How Superior Oil Joined the "Legislative Jamboree" and Took the Oil From the Dominican Republic… Tax Free

Major oil deposits recently discovered in the Dominican Republic by the Superior Oil Company of Texas could go a long way in aiding Dominican economic development. However, because of contract terms extremely favorable to the oil company, the discovery may actually have an adverse effect on the country's economy and environment. Superior's oil find, struck at 16,000 feet in the southeastern region, could yield 85,000 barrels a day at full production, possibly by 1984-5. This would be more than enough to cover local consumption, which currently stands at 40,000 barrels a day.

The Dominican Republic desperately needs the oil. Currently the country is reeling under a foreign , exchange crisis. This year, it will spend half the value of the nation's exports solely to finance its $580 million oil import bill, nearly three times what it 'was three years ago. Most of the remaining foreign exchange will go to servicing the foreign debt, which has doubled in the first two years of the current, Partido Revolucionario Dominicano government.

The terms for oil production were set four years ago, when Superior quietly negotiated a contract with the government of then-president Joaquim Belaguer, during what came to be known as the "legislative jamboree." Now that oil production is a real possibility, Dominicans are asking who, in addition to Texas-based Superior Oil, a few government officials, and foreign construction companies, is really going to benefit.

Superior Oil agreed in the contract to spend ("risk") a minimum of $3.6 million over four years of oil exploration. Upon finding oil, a 20-year nonnegotiable production contract would begin, with terms which would allow the company to make back its "risked" capital in the course of just two days of operation. And although the company agreed to make additional investments when oil was discovered, the government would be left to foot the bill for roads, waterworks, electric lines, pipelines and port facilities.

The contract stipulates that Superior will drill the wells, pump out the crude and market it. The company has the authority to set the rate of extraction; it is under no obligation to take the country's energy needs into account.

What is more, the government will have no independent means of monitoring Superior's- extraction, since the contract safeguards the "confidentiality" of Superior's data. "One of the central problems is that it's the company which manages all the information and makes its decisions unilaterally," says Victor Grimwaldi, a leading journalist on energy matters for La Noticia, one of Santo Domingo's daily papers. "Our country is in a terrible energy crisis and the government just accepts what Superior says."

Production will be divided between the company and the government on . a graduated scale tilted in favor of Superior. Only at a rate of 50,000 barrels a day will the Dominican Republic begin to receive more than 50% of production; up until that point, the company will be getting the bulk of the oil. For instance, on the first 20,000 barrels a day produced, the split is 60% Superior, 40% the Dominican Republic. "The Dominican state will receive some oil, but its share will be negligible compared with the profits that Superior Oil will make," says Hamlett Hermann, professor of natural resource economics at the Autonomous University in Santo Domingo.

The government's share of oil production will contribute to its foreign exchange income, but without local refining capacity, the Superior wells will not reduce petroleum import levels.

Aside from its share of the oil produced, the government will receive only a small taxation income from Superior's operations. The contract exempts Superior from income and social security taxes, from duties on importing equipment and materials, and from export taxes. These terms cannot be altered. "There are at least four articles which absolutely limit the capacity of the state to impose new taxes," says a lawyer and independent consultant hired by the Dominican Republic to evaluate the contract. "The contract raises questions about the sovereignty of the state."

The only tax the company must pay is on repatriated earnings. "Even here, the company is able to evade this tax through `capitalizing' its earnings as a loan to the parent com pany," the consultant, who refused to be identified, added.[1]

Nor will the oil discovery solve the Dominican Republic's unemployment problems, despite popular misconceptions to the contrary. Even before the oil strike was announced on July 24, more than half the local people expected that unemployment would be substantially reduced with the onset of oil production. And 60010 of the region's 82,000-strong workforce hoped to leave their current occupation to work in oil operations, according to a lengthy study commissioned by the local archdiocese.

These expectations will collide with the reality of petroleum operations. A 100,000 barrel a day field-larger than that estimated by the company-would directly and indirectly generate a maximum of 2,000 unskilled jobs and a total of 6,800-9100 positions, a private consulting firm concluded in its study for the archdiocese. Many of these slots may be reserved for foreigners, at the discretion of the company.

Moreover, the limited job creation may be offset by job displacement resulting from pollution. Superior Oil's 736,000 acre Dominican concession-a size equal to half the company's total exploration acreage in the United States-lies in the dry, southeastern region, the poorest area in the country. Small and medium scale agriculture is the main source of employment for the 307,000 people who live there. For this population, already suffering form a 30% rate of unemployment, Superior's discovery may cause great hardship.

No mention whatsoever is made in Superior's contract regarding its environmental responsibilities. Air, soil, and water pollution-characteristic byproducts of oil extraction-jeopardize the region's environment and its mainstay, agriculture. There is no provision in the contract for resettling the inhabitants who must move due to contamination or field expansion, or for compensating those whose livelihoods are destroyed through pollution. The company is under no obligation to leave the area in operable condition.

"Superior Oil's operations will have a terrible, and perhaps irreversible, impact on our agricultural potential, if they are not forced to restrict their emission of sulfur, gas, and oil particles," says a high-ranking agricultural official in the region.

In every election in the Dominican Republic since 1966, multinationals have surfaced as major issues. Superior Oil is well on its way to becoming such an issue in the presidential election to be held next spring. Already, a leading opposition candidate, Jorge Balanco, has called for contract renegotiation.

The multinationals themselves will be keeping a close eye on the outcome. Superior "is closely linked to Falconbridge, a company which has had tremendous economic influence in our country," says journalist Grimwaldi. "Falconbridge and Superior Oil come to our country in search of one thing: profits. And they will benefit from that candidate who makes their operations most profitable."

1 Superior Oil's performance elsewhere offers little reason to expect faithful payment of this tax. A Venezuelan court indicted Superior Oil in 1975 for having evaded $93 million in local taxes.

Deborah Huntington, who recently returned from the Dominican Republic, is a graduate student at Columbia University.

The Tangled Web... The mining and energy companies operating in the Dominican Republic are a tightly knit, interconnected group of firms which often share joint ventures, stockholders, board members and financial advisors, leading Dominicans to believe that a closed circuit of information about their resources is maintained by these companies. For instance, Falconbridge Nickel Mines Ltd., which has a major ferronickel mine in central Cibao, is 42% owned by the Canadian Superior Oil Co., a,100% subsidiary of Superior Oil. Falconbridge is the second largest nickel producer in the world, and its Dominican operations account for a large part of its production. Falconbridge established its operations with a $180 million financial package arranged by the investment bank Dillon Read. (This major debt financing arrangement has allowed Falconbridge to repatriate millions of dollars as untaxable interest payments rather than earnings.) Dillon Read was recently, bought by the Bechtel Group. Bechtel's subsidiary, Bechtel Power Corp., was hired by the Dominican government to elaborate an energy futures plan. It recommended conversion of the state electricity company's plants from oil to coal. Bechtel is the largest member of the Peabody Holding consortia, which is the largest U.S. coal mining concern. Peabody has a joint venture with the AMAX Corp. AMAX is the company which recently discovered coal in the northcentral region of the Dominican Republic. Another major stockholder in Peabody is the Fluor Corp., with 10% of the stock. Fluor's largest stockholder is the Canadian Imperial Bank of Commerce, which financed Falconbridge's Dominican investment and has a representative on Falconbridge's Board of Directors.