Can Africa dodge 'curse' of new oil wealth?

Is oil a blessing or a curse?

That question will ripple across many African nations in the coming decade as technology and geology converge to unlock billions of barrels of oil in underdeveloped countries where many live below the poverty line.

The prospect of oil and gas production fueling economic growth in Africa is matched only by the threat of the corruption, exploitation, and environmental devastation that often follow windfalls.

The downsides of mineral wealth extraction – be it diamonds, gold, or coal – have long been on display in Sierra Leone, South Africa, Ivory Coast, and elsewhere across the continent. In North Africa and parts of coastal West Africa, the extraction of oil is a decades-old industry, plagued by terrorism, theft, and greed. 

But a new crop of countries – particularly in East Africa – are on the verge of a new boom in oil and natural gas production, many analysts project. There's hope that this time around, better governance, increased transparency, and innovative financial models can mitigate the ill effects of a "resource curse." It will not be easy. 

“The dynamics of this are so tenacious, and the propensity for lower income countries to fall into the political and cultural dynamics of a resource curse are so overwhelming, that you basically have to do everything you can possibly think of [to avoid it],” Larry Diamond, a senior fellow at the Hoover Institution, a think tank at Stanford University in Stanford, Calif., says in a telephone interview.

Traditionally, oil wealth comes into national treasuries via revenue-sharing schemes or royalties paid to governments. In theory, that wealth is then spread among citizens in the form of investment in public services, infrastructure improvements, or other forms of distribution.

It's a workable system in a stable, functioning democracy, but many oil-wealthy African countries lack the transparency and accountability that prevent state officials from mismanaging resource wealth or keeping it for their own personal use. 

"Unfortunately, most countries having these discoveries have weak bureaucracies that don’t distribute money efficiently, and a lot gets lost on the way," says Todd Moss, vice president for programs at the Center for Global Development, a Washington-based think tank that promotes alternative distributions of resource revenues. "You put more money in the system and the corruption level just goes up," Mr. Moss says in a telephone interview.  

Learning from the past

Equatorial Guinea, as Mr. Diamond points out in a recent essay in Foreign Affairs on oil in Africa, is a prime example of what can happen to oil wealth on the way from the well to the wheel.

Between the early 1990s and 2008, the country's domestic product increased more than 5,000 percent as it became the fourth-largest oil producer in sub-Saharan Africa, according to a 2009 report by Human Rights Watch. Over the same period of time, infant and child mortality rates increased from 103 deaths per thousand in 1990 to 124 per thousand in 2007. Government oil revenues rose to $4.8 billion in 2007, from $190 million in 1993, according to the International Monetary Fund, but 77 percent of the population was living under the poverty line in 2006.

The personal wealth of the country's leaders and their family, meanwhile, has skyrocketed. Teodoro Obiang Nguema Mbasogo, Equatorial Guinea's longtime president, and his family have spent millions buying mansions and other assets in California, Washington, and elsewhere. Alleging foreign corruption, the US Department of Justice filed a motion in October 2011 to seize $70.8 million in assets from President Obiang's son, a government worker with an official salary of less than $100,000 per year.

"While his people struggled, he lived the high life – purchasing a Gulfstream jet, a Malibu mansion and nearly $2 million in Michael Jackson memorabilia," Assistant Attorney General Lanny Breuer of the Justice Department’s Criminal Division said in a press release at the time.  

In some cases, oil wealth is siphoned off before it can even reach government coffers. Nigeria lost over $11 billion to crude oil theft and pipeline vandalism between 2009 and 2011, according to the Nigeria Extractive Industries Transparency Initiative. Total crude production for the period was over 2.5 billion barrels, valued at $143.5 billion.

Oil leaks are a common occurrence in Nigeria, damaging local waterways and crimping farming and fishing activities. In 2008, two major oil spills sent between 500,000 and 600,000 barrels into the Niger Delta. The environmental devastation ended work for about 13,000 fishermen in the area. 

Those hardships loom large over Tanzania, Kenya, Uganda, and other East African countries poised to develop new oil and natural gas resources. 

Investment in East Africa's oil infrastructure will reach $7 billion by 2018, according to an October forecast by Wood Mackenzie. Oil and gas production in the region should triple over the next five years, from around 500,000 barrels of oil equivalent per day to 1.5 million barrels.

Solutions moving forward

There are reasons to think the region might be better able now than in the past to handle the sudden influx of investment. Led by the global Extractive Industries Transparency Initiative, countries are increasing efforts to publicly document the transactions between energy companies and governments.

There is also experimentation with alternative wealth distribution models that transfer oil cash directly to citizens as taxable income. The idea is that such a system makes governments more dependent on, and thus more responsive to, its tax-paying citizenry. A similar system in place in oil-rich Alaska is hailed as a model, but there are significant political and logistical obstacles to replicating it in East Africa.

Still, there is the hope that burgeoning East African democracies will be better equipped with the politics and infrastructure needed to harness an oil and gas boom. 

"I have always said that God loves Kenya so much that he hid the oil from us all these years," writes Mwangi Kimenyi, director of the Africa Growth Initiative at The Brookings Institution, a think tank in Washington.

Thirty or forty years ago, Mr. Kimenyi writes in an e-mail, the country did not have the institutional infrastructure for wealth management and a discovery of oil would have likely made Kenya a victim of the resource curse.

But today, the country is advancing governance, transparency, and better resource-sharing models, Kimenyi writes.

"In a sense then, risk of resource curse is much lower than would have been in the past," he writes. "Furthermore, the country has a very powerful civil society that has a powerful voice and will demand for transparency in the exploitation of oil."