A Review of the Nigerian Energy Industry

How IOCs fleece Nigeria of billions of dollars in M&A fees, taxes

Mrs. Diezani Alison-Madueke, Petroleum Minister

08 September 2014, Lagos – Nigeria reportedly lost about $10 billion in revenue which should have accrued to the country from mergers and acquisitions (M&As) by multinational oil companies over 10 years ago.

A report of an investigation by the Committees on Justice and Finance of the House of Representatives, exclusively obtained by THISDAY, reveals how oil companies manoeuvred their way and avoided payments of fees they were under obligation to pay.

The report also shows that Nigerian officials were willing collaborators as they failed to make demands from these companies monies due to the country.

Although the affected companies assigned their assets to the successor companies following the M&As of the 1990s to the early 2000s, they however failed to pay to Nigeria fees mandated by statutes before their new status could be perfected.

In a bid to improve economies of scale and hedge against oil price volatility, there were a rash of M&As in the oil and gas sector starting in 1998.

It started with British Petroleum’s (BP) acquisition of Amoco in 1998 and ARCO in 2000; Exxon’s merger with Mobil in 1999 to form ExxonMobil; Total’s merger with Petrofina in 1999 and with Elf Acquitaine in 2000, renamed Total S.A.; Chevron’s acquisition of Texaco in 2001; and the merger of Conoco Inc. and Phillips Petroleum Company in 2002 to form ConocoPhillips.

However, even when the companies denied the existence of these M&As under the Nigerian company and petroleum laws, they still turned around to claim capital allowances and investment tax allowance, which they would not have qualified for except by the virtue of being a new entity.

In its investigation, the joint committee discovered that three major oil companies that took over or bought into other companies years ago failed to update their status as required by law, and thereby deliberately avoided paying the charges that home and host countries alike enjoyed when the M&As took place.
“By international best practice procedures, Nigeria would have netted from these transactions a minimum of $10 billion,” the report said.

The companies involved are: (a) Chevron and Texaco which formed ChevronTexaco, (b) Total, Elf and Fina which formed TotalFinaElf, and (c) Exxon which merged with Mobil to form ExxonMobil.

Although these firms admitted that there were mergers between their parent companies around the world, they however denied the existence of such mergers between their subsidiaries in Nigeria. This denial, the House committees believed was “just to avoid payment of required fees”.

In their response to the committees’ investigation, all the companies denied any wrongdoing, saying they complied with all extant laws. But the joint Committee on Finance and Justice found otherwise.

Under Nigerian laws, merging companies are required to comply with the following processes:
•Application for assignment of interest in each oil block;
•Payment of reserve values in each block;

•Payment of a sign-on or signature bonus in respect of each block;
•Fresh registration of the new entity at the Corporate Affairs Commission; and
•Re-evaluation of all the books being operated by the merger companies.
According to the House’s investigation, the affected companies failed to comply with the following laws:

•Paragraphs 14-16 of the First Schedule of the Petroleum Act 1969;
•Petroleum (Drilling and Production) Regulations 1969 which state the application fees payable on assignment of blocks;
•Article 2 (Operator) and 19 (Assignment and Transfer) of the various Joint Operating Agreements;

The combined effect of these laws and regulations is that when a company transfers the right of operation of its blocks to another company, hitherto not approved to operate it, then it is bound to seek approval of the merger, which may be given after the necessary payments have been made.

In the course of investigation, the House received copious submissions from the Corporate Affairs Commission (CAC), the Federal Inland Revenue Service (FIRS) and the Department of Petroleum Resources (DPR).

The House also engaged the services of experts in the oil industry, a legal expert in oil and gas transactions, as well as tax consultants.

The report noted that Chevron set the precedent in 1984 when it acquired Gulf Oil Company. The report said: “Following the worldwide acquisition of Gulf Oil Company by Chevron in 1984, Chevron was meant to pay $75 million as premium but ended up paying $10 million.

“Chevron did not agree to pay this premium until ten years after the merger, when it became obvious that it could no longer operate as Gulf.”

However, that transaction was not the subject of the investigation.
The report said although the authorities were aware of these anomalies, they did not confront these companies due to weak institutional oversight and dishonest officials.

Following the Chevron/Gulf marriage, Total in 2000 merged with Elf in a N54.2 billion deal. On this merger, however, the House’s report found that Nigeria was the only country excluded from getting revenues from the merger.

The report said: “In Nigeria, Elf Petroleum Nigeria Ltd., a subsidiary of the global Elf, denied any merger but went ahead to change its name to Total Exploration and Production Nig. Ltd.

