International Politics of Oil Business Is Constantly Changing

Posted January 12, 2010 at 10:29am

In the oil business, corruption probes almost always mirror the drama of local political musical chairs, as seen by the recent corruption in Ghana involving oil and the Kosmos/EO Group.

[IMGCAP(1)]When I started my career in the oil sector, an old Houston oil man said to me, —Young man, oil is 5 percent technical, 5 percent financial and 90 percent politics!— Many years on, I have yet to receive more insightful or indeed more valuable advice.

Oil is politics. Why? Eighty percent of the world’s oil and gas reserves are held by sovereign nations (from Russia and Venezuela to Saudi Arabia and Nigeria). Most are developing countries with still-evolving political institutions. Indeed, most of them are almost completely dependent on revenues from their oil sector. More importantly, most of the larger economy and all businesses therein, are dependent on cash flows from this sector.

What does this mean? It means within these countries the governments rise or fall depending on how well they manage and, more importantly, how they control these sectors. In most of these countries, the president still must control most of the critical decisions despite having ministers responsible for these portfolios.

In the past, most of these political leaders had no clue about the true value of the concessions they handed out. Their concessions helped create some of the largest companies in the world (Total, BP, Shell, Exxon, Agip, etc.). Now that they do know the value of these corporations, their ability to deal with the oil companies has become even more politically charged, as governments grapple with a conundrum: “Do we continue to create wealth abroad for foreign corporations and their shareholders, or do we create wealth at home and in so doing create oligarchs that could rival our political power?—

As the situation involving the Kosmos/EO Group — the locally controlled Ghanian company accused of corruption — illustrates, trying to keep foreign capital in, while keeping the potential oligarchs within the fold, is a tough balancing act once the political dynamics change.

The Kosmos/EO Group’s role, like many local companies’ involvement across Africa, is critical to the transfer of wealth, knowledge and skills to local economies. More importantly, without the participation of local companies, it would be sheer madness to invest billions in Africa’s fragile new democracies, as they are way too dynamic to predict (like Guinea-Conakry, the Ivory Coast, and Congo), and foreign companies need to have local partners to hold their hands. Choosing who this “someone— tends to be is more of an art than a science and like all good works of art, the aesthetic appreciation changes as the rules of interpretation evolve. Perhaps EO’s art is still valid but now the aestheticians have changed the rules.

Osamede Okhomina is CEO of Energy Equity Resources Limited, an energy company with offices in London and Lagos, Nigeria.