When Oil Prices Drop, Corruption Risks Can Rise
Torrents of corruption swept across oil-producing countries from 2008 to 2014, when the price of oil reached historic heights. I covered this deluge in my recent book Crude Intentions: How Oil Corruption Contaminates the World. But when discussing the book recently, I’ve been asked: what does oil corruption look like now that prices have reached historic lows, and companies and oil-producing governments are struggling to stay afloat?
Some possibilities are on display here in the U.S., as industry bigwigs call in favors from their political allies in government and Congress. Other risks can be found wherever corporations are tempted to cut corners or governments are trying to convince cash-strapped oil companies to stick around.
Corruption is expensive. So, like other forms of spending, we can expect it to scale back when money is scarce. During the last boom period, a company could cover its operational costs, pay off all kinds of vested interests and still turn a profit. Despite the billions of dollars that went out the door for bribes, kickbacks and inflated contracts, Petrobras recorded high net income while the “Car Wash” corruption scandal was at its peak. High prices also incentivized companies to take risks, such as signing suspicious deals or taking on sketchy partners. As part of one risky deal, Shell and Eni negotiated with a politically-exposed money-launderer and proceeded with payments despite suspicions that top Nigerian officials would make off with the funds. The companies are currently on trial for corruption, and they deny wrongdoing.
While it’s impossible to say for sure, the most flagrant kinds of profligacy and risk-taking have likely cooled off a bit. However, as oil market players face historic duress, several governance risks will worsen – and in their most serious forms could constitute corruption.
Cutting costs, cutting corners
First, oil companies are under pressure to cut costs. Headlines are filled with examples of companies shuttering key projects, shutting-in production, laying off workers and reporting financial losses. In response to tough times, executives may choose to cut the budgets of non-revenue-generating divisions such as compliance and reduce the funds available for anticorruption measures such as staff training, project monitoring, third-party due diligence and public reporting.
Companies may be tempted to cut corners too— at a time when regulators may struggle to monitor their behavior. Complying with environmental, labor, health and safety obligations can be expensive, not to mention fully paying one’s taxes. To lower outlays, companies may side-step their obligations, dissuade regulators from doing their job, or exploit weaknesses in regulatory enforcement. This last risk could be even worse than usual. Authorities will struggle to monitor certain company operations while complying with the stay-at-home orders and travel restrictions meant to contain COVID-19’s spread. They’ll also face difficulty keeping abreast of rapidly changing dynamics. The scramble for storage, for instance, has resulted in unprecedented physical oil movements, including ballooning official stockpiles, reopening of moth-balled facilities, repurposing of vessels, and supertankers lining up along coastlines where they’ve never anchored before. These moves require quality controls, environmental protections, sanctions enforcement and other oversight, but will the patchwork of relevant authorities be able to rise to the task under current conditions? Other oversight actors, such as journalists and watchdog groups, face similar constraints (along with worsening repression in many countries), further obscuring the watchful eyes that might deter irresponsible behavior.
Like their private peers, national oil companies are also suffering from the plummeting demand for oil and could be tempted to duck their regulatory or tax obligations. But the cash crunch presents additional concerns in their case. NRGI research suggests that national oil companies tend to disproportionately pass on the costs of price declines to their government shareholders. While national oil company spending tends to decline during downturns, their payments to government decline more sharply. In some cases, this behavior represents a national oil company prioritizing its own ongoing commercial projects, a tendency that authorities may want to guard against. In others, it reflects efforts to steer funds toward vested interests. When prices fell several years ago, Angola’s national oil company went from transferring $25 billion to the government in 2012 to just $6 billion in 2016 – a dramatic plunge that contributed to the country’s financial crisis. Meanwhile, during this same period of economic stress, the national oil company signed contracts with companies tied to the then-president’s daughter and paid them more than $50 million. (She denies wrongdoing.)
