Corruption in Oil Industry: Price of Military Arbitrariness

22 May 2012

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As the Minister of Petroleum, Mrs. Diezani Alison-Madueke, intensifies efforts to end graft in Nigeria’s oil industry and change the ways of doing business in the sector, Ejiofor Alike writes that the endemic corruption in the industry was a product of arbitrariness by the military and civilian administrations, as well as lack of focus by past administration of the oil and gas industry

As the Economic and Financial Crimes Commission (EFCC) steps up investigation to verify the actual facts on the report of the recent probe of fuel subsidy, it should be pointed out that the issue of corruption in Nigeria’s oil industry, which the present administration has waged a relentless war against is not a new phenomenon.

Even when former President Olusegun Obasanjo identified corruption as the country’s bane in his inaugural speech in 1999 and waged a relentless war, which earned global accolades to the EFCC, the focus was still not on the oil industry but on other members of the political class, outside the industry.

While Obasanjo’s administration focused on corruption among the governors, it is to the credit of this present administration that corruption in the oil industry was brought to national consciousness.

This administration has also, for the first time in a very long time, taken more aggressive steps than any other past administration to address the issue of corruption in the industry, though a lot still needs to be done.

Before President Goodluck Jonathan’s administration came into power, the rot in the industry had raised local and international concern, prompting Obasanjo and the late President Umaru Musa Yar’Adua to begin a reform of the sector that culminated in the Petroleum Industry Bill (PIB).

The alleged malpractices in the administration of fuel subsidy, which was a subject of probe by the House of Representatives, was seen as insignificant by industry experts, when compared to what the country had lost to corrupt practices in just one transaction in the dollar-denominated upstream sector during the previous administrations.

Discretionary Award of Oil Blocks

Allocation of crude oil blocks, which this present administration may have deliberately avoided, witnessed the worst shady deals where the country was fleeced of billions of dollars in the past.

For instance, prior to 2000, allocation of oil blocks was on discretionary basis, with the military top brass allocating acreages to their associates and cronies, without laid down rules or due process.

 Also before 2000, some past Presidents were alleged to have awarded discretionary oil blocks to friends, associates, family members, party chieftains and security chiefs, who had no knowledge of the oil and gas business.

The beneficiaries of such oil blocks, who were later described as “brief-case investors,” by a former Director of the Department of Petroleum Resources (DPR) could source funds from international financiers and settle his benefactors, without payment of signature bonus or any benefits to the national treasury.

Obasanjo’s Competitive Bidding

The situation improved in 2000 when Obasanjo introduced competitive bidding for oil blocks allocation, with guidelines provided for by the enabling provisions of section 9(1) & (2) of the Petroleum Act, Cap. P. 1O Laws of Federation of Nigeria 2004.

But with the open, competitive bidding introduced by Obasanjo, the issues of discretionary awards was reduced but not eliminated completely.

 However, most of the deals were conducted transparently in the presence of the bidders, journalists, government officials, representatives of the civil society groups and other observers.

Testifying in 2009 before a House of Representatives Committee that probed the rot in the sector, His Royal Majesty, King Edmund Daukoru, Mingi XII, Amanyanabo of grand Nembe Kingdom in Bayelsa State and former president of OPEC stated that from the 2000 Bid Round, the 2005 Guidelines were revised to comply with the new electronic bidding process that was introduced, as an improvement on the old system.

He noted that as part of an evolving process, the 2005 Guidelines were further improved in 2006 and 2007, based on internal lessons learnt, as well as international process audits by Brazil, Norway and the United Kingdom at Federal Government’s request and also global best practices.

Shortcomings of Previous Bid Rounds

But even with these competitive bidding arrangements in place, the previous bid rounds still had some shortcomings, which degenerated into allegations and counter – allegations.

There were allegations that the bidding rounds were not all that transparent.

This may have prompted the International Oil Companies (IOCs), which are Nigeria’s traditional partners in the oil and gas business to shun all the bid rounds, leaving them to local and Asian investors.

One of the allegations against the government was that Chinese firms were given the controversial Right of First Refusal (ROFR) to some of the juicy acreages at the disadvantage of other local and foreign investors that were interested in bidding for the same blocks.

For instance, most of the investors boycotted the May 11, 2007 exercise as they felt that with the ROFR granted to some companies prior to the exercise, the Federal Government might have concluded some of the transactions before the actual date.

The timing of the bid round, few days before the May 29, 2007 handover date also raised concern among investors, who felt that the exercise should have been left for the incoming administration to handle.

They were particularly scared that the then incoming administration might not honour any agreement they would enter into with the Obasanjo’s administration.

NNPC’s Dual Roles

Over the years, the Nigerian National Petroleum Corporation (NNPC) has lost focus, as it combines regulatory and administrative functions with oil and gas business, fueling corruption that infected the entire oil industry.

