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Homepage > Regions / Countries > Africa > Central Africa > Chad > Oil in Chad: The Fragile State’s Easy Victory over International Institutions

Oil in Chad: The Fragile State’s Easy Victory over International Institutions

Thierry Vircoulon, On the African Peacebuilding Agenda  |   9 Sep 2010

In numerous countries, the exploitation of oil has generated debate about its economic, social and geopolitical consequences. For several years, research has shown a negative correlation between oil exploitation and socioeconomic development, governance and the revival of conflicts in oil-producing countries. Management of oil financial windfall is often opaque and enriches elites who enter into partnerships with oil companies. The economic problem associated with oil exploitation (known as the “Dutch disease”) is coupled with the political problem of the development of a “rentier” state—a rich but fragile entity that despite its growing wealth has socioeconomic disparities. Norway seems to be the only country that has been able to avoid the black gold curse, and its management of oil revenues has been used as a model for economic growth and sustainable development.

Chad’s petroleum project has faced a number of controversies. International observers were concerned with the potential creation of a “rentier” state and its negative impact on governance when the fragile state began oil development in 2003.[i] In response to the international community’s call for sustainable development and alleviation of poverty with oil revenues, the government of Chad agreed to prioritise those objectives and worked with the two main international donors, the World Bank and the European Union, and oil companies to enact strict mechanisms for managing future oil revenues. The World Bank and the European Union were delegated the task of supervising implementation and adherence to the mechanisms. Chadian civil society was also expected to check that the use of the oil revenues was strictly for the alleviation of poverty. Due to the apparent consensus on the management of oil revenues, the various participants in the Chadian oil project tried to comply with the mechanisms based on the Norwegian model in a Sahelian country.

After a public show of accepting the oil revenue management mechanisms, however, the Chadian government radically veered away from compliance. The Chadian government's noncompliance was made possible through the complicity of the oil companies who feared replacement by Chinese competitors. The Chadian government easily and strategically dismantled the agreed-upon governance system to take complete control of oil revenues.

A short-term consensus: From partnership to interference

The World Bank and the European Union’s financial involvement (via the European Investment Bank) was initially seen, not just as a guarantee, but also as a mandatory moral caution to dispel doubts about the nature of the partnership between the Chadian government and the oil consortium that was to exploit the Doba oilfield (ExxonMobil represented by its Esso filial, Petronas Malaysia and Chevron Texaco). In return for their investments, particularly in pipeline construction, the two international organisations required good governance of oil revenues. An oil governance law inspired by the Norwegian model was adopted on 11 January 1999 by the Chadian parliament stipulating the principle of fair and transparent allocation of oil revenues. A part would be saved for future generations, a part would go to an effective fight against poverty, and five percent of the oil revenues would go to the state’s budget. A financial agreement between the World Bank and the Chadian government required the transfer of the revenues to a Citibank account in London to ensure that the money would be spent for the benefit of the impoverished population and future generations.

The European Union lent around €150 million for pipeline construction. It imposed clauses to prevent the Chadian government from directly selling its petrol on the international market and tasked the oil consortium with preventing the Chadian government from bypassing them as a control on the oil revenues. The European Union feared public moral censure if Chadian crude oil profits were used for purposes other than fighting poverty.

Confronted with a growing armed opposition supported by Sudan, the Chadian government suddenly brandished the principle of national sovereignty to challenge the agreed-upon control system. Chadian authorities invoked “the current threats on future generations” (referring to the Eastern rebellion) and demanded the immediate use of oil revenues that were to be reserved for future generations and the addition of defense to the priority sectors originally listed. After amending the oil governance law, the shifting of oil money to the military effort had the expected outcome of defeating the rebellion in 2009.

In reaction to the changes in the original system for oil revenue management, the World Bank announced, on 12 of January 2006, the suspension of all its aid programs in the country and a freeze on oil revenue payments to Chad. Far from forcing the Chadian government to backtrack, the World Bank’s action motivated the government to threaten the oil consortium. Immediately after the World Bank’s decision, the Chadian government ordered the oil companies to directly pay oil revenues to the state or face suspension of their activities. The government also issued an ultimatum to the World Bank that it would close Doba oil production if the sanctions were not revoked. Concurrently, Chad restored diplomatic relations with Beijing and brought Chinese players to the oil game. In January 2007, the China National Petroleum Company (CNPC) bought the assets of Encana, a Canadian company, which allowed it to obtain exploration permits in the Bongor region of southeastern Chad. Capitalising on this opportunity, Chadian authorities gave the CNPC a building permit for a second pipeline to link the Mougo oil site to the future Djemaya oil refinery.

