Chad’s Oil Troubles

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Introduction

The oil pipeline agreement involving the World Bank, a U.S.-led oil consortium, and the government of Chad was hailed as a model to help developing nations dig their way out of poverty and avoid corruption. Under the deal, spurred by World Bank funding, most of Chad’s revenues would go toward development projects. But in December, Chad’s parliament voted to modify the agreement, canceling a "future generations" fund for Chad’s post-oil future, and diverting funds away from poverty alleviation and toward the purchasing of arms. The World Bank responded by suspending its loans and freezing Chad’s assets. A temporary agreement was reached April 27, but experts say potential civil war, cross-border troubles with Sudan, and the weakening of President Idriss Déby’s regime may threaten the pipeline deal, casting further doubt on the prospects for transparency in future development projects in the region.

What is the pipeline project?

Low-quality crude oil was discovered in Chad in the late 1960s, but investors hesitated to pour resources into the central African nation over fears of political instability and corruption. But in 1999, the World Bank proposed a plan that it hoped would be a test case for creating transparency and poverty reduction in resource-rich developing nations. In June 2000, the bank, the government of Chad, and an ExxonMobil-led consortium of oil production companies agreed on the proposal for a 650-mile pipeline project running from Cameroon to the Gulf of Guinea. The Bank provided an initial $190 million to kick-start the $3.7 billion project, and oil began pumping through the pipeline, ahead of schedule, in late 2003.

What are the details of the agreement?

As part of the agreement, Chad’s parliament passed the 1999 Petroleum Revenue Management Law. One goal of the law was transparency. The agreement required that Chad’s 12.5 percent share of direct revenues from oil production flow into a London-based Citibank escrow account (monitored by an independent body created to oversee the account’s management).

Another main goal was to channel Chad’s revenue into poverty-reduction programs. The "future generations" fund accounts for 10 percent of annual revenue and was created to provide Chad with reserve funds after the oil reserves are exhausted. Eastern Logone, Chad’s oil-producing region, receives 5 percent of the royalties, while 15 percent of royalties and dividends go to the federal government. The remaining funds from Chad’s portion of the revenue were earmarked for what the bank terms "priority sectors," including public-works, health, education, rural-development, and environmental projects. Chad also receives indirect revenues in the form of taxes, which are unsupervised and used for government expenditures.

How important are oil profits to Chad’s economy?

Chad produces around 160,000 barrels per day, which is relatively small, but its value has grown for the country as world oil prices have soared to near-historic highs. As of December 2005, Chad had exported 134 million barrels of oil and earned close to $400 million in direct revenue, $256 million of which funded poverty-reduction projects in areas like health, education, and the environment, and were outlined by the agreement. In addition, Chad’s gross domestic product (GDP) growth soared from 11.9 percent in 2003, to 29.7 percent in 2004, the first full year of oil production, according to an International Monetary Fund report in October 2005 (PDF). The same report also shows a projected trade balance swing from minus 31.8 percent in 2002 to plus 34.7 percent in 2005.

But despite economic advances, Chad has continued to be plagued by the instability, corruption, and destitution it has known since gaining independence from France in 1960. A large country of 10 million people, four out of five citizens of Chad live in poverty and the average life expectancy is less than forty-four years. Chad was ranked, along with Bangladesh, as the most corrupt nation in the world by the watchdog group Transparency International in 2005.

Why did Chad revise legislation on oil profits?

Chad had been relatively stable since President Déby seized power in a 1990 coup following three decades of civil war. Last year, Déby angered opposition leaders when he changed Chad’s constitution so he could seek a third five-year term in elections on May 3. But his grip on power has weakened since October, when members of the military began defecting in large numbers to join a coalition of rebel groups known as the United Front for Change (FUC), which includes some of Déby’s own family members. In April, government forces clashed with rebels on N’Djamena’s outskirts and put down a coup attempt. Déby’s regime accused neighboring Sudan of supporting the rebels, and threatened to close the border, which would hinder relief efforts helping the 210,000 Sudanese refugees who fled the violence in neighboring Darfur province, as well as the 500,000 displaced that remain in Sudan.

With rebellion growing, Déby looked to oil revenues as a way of bolstering his defenses. Robert Collins, an expert in African history and professor emeritus at the University of Santa Barbara, California, says even when the pipeline project was being hailed as a model for transparency, there were cynics who said: "That’s going to work until Déby wants to buy some guns." In December 2005, Déby overhauled the Petroleum Revenue Management Law, doing away with the "future generations" fund, and doubling the portion of money that would go directly to the federal government to 30 percent. Another change to the law was the inclusion of security as one of the priority poverty reduction measures to allow more arms spending.

Scott Pegg, assistant professor of political science at Indiana University-Purdue University, says the move to amend the law "drove a dagger through the heart of the project." A recent CFR Task Report on Africa says that "benefits have been flowing to parts of the population from early proceeds" but cites concerns about growing instability and Déby’s changes to the revenue-management law. A paper by the humanitarian group Catholic Relief Services contends that the Chad project threatens to be victimized by the all-too-familiar "resource curse" (PDF) that hits developing nations when they suddenly gain riches from resources such as oil or minerals.

How did the World Bank respond to Chad’s amendment of the law?

The World Bank responded in January by suspending disbursement of $124 million in loans to Chad, and froze the country’s $125 million in assets in the London-based Citibank escrow account. In a statement after those moves, World Bank President Paul Wolfowitz said bank officials were still committed to resolving the problem through dialogue.

Officials from the World Bank and Chad’s government found no way around the stalemate when they met in early April, and Chad threatened to stop pumping oil if the World Bank did not release the funds. On April 27, an interim agreement was reached, allowing Chad to increase its share of direct revenue for unsupervised government spending to 30 percent. In return, the World Bank reinstated loans to Chad, which also gets access to one third of the funds in the frozen escrow account over each of the next three months, until a permanent deal is reached. Chad’s government agreed to submit a new budget law guaranteeing that 70 percent of the direct revenue will still go to poverty reduction programs, but the fate of the "future generations" fund for a post-oil Chad has yet been determined.

How might the pipeline project setbacks affect other developing nations?

It may signal obstacles for future projects in the region, most experts say. "While Chad’s crude exports are not significant in global volume supply terms, the importance of any Chadian oil production disruption will be symbolic," says Florence Fee, a former executive with Chevron and Mobil and president of a London-based energy risk management company. "It could signal to investors that the interior of Africa is too high risk politically to warrant high capital investment." Fee also suggests that if there is a disruption, it could open the door to Chinese investment in Chad. The China National Petroleum Corporation is already actively involved in oil production in neighboring Sudan, as well as in Angola and Algeria.

In terms of achieving a model for fighting corruption, "governments will be able to see that they can get around transparency," says Princeton Lyman, a CFR senior fellow for Africa policy studies, who says it is less likely that a mechanism similar to the World Bank’s test case will be set up in the future. Collins concurs: "It’s a big setback for the development of revenue in poverty-stricken countries. The first question to rulers is going to be: ’Will you do what Déby’s done?’"