A Review of the Nigerian Energy Industry

PIB, Malabu and the $1billion Bazaar

Diezani-PIB15 August 2013, Lagos – Based on a subsisting motion sponsored last year by Deputy Majority Leader, Senator Abdul Ningi and 46 other colleagues, the Senate recently directed its committees on Petroleum Resources (Upstream) and Finance, chaired by Senators Paulker Emmanuel and Ahmed Makarfi respectively, to probe the controversy surrounding the payment of $1.092 billion to Malabu Oil and Gas Limited over OPL 245 oil block. The Senate decision came barely a week after the House of Representatives Ad-hoc committee which investigated the same deal concluded its assignment with damning conclusions.

While the Malabu controversy remains a business deal gone sour in a sector that is lacking in transparency, the circumstances surrounding a tri-partite transaction involving the Federal Government, Shell/Agip and Malabu Oil and Gas Limited in respect of OPL 245 is what has generated the current furore.At the centre of the deal is former Petroleum Minister, Chief Dan Etete and Shell Nigeria Ultra Deep, SNUD, a company incorporated in January 2001 for the sole purpose of operating OPL 245 as a fully-owned subsidiary of Shell. The block in question is located directly between the two major commercial oil discoveries of Agbami (OPL 216/217) and Akpo (OPL 246). OPL 246, for the uninitiated, was awarded also by Abacha in March 1998 to South Atlantic Petroleum (Sapetrol) of which Lt General T.Y. Danjuma is the major stakeholder.

To be sure, the House of Representatives Ad-hoc committee report on Malabu is very revealing of how the resolution arrived at by the federal government may not be in our national interest. But stories making the rounds also suggest that the current rash of probes may be more in the interest of some characters who lost out in the dirty deal than in the interest of Nigerians who were practically gang-raped. For instance, one of the key recommendations of the House report is that Mohammed Abacha, and not Dan Etete, owns the controlling shares in Malabu Oil and Gas. That may indeed be true but it appears that the former Oil Minister has already out-swindled the Abacha family and it should not be our business that people who helped themselves to our national wealth are fighting over the spoils.

What should be of concern to critical stakeholders is that nobody, no individuals should have the powers to singularly allocate national assets to themselves as it was done by the late Head of State, General Sani Abacha and his minister, Etete, with regards to OPL 245. Yet it would seem that we don’t learn any lesson from our experience which then explains why the Petroleum Industry Bill (PIB) still retains the clause that enabled the duo to award such juicy oil block to themselves. Notwithstanding the subterfuge, Section 191 of the PIB is a clever replication of Section 2 of the 1969 Petroleum Act which vests unrestricted powers in the hands of the Petroleum Minister with regards to “Oil exploration licences, oil prospecting licences and oil mining leases”.

Against the background that it is theabuse of such discretion that has created several idle but rent-dependent overnight billionaires and associated corruption in our system, certain provisions in the current PIB fail the test of credibility. For instance, Section 190 (1) of the legislation states that “The grant of a petroleum prospecting licence or a petroleum mining lease not derived from a petroleum prospecting licence in respect of any territory in, under or upon the territory of Nigeria shall be by open, transparent and competitive bidding process conducted by the Inspectorate pursuant to the provision of subsection (2) of this section.”

For the sake of emphasis,Section 190 states”There shall be no grant of discretionary awards, except as provided under section 191 of this Act.” Unfortunately, that exceptional clause in section191 stipulates that “Notwithstanding the provisions of subsection (3) of section 190 or any other provision of this Act, the President shall have the power to grant a licence or lease under this Act.”

