What next for Equatorial Guinea after oil?

Lessons in natural resource exploitation in African states

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I: When the oil wells run dry

Teodoro “Teodorin” Obiang, the son of Equatorial Guinea’s president who is also the country’s vice president, has an Instagram account resembling that of an influencer and not a possible future head of state. For example, when he visited New York for the UN meetings last September he posted a video showing off his $75,000 a night penthouse. Typical posts include flashy cars, boats, motorcycles, or foreign vacation locations. Seldom does he post anything to do with his own country or its people. In power since 1979, his father, President Obiang Nguema is currently the longest serving head of state in the world. His current legacy project is to relocate the country’s capital from Malabo on Bioko island to Ciudad de la paz on the mainland.

Teodorin is the embodiment of Equatorial Guinea’s squandered oil wealth. For nearly three decades the country has been a textbook example of growth without development. After the discovery of oil in the mid-1990s, per capita income soared and catapulted the country into the club of high income countries (it peaked at over $35,000). Meanwhile, living standards stagnated at deplorable levels — from education attainment, to infant mortality rates, to poverty rates, and more. Primary school enrollment has declined since peaking in the early 2000s. Life expectancy is 15 years lower than in countries of comparable per capita income (presently at round $7500). Poverty rates exceed 70%.

To compound matters, the country’s oil output is in decline. Current oil production (around 52k barrels per day) is a mere 13% of peak production in the mid 2000s. As a result of decades-long neglect of the non-oil sector, overall economic output is declining in tandem with declining oil production. The country has struggled to attract investments in new prospecting and drilling — partially due to its risk profile, onerous local ownership requirements, and global pressures against investments in fossil fuels.

Exxon Mobil, operator of the largest oil field, recently announced its intention to exit Equatorial Guinea by June 2024 and sell its assets to the government. In the short term, Malabo’s strongest selling point will be its geopolitical location as a potential naval base or commercial port location for countries that can pump cash into maintaining its oil sector — China and the United Arab Emirates (or perhaps Saudi Arabia) come to mind. India might also be interested in a reliable source of crude for its refineries as it seeks to reduce its reliance on coal. In the medium term both Bioko and the mainland present enormous agricultural potential as major cocoa producers — it takes 5-6 years for freshly planted cocoa trees to start producing pods.

Despite its 30 years of oil wealth, declines in infant mortality rates in Equatorial Guinea have lagged its relatively poorer neighbors.

The next decade will be tough. The IMF projects that the contraction of output will continue over the next five years. Besides, petroleum, the country exports wood products and little more. Like most countries afflicted by the “resource curse,” non-oil sectors have seen little investment since oil production began in the mid 1990s.

Current agricultural output has barely touched levels last witnessed in 1968. Agriculture contributes a mere 2.7% of GDP. The country imports 70% of its food needs. It is hard to imagine that Ghana’s cocoa industry was launched by Tetteh Quarshie from Bioko, and that the crop once accounted for as much as 75% of Equatorial Guinea’s economic output. The current global cocoa shortage — which is the result of decades of underinvestment in new tree crops — might just be the opportunity the country needs.

It’s worth noting that a switch to cocoa production might not necessarily result in broad-based economic development. The country is 74% urban (with over two thirds living in Bata and Malabo), meaning that a plantation model would be the most likely to emerge. Under the circumstances, the country would likely have to rely on a model of migrant laborers and concentrated ownership among large landowners. Under such a model it’s unclear if Equatorial Guinea would be able to effectively compete against Côte d’Ivoire and Ghana. Both countries, who together account for over 70% of world cocoa production, primarily rely on small-scale cocoa farmers with less than 3 hectares and who grow foods crops interspersed with the cocoa trees.

Besides agriculture, other diversification alternatives include tourism, transportation and logistics, petrochemicals, and fisheries.

II: Forget the “resource curse.” Natural resources are what you make of them

It is worth noting that Equatoguinean’s petroleum nightmare was not pre-determined. Not all resource-dependent countries end up like Equatorial Guinea or Venezuela. Australia, Botswana, Canada, Norway, the United States, the UAE, Qatar, among others are all countries that have managed to exploit their resource wealth for the good of majorities of their citizens. Compared to the worst resource-rich performers, even oligarchic Eastern and Central European countries seem to have done reasonably well at converting their natural resources into wealth (both for individuals and in producing development in the wider economy).

