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Caspian Sea: Oil-Rich Caspian Nations Should Emulate Norway's Model

This the first in a two-part series examining issues related to exploiting the oil and gas resources of the Caucasus and Central Asia. The second part deals with the prospects for the Caspian's oil and gas sector.

London, 9 July 1999 (RFE/RL) -- A leading Western oil executive is warning that the rich oil and gas resources of the Caucasus and Central Asian nations are not necessarily a guarantee of economic success or higher living standards.

Willy Olsen is a senior adviser to the Norwegian state oil company Statoil. He says the energy resources of the Caspian region could be "a blessing or a curse" depending on how wisely they are exploited.

He said market reforms must be put in place before energy revenues dominate the region's economies. He said success will depend on the reform of state bureaucracies, promotions made on merit, effective collection of taxes, creation of an effective legal system, and the building of market institutions.

He said the Caspian nations must avoid the mistakes of other developing countries that failed to convert oil and gas profits into stable economic growth. He told the Royal Institute of International Affairs in London last night that, in many cases, energy wealth has been wasted, benefiting officials, not citizens.

"With relatively few exceptions, oil revenues in the developing world have massively enlarged the scope of the state and its bureaucracies. Large oil revenues tend to concentrate power. Many petro-states have been unable to translate their windfall profits into a self-sustaining and stable development path. They have not had state institutions capable of tackling the shock that large petroleum revenues represent. Petroleum revenues have not trickled down, but trickled away."

Olsen has been involved in Central Asia and the Caucasus since 1991. He says the Caspian region could become a significant exporter of oil and gas in the next few decades. Some 250 possible oil and gas sites are to be drilled. No one knows the size of the resources. It will take years to establish their potential due to limited geological knowledge.

He said Caucasus and Central Asian governments see the energy sector as a way of resolving their mounting political, economic and social pressures. Only a very small minority in the region have seen their lives improve since the collapse of the Soviet Union. The total output of goods and services is still below 1989 levels.

"The euphoria of independence and the hopes of a free and prosperous future has to a large extent been replaced by disillusionment. The countries of Central Asia and the Caucasus have yet to return to 1989 GDP [gross domestic product] levels. Reading the annual U.N. Human Development report is depressing, extremely depressing. The countries of Central Asia and Caucasus ranked about the number 100 and are falling further behind each year."

Olsen says the region desperately needs income to tackle poverty, high mortality rates and a decline in public services, education and health care. The problems include lack of democracy, slow reforms, corruption and institutional resistance to change.

While looking to energy exports for solutions, governments underestimate the logistical, environmental and other problems involved in creating an export industry, including the time and cost. Oil firms think of investments, not of five years, but of 30 to 50 years.

Still, in a few years, several billion dollars will be invested annually in developing the Caspian oil and gas discoveries. This will have a big impact on the Caucasus and Central Asian economies.

Olsen suggested that his own country, Norway, provides a good example of how to develop energy resources rationally. He said it took Norway 10 years to develop its off-shore oil and gas industry, an endeavor that required patience and long-term commitment. At the same time, he says Norway has used the revenues sensibly.

"The petroleum revenues have transformed Norway's financial situation but, in my view, it has allowed us to send three times as many students to universities as we did 15 years ago, and we have six times as many students writing PhDs today as we had 10 years ago. For Norway, the discoveries of oil and gas have been a blessing. It has enabled us to transform into a knowledge-based society."

What is the secret of Norway's success? A study at Stanford University compared the development of a number of petro-states. It found that an efficient and uncorrupt government bureaucracy was crucial to Norway's ability to handle its transition into one of the world's largest energy producers. Other factors important to Norway's success were stable institutions, an effective legal framework, and -- in Olsen's words -- "political parties who were willing to save oil revenues for a future rainy day."

He said the Caucasus and Central Asian nations need to embark on reforms in order to try to create a similar framework.

"The path to success is not straightforward. It will require reforming the bureaucracies and ensuring that appointments to the civil service are made on merit, and not on political loyalty and social affiliation. It will require improving the collection of taxes, and developing a sound base for management of the economic transition. It will require establishing a respected and functioning court system which is crucial for developing an independent economy, and pursuit of human rights."

Olsen said the Caucasus and Central Asian countries are entering a critical period in their economic and political development. He said reforms are essential to ensure that the hoped-for oil and gas revenues become -- as he put it -- a "lubricant not an irritant."