Black Money 
The Corruption Underpinning Nigeria’s Indigenous Oil Sector: From Bidding Rounds to Regulation

Will Burke-Nash examines the history of petro-corruption that underpins Nigeria’s Indigenous Oil Sector

For decades, political corruption has torn at the roots of Nigeria’s petro-economy, yet what does it really translate to with respect to the indigenous oil sector? International Oil Companies (IOCs), National Oil Companies and indigenous firms each have different nuanced relationships with the Nigerian state. These relationships intersect the President, the Minister of Petroleum Resources, the Nigerian National Petroleum Corporation (NNPC) (Nigeria’s state-run oil company) and the Department of Petroleum Resources (DPR) (the primary regulator of Nigeria’s oil industry). Yet whilst much has been discussed regarding the corruption associated with the NNPC and the IOCs, little is known about the corruption that surrounds Nigeria’s burgeoning indigenous oil industry.

What is evident is that many indigenous firms are – or at least have been in the past – highly politically embedded: Friendships and political connections underscore many of these indigenous firms’ relationships with state officials. The nature of these relationships needs to be questioned because the awarding of oil contracts should be made on a competitive basis, and founded on technological capacity, whilst increasing local content should not come at the expense of regulation. In this article I examine the issues associated with the awarding of licenses for indigenous firms and scrutinise the relationships that many of these firms have had with the DPR and NNPC.


The Awarding of Oil Licenses


Historically, individuals politically connected to the President have benefitted from his ability to award licenses under the discretionary powers of the Petroleum Act 1969. This Act is the principal legislation that governs how oil licenses are awarded in Nigeria and enables the President to hand out oil licenses at his ‘discretion’. Many indigenous firms have leveraged political relationships in order to secure oil license agreements, not only during the last three oil-licensing rounds in 2005, 2006 and 2007 but also through ‘secretive’ unofficial discretionary awards based often on friendships.

During the prior-to-last presidency, this discretionary awarding of oil licences was compounded by the fact that President Obasanjo illegally appointed himself as the Minister of Petroleum as well as the Chairman of the Board of NNPC. Not only did this mean that oil matters were never discussed in cabinet, but it simultaneously undermined any pretence of Ministry and NNPC independence. This provided the government with influence over commercial and operational decisions relating to licencing awards, which it has been unable to restrain itself from utilising.

The result of this weak institutional capacity is simple: those firms that do not profit from political patronage have not put in tenders for contracts and licenses. The end result is that high-level public officials (both current and former) are understood to channel lucrative deals to either their political allies or companies that they partially own. During the last three licensing rounds, many of the IOCs’ competitive bids were overruled through the Presidents discretionary powers to award blocks. Although there is little information available on which companies won which blocks during each licensing round – meaning it is difficult to find out whom these firms belong to – there are some distinct examples.


The 2005, 2006 and 2007 Bidding Rounds


There are a string of cases where influential Nigerians with considerable shareholdings in indigenous firms have been awarded lucrative production contracts. During the 2000 licensing round, for example, an indigenous oil firm called Orandi – which was linked to Peter Odili, then Governor of Rivers State and a close associate of President Obasanjo – won one of the eight blocks being auctioned. Comparable events took place during the 2005 and 2006 bidding round when the government introduced the Local Content Vehicle (LCV) policy, which forced IOC operators to offer ten per cent equity to an indigenous company. Importantly, the LCV scheme was questioned at the time as a ploy to guarantee politically connected individuals a piece of the action. Emmanuel Ojie’s firm NJ Exploration Services was one of the approved LCV’s on one of the Korean blocks – Ojie was a close business associate of President Obasanjo at the time. Similarly, Southland, which was owned by Andy Uba – one of the Presidents closest advisors – was made an LCV for KNOC.

More concerning is that incorporation records from 2009 show that in the 2005 bidding round Senator Lee Maeba – the then Chairman of the Senate Committee on Petroleum (Upstream) and serving Senator of the Federal Republic in the upper legislative House – had an 80 percent stake in one of the LCVs, New Tigerhead PSTI Limited, which had won Oil Prospecting License (OPL) 257. Prominently, Senator Maeba was the driving force behind the NOGICD Act, having tried to push the bill through the House of Representatives in both 2005 and 2007, and was directly responsible for overseeing the licensing of oil blocks. Other examples include the owner of Shore Beach Exploration and key financier for the ruling party, Emeka Offor, as well as the owner of INC Natural Resources, Alhaji Saminu Turaki; the Former Govenor of Jigawa state. Contracts were awarded under the discretionary powers of the Petroleum Act 1969, favoring Nigerian elites, meaning that the relevant government agencies such as the Federal Revenue Service and the Office of the Accountant-General never received basic information on oil transactions, such as export prices, costs and production volumes.


