Oil companies in emerging markets,
Oil companies in emerging markets
Safe sex in Nigeria
Court documents shed light on the manoeuvrings of Shell and ENI to win a
huge Nigerian oil block and on the dilemmas of their industry
Jun 15th 2013
DEALS for oilfields can be as opaque as the stuff that is pumped from
them. But when partners fall out and go to court, light is sometimes
shed on the bargaining process—and what it exposes is not always pretty.
That is certainly true in the tangled case of OPL245, a massive
Nigerian offshore block with as much as 9 billion barrels of oil—enough
to keep all of Africa supplied for seven years.
After years of legal
tussles, in 2011 Shell, in partnership with ENI of Italy, paid a total
of $1.3 billion for the block. The Nigerian government acted as a
conduit for directing most of that money to the block’s original owner, a
shadowy local company called Malabu Oil and Gas. Two middlemen hired by
Malabu, one Nigerian, one Azerbaijani, then sued the firm separately in
London—in the High Court and in an arbitration tribunal,
respectively—claiming unpaid fees for brokering the deal.
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The resulting testimony and filings make fascinating reading for anyone
interested in the uses and abuses of anonymous shell companies, the
dilemmas that oil firms face when operating in ill-governed countries
and the tactics they feel compelled to employ to obfuscate their
dealings with corrupt bigwigs. They also demonstrate the importance of
the efforts the G8 countries will pledge to make, at their summit next
week, to put a stop to hidden company ownership and to make energy and
mining companies disclose more about the payments they make to win
concessions. On June 12th the European Parliament voted to make EU-based
resources companies disclose all payments of at least €100,000
($130,000) on any project.
The saga of block OPL245 began in 1998
when Nigeria’s then petroleum minister, Dan Etete, awarded it to Malabu,
which had been established just days before and had no employees or
assets. The price was a “signature bonus” of $20m (of which Malabu only
ever paid $2m).
The firm intended to bring in Shell as a 40%
partner, but in 1999 a new government took power and two years later it
cried foul and cancelled the deal. The block was put out to bid and
Shell won the right to operate it, in a production-sharing contract with
the national petroleum company, subject to payment of an enlarged
signature bonus of $210m. Shell did not immediately pay this, for
reasons it declines to explain, but began spending heavily on
exploration in the block.
Malabu then sued the government. After
much legal wrangling, they reached a deal in 2006 that reinstated the
firm as the block’s owner. This caught Shell unawares, even though it
had conducted extensive due diligence and had a keen understanding of
the Nigerian operating climate thanks to its long and often bumpy
history in the country. It responded by launching various legal actions,
including taking the government to the World Bank’s International
Centre for the Settlement of Investment Disputes.
Malabu ploughed
on, hiring Ednan Agaev, a former Soviet diplomat, to find other
investors. Rosneft of Russia and Total of France, among others, showed
interest but were put off by Malabu’s disputes with Shell and the
government. Things moved forward again when Emeka Obi, a Nigerian
subcontracted by Mr Agaev, brought in ENI (which already owned a nearby
oil block). After further toing and froing—and no end of meetings in
swanky European hotels—ENI and Shell agreed in 2011 to pay $1.3 billion
for the block. Malabu gave up its rights to OPL245 and Shell dropped its
legal actions (see timeline).
The deal was apparently split
into two transactions. Shell and ENI paid $1.3 billion to the Nigerian
government. Then, once Malabu had signed away its rights to the block,
the government clipped off its $210m unpaid signature bonus and
transferred just under $1.1 billion to Malabu.
Tom Mayne of Global
Witness, an NGO, has followed the case closely; he believes things were
structured this way so that Shell and ENI could obscure their deal with
Malabu by inserting a layer between them. Mr Agaev, Malabu’s former
fixer, lends weight to this interpretation. It was, he says, structured
to be a “safe-sex transaction”, with the government acting as a “condom”
between the buyers and seller.
It is not hard to see why the oil
giants would want to avoid being seen to be dealing directly with
Malabu, a shell company with tainted provenance. Its ultimate beneficial
owner is widely believed to be Mr Etete, the very minister who had
awarded it the block while serving under Sani Abacha, the late,
staggeringly corrupt dictator.
In 2007 Mr Etete was found guilty of
money-laundering by a French court. His conviction was upheld in 2009.
The trial centred on bribes he had allegedly demanded from foreign
investors while in government. He used these to buy, among other things,
a French mansion and about €1m-worth of Art Deco furniture, according
to French court documents.
Then in 2011 Mr Obi, one of the middlemen
in the final deal with Shell and ENI, took his claim for unpaid fees to
the High Court in London, calling on Mr Etete to give testimony. For
unclear reasons, he agreed to do so—but the hearings had to be moved
briefly to Paris so that Mr Etete could give evidence, because he had
been barred from Britain for failing to disclose his French conviction
on entering the country.
Mr Etete claims he has never been more than
a consultant to Malabu. If so, he is unusually hands-on. He was the
company’s main negotiator and its representative in the High Court,
where he admitted to being the sole signatory on its bank accounts.