Using nationalist rhetoric, Chadian authorities removed the international institutions’ control over the management of oil revenues. The Chadian Minister of Economy and Planning declared on 7 January 2006: “The World Bank talks about the originality of this law (…), as if Chadian people were ’cobaye‘ for its experimentation of a new type of management or governance[.]”[ii] After taking back control over oil revenues, Chadian authorities now had total control over the resources to carry out their own policies. They ended their partnership with the international institutions and offered to pay in full before the due date the loans forthe pipeline construction. Faced with either accepting full repaymentor a long and uncertain dispute with the Chadian state, the World Bank accepted the loan repayment in 2008 and thus withdrew from a contentious and potentially reputation-damaging investment. The World Bank reactivated its aid programs in 2009. After unsuccessfully trying to leverage political pressure on Chad and given the lack of cooperation from the oil consortium, the European Union, in 2010, abandoned further attempts to convince Chad not to make a deal on crude oil commercialisation. Unlike the European Union, the oil consortium quickly accepted Chad’s commercialisation of part of its crude oil. Meanwhile, the Chadian government initiated arbitration against the European Union. Following the example of the World Bank, the European Union accepted the repayment of the loans and ended the quarrel.

Since then, the World Bank has been completely unwanted in the oil sector. In April 2010, the Chadian government prevented a civil society workshop in Doba in thesouth of Chad, to which the World Bank’s representatives had been invited. The authorities didn’t appreciate this initiative and Doba’s governor justified the decision by saying that the World Bank “is not anymore a Chad partner in the oil sector”.[iii]

The easy dismantling of the internal control mechanisms

The initial transparent management of oil revenues requires that the Comité de contrôle et de suivi des resources pétrolières (CCSRP) endorses the expenditure of oil revenues. The CCSRP was created as a Chadian independent entity composed of state representatives, civil society members and representative bodies. Before authorising the expenditures, the CCSRP has to check if the requests submitted by the government were in conformity with the priority sectors listed by the oil governance law. The committee is composed of a Supreme Court magistrate, a member of parliament, a senator, the National Treasury Director, the National Director of the Bank of Central African States (BEAC), and four civil society representatives. They were appointed for three-year terms and are eligible for a second term. They were all appointed by their peers, except for the National Treasury Director and the BEAC national director who were appointed by presidential decree.

In 2007, invoking the periodic rotation within the CCSRP, the Chadian government removed the Chadian labour representative and two of the civil society representatives, and substituted them with more compliant peers. Other modifications were brought to the CCSRP’s mechanism through decree. Initially, the Chadian government had fifteen days to examine the CCSRP’s reports before their publication. Now, the report examination period was extended to thirty days without any official explanation. The government now has plenty of time to modify the reports to make them conform to its interests. These changes in the CCSRP composition and functioning have neutralised all rigorous internal control, and rendered the CCSRP’s reports and recommendations a simple matter of formality.

What can we learn from the Chadian David’s victory against the international Goliaths?

The failure of the Chad oil governance system was strictly political. The system was applauded as a role model of development when it was created. Created through a consensus of the World Bank, the European Union, the private sector and the Chadian government, it quickly imploded after the unilateral about face of one of the “partners.”

The ease with which a poor and fragile state like Chad disowned the oil governance arrangement and imposed its views on the great powers of the private sector, oil companies, and development aid, the World Bank and the European Union, is perplexing. The World Bank and the European Union seriously underestimated the political risk of the Chad petroleum project. Understandably, the international institutions did not want to deprive a developing country of its revenues. They also neglected the possibility of a reconfiguration of interests to the benefit of the Chadian government and overestimated the commitment of the oil companies to good governance. In the end, the oil companies were the weak link. They did not want to risk denial of new concessions, and, moreover, the Chadian government threatened that it would work with Chinese competitors. This was enough to make them radically change their strategy, taking Chad’s side against the multilateral institutions concerning the commercialisation of crude oil.

More generally, the World Bank and the European Union did not understand the regional and international dynamics. They failed to anticipate the new opportunities created by the rebellion and rising competition amongst Western states for oil resources which allowed Chad to advance its interests outside of the oil governance system. These two factors were enough to obtain the acquiescence of Western countries, namely under the auspices of the World Bank and European Union. They did not hesitate to sacrifice the good governance principle to maintain regional geopolitical balances and control over crude oil. The easy victory of the Chadian David against the international institutions Goliath reveals the post-Cold War realpolitik: democracy and good governance are no longer sacrificed to fight against communism but for the “containment” of radical Islam and control over crude oil. However, this new version of the old policy still leaves the same victims: the population, who are condemned to long-term poverty.[iv]



[i] The Fund for Peace 2010 rating (www.fundforpeace.orf) listed Chad next to last (before Somalia) in the failed state index.

2 Chadian minister of economy and plan press release, 7 January 2007. AFP, 8  January 2006.

3 According to the press release published by the workshop organizers, this quote was made by Doba’s governor who was expressing the views of the internal and territorial affairs’ minister. See press release on the local oil permanent Commission, 22 March 2010.

4 Chad is one of the least developed countries in the world, with a life expectancy of only 51 years-old, a poverty rate of 59% and a literacy rate of 25%.

 
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On the African Peacebuilding Agenda

This article is a post from Crisis Group's blog On the African Peacebuilding Agenda, featuring up-to-date analysis and commentary on issues surrounding Sub-Saharan Africa from the Africa Program.