NNPC And Foreign Multinationals: Joint Ventures Of Fraud

Ifeanyi Izeze

The termination of all agreements on fiscal incentives given to operating foreign multinational oil companies of the NNPC joint ventures for the purpose of increasing oil and gas exploration would ordinarily have been a very welcomed development but for the often familiar gulf between good concepts and their implementations in Nigeria, the initiative has been greeted with cautious jubilations.

Concept of Memoranda of Understanding (MoUs) as a major policy shift in the Nigerian oil and gas sector was employed by the Nigerian Government to ensure that the participating companies get a minimum profit margin after tax and royalties on their equity crude. The document contained procedures for reviewing such agreements in such a way that both parties (the NNPC and the joint venture partners) benefit from the dynamics of the economy, such as inflation, exchange rates fluctuations and dictates of the gyrating world oil market.

Unlike the Joint Operating Agreement (JOA), which sets the tone of the agreement between the NNPC and the operators, including the guidelines and modalities for running the ventures, the MoU contains the basic understanding on the joint ventures as a response to the specifics of fiscal incentives.

The federal government had Memoranda of Understanding with Shell Petroleum Development Company of Nigeria (SPDC), Exxon/Mobil Producing Nigeria Unlimited, Chevron Nigeria Limited, Nigerian Agip Oil Company (NAOC), TotalFinaElf and Pan Ocean Oil. The companies operate joint venture pacts with the NNPC, which manages the federal government’s equity in oil and gas business.

Apart from guaranteed minimum profit after tax and royalty on their equity crude, the MoUs also allowed for reserve addition bonus, in any year that any of the company’s addition to oil and condensate ultimate recovery exceeds production target for the period.

The incentives were granted at different times between 1986 and 2004 due to reluctance of most of the oil producing companies to invest in exploration and production activities in the country. It was originally geared to encouraged the foreign multinational operators to embark on aggressive exploration, to enabled Nigeria’s proven and producible crude oil reserve to move up to over 40 billion barrels with a defined time frame.

However, like all good concepts in Nigeria, the implementation of the MoUs was heavily infected by the virus of fraud and corrupt manipulations of loopholes in the agreement by the foreign operators in collaboration with their Nigerian partners.

The circumstances that led to the introduction of the first set of MoUs have changed drastically. So the continued granting of incentives to the foreign operating companies only amounted to a waste of highly critical resources by the federal government. Now with oil price hovering around $80 to $100 per barrel, and the obvious disinterest of foreign multinationals to invest in the nations upstream sector especially exploration and production to shore up proven and producible oil and gas reserve base, the entire essence for incentives was rendered very useless or rather foolish on the part of Government as the operators were simply ripping-off Nigeria.

It is a well-known fact that the huge monetary incentives which the foreign operators have been enjoying were diverted to investments outside the country in areas that have nothing to do with the enhancement of the fortunes of neither the oil industry nor the Nigerian economy. Rather than being invested in the capital -intensive exploration and production activities in the nation’s new frontiers particularly the deep offshore and inland basins, benefits gotten from the incentives were taken to new frontiers in Russia and other Baltic states.

Also, contrary to the foreign operators’ propaganda that the government’s funding of the joint venture was “significantly short of existing requirements,” disputes surrounding cash calls in the past arose on the few occasions where some government officials insisted on rejecting the foreign operators’ explanations for blurred expenditures on projects.

For instance, it was a common practice for oil companies to claim to spend over 900 million naira building a unit of line block of six classrooms in host communities in the Niger Delta. The NNPC in turn will offset the claims in their cash call reconciliation without asking questions. Water borehole projects in the Niger Delta where the water table is very shallow were commonly pegged at over one billion naira per unit and the Nigerian government was forced by blackmail to accept the bill partly because of the soiled hands of Government and NNPC officials.

The latest scandal of an operator overshooting its joint venture budget by $1.2billion was just a meager issue in the way these foreign operators had been milking Nigeria in the controversial MOU. The annoying aspect is that these companies would turn around to blackmail the NNPC/Government over cash call defaults or stubbornness in funding exploration and production activities when in actual sense they fraudulently incur all kinds of expenses that cannot be explained in real terms.