Indeed, there is no evidence of anyone else making decisions for Malabu.
When asked in court about others purportedly linked to the company and
its record-keeping, Malabu’s company secretary, Rasky Gbinigie (who
describes Mr Etete as a “family friend”), insisted that he had lost the
firm’s copy of the register of shareholders and all minutes of meetings,
that there was no written correspondence between him, the directors and
the shareholders, and that he had no documents to verify who put up the
company’s original share capital.
A not-so-secret alias
Last
year Nigeria’s Economic and Financial Crimes Commission (EFCC) looked
into Malabu after Mohammed Abacha, a son of the former dictator,
complained that he had been a founding shareholder but had been
illegally cut out. In an interim report later in the year, the
commission said that one Kweku Amafegha “stood in” as a nominee director
for Mr Etete. In the High Court’s hearing in Paris Mr Etete admitted
that he had himself used the surname Amafegha to open accounts in the
past. It was, he said, an alias that “I have always used when I go out
for secret missions internationally.”
In the same hearing Mr Etete
said of OPL245: “I put my blood, I put my life into this oil
block”—quite a commitment for a mere consultant. Yet, when asked
directly if he was its owner through Malabu, he denied it. When
presented with transcripts of a recording in which he supposedly claimed
that “It is my block”, he dismissed the transcripts as inaccurate.
Shell and ENI did not respond to The Economist’s questions about whom
they believed to be the beneficial owner of Malabu. Whether or not they
suspected it to be Mr Etete, their dealings with him were extensive. He
met ENI executives repeatedly. High Court testimony indicated that Shell
officials had met him as recently as December 2009, after his
money-laundering conviction was upheld. In an e-mail that came out in
court, a Shell man talked of having had lunch and “lots of iced
champagne” with Mr Etete, who had requested figures from Shell on what
it was willing to pay Malabu for the block.
ENI says it considered
cutting a deal with Malabu directly, until it emerged that the firm
might not have full ownership of the oil block because of “existing
disputes”, including with Mr Abacha. Mr Obi testified that Shell broke
off direct talks with Mr Etete for the same reason, and because he was
“an impossible person to deal with”.
But the oil giants were clearly
reluctant to throw in the towel. Shell was loth to walk away from a
block in which it had already invested tens if not hundreds of millions
of dollars. (The company will not say how much.) ENI was attracted by
the size of the block, the prospect of accompanying tax holidays and a
waiver of the usual requirement that production revenues be shared with
the national oil company.
Shell and ENI reject the suggestion that
their joint purchase was a thinly disguised transaction with a dodgy
brass-plate company. Shell says it made payments to the Nigerian
government only and that it has acted at all times in accordance with
Nigerian law. It previously said it had “not acted in any way that is
outside normal global industry practice”. ENI says its payments to the
government “were made in a transparent manner through an escrow
arrangement with a major international bank”. That bank was JPMorgan
Chase. A Lebanese bank had earlier declined to handle the payments, it
emerged in court.
The companies’ claim that they bought the block
from the state, not Malabu, is disingenuous, says Mr Mayne of Global
Witness. It is also contradicted by Nigeria’s attorney-general, Mohammed
Bello Adoke, who told a parliamentary committee last July that the
companies “agreed to pay Malabu”, with the government acting as an
“obligor” and “facilitator.”
The attorney-general was unusually
active in helping the deal along. He held meetings with Shell, ENI and
Malabu, helped to structure the final agreement and even advised on
payments to middlemen, according to Mr Obi. In Nigeria it is highly
unusual for an attorney-general to be so involved in a big oil deal. The
lead is typically taken by the petroleum ministry, which in this case
was said to be livid at being sidelined—particularly when Mr Adoke
requested that it extend the deadline it had given Malabu to pay its
long-owed signature bonus. Mr Adoke, it was suggested in the High Court,
had been lawyer to none other than Mr Etete before serving in
government. (Mr Adoke could not be reached for comment.)
Where did the money go?
The attorney-general has rejected as “without basis” claims in the
Nigerian press that much of the money the government paid to Malabu in
the 2011 deal was “round-tripped” back to bank accounts controlled by
public officials. But where that money did end up is shrouded in
mystery. Of the $1.1 billion, $800m was paid in two tranches into Malabu
accounts. This was then transferred to five Nigerian companies that
appear to be shells. One of these, Rocky Top Resources, received
$336.5m, some of which seems to have been passed on to unknown “various
persons”, according to the EFCC’s report. Some $60m went to an account
controlled by Mr Etete, who has said that he received $250m in total for
his role in the deal. He said in court that “Malabu shareholders
decided to spend their money the way they deemed fit” and that he is
investing on their behalf.
