The Impact Of Asian National Oil Companies In Nigeria (1) – Lillian Wong

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LEADERSHIP

The Impact Of Asian National Oil Companies In Nigeria (1)

Lillian Wong

December 30th, 2008

Introduction

There is no shortage of literature on the renewed interest in Africa by Asian countries seeking oil and other minerals to fuel their rapid industrialisation. Most attention has been focussed on China, and on India and others to a lesser extent. But there are few case studies.

This paper tries to fill that gap. It addresses the experience and impact of Asian National Oil Companies (ANOCs) in Nigeria, Africa’s premier oil producer. The study suggests that many of the general assumptions about the enhanced Asian presence in Africa need to be re-visited. However, Nigeria may be a special case.

Summary findings

The recent entry of a number of Asian National Oil Companies (ANOCs) into Nigeria has proved to be controversial. But not for the usual reasons. It is not their entry per se which has caused concern but the manner in which the entry was achieved. The former Head of State, President Obasanjo, came up with an initiative to entice NOCs from China, Taiwan, India and South Korea to acquire oil blocs for the first time in Nigeria. But the arrangement was clumsy. The ANOCs were given the Right of First Refusal (RFR), and discounted Signature Bonuses on a number of oil blocs in return for their commitment to invest in downstream and infrastructure projects. The concept of the “oil-for-infrastructure” deal was novel but its introduction compromised the much-proclaimed transparency of the oil licensing rounds of 2005, 2006 and 2007.

Nigeria’s traditional partners, the international oil companies (IOCs), expressed their concern about the scheme. They argued that it tilted the playing field against them. Indigenous players also grumbled as did local oil industry professionals. Bureaucrats responsible for implementing this new policy were sceptical from the start that the deals could be enforced. Western capitals, worried about Asia’s heightened search for oil and other minerals in Africa, concluded that the ANOCs entry into Nigeria was a further example of this trend. But that view missed the point. This initiative came entirely from Nigeria, and from President Obasanjo himself, not from Asia. Nigeria defended the deals, arguing that it would bring a “development dividend”. Asian governments were quick to see the value of this novel arrangement. Not only would they acquire oil blocs to enhance their energy security, but their companies would win large contracts into the bargain. Both sides believed this was a “win-win” situation.

President Obasanjo left office in May 2007 at the expiry of his 2-term limit. His successor, President Umaru Yar’Adua, has spent his first 18 months in office taking stock. In the course of this, many decisions of the Obasanjo era have been reversed or cancelled, either because they were deemed not to be in the national interest or because of the discovery of large-scale corruption in the execution – or often the non-execution – of projects.

One of the subjects under review is the “oil-for -infrastructure” deals made with the ANOCs. It is clear that 2-3 years down the line, there is still nothing on the ground to show for the generous treatment given to the ANOCs. At the very least, all projects are on hold. There is a strong possibility that the deals in their entirety will be cancelled and the oil blocs revoked. This would be a clumsy solution to a clumsy problem with diplomatic and political consequences. But the Yar’Adua government has concluded that the whole arrangement was compromised from the start by the absence of transparency and due process compounded by corruption.

There is a widespread perception in Nigeria that the timing of the deals had a strong political undertone. This context adds an important dimension to the story. The unspoken need to generate funds for President Obasanjo’s “third term” bid (in the event unsuccessful) is seen as the key to the unravelling of the deals. There are credible reports of large sums paid to President Obasanjo to support an extension of his tenure by certain beneficiaries (who will remain nameless) of the “oil-for-infrastructure” deals. It is also believed that officials who negotiated the deals compromised the arrangement by putting personal profit above the national interest.

Even if the deals are not cancelled in their entirety, it is absolutely certain that the new government will abandon this approach in future bidding rounds. In future rounds, the ANOCs will have to compete on equal terms, in a transparent process, on a level playing field with all other bidders for oil blocs. And, according to Asian diplomatic sources, that is in effect how they would like it to be. The ANOCs got unwittingly caught up in a classic Nigerian web of political intrigue and corruption. And now they may have to pay the price for their naivety. Two major projects linked to the oil-for-infrastructure deals were cancelled in May and June 2008. The whole scheme has started to fall apart.

Footnote:

Given the political and commercial sensitivity of this subject, all interviews were conducted under the Chatham House Rule. No interviewee is cited by name.

