On October 9th French oil major Total announced a new offshore oil exploration deal in Guinea (Conakry). Total stated that it plans to use regional ‘know-how and experience’, following its similar interest in Senegal and Mauritania and a commercial presence in Guinea since 1992. Regional experience notwithstanding, Total may face crucial corruption and governance challenges in Guinea, translating to downside business and reputational risks for the company.
Guinea is a fledgling presidential democracy, holding its first elections in 2010. The current president, Alpha Conde, was re-elected in 2015 on a growth and anti-corruption ticket. Guinea is an extremely poor country, ranked in 2015 in 183rd place (out of only 188 countries worldwide) on the UN’s Human Development Index. That said, a GDP growth rate of 5.2% in 2016 is encouraging, stemming largely from the profitable mining sector (gold, diamonds and bauxite). More promising still, Guinea’s Siamandou mountains hold the world’s largest untapped iron ore deposits. Poor governance and corruption, however, have ensured that the ‘El Dorado of iron ore’ remains in the ground, providing valuable lessons for Total, should offshore oil blocks be discovered.
Whilst political stability is slowly improving, Guinean society is still characterised by embedded corruption, adversely affecting the award of large-scale extractives licenses. The Natural Resource Governance Institute – an international NGO – partially attributes this to procedural opaqueness. A lack of transparency, coupled with low public-sector salaries, incentivises corrupt practices where government officials double-up as ‘consultants’ who are paid to secure licenses and concessions. The US government states that it is ‘difficult and time-consuming to conduct business without paying bribes in Guinea’. The often-blurred line between legitimate and illegitimate practices exposes multinationals to acute reputational and business risk. Accordingly, in 2017 the World Bank ranked Guinea 163rd out of 190 countries for ‘Ease of Doing Business’. All of this contributes to a poor enabling environment for investment.
Australian mining giant Rio Tinto encountered many of these problems in Guinea after acquiring Siamandou iron concessions in 1997. In 2008, Rio was stripped of its northern blocks, before seeing them transferred to a state arm and subsequently sold to a rival, an ordeal that is still creating a whirlwind of litigation. After developing its remaining two blocks, Rio is now being investigated by the SFO following unexplained ‘consultancy’ payments of $10.5m. Stanford research shows that corruption scandals damage firm value, something Rio can attest to given their immediate 1.4% share price drop after news broke of the investigation.
Guinea is now a signatory to the international Extractive Industries Transparency Initiative, which publicly monitors natural resource governance. Buoyed by this and by their experience in Guinea, Total will hope to avoid the potential risks outlined here. Nonetheless, Total’s successful operation of gas stations in Guinea is not in itself indicative of a wider or favourable enabling environment for commercial upstream oil investment, especially given the poor governance effect hydrocarbon rents are known to have. The experience of Rio Tinto should incline Total to proceed with caution.
Author: Stanley Fawcett