Clearly, this new lever for another discretionary power endangers a fair and open bidding process that the Nigerian oil industry truly requires. The discretionary award of oil production licenses that put the Nigerian oil blocks in the hands of Abacha and Etete will happen again if we still vests such powers in the hands of individuals. When Nigerians say that their president “is the most powerful in the world”, what they mean essentially is that he/she has control over the oil industry and can turn a pauper to a billionaire by the stroke of a pen. But is that the way to run a country in this modern era? That is a critical question we need to answer if we are desirous of ever institutionalizing a government that will be both transparent and accountable. While it must be stressed that this problem, like many others, predates President Goodluck Jonathan, we must begin to wean the system of such absurdities.

It is indeed instructive that Mrs Oby Ezekwesili provided the institutional template, first with the Nigeria Extractive Industry Transparency Initiative, NEITI, of which she was founding Chairman (this reporter was also a member) and then later as Solid Minerals Minister where she was also instrumental to writing the Nigerian Minerals and Mining Act, 2007 which detaches the office of the Minister and his/her Principal from the award of mining licences. Incidentally, between 2004 and 2007 when we were drafting NEITI Bill as members of the National Stakeholders Working Group under Ezekwesili, discretionary power in the award of acreages was of serious concern to us. Unfortunately, while the NEITI Act that we eventually succeeded in getting passed requires the Federal Government to conform with the provisions of the Global EITI (which includes a transparent bidding process for acreages), the same NEITI Act added a caveat that all existing long-term contracts must be respected, a last-minute insertion following pressure from the IOCs.

But to properly situate how discretionary power has created a culture of rent seeking behaviour that has in turn made our oil and gas sector largely unproductive, we may have to trace the trajectory of the controversial Malabu deal. The story began in April 1998, about three months before Abacha’s death when he decided to manipulate the Indigenous Exploration Programme Policy to award certain oil blocks to cronies who would act on his behalf and themselves. By the filings at the Corporate Affairs Commission (CAC) on April 18, 1998, the share capital for Malabu Oil and Gas Company that was handed OPL 245 was N20 million, divided into 20 million ordinary shares of N1 each. The shareholdings were distributed as follows: Mohammed Sani, better known as Mohammed Abacha, son of the late Head of State: 50 per cent or 10 million ordinary shares; Kweku Amafagha, representing the interest of Dan Etete: 30 per cent or 6 million ordinary shares; and Hassan Hindu, wife of the Wakili Adamawa, Alhaji Hassan Adamu: 20 per cent or 4 million ordinary shares.

However, with Abacha’s death and the emergence in 1999 of a “Pharaoh that knew not Joseph”, to borrow a Biblical expression, the story became interesting in 2000. At a period Olusegun Obasanjo was now President and Atiku Abubakar Vice President, the entire documents for Malabu got missing at the CAC and a new one surfaced: Enter Munamuna Siedougha and Fasawe Oyewole with the shares redistributed as follows: Munamuna Sidougha, 10,000,000 and Pecos Energy Limited, 10,000,000. It was at this point that Mohammed Abacha’s name disappeared from the Malabu manifest and Etete more or less became the sole proprietor.

Meanwhile, by a letter dated April 29, 1998, Malabu Oil and Gas Limited had been directed to pay N50,000 application fee, $10 million bid processing fee and $20 million for signature bonus, all within a period of one month as stipulated by law. But it was a year later that the processing fee of $10 million would be paid while only $2.04 million was paid as signature bonus. Interestingly, the April 6, 2001 cheque for the balance of $17.96 million for the signature bonus by SNUD as the technical partner of Malabu actually bounced. Three months later in July 2001, there was a directive from President Obasanjo to cancel the deal and with that, OPL 245 was put on offer by the Federal Government. At the end, Shell (that was to have been a technical partner for Malabu with a stake of 40 percent), now had control of OPL 245. But since it is not an indigenous company, the signature bonus had to change and the company was asked to pay $210 million. But with Etete feeling back-stabbed by Shell, he sought legal redress.