The attractions of Nigeria

Given the important place Nigeria holds in the global oil market, and given Asia’s thirst for oil, it may seem surprising that the ANOCs have not earlier shown an active interest in acquiring oil blocs in Nigeria. After all, Nigeria has been an oil producer for 50 years, and a gas producer, exported as LNG (Liquified Natural Gas), since 1999. The statistics speak for themselves. In 2006, Nigeria produced 3% of the world’s crude at an average of 2.4 mbpd, making it the 12th largest oil producer, and the 7th largest oil exporter. (1) Within Africa, Nigeria has long been the top producer. Its known reserves, standing at 36.2 bn barrels in 2006 placed it in 9th place world-wide. The high quality of Nigerian crude – light, sweet with a low sulphur content – makes it a prized commodity for refineries in the Atlantic Basin….and in Asia.

Until 2005/06, Asian countries have preferred to access Nigerian crude either through oil-lifting contracts or through buying it on the spot market rather than through direct investment. India, for example, currently imports 12% of its oil from Nigeria on a long-term supply contract, recently raised from 44,000bpd to 60,000 bpd ,in a new supply contract signed during the visit of the Indian Prime Minister to Nigeria in October 2007.(2) The main client is the state-owned Indian Oil Corporation which owns and operates 10 of India’s 19 refineries, and until recently was the monopoly importer of crude. For China, Sinopec performs the same function as an oil trader and the country’s leading refiner. Until the recent sharp downturn in Nigeria’s production due to militant activity, Sinopec has had annual contracts with the NNPC to supply 100,000 bpd while PetroChina has had annual contracts worth some 30,000 bpd. (3)

The Asian presence in Nigeria

Although Asian countries are latecomers to the oil sector in Nigeria, key Asian countries have long had a significant commercial presence there. In the wider economic context, therefore, Nigeria is not virgin territory. South Korea, India and China, the three countries which have recently acquired oil blocs, have long penetrated the Nigerian market, the largest in Africa, with the diplomatic, political and financial support of their governments.

• South Korea

Nigeria is now South Korea’s 3rd largest trading partner and its largest market in Africa for Korean construction companies. As of January 2006, Korean companies were involved in 60 projects valued at US$ 4.6 bn. This represented 75% of all construction contracts won by South Korea in the entire African Continent. (4) And there is no sign that this is likely to change. Most recently, in March 2008, Hyundai won a contract, valued a some US$ 1.6bn, for the construction of a massive FPSO vessel for Total’s Usan oilfield in the eastern part of the deepwater Niger Delta. (5)

High level visits have ensured that the relationship is deepened. President Obasanjo paid an early state visit to South Korea in July 2000, President Roh Moo Hyun paid a reciprocal visit in March 2006 while the Nigerian President visited Seoul again in November 2006.

•India

India, as a fellow Commonwealth country, has long enjoyed strong links with Nigeria. Nigeria is India’s largest trading partner in Africa – bilateral trade was valued at nearly US$ 8bn in 2006/07 of which oil constituted some 95% of Indian imports from Nigeria. A host of Indian companies have sizeable investments (the first company dating from 1923) in textiles, chemicals, electrical equipment and many other areas. Nigeria is the largest destination in Africa for Indian manufactured goods and it imports more pharmaceuticals than any other Africa country. The Indian community in Nigeria is some 30,000 strong (6).

Official visits have reinforced the strong commercial relationship. President Obasanjo paid a State visit to India in January 2000, a working visit in November 2004, while the Indian Prime Minister paid a reciprocal visit in October 2007. There is an active Nigeria-India Joint Commission which meets every 2 years.

• China

China too has long enjoyed a healthy commercial relationship with Nigeria. Some 50,000 Chinese citizens now live and work in Nigeria . There has been an exponential growth in trade in the last decade – rising from a mere US$384m in 1998 to over US$ 3bn by 2006. China sees Nigeria, with the largest population in Africa, as a key market for its cheap goods. Over 30 Chinese companies have constructed factories in Nigeria. And, some very large contracts have been awarded to Chinese firms – including their agreement with the Lagos State government to build a mega-million dollar Free Trade Zone in the city, and the main contracts for the infrastructure for the Africa Games held in Nigeria in 2003.(7) As a clue to China’s ambitions to further increase its presence in Nigeria, China’s export credit agency, Sinosure, announced in April 2008 that it would guarantee up to US$ 50bn worth of Chinese investment in Nigeria.(8)

High level visits in both directions in recent years have cemented this relationship. President Obasanjo paid several visits to China – in 2001, 2005 and 2007 while the Chinese President visited Nigeria in 2002 and 2006. During the latter visit, Nigeria became the first African country to sign a strategic partnership with China. President Yar’ Adua has since paid his first visit to China in March 2008.

