Are international oil companies trying to cheat Uganda?

Oil companies, like any other business, exist to make a profit for their shareholders.  Very few people nowadays believe that ‘profit’ is a dirty word or that making a profit through business is inherently wrong.  There is, nevertheless, widespread suspicion of oil companies—especially multinational companies working in developing countries—for several good reasons: 

• Most major companies have been associated with at least one case of catastrophic environmental pollution.

• There have been many developing-country examples of the ‘resource curse.’ International oil companies are by no means solely responsible for this but they are certainly ‘tarred’ by it.

• The big oil companies are really big.   For example, in 2010 the French company, TOTAL, reported global revenues of US$ 209 billion and profits of US$ 13.9 billion. The government of Uganda’s general revenue in the same year amounted to just US$ 2.7 billion.  This disparity of financial resources creates what economists call ‘asymmetric information.’ The companies, compared with many of the governments they deal with, have vast experience of the oil sector and technical capacity for gathering and interpreting technical data.  They also have the money to employ veritable armies of lawyers, accountants and consultants of various kinds.  This gives them profound advantages when negotiating deals with government, and can result in very large profits for the companies.

Oil companies typically respond by saying that they make huge, long-term investments, with substantial risks—including the risk of political instability, or a government reneging on a previously agreed contract—and the companies often have to wait for many years before they see a return on their investment.  This, they say, justifies high profit margins.

Although their main obligation remains to their shareholders, the major oil companies have, over the last 20 years, also formally adopted ‘corporate social responsibility’guidelines and practices. Some critics dismiss this as a mere public relations exercise – trying to improve their public image by building a few schools or clinics in areas whose oil they are extracting.   However, corporate advocates of  ‘social responsibility’ also argue that the long-term business interests of oil companies make ‘sustainability’ a vital concern for them: destroying the environment, alienating local communities and creating bad relationships with government are, simply, bad business strategies that will diminish, rather than increase, long-term profitability.   And, certainly, the ‘oil majors’ are working hard to re-cast themselves as friends of the environment, ‘energy companies’ rather than ‘oil companies’, and harbingers of a cleaner, greener world. (See, for example the Chevron advertisements currently broadcast on DSTV.)

Most economists, however, would still insist that it all comes down to economic incentives.  If an oil (or ‘energy’) company can drive a bargain on highly favourable terms, it will.  Some people call this cheating.  Others just call it business.