Nigeria – Kenya oil trade lacks transparency

*Bonny Oil Terminal.

*Bonny Oil Terminal.

*Revenues unaccounted for

31 January 2016, Nairobi — As Nigerian President Muhammadu Buhari visits the country, little might be said in public about a yesteryear multi-million-shilling 30,000 barrels of crude oil per day deal that ended up in smoke.

This remains one of the most opaque deals ever signed with Nigeria and the whereabouts of barrels of oil worth billions is still unknown.

A recent report by an international energy watchdog, the Natural Resource Governance Institute, has called for an end to government-to-government (g-to-g) deals, which, it says, are “crowded with middlemen” and asks the Buhari government to stop sales to smaller non-refining countries.

Kenya is named in the report as among the countries that lifted oil consignments from Nigeria.

The report says this was “characterised by secrecy, undue complexity, and an absence of oversight”.

One experienced trader is quoted in the report as saying: “When it comes to allocating cargoes for sale, bilaterals are the low men on the totem pole.” He goes on to imply the “payments to officials could sometimes get a g-to-g contract holder more attention”.

It all started in 1999 after then President Olusegun Obasanjo allowed Kenya to lift 30,000 barrels every day as part of a government policy to “find new buyers” and as “a useful way to pursue foreign policy aims”.

Kenya was to buy the oil at concessionary rates and below the Opec basket price.

At that time Kenya was buying an average of 35,000 barrels a day for domestic use.

In one year of the Nigerian concession, the government would have lifted oil worth $760 million.

However, Parliament was told that the government could only account for $40 million a year.

STINGING QUESTIONS
Interestingly, nobody followed up the matter of the missing billions after then Alego-Usonga MP Sammy Weya raised the issue.

“That matter was very dodgy. In my opinion people made money out of the deal,” Mr Weya told the Nation on Wednesday. “I never got convinced and some people were saying: ‘Why are you asking that question?'”

When Kenya signed the deal, it knew it had no capacity to process Nigeria’s high-grade Bonny Light as its Mombasa refinery was engineered to process United Arab Emirates’ Murban.

It was also uneconomical to ship it to Mombasa.

Thus, the Kenyan quota had to be lifted and sold to any willing buyer on the spot market, a term used in the oil industry to denote those who do not buy in the speculative futures market.

Mr Weya’s question raised a lot of issues.

Speaker: “Wait a moment. Is the Kenya Government trading with Nigerian oil? Has the Kenya Government become a broker?”

Energy Assistant Minister Mwangi Kiunjuri: “Mr Speaker, what happens is that we are given 30,000 barrels per day. If Kenya can lift that oil and refine it in our refineries for our use, then we can go ahead and do that. However, our refineries cannot meet the requirements for processing Nigerian crude oil.

So, instead of the Kenya Government losing that facility, it calls for tenders and tenders the facility to agents to lift the oil on its behalf. Then we get a commission, as a government, from whoever wins the tender.”

THE FIGURES
To date, how much oil was lifted in Kenya’s name — and at what rate — is a matter of speculation.

Similar public scandals have ensued, including investigations into the Nigerian National Petroleum Corporation (NNPC)’s g-to-g deals with Liberia, Jamaica, Zambia, Malawi and South Africa.

When Kenya signed the deal, it gave a huge chunk of its share to Vitol, a global energy company, whose chief executive is British billionaire Ian Taylor, described last year by the Independent newspaper as “one of Britain’s biggest tax avoiders”.

The other went to Arcadia, a Swiss-based company.

The arrangement looked simple: Once the government signed the bilateral deal, it was supposed to appoint a large oil trading company to arrange loading and transportation and find buyers in the spot market for any cargoes allocated to the government.

The appointed company would handle the financing for the government and wiring of payments to the NNPC.

The NNPC is regarded in Nigerian media as a “cesspool of monumental corruption and fraud” — a playground for oil brokers and multi-million-dollar briefcase companies.

Although the deal was signed in 1999, it was only in the 2004/2005 financial year that the first consignment of 5.38 million barrels appears to have been lifted.