In fact, the Joint Operating Agreement (JOA) between the NNPC and the international oil companies was established to enable the NNPC assume operatorship of the oil blocks after some years.

NNPC was essentially set up to tow the path of other National Oil Companies (NOCs) such as Brazil’s Petrobras, Malaysia’s Petronas, and Saudi Arabia’s Aramco, which compete for big oil blocks with Shell, Chevron, total and other IOCs, both in their home countries and other countries.

But except for a few small fields operated by its subsidiary, the National Petroleum Development Company (NPDC), with the technical assistance by an Italian company, NNPC has over the years failed to be a major oil and gas producer.

NPDC had lacked funding and expertise, thereby being restricted to marginal assets, producing barely 60,000barrels of crude oil per day (bpd), even with the assistance of the Italian firm, until this present administration came and raised the bar to over 100,000bpd.

After the current Minister of Petroleum, Mrs. Diezani Alison-Madueke, inherited the rot in the system, she quickly repositioned the NPDC and consummated a Strategic Alliance Agreement (SAA) between it and Seven Energy’s wholly-owned subsidiary, Septa Energy Nigeria Limited on Oil Mining Leases (OMLs) 4, 38 and 41.

The SAA provides the framework under which Septa will provide funding and technical services to NPDC, with the over two decade old NPDC, which was producing only producing 60,000bpd, is now producing over 100,000bpd and also targeting 300,000bpd in the next 24 months.

Instead of developing the required capacity to take over the operatorship of oil blocks from Nigeria’s Joint Venture partners, NNPC assumed “larger-than-life posturing”, combining regulatory functions with managing the country’s oil resources.

Appraising the state of Nigeria’s oil industry in the previous five decades, late President Umaru Yar’Adua had noted that the NNPC had “lost focus” in the discharge of its primary functions and wasted the country’s  potential by poor management.

Declaring open the 13th Nigeria Oil  and Gas (NOG) Conference and Exhibition in February 2008, Yar’Adua had stated that NNPC had thrown the country into a mess by assuming multiple but conflicting roles.
“I believe as President that in the conference of this nature, where the future of nations and companies are being discussed, it is imperative that we tell each other few home truths. This calls to question the paucity of the policy, regulatory, operational, fiscal and managerial framework that governs the country’s oil and gas industry. We have paid a very limited focus to the management and utilisation of our hydrocarbon resources. The enormous potential of oil and gas for generating economic growth, transferred technology, and providing a strong foundation for transforming our industrial and agricultural sectors have never really been fully exploited,” he explained.

“Nigeria, a leading force in gas in the world, is not only unable to meet its entire demand, but also unable to meet that of other contiguous nations. It stands to reason that the situation cannot and should not be allowed to continue. The NNPC has been made, over the years, to assume multiple, and often times conflicting roles, including those of policy formulation, regulation, commercial operations, and national assets management. This has adversely affected its capacity to effectively perform its primary role as an internationally and fully integrated commercial oil and gas company. This has become even more disturbing, considering that the last few decades have witnessed sister national oil companies, including those from OPEC countries, effectively competing against the international oil companies in all spheres of the industry, including certain significant operations of the industry beyond their national boundaries,” Yar’Adua further explained.

He noted that successive managements of the NNPC were contented to “simply grapple with our call obligations in these ventures”.

The refineries, pipelines, and depots were in very bad shape, with epileptic capacity utilisation, to the extent that Nigeria depended mainly on refined fuel imports, Yar’Adua observed.

Yar'Adua said the necessity for a more effective and coordinated framework was inevitable – and that informed his approval of the implementation of the new national oil and gas policy soon after he assumed duties.

The late president said it was in an effort to correct these shortcomings that his administration, at inception, initiated the oil and gas sector reform.

A committee mandated to implement the reform, he said, was consulting with major stakeholders, so as to proffer recommendations for the draft Petroleum Industry Bill (PIB).

Both the administration of Obasanjo and Yar’Adua’s government had frowned on the NNPC’s conflicting roles of regulating the industry and managing the national assets.

This necessitated the landmark reform, which Obasanjo had initiated to allocate NNPC’s current roles to different autonomous agencies to ensure transparency in the management of the country’s oil resources. The reform culminated to the drafting of the PIB, which is yet t be pass by the National Assembly.

It is believed that the PIB will make the oil industry, which has remained opaque over the years, more transparent and accountable to Nigerians.

But as the National Assembly delays the passage of the bill to unbundle the NNPC and sanitise the sector, the minister is taken far-reaching steps, involving eminent Nigerians to introduce global best practices in the ways of doing business in the sector.But it is doubtful if these efforts would fully eradicate corruption in the system, without the passage of the PIB.

Tags: Business, Corruption, Featured, Military Arbitrariness, Nigeria, Oil Industry, Price

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