The latecomers’ dilemma

In spite of the well established commercial presence of these countries in Nigeria, there are several reasons for the ANOCs’ previous reluctance to invest directly in Nigeria’s oil fields. Decades of military government raised concerns over the lack of sanctity of contracts . There was also a perception that Nigeria was the exclusive domain of the IOCs, leaving little room for outsiders. In the last decade or so, the real dilemma flowed from the increasingly hostile operating environment in the oil-producing region of the Niger Delta. Foreign companies working there have been increasingly targeted by the militants. This was a major disincentive to the risk-averse ANOCs. Nigeria’s reputation for fraud and corruption added to the political risk. So, in spite of Nigeria’s important place in the global oil market, Nigeria was very low down in the list of target countries for direct investment by the ANOCs. In any case, it has only been in the last decade that China and India have had the capital and the capacity to invest overseas.

Asia’s thirst for oil

The key reason, however, is that the heightened demand from Asia for oil has only exploded in the last decade. This has increasingly meant that oil availability in the Asia-Pacific rim has become insufficient to meet the growing demand from the rapidly industrialising countries in the region. Their economies have high growth rates : China at 11% and India at 9%, with both projected to continue at that rate over the next 20 years. China is already the second largest consumer of crude petroleum in the world after the USA while India, now the 4th largest economy in the world, will have to import over 90% of its oil requirements by 2020. South Korea is the 11th largest economy in the world and the 7th largest petroleum consumer. With no domestic supply, it is the world’s 5th largest importer of oil.(9)

Since 1996, oil consumption in the Asia-Pacific region as a whole has risen by 30% and growing. China has led the way with a 100% increase in its consumption in the decade 1996-2006. And some projections suggest that China’s oil imports could quadruple from 3.5 mbpd in 2006 to 13.1 mbpd by 2030. (10) Currently, China imports 50% of its requirements. That is set to increase to 80%. India too has experienced a 50% increase in oil consumption in the decade since 1996, and currently imports 70% of its needs. Other Asian industrial giants, like Japan and South Korea, with no domestic supply rely totally on imports. Only Malaysia and Indonesia are self-sufficient.

For these reasons, over the last decade, the ANOCs have been seeking to buy into oil fields round the world. Just as Western countries seek energy security and diversity of supplies to lessen their dependence on the Middle East, so Asian countries share the same objectives. The driver is economic need. Resource-rich African countries have been given particular attention in this respect in the last few years.

High level Asian diplomacy has underlined this. China, India and South Korea have each held Summits with African leaders. In November 2006, China invited 50 African states to Beijing where it spelled out its vision for a “new strategic partnership” with Africa. South Korea held its first ever Africa-Korea Forum later in the same month, where the emphasis was placed on the exchange of technology for resources. And, in April 2008, India hosted its first ever India-Africa Summit during which it unveiled a new strategy of “resource diplomacy” In all three Summits, energy security was at the top of the agenda.

But the ANOCs are not just interested in Africa. A recent study (11) has shown that ANOCs are now active in 40 countries with interests ranging from Kazahkstan to Iran, from Colombia to Sakhalin. The overseas arm of India’s NOC, ONGC-VL

(Oil and Natural Gas Corporation -Videsh Ltd ) operates in 15 countries, South Korea’s NOC, KNOC (Korean National Oil Corporation) in 15 while China’s CNPC (China National Petroleum Corporation) which includes PetroChina has projects in 23 countries. Another Chinese NOC, CNOOC (China National Offshore Oil Corporation) is fairly new to the business of buying into foreign oil fields. All four are now present in Nigeria.

Although the Gulf of Guinea became one of the new oil exploration frontiers at the turn of the century, and Nigeria holds over 60% of the known reserves in the region, the ANOCs shunned Nigeria for the reasons given above . It took high-level lobbying by President Obasanjo from the middle of 2004 to entice some ANOCs into Nigeria for the first time. He offered a proposition that was hard to resist – he would guarantee oil blocs , at discounted rates or with signature bonus waivers , in return for their investment in downstream/infrastructure projects. Asian companies would get lucrative contracts while Asian national oil companies would be granted preferential access to oil blocs.

