Caspian Oil Windfalls: Who Will Benefit?
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C aspian Oil Windfalls: Azerbaijan and Kazakhstan urgently need measures that guarantee accountability, transparency, and public oversight in their oil industries. Caspian Oil Windfalls: Only then will the two countries stand a chance of using oil and Who Will Benefit? natural gas revenues to raise living Who Will Benefit? standards for their people and lay the basis for healthy, long-term economic growth. Svetlana Tsalik Foreword | Joseph E. Stiglitz CASPIAN REVENUE WATCH OPEN SOCIETY INSTITUTE OSI Central Eurasia Project Caspian Oil Windfalls: Who Will Benefit? Author Svetlana Tsalik, director, Caspian Revenue Watch, Central Eurasia Project, Open Society Institute Editor Robert Ebel, director, Energy and National Security Program, Center for Strategic and International Studies Contributors Ingilab Akmedov, director, analytic information agency Trend and the Public Finance Monitoring Center in Azerbaijan Sabit Bagirov, chairman, Transparency International in Azerbaijan, and president, Entrepreneurship Development Foundation and Center for Economic and Political Research in Azerbaijan Richard A. Fineberg, consultant and analyst on economic and environmental issues related to Alaska and global petroleum development Richard G. Steiner, professor and associate director, University of Alaska Marine Advisory Program, Anchorage, Alaska Joseph E. Stiglitz, professor of economics and finance, Columbia University, New York City, New York, and author of Globalization and Its Discontents Caspian Oil Windfalls: Who Will Benefit? Svetlana Tsalik Robert Ebel, Editor CASPIAN REVENUE WATCH OPEN SOCIETY INSTITUTE Central Eurasia Project © 2003 by the Open Society Institute. All rights reserved. ISBN 1-891385-30-5 Library of Congress Cataloging in Publication Data A CIP catalog record for this book is available upon request. Published by the Open Society Institute 400 West 59th Street, New York, NY 10019 For more information, contact: Caspian Revenue Watch Central Eurasia Project Open Society Institute Tel: 1 212 548 0600 Fax: 1 212 548 4607 [email protected] http://www.eurasianet.org/policy_forum/crw.shtml http://www.soros.org Designed by Jeanne Criscola|Criscola Design Printed in the United States of America by Herlin Press, Inc. Cover photos by Steven Weinberg, www.stevenweinbergphoto.com Caspian Revenue Watch The Caspian Revenue Watch (CRW) is a program of the Open Society Institute’s Central Eura- sia Project, which sees the transparent use of revenues generated by the sale and transport of Caspian natural resources as an issue of great importance for regional development and the pro- motion of civil society. The Caspian Revenue Watch aims to generate and publicize research, infor- mation, and advocacy on how revenues are being invested and disbursed and how governments and extraction companies respond to civic demands for accountability in the region. CRW also supports projects that build the capacity of local advocates to monitor government revenues. It seeks to help ensure that existing and future revenue funds in the region be invested and expended for the benefit of the public—for example, to reduce poverty, reform education, and improve public health—through the promotion of transparency, civic involvement, and govern- ment accountability. Central Eurasia Project The Central Eurasia Project (CEP) of the Open Society Institute acts as a policy center, grant- making program, and OSI liaison for Soros foundations and programs in the South Caucasus, Central Asia, Mongolia, Turkey, Afghanistan, and the Middle East. It promotes public aware- ness about policies and developments in the region through its website, EurasiaNet, the Open Forum meeting series, and the Eurasia Policy Forum, which helps develop policy and advocacy initiatives. CEP awards grants to local nongovernmental organizations and international groups that promote human rights and civil society. CEP provides support to Soros foundations in Arme- nia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkey, and Uzbekistan. It also awards grants relating to Iran, and is exploring initiatives in Turkmenistan, the Middle East, and North Africa. Open Society Institute The Open Society Institute (OSI), a private operating and grantmaking foundation based in New York City, implements a range of initiatives to promote open society by shaping government pol- icy and supporting education, media, public health, and human and women’s rights, as well as social, legal, and economic reform. To foster open society on a global level, OSI aims to bring together a larger Open Society Network of other nongovernmental organizations, international institutions, and government agencies. OSI was created in 1993 by investor and