''Economic Brief: Oil and Gas Dynamics in the Gulf of Thailand''

A recent report from the International Monetary Fund (I.M.F.) has stated that in a moderate scenario oil revenue income for Cambodia would start at US$174 million by 2011 and peak at $1.7 billion per year by 2021. These predictions are based on the current project led by Chevron off the coast of southern Cambodia that looks set to begin production in 2008. The project holds an estimated reserve of 700 million barrels of oil in a technologically challenging arrangement. The I.M.F. predictions do not include the potentially larger basin that is currently in a disputed Overlapping Claims Area (O.C.A.) on the maritime border between Thailand and Cambodia. The Cambodian Ministry of National Defense has recently announced plans for a tripling in the size of the navy in order to provide security for the oil production facilities. According to Cambodian Minister of Defense Tea Banh, the recent expansion plans cite anti-terrorism and anti-piracy as the underlying justification for the expansion.

The implications for Cambodia are significant. The economic benefits of the resource revenue generated by the oil projects have the potential to make considerable improvements to Cambodian society. However, factors are already in place which suggest that the impact may not be positive. The income based on resource rents would in effect double the country's G.D.P. in the initial stages of the project. If this massive input is managed poorly, it could lead to severe inflation and have a considerable impact on the garment sector that currently makes up 80 percent of Cambodia's export economy.

Significant governance issues, chronic rates of corruption, a significant population bubble of young adult males, a reported high rate of availability of small arms due to 30 years of internal conflict, weak economic institutions, a recent history of civil war and a predilection toward political violence suggest that Cambodia has a strong possibility to face other and more considerable obstacles on the path to economic benefits. The pattern to date of resource extraction benefit in the forestry and fishing sectors is one of collusion between the political and military elite for self-enrichment at the expense of traditional stakeholders. According to some observers, the diversion of benefits from social investment to self-enrichment has meant that the social cleavages within the society have had little opportunity to heal. If this pattern is extended to the oil and gas sector, then the potential for systemic abuse is strong as is the potential for social unrest.

The tripling of the size of the Cambodian navy will likely make Cambodia's neighbors nervous. The O.C.A. with Thailand in particular is a sensitive area due to the considerable resources represented under the claim. Border disputes with Thailand in the past have been a cause for nationalist displays of violence, producing an alarming opportunity for nationalist political expression especially in the face of domestic social unrest due to the previously mentioned impact of resource revenue. Instruments are in place for the resolution of the disputed area, but there has been no movement since the memorandum of understanding was signed in 2001. Despite a diplomatic breakdown in 2003, the two sides continue to meet annually in an attempt to resolve the dispute.

In regard to China, the post-coup (1997) relationship with the country continues to strengthen. Economic, strategic, diplomatic and cultural ties have filled the void left by the international community, which generally withdrew from Cambodia after 1997. China continues to be the major donor for the Cambodian armed forces and is likely to remain so in the near future. The diplomatic benefit of the relationship for China accrues from the anti-Taiwanese stance of the Cambodians, along with an important ally in the Association of Southeast Asian Nations (A.S.E.A.N.) community. The discovery and production of oil in the immediate vicinity of China will only strengthen Beijing's efforts to cultivate and promote a regional ally.

In regard to the United States, for the first time in three decades the U.S. Navy paid a visit to Cambodia early in 2007. The United States has had poor relations with Cambodia since the coup in 1997, but it is now making strong overtures to the present leadership. In February, the ten year ban on aid to the country was lifted and a bilateral trade and investment framework agreement was signed in 2006 to promote better trade relations. The benefits for the United States include economic interests in the oil and gas sector, governance and democracy promotion in the region and an attempt to counter Chinese influence in Southeast Asia. The strongest opportunity for Washington to influence Cambodian policy in the short term lies in the garment sector, which faces an end to favorable trade status at the end of this year. Cambodian officials have been lobbying Washington to provide some reprieve from the anticipated sharp impact that the cessation of quotas will generate.

The bottom line is that the sudden and considerable flow of resource revenue may have a serious impact on the Cambodian state. The O.C.A. between Thailand and Cambodia offers a strong potential for revenue sharing and bilateral cooperation but requires a concerted effort to avoid nationalist sentiment and a problematic precedent of conflict over border issues. Chinese influence may continue to deflect and dilute international efforts to establish the strong governance and economic institutions required to properly manage the inflationary impact of the large revenue increase. The seemingly positive news of an oil and gas discovery must be tempered in light of the complex issues surrounding revenue generation and its impact in Cambodia.

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