Thank God that the Nigerian National Petroleum Corporation in this particular case mustered enough will-power to insist that the controversial budget overshoot was done without regulatory approval and in a not too transparent manner. Maybe we are beginning to see a new NNPC under new Acting Group Managing Director, Abubakar Yar’Adua.

According to the NNPC boss, Shell did not adhere to the performance plan. And this is where the funding problems or rather blackmails had come in the past. All the foreign operators, not only Shell, will not invest tangible resources in upstream but they would claim to have spent huge amounts which they would normally ask the NNPC to reimburse or swap with crude oil equivalent.

It is very commendable that for the first time in the history of the nation’s organized oil industry a chief executive of NNPC decided to stand to challenge the foreign multinationals’ unclear business practices. In the latest controversy over JV funding, the Acting NNPC Group Managing Director was resolute in maintaining that: “There was a programme and a budget but Shell over-performed by $1.2bn. They found money somewhere and went ahead with the project without discussing or getting the approval of the bigger partner in the joint venture only to come back and ask for reimbursement.

For Shell to claim that Government was not paying its counterpart fund in the JV was deceptive as such statement faile to portray the true picture of the case. The company over-performed, and the National Petroleum Investment Management Services that was supposed to approve it was not aware, so how can government pay back.

The clear message from the Nigerian government (NNPC) to the Chief Executive Officer of the company involved in the latest scandal, Royal Dutch Shell Plc Group, Mr. Jeroen van der Veer was that the country is sick and tired of multinationals’ blackmail to cover their unclear business practices in Nigeria. As had been the case before the current controversy, the Shell boss had addressed an international press conference claiming that government’s inability to meet its JV cash calls posed a serious challenge to future investments in Nigeria. Everybody that is familiar with the Nigerian oil industry knows that it was a blatant lie against the NNPC.

The NNPC boss had insisted that the corporation, which holds 55 per cent stake in the JV was reluctant to pay whatever was outstanding with crude oil as being suggested by Shell. His words: “You say we should pay back with crude, but the process was not very transparent, and how can we, when you (Shell) are the operator of the venture.”

These are just tips of the icebergs in the level of fraud perpetrated by the foreign oil companies against the NNPC (Nigeria) through the PSC understandings. These companies knew very well that the NNPC lacks the in-house capacity-technically and even the will-power to monitor the activities of the operators in the production sharing relationships.

Neither the DPR nor the NAPIMS has the technical capabilities in-house to do even actual fiscalisation of crude quantities at the terminals. They have to pathetically depend on the foreign multinational operators to collect the data for the Nigerian government. This is true. The most interesting aspect is that the DPR and NAPIMS staff hangs on the facilities and comfort provided by these foreign operators at the nation’s oil and gas export terminals. This pathetic scenario would make policing of the nation’s crude oil business even very difficult for saints not to talk of the peculiar people in the NAPIMS (NNPC) and DPR.

Now that the Federal Government has decided to do away with blurred MOUs, the NNPC should be encouraged to commence negotiations on working out beneficial alternative funding arrangements for projects in the sector. It is not enough to just cancel existing arrangements without an alternative reality. There must be a workable and more transparent alternative to the fraud ridden production sharing MoUs

Beyond fostering a workable alternative funding arrangement for exploration and production activities, the federal government and the NNPC itself must honestly subject themselves to the probing microscope of NEITI and other forms of self audit as concerns the full implementation of the Extractive Industry Transparency Initiative. The NNPC is expected to lead in public disclosures of financial dealings- earned and expended revenues. In essence, the corporation needs to do some house cleaning

Also, the federal government no doubt has genuine intentions in insisting frugal use of its resources to maximise benefits derivable from its investments in oil and gas business, however, to increase the nation’s proven and producible reserve and even actual production and ensure the integrity of assets, there is an urgent need to do more than the current lip service being paid to the thorny issues of the Niger Delta resource rights agitations. The government more than ever before needs to engage oil and gas producing host communities in finding solutions to the deteriorating crisis.

For either the government or the foreign oil firms to believe that the current trend of flow of production activities to offshore arenas would free them from the ongoing violent agitation in the region could best be described as self deceit or rather daylight dreaming. This is an advice. Those who have ears let them hear.