Briefly stated, resource endowment is not destiny. Human agency determines whether it is a “curse” or “blessing.”

Countries with well-managed resource sectors typically have a heavy involvement of domestic firms, joint public-private ventures with foreign firms, or both. In the United States, for example, large domestic firms dominate operations in the Permian basin and beyond, a fact that crowds in lots of related job-creating sectors in the U.S. economy (from business services, to finance, to materials and engineering, to logistics). Governments (federal and states) provide subsidies and tax incentives to these firms (to the tune of $20b annually). For decades (1975-2015), petroleum firms faced a crude export ban. For these reasons, petroleum is not an enclave sector and is fairly well integrated into the rest of the U.S. economy.

Another example is Botswana’s diamond sector. Debswana, the joint venture between the government and DeBeers has enabled the government to not only partake in taxes, royalties, and dividends, but also improved the legibility of the diamond sector from a policy perspective. This enabled the government to grow the state-owned Okavango Diamond Company into a formidable player, in addition to negotiating for ever more domestic value addition and prudent savings. The Pula Fund, Botswana’s sovereign wealth fund, has over $3.7b in assets under management. Only Libya (LIA), Ethiopia (EIH), and Algeria (RRF) have bigger sovereign wealth funds in the region.

Admittedly, neither approach is a silver bullet against distortions like the Dutch disease, oligarchic accumulation and political corruption, or resource giants’ oversize influence on policy. The U.S., for instance, benefits from having a large non-oil sector that can easily absorb the petroleum-specific political and economic distortions. In Botswana, the country’s bargaining power has for a long time been constrained by its dependence on DeBeers for technical know-how and market access.

The key point here is that it’s hard to imagine a successful petroleum sector in Norway without Statoil/Equinor ASA; mining in Australia without BHP; or relative successes in Gulf states without players like Qatar Energy and Saudi Aramco. Even Mexico’s Pemex and Brazil’s Petrobras have been important vehicles for de-enclaving of the two countries’ petroleum sectors. All these countries have succeeded, in part, by creating mechanisms (private, public, or both) that maximize the economic impact of their resource sectors.

Setting aside the morality plays and ideological fights that have historically defined much of the discourse on natural resources in Africa, the important question appears to be: what sorts of arrangements maximize the creation, capture, and accumulation of wealth derived from natural resources within resource-rich countries?

It would appear that the best arrangements would be those that i) facilitate optimal exploitation of resources relative to market forces (i.e., no under/overproduction); ii) retain profits and other earnings within the domestic economy (in the form of investments/savings and royalties/taxes/dividends); iii) facilitate job-creating linkages with non-resource sectors of the economy (to avoid enclave sectors); and iv) provide property rights protections for wealth created from the exploitation of natural resources (to obviate the need for [il]licit capital flight).

These considerations rarely get a serious hearing when thinking about natural resources in African states.

Throughout the region, justified fears of pillaging by foreign firms and governments (which still happens anyway) and state-led developmentalist ideologies have historically created a bias in favor of defensive public ownership of property rights to natural resources; and strong norms against elites’ accumulation of private wealth via the exploitation of the same resources. On their part, influential international organizations and activists (and their domestic counterparts) obsess about corruption among African officials — a fact that reinforces the norm against the accumulation of visible private wealth from natural resources in most states.

The absence of strong economic and political incentives for productive domestic ownership and operation long condemned resource exploitation in African states to foreign domination throughout the value chain. The enclave sectors so created denied African economies jobs; incentivized capital flight; facilitated outright theft by foreign firms through tax evasion, transfer pricing, and falsification of production estimates; and exposed political elites to foreign manipulation (which is always worse than manipulation by domestic firms with skin in the game in the domestic political economy).

Importantly, foreign firms typically negotiate not with domestic businesspeople out to maximize profits, but (mostly) easily corruptible politicians eager to survive the next political business cycle and who lack sector-specific knowledge. For instance, due to a lack of investment in geoscience, some governments have had to rely on foreign firms’ geologists to ascertain the value of their mineral deposits (think of the incentives here!) Furthermore, foreign firms’ profits typically dwarf the trinkets thrown at politicians and their fixers to obtain licenses. Criticism the obscene levels of foreign exploitation and bribery witnessed in the Democratic Republic of Congo, Guinea, Nigeria, Zambia, and elsewhere often focuses on the moral/governance failings of individual politicians. Rarely does anyone scrutinize the underlying economic incentives.

