Member of the International Board of Transparency International and of the Board of TI France
The extraction and consumption of oil is fuelling the climate crisis. It is, however, still part of our economy and continues to be extracted from many places, including from the depths of the seas and oceans, such as off the coast of Guyana. Contracts signed between governments and companies organize the sharing of this economic wealth between populations and companies. They must be public so that the public knows what share it will get of it. This is the case for any contract signed between a public entity and another entity.
In 2016, the government of Guyana signed an oil contract with ExxonMobil, the main oil producer in this oil-rich country and the largest non-state-owned oil company in the world. The contract was not made public. After months of demands for publication, the government finally relented at the end of 2017. The conclusions that Guyanese and international civil society have drawn from their analysis of the contract have led to demands for renegotiation to which the company so far has not acceded.
The offshore discoveries announced by Exxon since 2015 have made Guyana a very promising oil producer. Production only began in 2019 but is estimated at nearly nine billion oil equivalent barrels for the Exxon Stabroek block, operated in partnership with Hess and Nexen.
The critical importance of Guyana's offshore field to Exxon was highlighted late last year by Exxon's announcement of an after-tax US$17-20 billion write-down and its focus on investing in high value assets, first among which was the Guyana field. According to energy experts, Exxon needs Guyana more than Guyana needs Exxon. At least, Guyana's discoveries are especially important to Exxon.
They are also of utmost importance to the Guyanese people, who waited several years before being able to read detailed analyses of the contract.
In 2019, Kaieteurnews, a major Guyanese publication, released a study comparing the then published Exxon contract with 130 other oil contracts published on Resourcecontracts.org, a platform containing 620 previously published oil or mineral contracts. The study described the Exxon Guyana contract as at the bottom of the scale of all these contracts with a number of exorbitant provisions. These include an income tax exemption, very low employment obligations, deferral of the costs of unsuccessful wells to those of successful wells, no increase in royalties if production improves, insurance premiums and financing costs fully recovered by the contractor, and a public financial contribution to the decommissioning of facilities towards the end of the project.
In relationship to some of those disputable provisions, the government’s share of the future profits was also heavily debated, with two main questions being the percentage of the profit perceived and the total profit in dollar terms over the period of exploitation. The percentage, approximately 50%, was perceived as having been poorly negotiated, whereas the total profits depended on the magnitude of the exploitation, that magnitude raising environmental concerns. The UN human rights committee, in its session of July 2020, asked questions both on the negative effects on climate change from oil offshore production and on the “reports of corruption by public officials” in relation to the 2016 oil licenses.
It appeared that Guyana might have been deprived of at least several tens of billions of as a result of this contract. Guyana is a country where, according to the World Bank, half the population lives on less than $5.50 a day.
The risks of unequal agreements are immense in the oil sector
Deep water oil production is now well established worldwide with more than 10 million barrels per day, or about 10% of total world production, from countries as diverse as Brazil, the United States, Angola, Norway and Nigeria. Civil society in those various countries has a right to know what is negotiated by the government on its behalf and has a right to compare deep water contracts in their domestic waters with those concluded elsewhere.
A recent standard of the Extractive Industries Transparency Initiative (EITI), the world's largest multi-stakeholder initiative for transparency in the extractive industries, states that all EITI implementing countries and companies should publish all contracts entered into or modified as of 2021. It remains to be seen whether this provision, a voluntary initiative, will develop into a global standard. Exxon, as well as Chevron and other major oil companies, from the United States and elsewhere, remain faithful to their official discourse on the subject. They will simply comply with the law wherever they operate.
Respect for the law is the absolute minimum we should expect from any company. But even this minimum standard is not always met. The Transparency Institute Guyana Inc. (TIGI) has pointed out a number of legal breaches in the Exxon contract. Moreover, corporations should go beyond legal compliance and adhere to ethical principles. One of those principles tells us that all contracts entered into by a public entity with any other entity, whether private or public, should be published.
Why? Because public entities are accountable to the public at large. They also often lack the skills and resources needed to successfully negotiate with private interests.
Private companies can choose whether or not to disclose their transactions to their shareholders because they are sensitive to the risk of informing their competitors, and this is the main argument used by companies that still resist public disclosure of contracts with public entities. This is their point of view, but their public co-contractors have to follow another logic that should prevail over the private one in any political society that respects citizens' rights. A contract entered into by a public entity, even with a private entity, should be made public because, like everything else done by a public entity, it affects the lives of citizens.
The risks of unequal agreements are immense in the oil sector, and not only for contracts between governments and international companies. Contracts concluded between governments and very small companies for the sale of exploration blocks deserve to be published in full. To put it another way, with a disclosure obligation some of them would likely never be signed.
Two other Guyana offshore oil blocks were awarded to small companies in 2015. The licenses were then sold to Exxon, respectively 2016 and in 2017, without any noticeable work being done by the initial license owner. BP paid billions off the coast of Senegal for a license that was originally granted to a dubious but well-connected businessman. The Democratic Republic of Congo or Nigeria has also lost hundreds of millions or even billions of dollars in licenses almost given for free to ministers or their friends.
The publication of all licensing awards would deter small companies or individuals, and their friends in government, from entering into deals that clearly do not benefit the population. The huge sums subsequently paid by international companies to buy the licenses and actually exploit the deposits should have gone to governments, and not to the entities that obtained the first licenses at a very low price.
