The Dark Side of Power: The drivers of corporate corruption in the energy sector

As the Panama Papers, Bahamas Leaks and Paradise Papers scandals have recently demonstrated corruption is rife in our societies. Although corruption has always constituted a plague for human civilization and has also penetrated into unexpected sectors of our communities, such a criminal phenomenon has traditionally been wildly rampant in the energy sector, and its effects have proved to be extremely dramatic.

In the chapter entitled “The Dark Side of Power: Corruption and Bribery within the Energy Sector,” which has been recently published in the Research Handbook on EU Energy Law and Policy (Edward Elgar, 2017) Rafael Leal-Arcas and Jan Wouters (eds.), I offered a general introduction the topic of corruption and analysed the reasons behind the fact that, almost unexpectedly, over the course of the last decades, it has gradually moved from the margins to the centre of the international political stage.  In particular, I have stressed how the process of economic globalization, mainly consisting in capital and product market liberalization, has dramatically transformed the way in which companies organize their business activities and has had profound effects on the way in which corporations are governed.

Then, I tried to explain why corruption has proved to be particularly invasive in the energy sector. In particular, I have identified at least three key reasons that appear to lie behind the pervasiveness of corruption in the energy sector.

– The first one is the crucial geopolitical importance that energy resources have always had due to the asymmetric distribution of reserves, production, and consumption of natural resources among the globe.  The enormous difficulties that have constantly been experienced at the transnational level in regulating energy trade reflect the uniqueness of such a situation.  As a result, countries’ ability to meet their primary energy needs might well represent a relentless national drive to conclude a contract at any cost even secretly bribing foreign public officials. This is clearly connected with the enormous amount of money usually involved in energy transactions. The investments in the energy sector are usually massive and require a vast amount of funds. As a result, energy companies tend to become giant and enormously rich corporations, which in many cases are also backed by governments.

– The second reason is related to the inherent intrusiveness of the vast majority of energy investments with respect to a country’s environment and social fabric. It is well known that the explorations made to find crude oil and the construction of oil pipelines inevitably entail the causation of severe environmental damages as well as major risks for human health. Besides the potential environmental and health damages, which are extremely difficult to be restored, the construction of energy infrastructures necessitates massive deforestation and dispossession of land schemes. As a result, in order to obtain from the local governments the green light to construct such intrusive and damaging energy infrastructures, industrialized countries traditionally used imperialistic approaches,  then, after decolonization, they have systematically installed puppet regimes.  At the same time, the powerful energy corporations have methodically used corruption as an effective means of obtaining political support or controlling local rulers.

– The third one is that, for historical reasons, the vast majority of countries that are rich in terms of energy resources also appear more vulnerable to corruption. Although, as we have seen, every country, regardless of political tradition, culture or socio-economic status, has experienced bribery, misappropriation of funds and misuse of political position,  developing countries seem to be more exposed to corruption risks and that, in turn, such illicit activities exert adverse consequences on their development. Moreover, low public-sector wages, illiteracy, inadequate management controls and lack of adequate technology for monitoring, poor recruitment and selection procedures, poor working conditions and facilities, lack of public information, and the inadequate capacity to meet the demand for government services, are all factors frequently cited as a source of corruption in less-developed countries.

Finally, I offered the depiction of a recent tale of dishonesty, which is emblematic of the way in which corrupt practices are commonly perpetrated within the energy industry. It is related to the arrest of the Russian Economic Development Minister Alexei Ulyukayev on 15 November 2016, who was accused of corrupt practices because he allegedly received a $2,6 million cash bribe from the Kremlin-controlled Rosneft to facilitate the controversial acquisition of Bashneft. This scandal gave me the opportunity to investigate the reasons why corruption has become widespread in the Russian energy sector. As a matter of fact, since the adoption of the farcical privatization processes that followed the collapse of the Soviet Union, the energy sector has become the privileged hunting ground for the new class of emerging rich oligarchs. This phenomenon was consolidated during the ongoing Putin era. The President used his political influence to pursue a strategy aimed at gaining the complete control of the enormous amount of Russian energy resources and, once obtained the control of the vast majority of Russian energy resources, Putin began to exercise an immense power to benefit himself and his entourage. In order to pursue his political interests, the President used such a power to persuade key individuals, both domestically and abroad, to join his corrupt inner circle. For instance, in Italy, a journalistic inquiry has recently investigated the shady deals that Putin orchestrated to establish a close relationship between the Russian energy companies and Eni SpA, the Italian multinational oil and gas giant.

