Just reading the tittle of this article, which was featured in Americas Quarterly recently, sends shivers down my spine. Oil and Paraguay, I can’t think of a worst recipe for disaster: A country with high levels of poverty and rampant corruption, weak political institutions, no check and balances or enforcement mechanisms for that matter, and a serious absence of the state undergoes an oil boom…or more simply, a BOOM!  We have seen this happen way too many times across the world – Angola, Mozambique, South Sudan, Papua New Guinea, Ghana – to know this is an explosive combination, to say the least.

I’m not saying that oil per se is a bad thing, in fact, if managed correctly it could be a meaningful source of development, but bad management of a state’s natural resources can be disastrous and that is exactly what I’m scared of. Not only resource rich countries face the risk of Dutch disease, but also, as Michael Ross from UCLA argues, oil-rich countries do far less to help the poor than do countries without resources. He points to evidence that oil and mineral states fare worse on child mortality and nutrition, have lower literacy and school-enrolment rates and do relatively worse on measures like the UN’s “Human Development Index”. Furthermore, countries that are rich in petroleum have less democracy, less economic stability, and more frequent civil wars than countries without oil.

In a world where increasing resources and technology are being invested in developing alternative sources of energy and in a country that has been blessed by nature with abundant hydro-power, it seems rather irrational to be investing in exploiting oil instead of investing on expanding our grid and exploring ways in which to benefit from our of already existing resources.

Call me silly, but I’m happy to know that oil exploration in Paraguay is risky and costly. Hopefully that will help us buy some time to develop what’s needed to deal with a resource boom: and efficient, competent and transparent government. 

You can find the article below

The Promise of Oil in Paraguay

Paraguay has just 6.5 million inhabitants who consume 27,000 barrels per day of refined petroleum products. To put that into perspective, Argentina consumes 698,000 barrels per day, Chile 347,000 and Bolivia 62,000. This makes Paraguay’s needs for hydrocarbons very small when compared to its neighbors.

Yet Paraguay is currently importing all of its oil, as it does not have any domestic production. In recent years, the country depended on Venezuela for a good portion of its energy needs, importing close to 8,500 barrels per day in 2011, through a preferential payment program called the Acuerdo de Cooperación Energética de Caracas (Caracas Energy Agreement—ACEC). The program was interrupted by Venezuelan President Hugo Chávez in 2012 after Paraguayan President Fernando Lugo was deposed, leaving Paraguay reeling and awash in $260 million in debt.

Oil in Paraguay has a complex history. The Chaco region is believed to have massive oil reserves, with estimates of some 4 billion barrels—just less than half of the estimated reserves of Brazil’s famed Libra pre-salt field. Because of these resources, Paraguay and Bolivia went to war in 1928 over claims to part of the region, where oil had been discovered by Standard Oil of New Jersey. The Chaco War, which raged until 1935, resulted in 100,000 casualties and, despite winning the war, Paraguay was never able to develop the region’s potential, while Bolivia went on to become a major producer.

Subsequent to the end of the war, numerous exploration and production companies came to Paraguay, but there were never any significant finds. Between 1947 and 2005, 49 wellswere drilled without major production. A hydrocarbons law attractive to foreign investors was passed after the end of the Alfred Stroessner dictatorship (1954-1989), which provided favorable terms for companies wishing to develop projects in the country. Yet nothing to date has yielded tangible results.

Despite this record of futility, the administration of President Federico Franco has been very bullish on Paraguay’s potential for hydrocarbon development, with declarations of potential reserves that border on hyperbole. Quoting the Paraguayan government, one newspaper article claims that Paraguay has 14 trillion cubic meters of petroleum and gas reserves, which—when  considering natural gas alone—would place it fifth in the world—above the United States, Saudi Arabia and Venezuela. According to the minister of technical planning, Richard Kent, this would represent one of the “largest reserves of oil and natural gas that humanity has ever known.” Furthermore, in terms of shale potential, Paraguay is estimated to have the fifth largest resource base in Latin America.

The question remains, why hasn’t Paraguay capitalized on this potential? One of the issues is the size of the Chaco basin and the risk involved. Because so few companies have managed to exploit the area and seismic studies have been limited, it has proved to be extremely risky for prospective companies to get involved. With the cost of drilling a well approximately $10 million, and limited credit available, the smaller oil companies that are present in Paraguay have been skittish about making large investments. These companies do not have the financial backing of the majors.

Some observers have compared Paraguay to Colombia of a decade ago. During the past seven years, Colombia has managed to double its oil production in part due to shrewd investment and managing of the state oil company Ecopetrol. For Paraguay to become the next Colombia and to take advantage of the promise of its oil reserves, seismic studies, favorable investment terms and availability of credit must be present.

*Christian Gómez, Jr. is a guest blogger to AQ Online. He is director of energy at the Council of the Americas.