Next Stop for Big Oil: Cambodia?

As Chevron and partner Mitsui Oil explore offshore, skeptics worry that Cambodia will fall prey to the "oil curse"

by Susan Postlewaite

A Cambodian smuggler (L) rides his motorbike in Kandal province loaded with gasoline he got from neighbouring Vietnam, some 40 kms south of Phnom Penh. TANG CHHIN SOTHY/AFP/Getty Images

• View Slide Show

In the world of $90-a-barrel oil, oil companies have plenty of incentive to search in unusual places for the fossil fuel. One of the newest energy frontiers is in the clear blue waters off the coast of Cambodia. Here, where fishing sampans sail among scattered, picturesque islands in the Gulf of Thailand, U.S. oil giant Chevron (CVX) has drilled 15 exploratory wells 150 kilometers offshore from the tourist town of Sihanoukville. If all goes according to plan, Chevron will begin extracting oil and gas from these wells by 2011.

Onshore, many Cambodians are watching—some hopefully, others nervously—about what oil might mean for one of the world's poorest nations. Prime Minister Hun Sen has recently called discussion about the oil finds "premature" and "speculative," and will say little about the prospects, which Chevron initially estimated at 400 million barrels. That's not much compared to neighboring Indonesia, with 4.3 billion barrels in reserve, or Malaysia, with 3 billion. But for a poor country like Cambodia, which has precious few energy resources, it's a big deal. Quietly, the premier has been lining up undisclosed partners for a small domestic oil refinery while the Cambodia National Petroleum Authority has begun talking about setting up a national oil company.

How important is oil for Cambodia? The International Monetary Fund produced a "moderate economic scenario" last year that showed revenues to the government from oil could be $174 million when Chevron's production starts in 2011, peaking at $1.7 billion annually after 10 years. For a country with a total national budget of just $1.2 billion, such a windfall could bring such benefits as raises for public teachers now paid $80 a month, rebuilding the education and health systems destroyed during the Khmer Rouge era, or bringing electricity and clean water to the bypassed rural areas that make up almost all of the country. "There are a lot of uncertainties about the amount of oil available," says IMF Resident Director John Nelmes, who explains the $1.7 billion estimate is a conservative one based on total reserves of 500 million barrels.

Overlapping Claims With Thailand

Of course, the size of the estimated oil reserves hardly ranks Cambodia with the big leagues. But the current picture in Cambodia could change. In addition to Chevron's Block A, five other blocks licensed for exploration are so far unexplored. And in an overlapping claims area with Thailand there are huge unexplored oil fields that cover an area as much as all six existing blocks combined. Cambodia and Thailand signed a memorandum of understanding in 2001 to resolve the overlapping claims, but no progress has been made since then and diplomatic ties worsened after Cambodians burned down the Thai Embassy in Phnom Penh in 2003. Cambodia's Deputy Prime Minister Sok An says negotiations are expected to resume soon and he's willing to split the claims "on a 50-50 basis."

The question is, how should an undeveloped country like Cambodia proceed in tapping those resources? The possibility that Hun Sen's government might set up a state-owned oil company and a state-owned refinery horrifies some foreign advisors who worry that Cambodia could fall victim to what economists call the oil curse. That's the phenomenon of corruption in developing countries with state-owned companies that control abundant oil reserves. It's too easy for corrupt government officials to skim profits from state-controlled oil companies, says Warwick Browne, a former extractive industries project manager for Oxfam America in Cambodia.

Having a Phnom Penh-controlled oil and gas company would be "a very bad move," says Browne, adding that such state-owned entities "are black holes for corruption." He says a small national oil refinery would probably not be profitable and the government would have to subsidize sales to the population while forgoing the opportunity to earn needed foreign exchange by exporting to neighboring countries.