In spite of earlier hesitations, Asian governments reacted with enthusiasm to this unexpected opening into Nigeria. Subsequent public statements made that plain. The South Korean Government said of the deal “This is a win-win project where South Korea’s technology and Nigeria’ resources are swapped” (12). India’s Prime Minister , in his address to a Joint Session of Nigeria’s National Assembly in October 2007 said ” It is a partnership for energy security. Nigeria’s rich natural resources provide the base for our mutually beneficial cooperation” (13) while the Chinese President, when signing a number of oil -linked infrastructure agreements spoke warmly of the new “strategic partnership” with Nigeria.

Nigeria’s oil policy

This unusual offer was made for political reasons – ranging from narrow personal interests to grander diplomatic design – against the background of Nigeria’s oil policy. Nigeria’s national oil company, the Nigeria National Petroleum Corporation (NNPC) was set up in 1977. Unlike many national oil companies round the world, including the Middle East, the NNPC has always welcomed foreign equity participation. This has made Nigeria an attractive theatre for the IOCs who operate under Joint Venture arrangements (JVs). The IOCs have always dominated the industry and continue to do so. 98% of Nigeria’s oil reserves are held by the IOCs. Smaller independents and indigeneous companies tend to operate under a different arrangement, the Production Sharing Contract (PSCs). New entrants such as the ANOCs sign up to the latter.

With the return to civilian rule in 1999 , following 16 years of continuous military rule, President Obasanjo – who took the unusual step of doubling up as his own Minister of Petroleum – set two key objectives for growth in the oil sector. These were – to raise reserves to 40 bn barrels and to raise production capacity from the existing 2.5 mbpd to 4 mbpd, both by 2010. (14) When he came to power in 1999, reserves stood at 29.9bn barrels while production capacity had stagnated at around 2.3mbpd. While the coming on stream of a number of offshore oilfields in the past 2 years has moved Nigeria nearer its target, there is still a long way to go.

A key problem in this context has always been that, despite its resource endowment, the Nigerian oil sector has perennially suffered from under-investment. This has a variety of causes, not least the NNPC’s inability to pay its share of investment funding in exploration and development under the terms of the JVs. To meet the declared targets, Nigeria would have to attract large-scale new investment and new players. And, it would have to offer up new acreage. However, the targets remained elusive in spite of four licensing rounds held in the Obasanjo years – in 2000, 2005, 2006 and 2007.

In the absence of essential reforms to the NNPC which would have given a strong and transparent underpinning to the policy, the targets were not met in the Obasanjo era. It has been left to the successor government, headed by President Yar’ Adua , to tackle the critical issue of oil sector reform. The absence of transparency in the sector for decades has hampered its growth while the opaque nature of the NNPC has encouraged large-scale corruption. Nigerian leaders, whether military or civilian, have treated the oil sector – which accounts for 90% of Nigeria’s foreign exchange earnings – as little more than a “cash cow”. The Yar’ Adua government has committed to the same targets.(15) But it is unlikely to hold a new licensing round until the reforms are in place and the problems associated with the earlier rounds, some linked to the “oil- for- infrastructure” deals made by President Obasanjo with the ANOCs, have been sorted out.

The 2000 licensing round

The first licensing round held under the new civilian government was intended to put some order into how oil blocs would be awarded. President Obasanjo decided to abandon the long-standing discretionary approach favoured by the military and replace it with a more transparent system. Past governments had given out oil blocs to their associates, friends and cronies without due process at give-away prices. The beneficiaries, in turn, were able to hawk their blocs to foreign oil companies and walk away with a huge cash profit. Indeed, to make the point, some of the oil blocs awarded by the outgoing military were immediately revoked by Obasanjo, including those awarded to the family and cronies of a predecessor, General Abacha.