Race to the bottom
Second are “race to the bottom” risks. From the North Sea to the Gulf of Guinea, low prices will prompt oil companies to delay or abandon certain projects, especially if their production costs run high. For governments in these locations, stopped projects represent a threat to their revenues and possibly even their political survival. In a possible “race to the bottom,” governments may offer concessions to companies in order to get them to stay, or companies may demand this kind of special treatment. In Colombia, for instance, in the face of the coronavirus crisis, business leaders – including in the oil and mining sectors – requested lower taxes and labor deregulations and sought to abbreviate consultations with indigenous groups and environmental license procedures that “today slow down development.”
Whether any of these “please don’t go” deals constitute corruption will be subject to debate. Public officials could decide behind-the-scenes to alleviate a company’s tax, environmental, labor or other obligations, bypassing the mandated checks and balances. Existing license-holders often have opportunities for ad hoc renegotiations with the authorities which might be very difficult for outsiders to observe, especially in more authoritarian settings. Others will be agreed in plain view.
Either way, if the concessions serve the short-term agendas of political and corporate leaders but undermine the public interest, they count as corruption in my estimation, even if they are done legally. Research from NRGI’s Daniel Kaufmann and others, as well as cases described in Crude Intentions, show that corruption can be legal, especially when top authorities are its beneficiaries and also set the rules of the game. And some of these moves may be labeled and justified as temporary, but then become permanent if strong vested interests are at play.
Undue corporate influence
Finally, oil industry players may exert undue influence over government decisions around company bailouts and other forms of relief. The current situation in the U.S. shows how well-connected industry players line up for concessions when prices drop. The industry has strong ties to those in power. They’ve donated generously to the election campaigns of lawmakers across the nation, through direct donations and contributions to super PACs. Companies spend handsomely on lobbying, and their lobbyists often arrive through the revolving door from Capitol Hill. (Industry lobbyists also find their way back into government, as with the current heads of the Department of the Interior and the Environmental Protection Agency.) Oil companies can use all these channels, as well as cozy informal ties, to bring their case to policymakers.
It’s too soon to say what relief package the industry will receive in the U.S. Last week, the Federal Reserve shifted its Main Street Lending Programs to allow more oil companies to qualify for aid. Other options floated so far include: tariffs to protect the domestic market, paying companies to leave oil in the ground, royalty relief and a special federal lending facility. These moves would come on top of other recent concessions. The Trump administration has gutted transparency rules in response to oil lobby demands and has used the coronavirus crisis to justify stopping the enforcement of major environmental protections. The administration also pushed Russia, Saudi Arabia and other OPEC countries to cut their production, which helps U.S. oil companies—not consumers. At a meeting on 3 April between President Trump and eight energy company CEOs, energy secretary Dan Brouillette pledged, “I just wanted you to know — and for the industry players who are here: We are moving very aggressively. We’re using every tool that we have at the U.S. Department of Energy, not only to provide immediate relief for this particular industry and the economy itself, but also to look for technologies that over time will reduce the cost structure for the entire industry.”
When public officials are tempted to prioritize certain private interests over the wider national interest, the scenario represents a corruption risk. Like its peers around the world, the U.S. government has limited money to spend on two public emergencies: the coronavirus and the related economic crisis. Every dollar spent on the oil industry could have helped the communities bearing the brunt of the pandemic, or the 30 million Americans who have filed for unemployment. The bailout could also run counter to addressing a third emergency – climate change – by propping up unviable (or “zombie”) shale producers in particular. Will U.S. policy reflect these wider concerns, or the economic wellbeing of industry insiders?
As low prices spread turmoil across the oil industry, more familiar forms of corruption will likely persist, such as companies paying bribes to win contracts or national oil companies awarding deals to political elites. But several newer risks deserve special attention from anticorruption actors, watchdogs and transparency advocates, as the current context actually increases the chance that they’ll arise. If they do, the citizens of oil-rich countries will suffer even greater harms during this already challenging time.
