Cambodia will have its own oil in 2011, but will this reduce poverty?

By Lang Hokleng | Published on May 1, 2008

PHNOM PENH – In Cambodia, where some 35 percent of the population is living under the poverty line, exploration into offshore oil has raised hopes among government officials and experts that the country will be able to begin to reap the benefits of the resource by 2011. There is a general feeling of optimism that the revenue generated by the mineral resource, sometimes referred to as ‘black gold’, will come to play a major part in reducing poverty.

“We hope to obtain kerosene products from 2011 if there are no obstacles,” Te Duong Dara, Director General of the Cambodian National Petroleum Authority (CNPA), said at a conference titled Fuelling Poverty Reduction with Oil and Gas Revenues: Comparative Country Experiences and held between March 26 and 28, 2008 with global oil industry experts and energy company officials in Phnom Penh. H.E. Sok An, Deputy Prime Minister and Chairman of the CNPA, said at the conference that Cambodia views the production of oil as a “vital step in contributing to the country’s sustained economic development.”

Nevertheless, there are challenges. As Te Duong Dara commented, “the issues surrounding oil production are more difficult than those regarding the establishment of a garment factory. Currently, we have oil resources, but no human capital for this work.” Optimism has also been tempered by poverty reduction experts and high-level government officials, including Prime Minister Hun Sen, who have warned of the dangers of pinning too much on oil exploitation and being premature in calculations regarding the revenue to be generated from oil.

In 2005, a U.S. oil and gas conglomerate, Chevron, discovered six oil blocks, which have the potential to be exploited for 30 years. The oil blocks lie off the coast of Cambodia near the city of Sihanoukville. Chevron works in Cambodia with its minority partners, GS Caltex and Mitsubishi, and is authorized to exploit the country’s offshore oil deposits, having signed a revenue-sharing agreement with the government back in 2003. Chevron controls offshore Block A and is one of a number of foreign companies searching for oil in the six blocks.

Chevron Corporation was founded in 1879 and is the fifth-largest global energy company. Headquartered in San Ramon, California, U.S. and active in more than 180 countries, the company employs approximately 59,000 people worldwide and is engaged in every aspect of the oil and gas industry, including exploitation and production, refining, marketing and transportation, chemical manufacturing and sales, and power generation.

Reports about the oil available in the six blocks have not yet been able to clarify how much of the resource is actually present. “We are not sure yet how much oil lies in these blocks because the natural conditions are not favorable to draw accurate conclusions,” said Te Duong Dara.

However, estimates are in the hundreds of millions of barrels for crude oil and three times as much for natural gas. According to a recent report from the International Monetary Fund (IMF), there may be at least 500 million barrels of recoverable oil in the sea. In a “moderate-case scenario” (one based on assumptions such as production sharing agreements, size of recoverable resources, and oil prices), the report says that income generated would begin at US$174 million by 2011 and peak at US$1.7 billion per year by 2021.

In recent weeks, the Cambodian government has speculated that Chevron would be able to recover 15 to 20 percent of this amount starting in 2011. Plans on extracting the oil and bringing it to shore, and details of Chevron’s commercial terms, are still being discussed. Chevron itself has not commented on the amount of oil it has discovered and on its plans regarding commercial exploitation. A recent statement revealed only that oil and gas in its test wells were “dispersed rather than located in one core field.”

The March conference in Phnom Penh saw the participation of more than 500 stakeholders from outside and inside the country and provided a forum for developed and developing countries to share international best practices for the development and management of their petroleum sectors, according to the press release.

Sponsored by the United Nations Development Program (UNDP), the conference aimed to discuss the management of revenues for sustainable socioeconomic development. This is an ongoing concern for Cambodia’s development partners; poorly managed revenues could lead to serious inflation and wide-scale corruption, among other issues.

Experts at the conference warned that oil production did not guarantee prosperity for all. Jo Scheuer, Director of UNDP Cambodia, said, “economic growth in resource-rich developing countries has been on average two to three times lower than in resource-poor countries. Many assume that the discovery of oil and gas reserves automatically translates into greater prosperity. Unfortunately, this is not the case.” He went on to say that transparency was one of the key factors necessary for oil revenues to have an impact on poverty reduction.

Member of the opposition party, Sam Rainsy, Son Chhay welcomed the new results but said that mismanagement of incomes could make the nation even poorer; “we are happy that we have found kerosene and oil, but we must be vigilant about managing these resources.”

Although GDP growth in Cambodia has averaged 11 percent over the past three years, nearly one-third of the country’s 14 million people survive on only US$0.50 a day or less. This is currently impacted by the price of oil, which has almost doubled since 2004, when a liter of gasoline was around US$0.75. Prices reached around US$1 in 2007 and today have hit more than US$1.25. Diesel prices are at US$1.13 per liter.

Government officials remained adamant that profits from oil would not be wasted. H.E. Sok An claimed that the government has set its sights on long-term benefits rather than short-term gains. During the conference, officials also committed to ensuring sustainable development and poverty reduction from oil production. This would include the creation of a regulatory framework, the development of human resources, and transparency. “If we have the right laws and transparency, foreign investors will bring more business to us,” said Te Duong Dara.