I like it when things line up. Syzygy, they call it.
What do Mongolia, Iraq, and Venezuela have in common? (Hint: it’s not oil.)
It’s that they have all recently bumped into the sharp edge of resource reality.
There is something about the discovery of valuable resources that make people and countries take leave of their senses and figure that now they are set for life; they just have to squeeze every penny from the energy or mining companies, sit back and let the money roll in. But this is not the economy for that, not with commodities being hammered the way they have been (and it would have been worse without China), and with national treasuries as depleted as they have become. The cash cow has become lean. Compromises are in order.
In late August, the Wall Street Journal reported
“Mongolia’s Parliament agreed to cancel a windfall-profits tax on copper and gold and took other steps aimed at hastening development of its more than US$3 billion Oyu Tolgoi project, one of the world’s largest undeveloped mineral assets.
The mine, which is being developed by Anglo-Australian mining giant Rio Tinto and Canada-based Ivanhoe Mines Ltd., is viewed as a blueprint for billions of dollars of investments in Mongolia. The country has some of the world’s largest untapped reserves of coal, copper and other commodities… Talks on an investment agreement have dragged on since 2003 and hit a serious snag in 2006, when Mongolia introduced its windfall tax in a bid to capture more profits from its resources. The provision imposed a 68% tax on copper sold above US$2,600 a metric ton and gold priced above US$500 a troy ounce on the London Metal Exchange.”
Not coincidentally, at almost the exact same moment, the Journal was also announcing,
“Iraq is seeking lower upfront payments in its second oil bidding round, hoping to recapture the interest of international energy companies that largely shunned the country’s first attempt to open its oil fields to investment in June.
The country is now seeking signing bonuses of $1.2 billion in total for contracts to develop the 15 fields on offer, Iraqi oil officials and executives from companies involved in talks on the deals said. Iraq’s attempt to auction off contracts for eight fields in June got hung up in large part on its demand for $2.6 billion in so-called soft loans that oil companies were supposed to pay when signing deals.In addition to the lower up-front payments, Iraq this time will allow international oil companies to operate the fields. Terms of the first bidding round had stipulated that Iraqi oil officials would be involved in running the fields.”
It isn’t only greed (considering how rich extraction companies used to get off contracts that disproportionately favored them, countries are right to be suspicious and demanding) that is undermining the incomes of resource countries. It’s policy, and their own investment.
That’s where Venezuela comes in. Investors are hesitating in Venezuela. The Economist recently wrote on the oil sands there.
“It does not help that PDVSA wants a 60% share and operational control in each block while not putting up any money. On top of that the government will take a 33% royalty and a windfall tax.”
Energy specialist Michelle Billig is quoted saying it’s more than the recession that has caused investors to hesitate there; it’s political risk.
Hugo Chavez is famous for using the country’s oil resources not only to fill the coffers but to express his political pleasure or displeasure. This might be more feasible if Venezuela had a history of funneling funds back into maintaining and developing its oil industry itself, but it doesn’t. That expense is left for its investors. And that’s why although Chavez barks and occasionally bites the hands that feed (and try to pet), he has to back-pedal when to lure the money back.
It is right that countries that have nationalized their natural resources (for better or worse) seek every penny they have coming to them — they owe it to their people. But they also owe them a fully developed economy that provides jobs in multiple sectors. Many developing countries, particularly those ruled by political despots, have a long sad history of taking what is offered them and keeping it for themselves. But it’s a negotiated relationship with the extraction companies. This is not the moment of commodity power. Footdragging is no substitute for financial sophistication.
What so many countries ignore is the more they rely on these commodities, the more they see them as the solution to their financial problems and a pot of gold, the more the resource curse inevitably claims their economies. After close to a century and countless promises that the oil would end poverty there, Venezuela’s people are still poor.
