Basic guide to corruption and anti-corruption in oil, gas, and mining sectors
Finding examples of corruption in extractive industries is easy. Corruption is widespread and endemic in the oil, gas, and mining sectors. The most common types are bribery and grand corruption, according to the Bribe Payers Index. Some of the most corrupt countries according to the Corruption Perceptions Index, have large extractive industries. These include Sudan, Iraq, Libya, Venezuela, Angola, Zimbabwe, Nigeria, and others. Petroleum revenue mismanagement in the Niger Delta is a typical case.
Corruption as an extractive industry problem
Countries with abundant reserves of non-renewable natural resources are more often cursed than blessed. A rich body of academic and policy literature has proven this. This resource curse phenomenon is also known as the paradox of plenty. It means that resource-rich countries are prone to suffer certain disadvantages. They are often poor with slow or negative economic growth, have non-democratic governments, and experience civil war. Corruption prevents resource revenue use that benefits economic growth and social welfare.
The resource curse effects are clear in the stark welfare gaps in two petroleum-rich countries: Norway and Nigeria. Norway has managed its oil and gas reserves and revenues to benefit society and future generations. Nigeria has experienced negative economic growth despite its extensive oil and gas industry. Grand corruption explains much of Nigeria’s problems.
Discretionary powers allow for corruption
Corruption occurs when both motivation and opportunity is present. Personal benefit motivates individuals to be corrupt, but they depend on opportunity as well. Official bureaucrats may have vast discretionary powers over natural resources. Opportunities for corrupt behaviour arise when decision-making accountability for these people is low. The perfect scenario for corruption is when:
- a few individuals hold all the power to make certain decisions,
- public information about decision-making is scant,
- procedures to hold decision-makers accountable do not exist, and
- decisions can yield personal (private) rewards for decision-makers.
Oil, natural gas, and minerals and metals are critical energy sources for societies to function. They affect both the economy and national security. In fact, these fossil fuels are the predominant energy source for the world’s population. Because of this, extractive industries are under heavy government controls. Governments limit the public’s insight into their resource management activities. They control permits, licenses, extraction contracts, and tax collection, and enforce environment and safety regulations. These points of contact between authorities and operators present corruption risks.
Governments that depend on natural resource revenues want monopoly control over the sector and earnings. Large sums of money create incentives for individuals in power to grab pieces of the pie for themselves. Some people with decision-making authority actively make money from public resources and keep it for private use. This is called rent-seeking behaviour. It diverts funds away from public welfare spending.
Less democracy = more opportunity for corruption
The resource curse tends to happen in non-democratic countries. The authorities in these places do not rely on people’s votes or tax payments to stay in power. Instead, they sometimes use resource revenues to "buy" legitimacy. They may pay for support from certain groups of society with income from extractive industries, or squash dissent through military spending. Societies without democratic governance systems lack mechanisms to hold public officials accountable to citizens. They are free to act on frequent opportunities to benefit from corruption.
Firms supply corruption to gain advantages
Governments represent the demand-side of corruption in extractive industries. Public officials may demand bribes from companies in exchange for access to resources. On the supply-side we find individuals and organisations using corruption to get access to resources. The supply of corruption increases if the resource is worth a lot of money, is non-renewable, and in limited supply. Combined with strong government resource control – this raises the potential for corrupt firms to gain lucrative advantages.
Firms may view corruption as an easy way to get advantages. These may be access to resources and reduced political interference with their operations. Many also maximise profits by, for instance, evading tax payments.
Large investments and potential benefits increase corruption
Extracting and producing oil, natural gas, and minerals and metals requires large investments and specialised knowledge. Poor yet resource-rich countries often lack both. This increases the risk of corruption. Once a firm has set up a large-scale extractive project and hired skilled workers, closing the operation down is costly. Many firms therefore continue despite demands for corrupt transactions. Years can pass before firms see returns on their investments – another incentive to keep working even with endemic corruption.
Iron ore mining in Guinea is an example of both the enormous benefits and costs of investing in a large-scale extractive industries project. The necessary infrastructure to extract Guinea’s iron ore reserves in Simandou includes railways, roads, and a port – estimated to cost US$20 billion. The benefit is access to a high-quality reserve worth an estimated 7% of global iron-ore output.
Corruption risks in global transactions
Traders who deal in oil, natural gas, and minerals and metals operate in international markets. Buyers and sellers transport high-value commodities across the globe. International financial systems and transactions that facilitate this trade bring their own corruption risks. Tax havens and shell companies help public and private leaders hide wealth. Multinational companies can engage in transfer mispricing to evade tax.