Strategic Alliance Agreements (SSAs)


The Nigerian Petroleum Development Corporation (NPDC) – Nigeria’s state owned oil producing subsidiary of the NNPC – has also come under serious criticism more recently for acting as a mechanism through which oil wealth can be channelled away from the central bank, largely through ‘Strategic Alliance Agreements’ (SAA’s) with local indigenous firms. SAA’s are agreements specifically between the NPDC and indigenous firms allowing indigenous firms to take over operatorship of government owned oil blocks. These agreements are claimed to contravene the constitution because they transfer control over revenues and profits on state-owned assets to private firms. Out of a total of $7 billion in revenues generated under these arrangements, only $400 million was paid in taxes to the state.  Two indigenous firms – Seven Energy and Atlantic Energy – were recently given the right to manage five of the NPDC’s oil fields through these ‘unconstitutional’ no-bid contracts. Through these SSA’s, neither firm pays taxes to the Nigerian government, and they themselves have subsequently sub-contracted production work to other operators. Importantly, both firms were co-founded by one of Nigeria’s wealthy elites, Kola Aluko, along with Jide Omokore, one of President Jonathan’s close associates.


Technological Inadequacy


A corresponding issue associated with many of these discretionary awards is that many LCV’s and other indigenous companies have had virtually no prior experience in oil. For example, another firm also owned by Emeka Offor, Starcrest, had no history or credibility as an oil company, and was only registered days before the the bidding round in 2006. Similarly, Atlantic energy, one of the firms licensed under an SSA to operate drilling on the block on behalf of the NPDC was only incorporated as an oil firm the day before the agreement. Many of the LCV’s have opaque ownership and finances and very few have the ability to fund their share of operations in either the mature Niger Delta area or in offshore regions. In 2005 this was compounded by the fact that the oil industry regulator, the DPR, decided to give out information selectively and was inherently negligent in its due diligence. Accordingly, favouritism and corruption has fundamentally undermined competition in Nigeria’s oil industry and has resulted in the awarding of blocks to unqualified companies who are unable to exploit complex geological reserves.


Relationships with the Regulatory Bodies    


There are also nuances in the direct relationships that indigenous firms have with the regulatory bodies. One senior employee of the NNPC with whom I spoke highlighted how many senior Nigerian businessmen working for the indigenous firms have direct personal relationship with senior figures working for the NNPC and the Ministry of Petroleum Resources. He claimed that they are very much an elite, and the nature of these relationships has opened up space for greater preferences when they are available, enabling indigenous firms to be treated less harshly than the IOCs if things go wrong. This general attitude towards purportedly accommodating regulatory breaches associated with indigenous firms has most likely evolved out of the Nigerian governments desire to bend over backwards to encourage indigenous companies as part of its drive to encourage local content. The unfortunate side effect is that some indigenous firms have not adhered to their work programs and financial commitments. If these cases involve an IOC, you would expect the government to terminate these firms’ licenses, but instead there has been a discernable tolerance towards indigenous firms. Whilst the local regulatory authorities should step in at the point at which these companies come up for budget reviews for work program discussions and the letting of contracts, this is often not taking place in reality. This is problematic because is has been posited that these indigenous Nigerian companies have less concern for governance issues and weaker internal regulatory mechanisms.


Signs of Reform?                                                   


With the impact of corruption on government revenues compounded by the sustained lows in the global oil price – Brent Crude is at $38 dollars per barrel at time of writing – the task of Nigeria’s newly elected President – Muhammadu Buhari – to cleanse Nigeria’s oil industry of corruption is more pressing than ever. Whilst only time will tell as to whether President Buhari lives up to his electoral mandate – founded upon a bid to rid corruption in Nigeria’s oil industry – the initial direction of his policies is positive. Nigeria’s new vice-president, Yemi Osinbajo, has already begun to overhaul the way in which the state’s government agencies operate, giving the federal government better oversight over its treasury accounts, thereby minimizing the ability of government officials to divert state funds; previously the NNPC’s revenue and expenditure was not reflected in the national budget – allowing substantial leeway for corrupt officials – whilst at the same time multiple treasury accounts maximized opacity. Buhari has also begun to overhaul the NNPC by firing a number of its previous management and replacing them through a reform process that will hopefully transform the state-run oil company into a more dynamic profit generating organisation. This long-overdue reform is an essential step in plugging the billions of dollars in state oil revenues that have gone missing over course of previous administrations, and should, tentatively, pave the way for reform in the sector as a whole, principally in the form of the Petroleum Industry Bill.  Given that oil accounts for roughly 70 per cent of government revenue, reforming Nigeria’s oil industry by plugging internal revenue leaks is more important than ever before; hopefully this will include the indigenous sector as well.