“It paid a controversial $5million for the name change. Even this payment was not done until 2008.
“But in reality there was merger in Nigeria because the oil blocks that Elf operated was granted only to Elf and if it had to be operated by another company, as they presently are, then there must be a consent from the federal government after payment of fees.

“The Joint Operating Agreement between Elf and NNPC did not define Elf to be able to pass its own interest to any other company or successor in title.
“It was to Elf and Elf alone, and if it is transferred to someone else, then payment of fees for validation is inescapable.

“Total knew some payment must be paid and 6 years after the name change, it paid a paltry $5 million. There is no law that requires a company to pay as much just for change of name.”

Despite Total’s denial of a merger, FIRS’ documents show that it claimed capital allowance and investment post-merger.

Capital allowance claims are reserved for newly established companies as incentives and not for companies already in operation.

With respect to Chevron, unlike other companies that denied the existence of a merger or acquisition, Chevron admitted there was a merger between Chevron Nigeria Ltd and Texaco Overseas Nigeria Petroleum Company Ltd in 2002.
Assets on which the merger was based included Texaco’s multibillion barrels Agbami discovery offshore Nigeria.

Chevron paid $8 million as “assignment fee” to the federal coffers as demanded by DPR but claimed it was not caught by the fee-paying provisions on the grounds that (a) the merger was sanctioned by a Federal High Court in Lagos and not by a separate deed of assignment; and (b) that it paid $8 million as assignment fee as required by DPR only gratuitously because the company did not want to join issues with the authorities.

However, after a thorough investigation, the House found as follows:
“That the dateline of events did not support Chevron’s claims but shows deliberate steps to evade payment. This is because the payment was made over one-and-a-half years before the court order was procured. It may be suggested that the order was sought having discovered under-payment and in order to avoid further payment.

“The actual merger took place in 2002. The DPR letter was dated 6th December 2002 and payment made on 6th January, 2003. The order of the Federal High Court Lagos did not come until 29th October, 2004.

“Apart from the law, the JOA between the different oil companies signed in 1991 provided that successors in title of the named parties must seek ministerial approval to operate the newly-acquired assets.

“Chevron and Texaco have different JOAs with NNPC. The licences to operate the different OMLs (Oil Mining Leases) are yet to be re-assigned to a different entity.”
The law excludes the usual clause that empowers successors in title to step into the shoes of the original parties’ agreement without first seeking and getting government’s approval and payment of premiums.

“The committee discovers that no one granted Chevron approval or consent to operate OMLs previously held by Texaco.

“Thus the committee determined that Chevron has been operating the OMLs illegally without approval since 2002.

“Interestingly, Texaco has become defunct in Nigeria, as it is no longer registered with CAC, it no longer pays taxes, and no longer has subsisting records with DPR,” the report  of the committees revealed.

The committees said they were considering how these OMLs would revert to the federal government.

With respect to the Exxon merger with Mobil in US in 1999, the House said the global $75 billion merger of Mobil and Exxon was never in doubt.
The House, however, found that the Nigerian subsidiaries – Mobil Producing Nigeria Unlimited and Esso Exploration and Production Nig. Ltd. – have not changed and still operate different blocks differently.

The report stated: “But staff and management, vehicles, building, etc, are interchanged among them.

“It can be said that there is merger of sorts between the two companies even in Nigeria, given information gathered elsewhere and on the ExxonMobil website.
“For instance, Mobil Producing does not have a website, or vehicle or building separate from ExxonMobil.

“To cleverly avoid payment of fees, the two companies work together (merge) except when it comes to rights of operation of oil blocks between one company and the other.

“In other words, there was merger in all respects (staff, logo, etc) except the formal ownership and formal operation of oil blocks. Thus the two companies avoid the legal problem associated with inability of a third party wearing the shoes of a named party in a JOA.”

The House described the method adopted by Mobil as a sophisticated way of avoiding approval from government.

However, it said: “Smart as this is, the name ‘ExxonMobil’ is boldly scripted in all its offices. However, the website, vehicles and documents are not known or registered under any Nigerian law.

“Similarly, lawsuits in the Niger Delta have been dismissed on the basis that ExxonMobil is not a juristic person.
“The company has thus engaged in one of the most bizarre corporate deceptions in Nigeria.

“It amounts to fraudulent misrepresentation of identity by a company that is the fifth biggest in the world; all in a bid to avoid payment of fees in a developing country with weak oversight and enforcement capacity.

“Mobil and Esso also claimed capital allowance and investment tax credit after the global merger, a move that suggested existence of a merger, or the claims and allowances become illegal.”


– This Day

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