This is not a procrustean case for domestic private ownership of mineral resources. It is an argument for not letting history or ideology get in the way of maximizing the economic benefit from natural resources. To be blunt, the fact that there are no successful African resource sector giants (public or private) is a major problem (South Africa being the exception).

Overall, the type of ownership ought not matter. What matters is the ability to convert natural resources into domestic wealth and broad-based economic development. Different countries should be free to adopt favorable ownership structures conditional on their contexts. What they should avoid at all costs, however, are the current models of almost exclusive reliance on foreign firms. The bribes, loans, paltry royalties, tax evasion, or infrastructure swaps simply aren’t worth it. Countries with strong institutions are more likely to benefit from outright state ownership or joint ventures with domestic or foreign private firms. In weakly institutionalized countries predominantly domestic private ownership structures are likely to yield the best possible outcome (such resource magnates would figure out how to protect their property rights).

III: The total corruption of Equatorial Guinea

Which brings us back to Equatorial Guinea. While not losing sight of or excusing the Obiang’s poor choices over the last several decades, it is also worth shining some light on the people who have sat on the other side of the table when negotiating oil production agreements. Hess, Marathon, and ExxonMobil have been the leading players in Equatorial Guinea’s oil sector over the last 30 years. Hess sold its interests to Kosmos and Trident in 2017. ExxonMobil will exit this year. Marathon appears set to keep operating into the foreseeable future — with investments in a gas “mega hub” to process and liquify natural gas from fields in Equatorial Guinea and the wider region.

Regardless of the country of operation or identity of particular firms, opacity and corruption are core features of firms involved in natural resources (from actual mine operators, to logistics and business services, to commodity traders). These firms typically have elaborately layered ownership structures and subsidiaries to obfuscate beneficial ownership and evade taxes through transfer pricing. For example, it is not a coincidence that one of Shell’s most profitable units is a Bahamas-based trading shop with less than 40 employees and which in 2022 minted $1.55b in tax-free profits. Whether through legal or extra-legal means, foreign resource sector firms operating in low-income countries have ample opportunities to avoid meaningfully contributing to their hosts’ economies. That’s simply the nature of the business.

With this in mind, Equatorial Guinea’s oil sector is a textbook example of most of the things that can go wrong. Its oil blocs were offshore, which required higher-than-usual initial technical and financial investments. The off-shore feature reinforced the enclaving of the sector — as described in Hannah Appel’s excellent ethnography of one of the American firms involved. Layered ownership and operations involving all manner of subsidiaries and contractors made it possible to hire very few Equatoguineans and to avoid paying those hired fair wages. Even the lifestyles of the expats in Malabo vivified Equatorial Guinea’s loss: the enclaves where they lived were designed to essentially be “Houston in the tropics” — from the architecture, to the imported food, to their zip codes, to entertainment. Contact with Equatorial Guinea was limited to the bare minimum.

The sheer concentration of resources within this compound and others like it in Equatorial Guinea is difficult to overstate. The Endurance compound alone generated enough energy to power the entire country’s electricity needs twenty-four hours per day, every day. Food to feed foreign employees was shipped in from Europe and the United States. The luxurious mansions in which migrant management lived were serviced by their own sewage and septic systems, and appointed with flat screen tele- visions, wireless Internet, and landline phone service with Houston area codes.

…Management-level migrant oil workers and their wives living in these lavish “suburbs of Houston” received up to a 75 percent salary increase for working in what was known in the industry as a “hardship post.” Equatoguineans, regardless of their class position, governmental authority, or employment with the company, were prohibited from living on the compounds.¹

In other words, oil production had little contact with the Equatoguinean economy except through the taxes and royalties paid to the government. And since the initial production contracts were signed in the mid-1990s when the elder Obiang was desperately in need of a political lifeline, the oil firms got the deals of dreams.

