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How Big Oil Became the Perfect Fuel for Corruption

The oil industry is changing, with a whole host of new players jumping on board to profit from the dirty money the trade so easily provides.

by Sefton Darby
Apr 29 2015, 3:00pm

Imagen por Nestor Gallina

Two recent scandals have highlighted the role a new breed of company is now playing in the famously unaccountable oil industry. Earlier in April, the treasurer of Brazil's ruling Workers' Party, Joao Vaccari, stepped down after he was arrested and accused of participating in a scheme with Petrobras, the Brazilian government-owned oil titan that pumps out more than $100 billion in annual revenue. Politicians from various major Brazilian parties allegedly received dirty money from inflated deals between oil and construction firms; scores of congressmen, senators, and executives are currently under investigation.

On April 22, the results of the scandal were finally revealed as Petrobras released its long-delayed audited accounts for last year. Corruption had cost the company a staggering $2.1 billion, it said. Combined with low oil prices, the company has seen a stark reversal of its fortunes from an $8.5 billion net profit in 2013 to a net loss of $7.37 billion in 2014.

How long President Dilma Rousseff can keep the scandal from her door is yet to be seen — as a former energy minister and chief of staff to the previous president she chaired the Petrobras board for seven years. Prosecutors are alleging that hundreds of millions of dollars were diverted from Petrobras construction contracts to politicians, predominantly those from Rousseff's own party, during her time at Petrobras. It is a scandal that will continue to roll on and has decimated Rousseff's approval ratings in the process, helped by a concerted effort by political rivals who are calling for her impeachment. Hundreds of thousands of people have protested against corruption on the streets, while the company has lost billions of dollars in value.

Related: Here's why everyone is so pissed at Brazilian President Dilma Rousseff. Read more here.

Meanwhile, over in China, the former head of the China National Petroleum Corporation (CNPC) Jiang Jiemin, who has been under arrest since 2013, went on trial earlier this month for bribery and corruption. Unfamiliar with CNPC? Well it's probably not the only enormous oil company that you've never heard of. Sinopec (another Chinese oil company) and CNPC came in as being the third and fourth largest companies in the world according to the Fortune Global 500 list last year — behind Walmart and Shell, but ahead of any US oil producer, and way ahead of Petrobras, a veritable laggard as only the 28th largest company on the planet.

Way back in days of yore, the world of oil used to be nicely divided up between two kinds of players (or three, if you looked closely). First, there were the guys who owned and produced most of the oil but didn't venture much beyond their own countries — the government-owned companies of Saudi Arabia, Russia, Iran, Iraq, Venezuela, Nigeria etc. Then there were the big multinationals like ExxonMobil, Shell, BP, and Chevron who made their money out of some oil operations and selling it at the pump, but who haven't been heavy hitters on the global oil production front for ages. Finally, if you really zoomed in, there was a third kind of company: A tiny number of opaque commodity traders (Glencore, Vitol, and Trafigura, for example) who basically acted as middle-men between the first two.

The past decade has seen the emergence of a new kind of player. Or at least, a new mutation of the first kind of government-owned, oil-producing giants. Government-owned oil companies are now playing beyond their home borders and competing directly with the multinationals. Companies like these — China's CNPC, Brazil's Petrobras, India's ONGC, Malaysia's Petronas, and Norway's Statoil, to name a few — now have projects in every corner of the globe, and that trend is on the up.

Related: By Rooting Out Corruption, China Is Risking Its Oil

Statoil and Norway aside, why is there so much corruption floating around this one industry? Partly because it generates truly eye-watering amounts of cash while not actually taking up much physical space (indeed, much of it is offshore) and without employing huge amounts of people. Controlling oil commerce requires far less control of people, land, and infrastructure than other major industries.

The other big factor driving corruption in the oil industry is because the piles of cash are so big and concentrated into a relatively small number of big tax streams and projects. Once the flow of cash is so tightly concentrated, regularly shaving off an otherwise-innocuous few fractions of a percent will make you a very rich corrupt executive or politician if you do it long enough.

This problem is so endemic and severe that many oil rich countries suffer from the so-called "resource curse." In the long run, developing countries blessed with economically valuable resources like oil tend to end up poorer, more corrupt, and more likely to be at each other's throats with knives. The entire corrupt elite of oil-rich autocracies around the world, whether they're kings, princes, mullahs, or shady dictators, are only possible (in part) because they can keep their public at arm's length. They can pretty much ignore the public because they don't need much tax out of them — the various head honchos can just feed off fossil fuel revenue in a kind of "no taxation and no representation either" deal. Look at the list of countries with the longest serving heads of state and you'll see oil everywhere — Brunei, Bahrain, Oman, Cameroon, Equatorial Guinea, Angola, and Iran to name but a few.

On the company side, some have come to believe that they need to shoot first in the corruption wars. If your company won't play dirty then some other company inevitably will, and they'll end up as top dog because of their shady dealings. As the Danny Dalton character in Syriana put it, "Corruption is our protection… corruption is why we win." What Dalton (loosely based on businessman James Giffen and his role in the Kazakhgate scandal) is outlining here is the depressing facts of corruption — the benefits are upfront (you win the contract or avoid tax), and the risks (getting caught) are only of concern in some far-off, distant future. Unfortunately, the people who end up getting short-changed are the citizens of the countries that actually own the oil.

With oil at $55 a barrel you might think that the oil business is less dizzyingly profitable and we'd be seeing less of this stuff. After all, rigs are being parked up around the world. But it doesn't quite work out that way. First off, when you start laying off thousands of employees, all those nasty little secrets start to ooze out. And for those still in the game, the great big bountiful pie that was once enough to feed everyone is now a lot smaller. This means that we can expect to see a fair number of previously cozy deals come unstuck.

As oil prices drop and profit margins shrink, companies are going to get pretty desperate. Which means there's good reason to expect some pretty desperate and shady behaviour around and directed the lawmakers, regulators, and taxmen. Obeying the law, paying your fees and taxes are all nice, easy things to do when times are good. But in leaner times, desperate companies will do desperate things, and that's going to lead them to step up pressure on lawmakers to cut taxes and regulators to ease up.

So what's been happening in Brazil and China could just be a small taste of what's to come. Expect to keep on seeing more dodgy deals exposed in the future, and expect them to be coming from companies that you've probably never heard of.

Follow Sefton Darby on Twitter: @SeftonDarby

Photo via Flickr