For this, Kenya received only Sh41.6 million from the proceeds, according to documents tabled in Parliament.

Assuming that Kenya would have picked up its allocated quota every day, it would have lifted more than 10 million barrels every year.

UNANSWERED QUESTIONS
In the 2006/7 fiscal year, Vitol is said to have lifted 4.71 million barrels at a commission rate of US cent 15.1, and another 4.67 million at the same rate during the year 2005/2006. during the lifespan of the Nigerian deal, Kenya earned a paltry Sh132 million.

The question that has never been answered is how much oil was lifted in Kenya’s name, and if so, where did the money go?

The report says that big oil companies loved these bilateral deals — and for a good reason.

It allowed them to get a bigger share of Nigerian oil at a nominal rate.

Again, the foreign governments had no way of knowing how much “discounted” oil was lifted in their name.

Insiders interviewed by the watchdog claimed that the first g-to-g contracts “emerged as devices to allow big trading companies to circumvent an informal NNPC rule that no term lifting contract holder could receive more than 60,000 barrels per day.”

But if a company also had a contract to lift the discounted oil, it could get an extra 30,000 barrels — if it was available. And that is where the loophole was. Availability.

“Buying g-to-g cargoes helped the bigger traders protect their market shares and to lift more than their own daily allocations from NNPC,” says the report.

Term lift contracts allowed companies holding such pacts an opportunity to purchase a set amount of oil at the official selling price but they could also top up their allocation by signing “lifting contracts” with countries that had bilateral deals for discounted oil with Nigeria.

That is how Kenya walked into this scandal.

Interestingly, and Parliament was told as much, the government had no say on how much fuel was lifted in its name and there are no details on how much oil was sold.

OIL THEFT
Then Assistant Energy minister Kiunjuri (now CS for Devolution) told Parliament that the lifts were “dependent on availability and subject to nominations by NNPC”.

The discounted Nigeria’s Bonny Light that Kenya was receiving is a premium crude known for its excellence in making gasoline.

At the spot market, Bonny Light was then selling for $70, meaning Kenya could access crude worth $2.1 million a day at discounted terms.

According to the Opec Basket Price — which shows average prices — and Nigeria Central Bank statistics Bonny Light was in 2006 retailing at $60 per barrel and could fetch premium prices because of its high demand.

That meant that whoever got the allocation could make a fortune.

Bonny Light is usually sold on the open market at $4 to $5 premium on each barrel of crude oil.

Thus, whoever got the Kenyan allocation from NNPC made a difference of between $4 to $5 per barrel, according to oil records.

Could the Kenyan oil quota have been stolen and sold?
Oil is usually stolen in Nigeria and President Buhari recently told an audience in Washington, DC, that about 250,000 barrels of Nigerian crude, about 10 per cent of the country’s daily output, are stolen daily. “The amount involved is mind-boggling,” he said.

In 1999, Nigeria had just returned to democracy following the election of Mr Obasanjo and decided to use discounted oil as part of its foreign policy and to find new markets, a practice used by previous regimes with different results.

FEDERAL DIRECTIVES
But was Kenya getting the oil for free? Parliament was told no. They got a special rate and tendered for firms to do the lifting.

But it is countries such as Kenya which were not refining the discounted oil that became a nightmare.

However, it is the number of companies that lined up to take advantage of the g-to-g deals that is shocking.

“Some of the smaller country deals have a further tier of middlemen below the briefcase level, commonly referred to as “agents,” “consultants” or “deal negotiators.”

One g-to-g deal we reviewed for this report included nine separate such parties, organised into different “groups” aligned with either the buyer or the seller… these actors typically earn one or two cents per barrel of oil lifted.

It is unclear what they do to receive such fees.

The report says the NNPC does not publish guidelines on how it awards term contracts and that it signs lifting deals with countries “based on federal directive” and “has no control over the selection or the volumes” allocated to a particular foreign nation.
*John Kamau – Daily Nation

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