Still on Enjoying Nigeria’s Oil Wealth (2), By Tolu Ogunlesi
Last week I wrote a guide about how anyone wishing to enjoy Nigeria’s oil wealth might go about it. Innovate. Stay In Control. Find Loopholes. Lower The Bar. (Mis)Use Technology. Set Up A Probe Panel. Think Big. And, last but not least, Make Sure Nigeria Never Learns To Count.
I however realised, after the article was published, that my outlining of the details of the Strategic Alliance Agreements (SAAs) contained errors. The overall point of that section (Innovate, Innovate, Innovate) remains valid, but my explanation of the actual details of the SAA was inaccurate. I would therefore like to use the opening bit of today’s column to correct the errors and set out a more accurate portrayal of what is no doubt (even to insiders) a very complicated and often confusing arrangement. (I’d also like to thank everyone who got in touch to point out my errors and offer clarification).
So, this is how the SAAs actually came into being, and what they entailed. Between 2011 and 2012, Shell, ENI and TOTAL divested their minority stake (typically amounting to a total of 45 percent; 30 percent Shell, 15 percent ENI + TOTAL) in five onshore oil blocks in the Niger Delta, to a bunch of local Nigerian companies. Since Shell and its partners had acted as “operator” on these blocks, one would have assumed that the operatorship would pass on to the indigenous successor companies that took over their stake. (As one industry insider explained it to me, the “operator” of an oil block is the company which is in control of daily operations).
Enter the SAA. The NNPC (which by virtue of holding 55 percent of the block, is deemed the “senior partner”) decided that the NPDC (its oil producing subsidiary) would step up and exercise operator rights. (The NNPC, I’ve been told, reserves the right to determine which of the joint owners becomes the operator of the asset). All of this was ostensibly part of a local content agenda aimed at developing local capacity and competence within the oil industry. Now being an operator comes with certain obligations, including but not limited to fully playing your role in funding the production work. But the NPDC had no money (not surprisingly, considering it’s a child of the government), and therefore entered — or was made to enter — into a Strategic Alliance Agreement (SAA) with two companies, Atlantic Energy and Septa Energy, who would help provide funding and technical support, i.e. staffing and expertise.
So what the SAA accomplished was to introduce third parties into a scenario that had typically involved two sets of partners. In exchange for helping fund the NPDC’s 55 percent share and providing the required technical and managerial assistance to NPDC, Atlantic and Septa were expected, by the terms of the agreement, to receive remuneration as follows: they would recover all costs expended in supporting the NPDC. Two, they would get a share (between 20 percent and 70 percent) of the profits deriving from the crude oil production (my understanding is that they would get this compensation in kind, that is, as barrels of crude oil from the 55 percent share due to the NPDC).
Now there were some benefits embedded in the process. For example, allowing the NPDC exercise operatorship responsibility was a good move. One member of staff tells me of the excitement amidst the company’s technical staff when they realised they would be getting a chance to operate assets, instead of being the dormant partner they’ve mostly always been, kept out of the most important parts of the operations of the oil blocks on which they’ve represented the NNPC. It does seem that in recent years the NPDC has developed impressive levels of added expertise from the chance to operate the divested assets.
But that’s where the good ends. The SAA itself was designed as a classic ‘sweetheart’ deal to ensure wholesale transfers of wealth belonging to the Nigerian people to a small group of connected businessmen. You had a company like Atlantic Energy which was not an equity partner on the oil blocks it was printing money from. With no equity holdings it, of course, had no equity risk. On the other hand, the Nigerian people, on behalf of whom the NPDC/NNPC were holding 55 percent, were suffering sizable revenue shortfalls. (This might explain in part why years of $100 oil prices failed to translate, under President Jonathan, into any sizable savings in the foreign reserves or Excess Crude Account or Sovereign Wealth Fund).
On paper Atlantic and Septa were supposed to wholly fund the needs of the cash-strapped NPDC. It may have started that way, but insiders say the funding enthusiasm soon dried up — but of course not the benefits/remuneration! And where the proceeds from the sale of the entire 55 percent of the NNPC/NPDC’s share of crude were meant to go to the Federation Account, from where it would be appropriated to the three tiers of government, with the SAA in place a grand excuse was created to justify the direct transfer of a portion of Nigeria’s oil wealth directly to the SAA partners, without appropriation. Try to imagine how much we lost to those ‘innovative’ arrangements.
Now there are several other ways in which Nigeria has been bleeding oil money. A well-known one is oil theft; every day we lose hundreds of thousands of barrels of oil to sophisticated gangs who often operate with the collusion and blessing of the state: bureaucrats and security personnel. The stories one hears are mind-bloggling, of entire shiploads of crude oil taken illegally and sold on the international black market.
There are also the losses arising from the less-than-transparent oil swap deals (again the NNPC is involved in this) involving private companies. Here’s how that works. Since Nigeria’s refineries are almost comatose (available figures indicate that the four refineries can collectively only process around a fifth of their roughly 450,000 barrels daily capacity). Instead of putting energy into getting the refineries fixed or privatised, again the government decided to allocate about half of that daily processing capacity to a group of private companies, in a swap arrangement that would involve them taking the crude oil abroad for processing and then bringing in refined products.
The stories you hear about the crude oil swaps are as disturbing as the ones about the SAAs. The benefiting companies allegedly bring in poor quality petroleum products in exchange for the crude Nigeria daily bestows upon them. They are also, from what I heard, not required to bring in the full complement of products derived from the refining of crude oil. Now Nigeria’s crude oil is widely regarded around the world for its quality.
Upon refining, almost a third of it is supposed to be jet fuel. Yet as at last year these swap partners were reportedly not required to deliver jet fuel to Nigeria in exchange for the crude they took. Some of these companies which also operate in the downstream sector allegedly routinely collect subsidy payouts on the ‘swap’ petrol they bring into Nigeria.
Former Central Bank Governor Lamido Sanusi once summed up these deals – from swaps to SAAs – as “a whole set of [Special Purpose Vehicles] set up to facilitate criminal acts.”
Welcome to Nigeria. The questions are endless. Would it not have been better for the government to hustle for some initial/seed funding money for the NPDC (when it took over operatorship), and then allow NPDC use part of the proceeds from the operation of the blocks to continue the funding, instead of acting as ‘Father Christmas’ to Atlantic and Septa? And with the swaps, if you insist on keeping local refineries comatose, why go ahead and employ middlemen to help you sell your crude oil to foreign refineries? Why not have the NNPC directly enter into trade agreements with these foreign refineries? Someday perhaps, we will have answers to those questions.
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