The Tribune

* Activists: Fund 'insurance' for clean-up

* Say defeats Bahamian wealth-building

* Cite inequality examples in Gov't warning

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Oil exploration royalties collected by The Bahamas' sovereign wealth fund could be used to finance spill/pollution clean-up from the very same activities, environmental activists are warning.

An analysis produced for the Our Islands, Our Future coalition argues that the Sovereign Wealth Fund Act's language effectively permits royalties generated by commercial oil production to be used to finance remediation of the same industry's most harmful effects, thereby undermining the fund's main goal of building wealth to benefit future generations of Bahamians.

The report, by Sea Change Economics, pointed to the Act's "exceptional withdrawals from fund" clause, which would allow the Central Bank to withdraw from the Bahamian sovereign wealth fund an amount beyond the annual limits set for any given financial year.

The "exceptional circumstances" justifying such a move include "devastation caused by man-made natural disasters", a definition that Sea Change Economics said would almost certainly include any major oil spill or pollution-related incident if one were to occur as a result of future Bahamas-based production.

As a result, the economists contracted by Our Islands, Our Future argued that The Bahamas' sovereign wealth fund could ultimately be used as a form of "insurance" in a worst-case scenario that cuts across its main objective.

Noting that the Act was passed at the same time as upgrades to The Bahamas' petroleum industry regulatory regime, designed to facilitate Bahamas Petroleum Company's (BPC) activities, the Sea Change Economics report said: "The Act does define 'exceptional circumstances' that will allow for additional withdrawals from the fund over the regular specified limit.

"Interestingly, the very first of these exceptional circumstances include 'man-made environmental disasters or natural disasters', which would almost certainly include oil spills. Because the intended source of revenue to this fund is the revenue received from offshore oil extraction, this would almost seem to structure this fund as additional insurance to The Bahamas, as funds that came from oil could be used in the event of an oil disaster.

"Unfortunately, this framing would also erode the intended use of this very fund, with payments intended for future generations instead being used as an emergency back-stop." Tribune Business' own review of the Act confirmed the existence of the language referred to in the report, which also questioned whether the proposed sovereign wealth fund as structure could be too reliant on oil and commodity prices.

"The text of the Act explicitly prohibits investment of the fund in Bahamas-related activities, a standard practice in sovereign wealth funds as a way to reduce investment risk and avoid potential corruption," Sea Change Economics added.

"There are no limits on investing in oil extraction outside of The Bahamas. However, in the interests of diversifying risk, it is perhaps worth asking whether the fund and the revenue going into the fund should both be reliant on the state of global oil prices."

The analysis prepared for Our Islands, Our Future and its members also argued that - based on what has happened in other countries where oil has recently been discovered - there is no certainty that the benefits will filter down and be felt at all levels of Bahamian society.

"There are many promises and expectations surrounding the question of how the economy of The Bahamas could be changed if the country becomes an oil-producing nation," it added.

"However, with oil prices at historic lows, a global energy transition underway and an increasingly crowded world market dominated by controlling interests, there is a great amount of uncertainty about whether The Bahamas can realistically expect to benefit from entering the field."

Acknowledging that there were numerous factors beyond the scope of its analysis, Sea Change Economics cited the case of Ghana. While the west African nation's economic output has more than doubled since oil drilling started there, growing from $32.2bn annually to $66.98bn, the employment rate among its working age population was said to have shrunk by 1.54 percent over that period.

While conceding that Ghana's economy appeared to have benefited, Sea Change Economics argued that the country's dependence on oil and other export commodities such as cocoa had left it vulnerable to global market price swings.

"This has played out over the second half of the last decade, as the fall in oil prices since 2015 has reduced Ghana’s oil revenue by half, despite expanding exploitation to two additional offshore oil fields in 2016 and 2017," Sea Change Economics said.

"Unsurprisingly, the COVID-driven oil price freefall has further increased the Ghanian government’s budget shortfall to nearly $1bn, renewing calls for further diversification of the nation’s economy."

Turning to Angola to further make its point, Sea Change Economics added: "On paper, Angola appears to be the best case scenario for entering the global oil market. Since the beginning of commercial oil production in 1999, GDP has grown from $6.15bn to $94.64bn, a 1438 percent increase.

"However, context is important, as the country scores very low on many human development indexes. The wealth from petroleum is more than half of the economy’s value, yet that value has not accrued to the general populace."

Citing Cyprus, Namibia and Lebanon as examples of countries where exploratory drilling has taken place, but commercial production has yet to start, Sea Change Economics also pointed to Uganda as an example where little has happened despite oil having been discovered some ten years ago.

"Uganda may serve as a cautionary tale of the potential delays that countries considering entering the global oil market could unexpectedly face, as contractual and tax disputes, differences between the government and international investors over the portion of oil production to be exported versus refined locally, disagreements over the export pipeline, and, of course, historically low global oil prices have all caused significant delays to what has been an ongoing promise of wealth to its citizens," it added.