philanthropist George Soros to support his foundations in Central and Eastern Europe and the former Soviet Union. Those foundations were established, starting in 1984, to help former communist coun- tries in their transition to democracy. OSI has expanded the activities of the Soros foundations network to other areas of the world where the transition to democracy is of particular concern. The network encompasses more than 50 countries with initiatives in Africa, Central Asia and the Caucasus, Latin America, and Southeast Asia, as well as in Haiti, Mongolia, and Turkey. OSI also supports programs in the United States and selected projects elsewhere in the world. v Caspian Revenue Watch Advisory Board Natalia Ablova Director, Kyrgyz-American Bureau on Human Rights and Rule of Law Terry Adams Senior Associate, Cambridge Energy Resources Associates Director, Caspian Energy Program, Department of Energy Law, University of Dundee (Founding President, AIOC Consortium, Azerbaijan) Patricia Armstrong Human rights consultant Sabit Bagirov Chairman of the Board, Transparency International, Azerbaijan (Former President of Azerbaijan State Oil Company) Gordon Barrows President, Barrows Company Mikhail Chachkhunashvili Chairman of the Executive Board, Open Society Georgia Foundation Edward Chow Visiting Scholar, Carnegie Endowment for International Peace International oil and gas consultant Robert Corzine Director, Asymmetric Associates Independent energy consultant Arthur Drache Partner, Drache, Burke-Robertson & Buchmayer Robert Ebel Director, Energy and National Security, Center for Strategic and International Studies Jonathan Elkind Independent consultant (Former Director for Russian, Ukrainian, and Eurasian Affairs, National Security Council) Richard A. Fineberg Independent analyst of Alaskan oil and environmental issues Bennett Freeman Independent consultant (former Deputy Assistant Secretary of State for Democracy, Human Rights and Labor) Arvind Ganesan Director, Business and Human Rights, Human Rights Watch Scott Horton Partner, Patterson, Belknap, Webb & Tyler LLP vi Terry Karl Professor, Department of Political Science, Stanford University Richard Kauzlarich United States Institute of Peace (former United States Ambassador to Azerbaijan) Sergey Kuratov Chairman, Ecological Society, Green Salvation, Kazakhstan Karin Lissakers Advisor to George Soros, Soros Fund Management (former United States Executive Director, Executive Board of the International Monetary Fund) Douglas Norlen Policy Director, Pacific Environment and Resources Center Stewart J. Paperin Executive Vice President, Open Society Institute Anthony Richter Director, Central Eurasia Project, Open Society Institute Laurent Ruseckas Director, Caspian Energy, Cambridge Energy Research Associates Miguel J. Schloss Executive Director, Transparency International, Germany Isaac Shapiro Senior Fellow, Center on Budget and Policy Priorities Sergey Solyanik Vice-Chairman, Ecological Society, Green Salvation, Kazakhstan S. Frederick Starr Chairman, Central Asia Institute, Johns Hopkins University School of Advanced International Studies Richard G. Steiner Professor, University of Alaska Marine Advisory Program Simon Taylor Director, Global Witness David Usupashvili Rule of Law Project Deputy Chief of Party, USAID Evgenii Zhovtis Director, Kazakhstan International Bureau for Human Rights and the Rule of Law Sergey Zlotnikov Executive Director, Transparency International, Kazakhstan vii Contents Foreword | xi Acknowledgments | xiii Map | xiv 1. The Hazards of Petroleum Wealth Introduction | 1 The Resource Curse | 3 Reasons for the Resource Curse | 5 Implications for Caspian Petroleum Exporters | 10 Chapter Summaries | 12 2. Natural Resource Funds: Case Studies in Success and Failure Introduction | 17 Alaska Permanent Fund | 19 Alberta (Canada) Heritage Savings Fund | 26 Venezuela’s Stabilization Investment Fund | 30 Chilean Copper Fund | 33 Norway’s State Petroleum Fund | 36 Chad’s Oil Revenue Management Plan | 40 Oil Funds in the Persian Gulf | 44 Nunavut Trust of Canada | 46 Making Funds Work: Lessons Learned | 49 3. Securing the Take: Petroleum Litigation in Alaska Richard A. Fineberg Introduction | 53 What Drives Host-Industry Disputes? | 55 Alaska’s Petroleum Litigation | 57 Caspian Basin Development | 63 Conclusion and Recommendations | 66 viii 4. Models of Public Oversight of Government and Industry Richard G. Steiner Importance of Informed Public Participation | 71 Structure and Function of an Alaskan Regional Citizens’ Advisory Council (RCAC) | 75 Lessons Learned | 79 Public Oversight in Developing Democracies | 83 Challenges and Opportunities for RCACs in Azerbaijan and Kazakhstan | 85 5. State Oil Fund of the Azerbaijan Republic Sabit Bagirov, Ingilab Akhmedov, Svetlana Tsalik Introduction | 89