In November 2006 while the court process was still on, there was another twist in the tale when the federal government decided on an out-of-court settlement with Malabu which led to the restoration of OPL 245. The oil block was thereafter re-awarded to the company with a new signature bonus of $210 million. A letter to that effect dated 2 December 2006 was signed by Dr Edmund Daukoru, then Minister of State for Petroleum Resources (President Obasanjo held the substantive portfolio throughout his tenure). Why Obasanjo decided to approbate and reprobate on Malabu only him can explain but it would seem that the rash of court cases may have affected his judgment.

With Malabu back in the picture regarding OPL 245, Daukoru wrote Shell that “following a review of expert legal opinions on respondents’ prospects in the legal appeal by Malabu Oil and Gas, Government has decided that the best option against exposure to substantial damage is an out-of-court settlement. That Shell is to forgo block 245 to Malabu while Government provides a mutually acceptable substitute of comparable potential against the $210 million, which Shell has already paid or will be expected to pay as signature bonus”.

But Shell would not relinquish the block without a fight. Having apparently seen how commercially rewarding OPL 245 could be and unwilling to accept the promise of another block, Shell took the Federal Government before the International Centre for the Settlement of Investment Disputes, ICSID, an arm of the World Bank in Washington DC. The case was on throughout the tenure of the late President Umaru Musa Yar’Adua but on July 2, 2010, the current administration wrote a letter allocating OPL 245 to Malabu Oil and Gas. That followed an out-of-court settlement brokered between the Federal Government and the contending parties.

Now, the House report clearly states that the terms of settlement of the Malabu deal are unfavourable to the country with regards to our oil assets, especially when compared with our stake on Danjuma’s OPL 246. It is also on record that then Nigeria National Petroleum Corporation, NNPC, Secretary, Professor Yinka Omorogbe, a respected academic with solid integrity who was cleverly eased out of the system, was critical of certain aspects of the agreement. Yet the federal government still nonetheless went ahead to conclude the deal. That has led to all manner of insinuations and allegations that some officials may have acted beyond the call of duty in the transaction.

But I find the basis for which the House report seems to be slanted against the federal government rather suspicious. While I am also of the view that the manner in which Etete edged out Mohammed Abacha from the Malabu deal smells fraud, I do not believe that should be the business of those who superintended the transaction on behalf of the federal government. Since all the Malabu documents and court papers have always listed Etete and not Mohammed as the prime promoter of Malabu, the two of them should go and sort themselves out. What I think should be of concern to our lawmakers is whether indeed our officials acted in good faith. That is what interests me.

With the intervention by the United Kingdom authorities to probe allegations that Etete made some curious payments into several onshore and offshore private accounts after receiving the settlement claims from the escrow account at JP Morgan, it will not be difficult to establish if any official was indeed involved in financial impropriety, since money trail is very easy to trace. And if any official is found to have been paid from the Malabu account not only should such public officials lose his/her job, the person should face criminal prosecution.

However, my main concern really is not that the government acted as intermediary in the transaction but rather that it has chosen not to learn anything from the whole controversy. Of course, there will always be questions in an industry where the more you look the less you see, but there can be no doubt that Shell indeed had a good case before international arbitration.

According to the company’s statement of claim at the arbitration, Malabu in March 2000, came with “a farm-in proposal. Malabu was looking for an international oil company to take a 40% equity stake in the OPL 245 licence itself and ‘carry’ Malabu in developing the block, i.e the international oil company would take all the exploration and development risk by funding Malabu’s share of the costs (including the acquisition, exploration and development costs of the block) as well as its own. Those costs would then be recovered by the international oil company from Malabu’s share of oil production.”

