number of investors with a strong preference for responsible corporate action and sustainability.

Dr Sambit Bhattacharyya is a reader in economics at the University of Sussex Business School.

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