On offer in this round were 33 blocs : 22 offshore blocs, half of them located in deep offshore waters; a further 7 in shallow waters; and 4 onshore. Around the same time, Nigeria also unveiled a Marginal Fields Policy – designed to develop local expertise in the oil business. Under this policy, small concessions released by the IOCs because they were no longer considered profitable enough , were farmed out to local players. Five State governments and 26 indigenous companies benefited from this exercise. (16)

In the event only 8 blocs were taken up. Bids had been assessed behind closed doors by the NNPC on a number of criteria – financial, technical and capability – after which the successful bids were made public. But, final approval for the awards rested with the President (simultaneously the Oil Minister) who sometimes overrode the marking system for political reasons. One of the 8 blocs went to an indigenous company, Orandi, linked to Peter Odili, the Governor of Rivers State, whose business relationship with President Obasanjo has been widely rumoured. Overall, a mere $US190 m was taken in Signature Bonuses, and they dripped in bit by bit over a 4 year period for lack of clear timelines.(17)

For the purpose of this paper, the important point is that was no interest at all in the 2000 round from the ANOCs.

The 2005 licensing round

The 2005 round was better organised. And, there were significant new elements. Most importantly, months of prior negotiations with some Asian countries brought the ANOCs into the frame for the first time. The 2005 round was Nigeria’s first ever open auction, with bids recorded simultaneously on an electronic screen for all to see. A huge amount of acreage was on offer – 77 blocs in all, but only 44 were awarded. Of those nearly half fell away because the winners defaulted on payments. The round raised over US$ 1 bn, in Signature Bonuses, far less than had been anticipated. To ensure the transparency of the process, Nigeria had unusually invited observers from Norway, the UK, USA and Brazil to monitor the proceedings.(18) But, many of Nigeria’s traditional partners, like Shell, did not take part in the bidding while bids from Chevron and ExonMobil were disqualified because the bids were” incomplete.” Two innovations had caused the IOCs to hold fire in this round. (19)

The first was the introduction of the Local Content Vehicle (LCV). Under this, an operator would be obliged to offer up to 10% equity in any bloc to an indigenous company. This produced a rash of shell or paper companies causing bidders serious difficulty with due diligence. Of the 100 plus LCVs which pre-qualified, only 10% had previous experience in oil Exploration and Development. (20) The ANOCs, new to Nigeria, would have had particular difficulty choosing the mandatory LCVs. The President argued that the LCV scheme would develop local expertise in the oil business. Its critics pointed to the success of the existing Marginal Fields policy which did precisely that. Many therefore dismissed the LCV scheme as a mechanism to reward cronies with a slice of the action. Evidence points in that direction. The outcome suggests that the ANOCs were given a steer in their choice of LCV. eg NJ Exploration Services, owned by Emmanuel Ojie (a well known and close business associate of President Obasanjo) was the approved LCV on one of the Korean blocs awarded in 2005 round. Another LCV, Southland, teamed up with KNOC, is owned by Andy Uba, then the President’s closest advisor and gatekeeper. In the 2006 round, (see below), another of Ojie’s companies, Emo Oil, was the approved LCV for the 2 blocs awarded to India. Another, Shore Beach Exploration owned jointly by Emeka Offor, a key financier of the ruling party, and Ojie, was the approved LCV for blocs awarded to China in 2006. (21).

The second innovation which upset the IOCs was the introduction of the “Right of First Refusal” (RFR) which favoured Asian bidders. Prior to the auction, President Obasanjo had entered into strategic deals with South Korea, Taiwan, China, India and latterly Malaysia offering them lucrative blocs in return for the promise of strategic investments. See Table 1

Table 1 Summary of Strategic Deals with the ANOCs

South Korea

– gas pipeline from Ajaokuta to Kano via Abuja with spur to Katsina

– 2 integrated gas power stations at Abuja and Kaduna

– Construction of the Port Harcourt- Maiduguri railway

China

– core investor in the Kaduna refinery

– construction of double track,standard guage Lagos-Kano railway

– construction of an HEP complex at Mambilla (3 gorges project)

India

– build a Greenfield refinery 180,000 bd capacity

– build a 2000MW independent power plant

– feasibility study for a new east-west railway Lagos to Delta

Taiwan

– core investment in port Harcourt refinery

– unspecified IPP (power plant)

Malaysia

– 2.5 m ton pa Petrochemicals project in Delta State with creation of 7000 jobs

Source: compiled from data from the Department of Petroleum Resources, April 2008

But this innovation by the President compromised the very transparency of the process he had sought. It is unlikely that the full implications of this decision were brought to his attention or even discussed. As noted above, President Obasanjo also acted as his own Petroleum Minister. Oil matters were never discussed in Cabinet. (22). All decisions on this key sector emanated from the Presidency alone. The NNPC and the DPR (Department of Petroleum Resources), responsible for organising licensing rounds, acted on instructions from the Presidency. Line Ministries which would later have to implement the projects agreed under the strategic deals were not consulted at the time as to whether the projects were appropriate. This peculiar set-up inevitably left confusion in its wake.