Given that several other oil exploration and development licences allocated by the Abacha regime had been withdrawn by the Obasanjo administration at the time, “Shell made enquiries of the Assistant Director of the DPR, Mr. Andrew Obaje, on 31 March 2000. He confirmed to Shell that OPL 245 had been owned by Malabu since April 1998 and was currently in a good standing. Mr Obaje told Shell that the FGN did not intend to revoke the allocation because Malabu had paid all the required fees and part (US$ 2.04 million) of the US$ 20 million signature bonus for the block. The map of allocated concessions obtained from the DPR also indicated that Malabu was the owner of OPL 245. On 4 October 2000, Shell was approached by a new Malabu representative. He was known to Shell, because he had been employed as the Managing Director of Texaco in Nigeria until his retirement in mid-2000. Shell received verbal assurances from the then Vice President of Nigeria that there was no objection from the FGN to Shell acquiring an interest in OPL 245.”

With all the agreements signed between Malabu and Federal Government and the requisite documents ceded, Shell on 24 May 2001, received the signed title deed of OPL 245 together with the co-ordinates of the licence area. “However, in approximately mid-June, reports appeared in the Nigerian press suggesting that notwithstanding the assurances Shell had received from Malabu and the results of its own due diligence – certain individuals whose names were not contained in any official records were claiming an interest in Malabu and/or OPL 245. In early July 2001, Shell received news that the FGN had withdrawn the allocation of OPL 245 to Malabu. The FGN’s revocation was a shock to Shell, as no explanation was given, but Shell continued to hope that Malabu (together with Shell’s assistance) could reverse the FGN’s revocation. Shell did all it could do to assist Malabu to reverse the FGN’s decision. On 25 March 2002, a Shell representative was suddenly and unexpectedly summoned to meet with President Obasanjo in Abuja the following day. Chief Olusegun Obasanjo (the President of the FRN), Mr. Obaseki , Mr. Kayode Are (the Director General of the State Security Service), Mr. Funsho Kupolokun (Special Assistant to the President of the FRN on Petroleum Matters) and a representative from ExxonMobil were all present. At the meeting, the President of the FRN informed Shell and ExxonMobil that OPL 245 would not be returned to Malabu and that Shell and ExxonMobil would instead be invited to bid competitively not for the role of licence-holder (as Malabu had been) but rather for the role of Contractor for OPL 245 with NNPC holding the licence.”

Quite naturally Malabu kicked, accusing the federal government of breach of contract and Shell of underhand dealing. But with the award, Shell commenced operation to develop OPL 245, spending in the process, according to its figure, “over US$ 535.9 million” while exploration work had already resulted in two significant discoveries. But on 30 November 2006, there was yet another twist when the Federal Government again canceled Shell’s contract and re-awarded the block back to Malabu. With that, Shell took the case to international arbitration until it was finally resolved in July 2011. But has it really been finally resolved?

With so much money involved and several contending interests (including Mohammed Abacha claiming he registered Malabu before Etete allegedly defrauded him), we have definitely not heard the last of the Malabu controversy. For sure, the case will drag on for years both in local and foreign courts, especially since Energy Venture Partners Limited (a British Virgin Island company) and International Legal Consulting Limited (a Russian company) have already joined legal issues with Malabu. Our security agencies should also be interested in the current investigation by the UK Proceeds of Crime Unit to ascertain if any of our officials was paid bribe following the consummation of the tripartite agreement. But as far as I am concerned, the critical issue to deal with is: How do we ensure it doesn’t happen again?

The Malabu controversy is coming at a period our oil and gas sector is seriously challenged on all fronts: from the massive oil theft that threatens the national budgets to the discovery of shale oil in the United States and now there are reports that our once-promising multi-billion dollar Olokola, OK, LNG project might end up another waste with the withdrawal of the foreign investors. What the foregoing indicates is that there is much to engage the attention of our lawmakers and other critical stakeholders so that we do not continue to repeat the mistakes of the past.

The OPL 245 deal which led to the payment of $1.092 Billion to Malabu was the result of a systemic abuse of discretion in which an oil minister and his late boss, taking powers from military decrees, subtly allocated a fruitful oil block to themselves even though Etete has succeeded in playing a fast one on the Abacha family. But while Mohammed Abacha and Dan Etete can use their proxies to fight either in court or at the National Assembly, the core question in the Malabu deal lies in the process of awarding oil licenses and leases which is placed at the discretion of the Oil Minister or President. That is the critical issue we must deal with.

