Big Oil And The Bank: Clear And Present Danger

by Stephen Kretzmann

It was early June, in the sweltering heat of Nigeria’s oil capital, Port Harcourt, and the phone was ringing. The man on the other end said he was in town for only a few hours, that he was here representing the International Finance Corporation (IFC), and that he’d like to talk. It wasn’t hard for the staff of Environmental Right Action in Port Harcourt, Nigeria to figure out why he was calling.

Just two weeks before, Washington, D.C.-based nonprofits had revealed that the IFC, the World Bank’s private sector lending arm, was about to approve a $15 million loan which would ultimately benefit Royal Dutch Shell’s operations in Nigeria. Communities, and local environmental and human rights groups, were outraged. Shell is widely blamed in the Niger Delta for the death by hanging of writer/activist Ken Saro-Wiwa in 1995, as well as a host of other human rights and environmental problems associated with oil development. Even the IFC’s own internal documents recognized that association with Shell in Nigeria represented a “reputational risk” to the World Bank Group.

The IFC had a problem on its hands. Although it had been working on the loan for almost two years, it had never formally consulted with the communities who might be affected by the loan — an oversight which represents a serious breach of Bank guidelines, and could have derailed the project. So a small team was quickly dispatched to Port Harcourt to talk to some of the locals. According to Isaac Osuoka, of Environmental Rights Action (ERA), “the man arrived here on a half hour’s notice, talked to me for about twenty minutes, during which I told him we opposed the project, and that was it.”

Back in Washington, though, the loan was speedily approved, now that management had been satisfied that “proper consultation” had indeed taken place. IFC staff claimed to have conducted six consultations with other groups on the ground in Nigeria, and said that only ERA opposed the project. ERA was quick to point out that four of the other five groups that IFC “consulted” were actually funded by the oil industry — and that the fifth was a U.S. academic who had been traveling in Nigeria. It was, according to Nnimmo Bassey of ERA, “a mark of the hypocrisy often termed transparency in the boardrooms of these neocolonial concerns.”

But there is little unique about the Nigeria loan; the World Bank and Big Oil often work together. The World Bank Group currently devotes approximately 20 percent of its lending to energy-related projects, of which the overwhelming majority is devoted to projects that extract or burn fossil fuels. Financing for fossil fuel related projects alone topped $1.3 billion in 2000. Overall, between 1992 and the present, the Bank Group approved funding for more than $18.5 billion in oil, gas, and coal projects in developing countries — about 25 times more than the Bank spent on renewable energy sources such as solar and wind.

Beginning in 1998, rising awareness of the Bank Group’s role in fueling climate change has led to some retrenchment of some World Bank branches’ fossil fuel portfolios. At the IFC, however, little has changed: since 1998, the agency has backed corporate oil, coal, and gas developments to the tune of $2.5 billion.

At base, say critics, the issue is that Bank lending for fossil fuel projects runs counter to the Bank’s stated mission of helping the poor. Lending for fossil fuels actually harms both the poor and the environment, they argue.

A recent internal paper from the IFC offered support for this claim, noting that: “The notion that governments invest incremental rents/returns from extractive industries profitably and for the benefit of poor people is all too often more of an aspiration than a reality. Cross national data from 113 countries between 1971-1997 has shown that oil exports are strongly associated with governance weaknesses — some resource rich governments use royalty proceeds to keep tax rates low, cultivate patronage and increase military expenditures”

Michael Ross, recently a visiting scholar at the World Bank, conducted the study “Does Resource Wealth Cause Authoritarian Rule?” Ross concluded the problems with lending in this sector can be traced to “a rentier effect, which suggests that resource-rich governments use low tax rates and patronage to dampen democratic pressures; and a repression effect, which holds that resource wealth retards democratization by enabling the government to better fund the apparatus of repression.”

Environmentalists have long been concerned about the local and global impacts of fossil fuel extraction, including oil spills, tailing ponds, toxic emissions and other local impacts. While best practices can mitigate some of these impacts, the issue of carbon emissions from fossil fuel projects is not so quickly dealt with.

Research by the Institute for Policy Studies, Friends of the Earth, and other groups critiquing the pattern of international financial institution investments in oil, gas and coal projects concludes the planned projects will vastly accelerate global warming, while also choking off investment in renewable energy and recklessly endangering and displacing local people and environments.

In response to such criticism, the World Bank recently began a "strategic review" of its investments in the oil, gas and mining sectors. According to the Bank’s own reports, lending in these areas represents a “clear and present danger” because of “global concern over inherent sustainability of extractive industries” and “compelling evidence of accelerating global warming.” Environmentalists and human rights advocates remain skeptical of the efficacy of reviews unless the critical question of whether to lend at all to these industries is on the table.

"There is no reason why the richest corporations on the planet deserve any form of public subsidy from the World Bank or any other public institution to continue to pump out more oil, gas and coal,” says Daphne Wysham, coordinator of the Sustainable Energy & Economy Network. “We need to invest our public money in the public good. For the poorest who will be most dramatically and directly harmed by climate change, the greatest public good is to invest every spare dollar in renewables and energy efficiency now."

For the World Bank, it is still business as usual while the studies move forward. After approving the loan for Shell’s contractors in Nigeria, the IFC immediately moved to the next critical piece of funding for the poor. In mid-June, the Board approved a $1.75 million loan for a 4-star hotel in Port Harcourt because “these companies will continue to demand clean reasonably priced hotel rooms.”