Editorials Opinion and Analysis
The Risk Premium
(Page 2 of 6)
Members of MEND were the very people who kidnapped Russell Spell and eight co-workers and have since claimed responsibility for still more kidnappings and acts of sabotage. That same year—MEND’s first in operation—the organization and similar groups kidnapped 128 foreign nationals, shut down 25 percent of Nigeria’s oil production, and helped drive crude oil prices close to $80 a barrel, according to the Norwegian-based international security consultants Bergen Risk Solutions.
Most American consumers understand that the invasion of Iraq has contributed to the skyrocketing cost of crude. It’s the war premium, what the market adds to the price of a barrel of oil because the crude that once flowed from Saddam Hussein’s fields is now less dependably available. Americans are less aware, however, that there is another reason why the price of oil has blown past $100 a barrel and gasoline is approaching $4 a gallon: The countries around the globe where oil remains available in abundance are increasingly dangerous places to operate, with corrupt governments that are indifferent to the welfare of their citizens, in turn inspiring the proliferation of guerrilla groups like MEND. The cost of drilling in these venues—of attracting and protecting workers, of losing work time due to sabotage, of paying ever higher insurance premiums, of making quasi-legal payoffs that are part of doing business, of providing medical treatment for kidnap victims like Spell, of defending lawsuits, in short, the cost of everything that can go wrong in a destabilized country rich in oil—gets figured into the price of every barrel. The cost of doing business in this dangerous world—a cost all of us pay at the gas pump—is called the risk premium.
No one likes to discuss oil’s risk premium very much, particularly in Texas, because the talk is believed to encourage violence and increase costs, not to mention scare off potential employees. In the big picture, the risk premium is a worldwide concern, but it also hits close to home, because what affects oil affects Texas. The companies and the workers who bear the risk—financial in the case of the former, life and limb in the case of the latter—are disproportionately Texan. The experience of Russell Spell and others like him influences the employment practices and business decisions of major Texas companies, shapes the rulings of Texas courts, and affects the costs of Texas medicine.
In oil, as in war, the job of protecting vital American interests has been contracted out to private companies, whose employees can find themselves in harm’s way. In war-torn Iraq, more than a thousand workers for Halliburton and other contractors have been killed while trying to deliver toiletries or packaged foods to American soldiers. In oil-producing countries like Iraq, Venezuela, Mexico, Nigeria, and those parts of the former Soviet Union that have been corrupted by the Russian mob, American workers similarly find themselves caught up in resource wars. These countries may be rich in oil and gas, but they are rent by social inequities. American companies that undertake the exploration and exploitation of these resources can easily find themselves grappling with civil strife, growing anti-Americanism, the constraints and stark penalties of the Foreign Corrupt Practices Act (FCPA), and the potential for lawsuits from employees who find themselves unprotected in life-threatening situations. As long ago as 1998, in Cabinda, Angola, a four-car motorcade containing thirty employees of a major oil company was attacked near the local airport by a rocket-propelled grenade. Today, radicals who once sabotaged pipelines in Colombia have moved on to Venezuela. Every such incident adds to the cost of producing oil. Not surprisingly, Exxon Mobil recently announced that it would spend $1 billion a year on exploration in safer, if less promising, locales like Germany, Greenland, and New Zealand.
The private security business has burgeoned as the threats grow. “It’s become a number one priority. Companies have to protect their most precious commodity, which is personnel,” says security expert and former Bush confidant Joe Allbaugh, the CEO of the Allbaugh Company. Willbros at one time had a group that did nothing but repair damaged and sabotaged pipelines in Nigeria. The promotional materials for London-based Control Risks state, “If a client falls victim to an incident such as kidnap, extortion, illegal detention of employees, or product tampering, Control Risks will deploy consultants to advise on negotiation strategies and liaise with law enforcement, families, and the media. We have handled more than 1,400 such crises.” A company called Worldwide Employee Assistance Programs now offers treatment for oil company kidnap victims suffering from post-traumatic stress disorder. Chevron has an in-house attorney who specializes in lawsuits brought by employees who have been kidnapped.