Within such a grim scenario, the circumstance that many governments, international organizations and NGOs are committed to fighting against corruption is surely admirable and has to be warmly welcomed. However, it is necessary to recognize that, especially in the energy sector, we are still very far away from defeating corruption or even curbing it…

4 thoughts on “The Dark Side of Power: The drivers of corporate corruption in the energy sector

  1. Corporate corruption has always been a problem and will always be a problem. However, the real corruption occurs when corporations become powerful enough to bully the government into creating special carve outs that give them an edge against the competition. As to the topics I know about in your research.

    1) The problems in Nigeria were not the sole fault of the oil companies. The environmental impact of theft of oil (illegal taping of pipelines etc) left a huge economic and environmental / safety issue for the people! So while the oil companies did their part in contributing to the problem you cannot leave out the local criminal organizations that participated in spoiling the environment. While I was in Nigeria the theft rate was close to 50,000bbls of oil per week by illegal tapping.

    2) The economic collapse of 2008 was not the sole responsibility of corporations but of government overreaction to the ENRON scandal of the early 2000’s This required banks and investment houses to put a value on all assets at the end of each business day! The banking sector had been using the Mortgage backed securities to bundle mortgages and sell them as an investment vehicle. Until 2008 they used a cash flow analysis to determine the value of the asset. However the rules changed in 2008 by Washington that they could no longer use this method. Since these mortgages were bundled that banks could not tell how many loans were performing and how many were non-performing so even though they had a positive cash flow they had to be listed on the books as a ZERO asset. Making the largest holders of these assets insolvent on paper but not in reality.

    3) We do need laws to combat corporate coruption in all of it’s forms but doing so taking great care to adhere to the Constitution and the protection of citizens rights! I have always said, “Beware of the powers granted to your own side as one day they will be used against you be the other side when they assume power.” We see this in action today when Obama usurped the power of Congress with his “Phone and Pen” Today his entire legacy has been virtually wiped away using those same powers. We need new laws governing the actions of Congress people! They should be held to the same standard of insider trading as our Corporations are held. Only then will there be justice against corporate ethical lapses.

    That’s just my opinion, I may be wrong and it won’t be the first time either 🙂

  2. Thank you for sharing your knowledge on the corporate corruption in the energy sector. I agree that corruption in this specific sector causes some extremely dramatic effects. I can find myself in the three key reasons you gave that lie behind the pervasiveness of corruption in the energy sector. Moreover, your article inspired me to make a comparison with corruption in the water sector.
    I think it is important to remember that everyone has the right to a dignified existence. Without water or energy this right cannot be guaranteed. Energy and water are not luxury goods, but vital rights as they are indispensable to our health. Everyone needs it to be able to heat their home, cook and many other activities in order to develop themselves.

    Firstly, I would like to compare the fact of the crucial geopolitical importance that energy resources have always had due to the asymmetric distribution of reserves, production, and consumption of natural resources among the globe.
    This element also applies within the water sector. Globally, more than 1 billion people have no guaranteed access to water and more than 2 billion people lack adequate sanitation, with disastrous consequences for development and poverty reduction due to asymmetric distribution. This leads to water crisis and the corruption problems we are seeing today.

    As you stated in this article, the explorations made to find crude oil and the construction of oil pipelines cause severe environmental damages as well as major risks for human health.
    Corruption in supplying drinking water and sanitation facilities occurs across the entire drinking water supply chain, from budgeting to the construction, maintenance and operation of water networks. As a result, investments in the sector disappear, prices rise, and the water supply decreases.

    Nevertheless, according to the Global Corruption Report of the Transparency International Secretariat the fight against corruption in the water sector is still possible. The following recommendations are made: transparency and participation in water policy, stronger regulated supervision and ensuring fair competition.

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