It is also important that oil contracts be published for countries that do not own oil but import it, paying a large part of their own wealth for this indispensable resource. The Gambia was plundered for decades, until 2017, by an autocratic and corrupt regime that is being investigated by public authorities and journalists. International oil companies sold oil to an importing entity that was later proven to have wired money amounts to the head of state's personal account. The publication of all oil supply contracts from that time would certainly help to establish whether the conditions applied corresponded to those in force on the market.
What is true for oil contracts is also true for all other public contracts
In the frenzied years leading up to the 2008 global financial crisis, JP Morgan, the world's largest banking conglomerate, managed to conclude a financial derivatives contract with BVG, the public entity that manages Berlin's public transport system. Through this contract, BVG received a comfortable regular income by agreeing to insure JP Morgan against default on complex debt products. As the products defaulted due to the crisis, JP Morgan sued BVG for more than US$200 million before dropping the lawsuit in the public outcry about having signed such a contract with a public transportation company.
If the Berlin BVG had made the contract public as soon as it was signed, citizens could have warned the authorities of its consequences and obtained its renegotiation or cancellation. While conjecture, if the BVG's managers had known that the contract would be published, would they have signed it?
Is this all in the distant past? A recent study by TI Slovakia shows that out of a sample of 27 major European cities, only one-third publish their contracts on the Internet sufficiently and in a suitable format.
If all of the corrupt contracts entered into by Brazilian public works giant Odebrecht with public entities in Latin America and Africa had been subject to mandatory publication, they might have been signed under different terms. According to a study by the Centro de Integridade Pública (TI Mozambique), if the Mozambican government's loan contracts with local banks were published, interest rates would likely be lower in Mozambique.
If all contracts signed between governments and pharmaceutical companies for vaccines and treatments against COVID-19 were published, instead of being hidden as is very often the case, there would be more competition and lower prices. There would be less corruption and prices would be even lower, and more lives would be saved.
Asymmetry between private and public interests has always been a powerful driver of uneven transactions. This asymmetry is also informational, and it is well known in economics that transactions characterized by information asymmetry must present certain guarantees for the least informed party. In addition to informational asymmetry, the obvious lack of financial skills and sometimes negotiation skills on the part of public entities further strengthens the argument in favour of publishing public contracts. The publication of these contracts is the best guarantee of a fair deal.
Currently, contract transparency in the extractive industries sector is reminiscent of the situation in the late 2000s, when oil companies were strongly opposed to the systematic tax payment disclosure on a country-by-country basis, as such disclosure could only be required by national laws. Companies stuck to their usual and not always well-founded claim that they would always comply with all national laws and they strongly opposed the civil society campaign for global country-by-country reporting in the extractive industries. The provision, applied to extractive companies publicly traded in the United States, was eventually added to the Dodd Frank Act of 2010, a national law of a country, the United States, with immense international economic power.
All U.S.-listed extractive companies, regardless of their country of incorporation, complied with this provision and published their payments on a country-by-country basis. National regulations in other countries have also been amended where they previously prohibited such disclosure to allow companies operating locally to comply with U.S. law. An amendment to the Dodd-Frank Act or a new U.S. law could form interesting approaches to promote transparency in global public contracting in the extractive industries sector. Thus far the US legislator has been more interested in repealing or altering many Dodd-Frank’s reforms, notably through the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) of 2018. It remains to be seen what the Congress elected in 2020 wants to do.
Irrespective of what the US or other legislators may decide, the oil companies themselves have a specific responsibility to the people of their host countries and the governments that represent those people. They extract wealth that belongs to the people and often represents their main opportunity for development. How they intend to share that wealth with the people has to be known to the people.
There is another public responsibility of oil companies. Many offshore fields are now being explored and exploited deeper in the sea, more than 150 meters below the ocean floor. Oil companies are going further because the easily accessible oil resources have been fully used. Deep water production is more uncertain, costs more money and may lead oil companies to want a larger share of the profits. As fossil fuel consumption is accelerating the planet towards climate disaster, would it not be much better to keep that deep oil under the oceans?
The climate crisis is the greatest threat facing our world and the global public interest is very clearly not aligned with the intensification of oil production. Opening contracts to scrutiny may even prevent extractions that would only accelerate the climate crisis. The fight to reverse climate change and the degradations it brings across the globe is the fight of our time. The fight for better, more equitable, sustainable and resilient societies is also the fight of our time. While deep oil production goes on for the time being, it is only fair that a very large share of the benefits be given to the governments of the oil producing countries, and through those governments to benefit the people.
The climate crisis affects the most vulnerable and marginalized communities the most. Development is one of the best responses to the urgently needed adaptation to climate change. The publication of public contracts is a powerful tool to increase the share of profits given to development.
I want to warmly thank Frederick W.A. Collins, B.A., FLMI, the President of the Transparency Institute Guyana Inc. (TIGI), for the time he spent carefully reading this article. My work considerably benefitted from his critical comments and suggestions.
François Valérian is a member of the International Board of Transparency International and of the Board of TI France, a professor of Finance, Regulation and Supervision at Ecole des Mines de Paris – Mines ParisTech, and an associate Professor of Finance at Conservatoire National des Arts et Métiers (CNAM, Paris).