Corruptible oil

July 27, 2015
Where there's oil, there's also a good chance some level of corruption exists. Such is the case, especially, when you combine poverty and an abundance of one of the world's most precious resources.

Matt Zborowski
Staff Writer

Where there's oil, there's also a good chance some level of corruption exists. Such is the case, especially, when you combine poverty and an abundance of one of the world's most precious resources.

It's a topic that has appeared on OGJ's pages often over the years. One of the better quotes documented by OGJ on the issue came in December 2007, when Diarmid O'Sullivan, then working for London-based Global Witness, spoke at a conference held by the South African Institute of International Affairs (OGJ Online, Dec. 10, 2007). O'Sullivan rather eloquently described oil wealth as "a mild toxin, much like alcohol. If you don't have a strong constitution, it tends to make you unstable."

Still fresh on the minds of industry observers is the bribery scandal that engulfed Brazil's state-owned Petroleo Brasiliero SA (Petrobras), resulting in the resignation of its chief executive officer and several other executives, billions of dollars in write-downs and divestments, and a junk credit rating. Petrobras is something of a reflection of its politically and economically beleaguered nation.

Where corruption's strongest

Even though it was speculated that the scandal could've involved the highest reaches of Brazil's government, the country isn't considered one of 33 countries that constitute an "extreme risk" to businesses, according to research published last month by a UK-based risk analysis and forecasting firm. On its own continent, Brazil still ranks behind Venezuela on Verisk Maplecroft's 2015 Corruption Risk Index (CRI), which in addition to Venezuela, identified energy powerhouses Mexico, Russia, Angola, Nigeria, Iran, Iraq, and Kazakhstan as "extreme risks."

Notably, during 2007-08, Venezuela's state-owned Petroleos de Venezuela SA took over an oil-for-food program in which more than 1 million tons of food were bought for $2.24 billion, but just 25% of it was received. Just 14% of the food was distributed to hungry citizens. In Nigeria, $20 billion are alleged to have vanished from state-owned Nigerian National Petroleum Corp.'s coffers.

Mexico, of course, is undergoing energy reform and determined to attract international investment to reinvigorate its energy sector. Outsiders have cited corruption as a primary deterrent for entering the country despite its potentially large untapped resources. Arnold Spencer of Akin Gump Strauss Hauer & Feld LLP wrote informatively in OGJ's June 1 issue on dealing with corruption in Mexico as reform takes hold (OGJ Online, June 1, 2015).

Trevor Slack, legal and regulatory analyst at Verisk Maplecroft, noted that risk is particularly high in developing economies. "Factors such as weak rule of law and a lack of institutional capacity in these markets undermine efforts to combat entrenched systems of patronage, while exposure to corrupt public officials and a reliance on third-party agents is also higher."

Russia, among the world's leaders in oil production and reserves, has experienced a tumultuous last year with the ongoing conflict in Ukraine and resulting sanctions. Consequently its CRI ranking dropped from an already dubious 24th in 2014 to 10th this year. China and India respectively pose a "high" and "extreme risk" to investors despite Beijing's clampdown on corruption and New Delhi's establishment of a national anticorruption ombudsman.

Transparency, caution needed

"The FBI's probe into FIFA reflects a clear trend," said Slack. "Since the downturn, anticorruption enforcement actions have definitely become more aggressive, particularly by the US, and legislation has become tougher. Identifying geographical patterns in corruption and trends in the performance of countries should therefore be an imperative for business."

Petrobras late last year and early this year responded to the "Car Wash" probe by forming a governance, risk management, and compliance department. But dramatic changes in culture within a country or organization don't happen overnight. The concerns of outside investors in Brazil probably aren't eased by the creation of yet another agency.

Like Spencer outlined for Mexico in his OGJ article, companies operating in corruption hotbeds should take matters into their own hands by establishing a culture of compliance within their organizations. That includes rigorous vetting of third parties amid local content rules. Because these are aspects over which companies can exert some control-and in a manner not much different from an alcohol-awareness class.