By that stage in the Obasanjo Presidency, he was reportedly “fed up with the Shells and Exxons” (23) who had repeatedly declined to build new refineries, on cost grounds, or otherwise invest in job-creating projects outside their core business. There was a growing sense that the IOCs came only to exploit Nigeria and gave little back in return. Nigeria’s infrastructure was decrepit in dire need of modernisation. In several visits to Asian capitals, Obasanjo saw the possibility of tapping Asian expertise for Nigeria’s benefit. He could achieve a “development dividend” from the ANOCs which Nigeria had failed to get from the IOCs. Many recall that at the time the official defence of the scheme emphasised that relationships between countries do not go in the cycle in which oil rounds come about. The argument continued that if in the middle of planning a round Nigeria felt it wanted to have good economic relations with another country that promised to do major infrastructure projects, that Nigeria had the “sovereign right to do a package.” (24)

By coincidence, the President was planning at this period to have the constitution changed to extend the Presidential tenure beyond the prescribed 2 terms of 4 years into a third term. Such an enterprise would require significant funds to persuade the political class to go along with the plan. Big infrastructure contracts would provide an opportunity in this sense. The Nigerian press did not miss the point , then or since (25). In the wider context, Nigeria also needed the support of key Asian countries for its bid for one (of possibly 2) of the proposed Permanent Seats for Africa on the UN Security Council when enlargement takes place. Nigeria faces competition from South Africa, Egypt, Kenya, Senegal and others in this respect. Nigeria has openly supported India’s bid for one of the proposed Asian seats and hopes for reciprocal support.

Against this background, the offer by Nigeria of both oil blocs and big construction contracts proved to be compelling. The ANOCs rose to the bait . ANOCs from China, India, Korea and Taiwan planned to bid for oil blocs. But the 2005 round did not quite go to plan for them. The Chinese misunderstood the process, believed that they had secured blocs in the course of the earlier talks, and so failed to bid at the auction. India’s ONGC -VL was the favourite to acquire the 2 best deep offshore blocs on offer. Its confidence was based on 6 months of discussions with Nigerian officials. But, on the day of auction, the 2 blocs in question (OPLs 321 and 323) went to KNOC of South Korea, partnered with Equator Exploration, a controversial company listed on the AIM but with no assets in the oil business. Curiously, ONGC was initially partnered with the same Equator. It seems that Nigeria had played India against South Korea to achieve the best deal on downstream projects. The structure of their bids was different. For this round, ONGC bid as an upstream company with no strings attached. By contrast, KNOC led a consortium (which included electrical engineering and Daewoo shipbuilding ) which meant it was better prepared as an infrastructure provider. (Note: India learned its lesson for the next round in 2006, see below). In addition, although ONGC was prepared to pay the same Signature Bonus as KNOC, it appears that the Indian Cabinet’s delay in agreeing the bid price contributed to ONGC to losing out. Although India tends to be more cautious about spending public money in foreign acquisitions (than say the Chinese), in this case , prior discussions with Nigeria had led India to believe that these blocs were in the bag. The Indian government was so displeased at the outcome that it complained directly to President Obasanjo about what it described as “unfair treatment meted out to the oil major” (26).

So, at the end of the 2005 round, with China and India missing out for different reasons, the only ANOCs to be awarded blocs were from Taiwan and South Korea. But the Taiwan deal went wrong too. Nigeria’s overall strategy – to attract non-traditional players, especially from Asia, into the Delta and Deep Offshore – had not been achieved.

Taiwan’s CPC (Chinese Petroleum Corporation- Taiwan) set up a partnership with a local company , Chrome Oil, for the 2005 round. Chrome Oil is owned by Emeka Offor, a controversial Igbo businessman and an ally of President Obasanjo. CPC/Chrome was awarded 2 blocs (OPL 274 and 275 ) . However, it failed to pay the Signature Bonuses. Thus in default, the award was not finalised. As with all the ANOCs Nigeria had concluded a deal in advance of the auction. In the case of CPC it was to have the Right of First Refusal (RFR) on these blocs in return for its agreement to take a 51% stake in the ailing Port Harcourt Refinery. That commitment fell away with the default.

