Cash-strapped Cambodia eyes black gold

US oil giant Chevron is poised to prove Cambodia is sitting on oil reserves worth $1 billion annually.

Surrounded by shipping crates and puddles, the equipment stacked on concrete blocks in the center of this dingy port facility on the Gulf of Thailand looks more like scrap metal than anything worthy of protection.

But the piles of metal pipes behind flimsy yellow rope are guarded by an armed security officer, as they may hold the key to this impoverished nation's future.

In the coming weeks, US oil giant Chevron will ferry them hundreds of miles offshore, and use them to reconfirm what many already believe to be true: Cambodia is sitting on a billion-dollar gold mine. Black gold to be exact.

The amount of oil Cambodia will produce in the coming years is likely to have a negligible impact on world markets. But for this impoverished country of 13 million, still recovering from the brutality of the Khmer Rouge and Vietnamese occupation, it could be nothing short of transformative.

"If managed well, this could be a huge opportunity for Cambodia," says Tim Conway, a poverty reduction specialist for the World Bank.

The oil money, says Mr. Conway, "could allow them to make investments in infrastructure, help diversify the economy, and develop schools and resources to help them compete in the region and the world economy.

"The concern is that if it's not handled properly, it could actually make them worse off."

Chevron used 3-D seismic data to survey more than 2,427 kilometers, and drilled five exploration wells last year, hitting oil in four. They've been cautious in public statements, announcing only that they plan to reconfirm their finds with 10 more test wells in the months ahead.

But the government, diplomats, and the myriad aid organizations operating here have been less sanguine. Earlier this month, officials in this southern port town announced plans to construct a massive new port facility to service oil operators offshore, in anticipation of a full-scale oil boom.

Oil companies from China, Vietnam, South Korea, and Japan are all vying for offshore contracts. The UN Development Program (UNDP) identified oil as the best hope for the country's future, and released estimates widely cited in the development community. In Chevron's "Block A" alone, the first of six demarcated offshore zones, the government share of oil and gas revenues are expected to top between $700 million to $1 billion a year.

By some estimates – according to the UNDP – it's not unreasonable to believe that in the coming years, revenue from gas and oil deposits will more than double Cambodia's GDP, which now stands at about $5 billion (much of that is from foreign aid). And that's not even counting the disputed zones between Thailand and Cambodia, which could be the richest of all.

"I think that the oil and gas in the overlapping area is 10 times bigger than the oil [in] Block A," says Men Den, director of exploration at the National Petroleum Authority.

So why then are development experts wringing their hands? The list of developing nations ruined by the "resource curse" is a long one, many say.

Over the past 35 years, per capita incomes in countries with a dominant, nonrenewable resource grew two to three times slower than those of resource-deficient countries, according to one paper prepared by the Overseas Development Institute.

Many diplomats and NGOs in Phnom Penh worry that the oil and natural gas – which could start flowing as soon as 2009 – could reverse more than a decade of poverty alleviation and transform Cambodia into a full-scale kleptocracy.

Nigeria is the textbook case of what could go wrong, according to the UNDP.

It raked in more than $450 billion in oil money over the past 35 years, yet 60 percent of the population lives on less than $1 a day and the country is carrying a $30 billion debt.

It may be possible to head off such a dire fate, but only time will tell. Soy Sokha, economic adviser to Cabinet Minister Sok An, said: "It's too early to think about using the revenue for education or public health. We must go step by step."

But revenue planning, experts say, is exactly what's needed. If not properly managed, resource booms create inflation, which can drive down the value of foreign currency and reduce the competitiveness of other domestic products on world markets, experts say.

The phenomenon is so common it's even got a nickname: "Dutch disease," so named because that's what happened in the Netherlands when it discovered large reserves of natural gas in the North Sea in the 1960s.

Time and again, experts say, resource revenues have also eroded the links between government leaders and the people they serve. Since the government is no longer dependent on taxes to finance its operations, leaders start to feel they have no obligation to the people, according to the UNDP and World Bank. Violence often becomes the means of protecting the wealth of a small oil oligarchy.

Foreign economic advisers operating in Phnom Penh have long tried – with limited success – to convince the government to deal with the structural problems that predispose a country toward the resource "disease."

Here, corruption is a major problem and transparency is a constant challenge. The National Assembly and Senate have shown little ability to exercise effective oversight on budgetary matters. "Without a fundamental shift in the role of the state," the UNDP report warns, "it's unlikely Cambodia will realize its potential."

But the good news is that some developing nations have managed to avoid the "curse." Indonesia reduced its poverty rate by 86 percent and tripled its per capita income between 1975 and 1990, according to the UNDP.

But, says Chea Vannath, former president of the local Center for Social Development, if action isn't taken soon, the results are only too predictable: "The poor will become poorer and the rich will become richer."