Because oil is often found in remote places, contractors have always had to construct entire cities—with roads and airports and sewage treatment plants—in order to keep their people comfortable. Now compounds and job sites also have to be secure, which means the cost of construction and protection has gone up. Workers must be ferried to and from job sites in armored vehicles with (hopefully) trained guards.
The complexities of the Federal Corrupt Practices Act can also ensnare oil companies. The rule of thumb is that bribes to smooth the way for operations do not bring the FCPA into play, but companies that pay to win or extend contracts can end up as defendants in a major lawsuit or criminal prosecution, with legal fees that start at $3 million. As an executive for one major contractor told me, a pipeline that might take two months and cost $60 million to build in the U.S. would take at least six to eight months and cost a minimum of $150 million in Nigeria. “Your imagination isn’t big enough to figure out how Nigerians can separate you from your money,” he said. Still, the delta’s sweet, cheaply refinable crude is a siren song to Big Oil, especially because it can be shipped easily to markets in Western Europe. Nigeria pumps more than two million barrels a day, worth about $84 billion a year. It provides a crucial 14 percent of American imports.
That is pretty much the extent of the good news. Nigeria is the poster child for high-risk oil exploration and production, a living testament to the so-called oil curse. This holds that countries rich in oil wealth tend to have stunted economic growth—agriculture and industry wither and corruption thrives—because all the focus is on one incredibly lucrative business. “Everything is extracted and nothing is produced,” explains University of Houston history professor Kairn Klieman, who offers the only course in the U.S. on Africa and oil. “The political culture is, ‘I don’t have to produce.’ ” According to Bergen Risk Solutions, oil accounts for 90 percent of Nigeria’s export earnings and fully 80 percent of the government’s revenues—but somehow 85 percent of the money ends up in the hands of 1 percent of the population. Twice the size of California, with an estimated 148 million people, Nigeria is the most populous country in Africa and eighth in the world, but 70 percent of its people live on less than $1 a day. It is one of the most corrupt countries on earth, rated 2.2 out of a best possible score of 10 on Transparency International’s 2007 Corruption Perception Index. An estimated $400 billion has been lost to corruption since the country gained independence from Britain, in 1960, and 14,000 people have been killed in violent outbreaks since military rule supposedly ended, in 1999.
In other words, oil and oil field service companies must operate in a tinderbox in which the Nigerian government is located in the north and the oil is located in the south; the wealth is shipped north, while the people who live in the south get virtually nothing. There, millions of desperately poor people live in primitive villages with no electricity or running water. In the urban wasteland that is Lagos, Nigeria’s largest city, they live under the freeways in shanties, their cook fires coating the air with a sticky brownish haze. If you blow your nose in the polluted air, your mucus will be black. The government enjoys an enviable split with its multinational oil partners—taking anywhere from 50 to 80 percent of the revenues—but public services are few to nonexistent; the government functions primarily to enrich the officials who collect money from the foreigners who come to extract oil. A former governor of Delta State, James Ibori, managed to accrue his own jet, his own Mercedes Maybach, and some pricey London real estate. Not only do foreign companies have to pay bribes to import workers (most of the locals are too uneducated to be trained), but they must also pay bribes to get out of the airport, to get into their hotel, to bring equipment into the country, to appease local landowners, and much, much more. American companies face even bigger problems: If the bribes violate the FCPA, American companies will find federal investigators at their door.
The difference between common thieves and groups like MEND is one of sophistication and ambition. Once, oil companies paid small bribes—a “suggested list for Christmas gifts” from one local potentate featured a cow, fifty yams, four cartons of wine, beer, and Maltina (Nigeria’s premier malt drink), along with 250,000 nairas (a little more than $2,000). A kidnapping used to be a low-key fundraiser in which a small ransom would be paid—maybe just a few hundred dollars—and the employee would be back at the compound in time for dinner. A Nigerian Web site, Oyibosonline.com, which hasn’t quite come to grips with the current explosion of violence, offers nine T-shirts printed with kidnapping slogans, including one that says “Kidnapping, Nigeria’s fastest growing industry.”
Pages: 1 2 3 4 5 6 next>>