Among the listed owners of three of the
recipient companies is Abubakar Aliyu, who is reported to have close
business ties to a senior politician, Diepreiye Alamiesegha, the former
governor of Bayelsa state. Mr Alamiesegha’s skills in escapology would
impress Houdini. Detained in Britain on money-laundering charges in
2005, he jumped bail. After returning to Nigeria, he was sentenced in
2007 to two years for each of six corruption-related charges, though he
served only a few hours in prison. In March 2013 he received a
controversial pardon from Goodluck Jonathan, Nigeria’s president. Local
press reports have made unsubstantiated allegations linking both the
president and Mr Alamiesegha to the Malabu deal.
The EFCC’s report
states: “Investigations conducted so far reveal a cloudy scene
associated with fraudulent dealings. A prima facie case of conspiracy,
breach of trust, theft anmd [sic] money laundering can be established
against some real and artificial persons.” Officially, the EFCC’s
investigation is still open, but a source familiar with it says that its
sleuths have been discouraged by higher-ups from moving forward.
However, other countries’ fraudbusters have taken an interest. At least
one of the parties involved in the oil-block sale has been contacted by
America’s Department of Justice.
As for the legal actions brought in
London against Malabu by the middlemen, the High Court is expected to
rule soon on Mr Obi’s claim for $200m. Mr Agaev’s separate arbitration
case, in which he sought payment of a $65.5m “success fee”, was recently
settled behind closed doors.
Shell and ENI now each own half of an
attractive oil block. To get it, however, they have had to strike a deal
that brings with it reputational and legal risks. They might
conceivably face action under their home countries’ anti-corruption
laws, if enforcers reject their claim to have dealt only with the
Nigerian government, not Malabu. Shell “would obviously have preferred
to secure OPL245 without going within a million miles of Malabu and
Etete,” says someone who was involved in the negotiations.
Ethical dilemmas
The saga is a striking example of an ethical dilemma that is growing
more acute for international oil companies. They are desperate to
replace their shrinking reserves with new finds, but many of the most
attractive fields are in unstable or poorly governed places. Worse, the
industry has to contend with increased resource nationalism in
oil-producing countries, making it harder for outsiders to secure
reserves, and with greater competition from state-owned firms in Asia,
Latin America and the Middle East, which may not have to operate to the
same ethical standards.
As a result, firms that refuse to touch any
deal with the slightest whiff of impropriety risk eventually going out
of business, says Peter Hughes, an energy consultant and former BP
executive. They may feel that the best they can do, short of walking
away, is to put as much distance as possible between them and the source
of the bad smell, as Shell and ENI apparently tried to do with their
two-part transaction.
Mr Etete in his heyday as oil minister
How
arm’s-length is arm’s-length enough? That depends on the company’s
“threshold of ambiguity”, says Cory Harvey of Control Risks, which helps
companies to manage political and reputational risk. This will vary
from company to company and will be perceived differently by management,
regulators and NGOs. Ms Harvey has seen oil-industry clients walk away
from deals because of concerns about the reputation of, or lack of
reliable information on, a seller or local partner. But energy
transactions in difficult places can be “spectacularly complex”, she
says, making it hard to gauge the acceptable level of risk. Nigeria is
“arguably the most complex environment of all”.
Mr Hughes argues
that when foreign companies turn a blind eye to questionable aspects of a
deal, it can sometimes benefit developing countries with natural
resources. The publicly traded oil majors are, on balance, a force for
good, raising overall standards of behaviour by trying to operate as
cleanly as possible in most circumstances, he says; better that than
leaving the field to less scrupulous operators. Ethically speaking, the
industry “has to be viewed in relative, not absolutist, terms,” he
argues. Mr Hughes points out that Shell periodically talks of scaling
back its Nigerian operations, which he believes to be “part of a
political-risk management strategy” to exert pressure on the government
to act more cleanly and predictably.
Global Witness prefers to see
the OPL245 affair as “a lesson in corruption” that demonstrates how
important it is for rich-world governments to press on with transparency
initiatives, on two fronts. The first front concerns payments to
governments. In the past year America and the EU have begun to require
resources firms listed there, and large unlisted firms in the EU, to
report, project-by-project, their payments to governments. Had this been
in force at the time, it would have picked up the $1.3 billion
transaction with Nigeria. This would have prompted public scrutiny of
the deal and the subsequent money flows through Malabu, which in the end
came to light only because the two middlemen decided to sue.
Shell
says it favours greater transparency, if applied globally. It opposes
the existing project-by-project initiatives because they omit companies
not listed in America or Europe, thereby handing them a competitive
advantage.
The second front for improving transparency concerns the
use of murky corporate vehicles. Hopes are growing that the G8, which
meets next week with Britain’s David Cameron in the chair, will take
steps towards ending the use of anonymous shell companies. Had corporate
registries been collecting, and making publicly available, information
on beneficial owners back in 1998, the identity of Malabu’s owners might
have been clear from the start. And it would have been much more
difficult to move the proceeds of the sale to Shell and ENI into the
corporate equivalent of a black hole, seemingly out of the reach even of
Nigeria’s anti-corruption commission.
The Economist 15th June 2013
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