A striking feature of the total corruption of the Equatoguinean oil sector is the absence of productive involvement by local elites in the engine of their economy. No bonafide locally-owned engineering, business services and logistics, or trading firms exist. Instead, the whole point appears to be to get spot payments in bribes that are orders of magnitude lower than future flows to the bribe-giving foreign firms and store some of the value in assets outside the country. The state oil company, GEPetrol, operates as little more than a conduit for laundering bribery through joint ventures with opaque subsidiaries. It is simply not a serious wealth-creating enterprise. The country has an onerous 35% local ownership requirement in the oil sector which operates more like a shakedown than a legitimate industrial policy.

There has been little investment in productive assets or job creating ventures in Equatorial Guinea. Government projects or programs have invariably been overpriced and run aground. An example is a 2010 plan to build a national training institute (the National Technological Institute of Hydrocarbons). The initial budget of $81m ballooned to more than $139m by 2012, dwarfing the country’s entire education budget. Much of the stolen money was laundered as consultant fees to European shell firms with links to government officials.

Existing documentation illustrates how illicit cash (for example, laundered through a U.S. bank as well as others in Spain, the Netherlands and Cyprus) paid for properties in the United States and Europe (and passports in Cyprus). The Obiang clan also got cash by overpricing leasing contracts or land sold to oil companies.

When all is said and done, the Obiang clan’s material prospects are tightly tied to their continued stay in power. Decades of access to tens of billions of dollars in flows have not made them independently wealthy. They must continue stealing to stay rich. They also lack secure property rights both at home and abroad. Whatever they own in Equatorial Guinea is only as secure as their hold on power. Their foreign possessions are always at risk of being seized by foreign governments as soon as it becomes politically or legally untenable to facilitate the obscene levels of corruption. Teodorin has already “lost” hundreds of millions of dollars in the U.S., Brazil, France, South Africa, Switzerland, and the Netherlands after houses, cars, super yachts, and other personal items were seized.

Notably, Teodorin’s seized super yachts are worth more than assets currently under managed by Equatorial Guinea’s wealth fund (a mere $165m after more than two decades of operation and guaranteed 0.5% of annual oil revenue flows). There does not appear to be a plan for life after oil.

IV: Conclusion

Three important lessons emerge from the last 30 years of oil in Equatorial Guinea and experiences in other African countries. First, politicians and public sector officials will soon take relatively small bribes than invest in profit-maximizing public enterprises to exploit their countries’ natural resources. Therefore, public ownership of the rights to natural resources is not always a good development strategy. In some cases domestic private sector-led resource exploitation might provide better outcomes. Incentives matter.

Second, African political elites who mortgage their countries’ resources in exchange for bribes do so in part because they lack property rights at home and abroad. Politics and ideology at home prevent them from establishing legible wealth-maximizing firms. Furthermore, it is often much easier to collude with major foreign firms than try to compete against them. As a result, these elites operate at the margins of the global commodities elites. Despite their access to bribes and public revenues, they struggle to accumulate productive wealth (at an enormous cost to the societies they govern).

Third, global resource sector firms are structurally corrupt due to the nature of the business. Due to obsolescing bargain dynamics, the enormous potential upsides to bets, differences in technological know-how, and the sheer amounts of cash involved, these firms typically must rely on non-market strategies (including corruption) to stay competitive. The common acceptance of opaque ownership structures in the sector and the types of people who self-select to work in the industry reinforce the generalized sectoral proclivity to corruption. It also helps that national security concerns by major powers essentially gives these firms a blank cheque to do whatever it takes, as long as they don’t cause too much political embarrassment to their home governments.

You can’t counteract all this with good governance and transparency initiatives. Only domestic bureaucratic ambition (which is rare) and/or a robust domestic private sector profit motive stand a chance.

These lessons will be important as we enter a new era of resource nationalism (some of it driven by the pursuit of critical minerals). One hopes that African policymakers and publics will rethink approaches to the management of natural resources. The overriding imperative should be to promote domestic productive ownership of property rights to natural resources (whether through public, private, or joint ownership) and not a blind fetishization of specific ownership structures. It is high time the region’s natural resource sectors stopped being mere playgrounds for chancers (domestic and foreign) and the major global firms behind them.

1. Hannah Appel (2019): The Licit life of Capitalism: US Oil in Equatorial Guinea, Durham, NC: Duke University Press