KNOC was therefore the last Asian standing at the 2005 round. It had been promised the Right of First Refusal on the blocs (OPLs 321 and 323) on the basis of its pre-negotiated strategic commitments . These were – to build a gas pipeline from the Delta to Abuja , with 2 integrated gas power stations en route, and to rebuild the decrepit Port Harcourt – Maiduguri railway line. In total, the Koreans had promised an investment of some $US 6bn.in exchange for oil blocs. The “development dividend” looked promising.

But there was a curious twist to this. Both KNOC and its rival, India’s ONGC, had offered a signature bonus of $US485m for the 2 blocs. The deadline for paying the bonuses was set at January 2006, a full 6 months after the bidding round in August 2005. KNOC and its partners missed the deadline. In fact, nothing at all had been paid by the deadline. Indeed, payments did not start to roll in until after the official visit to Nigeria of the South Korean Head of State, President Roh Moo Hyun, which took place 9-12 March 2006. According to DPR records, KNOC did not pay its share until June 2006 – $92.3m by bank draft together with a Letter of Credit to the Ministry of Finance for $231m – although its partner in the blocs, Equator Exploration, paid its share earlier – some $162.7 m in 4 bank drafts between 13 and 26 March 2006. (27) In fact the PSC (Production Sharing Contract ) between KNOC and the NNPC was not signed until the visit of the South Korean President, after which the signature bonus was paid.

But the new Nigerian Government has since discovered that the full amount was not paid. This would give cause to cancel the blocs. It is likely that President Obasanjo gave KNOC a discount – probably in order to keep the Koreans on side in the oil-for-infrastructure deal. Although DPR records show that the full amount was paid, a large chunk was in the form of an undated Letter of Credit. This is in unlikely instrument for the purpose – Signature Bonuses are always paid by bank draft or wire transfer. Was this written off or never collected? Apparently, there is no formal record of any discount and Obasanjo has not provided any clarification of what transpired.

The 2006 Mini-Round

Given the failure of the 2005 round to seal the oil-for-infrastructure deals with any of the the ANOCs except KNOC, Nigeria decided to hold a mini-round the following year. It was designed specifically to fulfil promises of blocs made to China ,India and Taiwan. As the guidelines made clear, the mini-round was” open to serious downstream investors only”, the RFR was attached to each bloc, and given the lax payment schedule from 2005, this round specified that 25% of the Signature Bonus had to be paid on the spot, the balance on or before the date of PSC signing.(28)

Only 19 blocs were on offer for which there were 11 bidding consortia.. Apart from the ANOCs, the bidding list curiously included indigenous consortia with little or no experience in the oil business. eg Transcorp, in which President Obasanjo is known to have had shares, Cleanwaters (Rivers State investors) and INC Nat Res owned by the then Governor of Jigawa State (who was a vocal supporter of the third term agenda). All three pretended to promise downstream investments. But, their inclusion as preferred bidders raised suspicion that all was not well. Apart from BG, teamed up with the indigenous company Sahara, (also linked indirectly to the Obasanjo family) none of the oil majors took part in the round largely because of the strict requirement for linked strategic downstream investments.

But this round was the ANOCs show. India, China and Taiwan were all given RFR on pr-assigned blocs in return for promises of infrastructure investment.

The first was India’s NOC, ONGC by then teamed up with Mittal Steel in a new company known as OMEL, (29). This new public-private partnership proved to be a more successful vehicle for India’s entry. It strengthened India’s bid as an infrastructure provider allowing it to compete more successfully with the Koreans and Chinese. OMEL was pre-assigned 3 blocs (OPL 279 , 285 , and 216). In return OMEL committed to an investment of some $US6bn to include the construction of a 180,000 bd refinery, a 2000MW Power Plant , and a feasibility study for a new east-west railway line from Lagos across the Delta to Port Harcourt. ONGC in its own right was offered 2 blocs 217 and 218 in compensation for losing out to KNOC in the 2005 round .

Secondly, China’s CNPC (China National Petroleum Corporation) was offered 4 blocs – 2 in the Niger Delta (OPLs 471 and 298, formerly OML 65) and 2 in the frontier Chad Basin ( OPLs 732 and 721). These were essentially the blocs the CNPC should have bid for, but failed to do so, in the 2005 round. In return, CNPC commited to investing some $US2bn in the ailing Kaduna Refinery.