As things stand, the PIB merely transfers the powers of the Minister in the 1969 Petroleum Act to the President who can now grant licenses outside the bid round. So effectively, nothing has changed, and that is the problem. The President should not have such transactional powers which he/she could then easily delegate to the minister who acts on his/her behalf anyway. The lesson we must learn from Malabu’s OPL 245 is that NO ONE SHOULD HAVE discretionary power to grant leases outside a competitive and transparent bid round.

Moghalu’s Economic Prescriptions
The Deputy Governor of Central Bank of Nigeria, CBN, in charge of Financial System Stability, Dr. Kingsley Chiedu Moghalu, will today in the United States speak on the theme “Africa as the Last Frontier: Why It Matters in the Global Economy”, which is the central thesis of his most recent book. According to the Woodrow Wilson International Centre for Scholars where he will be keynote speaker, Moghalu is expected to “share his experiences and thoughts on how the region (Africa), which had previously been largely ignored, can become a key player in international economic affairs.”

Given the lack of premium we place on scholarship in our country, it is no surprise that Moghalu’s first opportunity to discuss his highly-revealing book, “Emerging Africa: How the Global Economy’s ‘Last Frontier’ Can Prosper and Matter” (publicly presented on June 8 this year to mark his 50th birthday), would come from the United States. Yet it is an interesting book I will strongly recommend for those who seek a better understanding of how our continent has consistently failed to realise its economic potentials.

Having spent 17 years at the United Nations, most of it at duty posts in the United States, Cambodia, Croatia, Tanzania, Switzerland etc. and with a Masters from Fletcher School of Law and Diplomacy at Tuft University and a doctorate from the London School of Economic, Moghalu knows his turf. Yet even when he may not have pulled his punches with regards to the challenge of development and associated problems in Africa, he is nonetheless positive in both his outlook and projections: For all the problems he identified, he outlines possible alternative pathways to development and that is why I find the book rather insightful.

The section that will most likely interest readers the most is part two which comprises four chapters on economic transformation with Nigeria as the case study. Of course the title sounds rather patronising given the slogan of this administration, yet the arguments are indeed as compelling as the facts and anecdotes used to illustrate his positions. It begins from a premise that any agenda that is transformational must of necessity be a process which details how people are transported from poverty into a measure of prosperity.

Three Foundational questions, according to Moghalu, will determine the trajectory of the Nigeria economy in the years to come. The first is a choice between power devolution (the centre versus the “federating units”) as opposed to a strong leadership that drives development from the centre. How this contest is resolved, Moghalu believes, will play a critical role in the economic prosperity we seek. The second of the foundational questions is the ever-constant tension between the technocrats and the political authorities with regards to economic management. Here he cites several examples with the most recent being the disagreement between the executive and the legislature over what should be the appropriate oil benchmark for the 2013 budget. The third of the foundational questions flows from the second when economic choices are determined more by political expediency of the immediate needs than by some practical but futuristic aspirations, using the example of the Sovereign Wealth Fund to drive home his point.

Rarely does one find a book on the economy interesting to read but Moghalu’s is one of those exceptions as I found it difficult to put down, not only because of its reader-friendly presentation and flowing prose but also because of the compelling facts and data it contains. It is a serious work of scholarship that needs to be properly engaged and interrogated but I leave readers with this prescription: “In Nigeria today, for example, pick up the average daily newspaper and you are confronted with the clamorous, cacophonous vaunting of a thousand narrow interests-from tribal groups to religious associations and militant groups. The consent of this motley collection of nationalities and other interests needs to be manufactured to rise above their differences and pursue a clear, unified vision of economic transformation-a rising tide that will lift all boats… ”

– The Verdict by Olusegun Adeniyi, This Day

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