A late entrant to the round was Taiwan’s CPC, partnered with a controversial and hitherto unknown local company, Starcrest Energy, which was pre-assigned 1 bloc (OPL 219 , renumbered 294 ) in return for an unspecified IPP (independent power plant).

Held in May 2006, the outcome was not unexpected. 8 blocs went to ANOCs – China’s CNPC won 4 blocs, India’s OMEL was awarded 2 blocs (it did not bid on the 3rd on offer), and Taiwan’s CPC 2 blocs. In the event, ONGC did not bid at all. The local consortium, Transcorp, were also successful in the round although it later transpired that it failed to pay the full signature bonus.

However, for some unexplained reason, Taiwan’s CPC, in a joint venture with Starcrest Nigeria Energy, asked on the floor of the bidding conference to swap the blocs it had been awarded ( OPLs 292 and 226) for OPL 291.- an arrangement which NEITI (Nigerian Extractive Industries Transparency Initiative) pronounced as acceptable. (30) Then, even curiouser, CPC withdrew altogether and later sold its share of bloc 291 to a Western independent, Addax, in October 2006. Addax retained Starcrest as its partner in the bloc. This raised suspicions about the deal and it became a “cause celebre” in the Nigerian press. (31)

Due diligence investigation showed that Starcrest was owned by Nigerian businessman Emeka Offor while the LCV on the bloc was given to Shorebeach Nigeria – a company owned jointly by Offor and Emmanuel Ojei, both close associates of President Obasanjo. Rumours that Offor had paid out US$25 million to unnamed individuals after Addax had paid the signature bonuses complicated matters (32) NEITI officials confirmed that there were serious irregularities about this deal . Starcrest was only registered just before the round, it had no history, and no credibility as an oil company. Informed opinion suggested that the CPC/Starcrest bid was little more than a vehicle for raising funds for the third term. The withdrawal of Taiwan’s CPC from this murky arrangement may be understandable in this light.

In the meantime, the political context had changed. On 6 May 2006, the Nigerian Senate in a dramatic vote threw out a raft of constitutional amendments before it, including the proposal for a third term for President Obasanjo. In spite of reportedly vast sums of money paid out by the Presidency to the National Assembly to ensure the safe passage of the third term, the Senate killed it dead. By this stage, strong rumours were circulating that some of the beneficiaries of oil blocs in 2005/06 , including the ANOCs, had

made significant contributions to the fighting fund for the third term.(33) There is no paper trail to that effect but it is plausible. If this were to be proven, it would add a new dimension to the oil-for-infrastructure deals.

The 2007 licensing round

In 2005 and 2006, therefore, a few ANOCs had established a toehold in Nigeria. And, in return, they had each promised large-scale downstream/infrastructure investments. With the third term lost, and a new election imminent in April 2007 with the handover to a new President set for the end of May 2007, it seemed unlikely that another bidding round would take place. On the contrary, President Obasanjo was determined to farm out more acreage before he left office. The targets were still in place – to raise reserves to 40bn barrels, and production capacity to 4 mbd by 2010.

But the political game had changed, from raising third term funds to raising funds for the ruling party for the 2007 election and to rewarding cronies in a last minute fire sale. In the industry, the 2007 round was perceived “…as a last chance for Mr Obasanjo to dispense patronage to key backers before the end of his eight-year tenure” (34) It was held within 2 weeks of the Presidency handover. There were other last minute decisions too, including the sale of the Kaduna and Port Harcourt refineries to a local consortium headed by Aliko Dangote, Nigeria’s wealthiest businessman, and an ally of President Obasanjo.

The 2007 round was characterised by – and indeed compromised by – the same oil-for-infrastructure philosophy. The round was open to ” promotors showing seriousness in order to qualify for Right of First Refusal”, it introduced a new condition that “projects must commence within 18 months of entering into the agreements” and a non-refundable deposit of 50% of the offered Signature Bonus had to be paid on the spot. (35)

45 blocs were on offer but 24 had been pre-assigned on RFR terms to 12 companies/consortia. A number of ANOCs had so pre-qualified. These were: Petronas (Malaysia) pre-assigned 1 bloc in return for the promise of a 2.5mton petrochemical project in Delta State; CNOOC (China) 4 blocs in return for a $US2.5bn Chinese Exim Bank loan for the Lagos/Kano railway upgrade and for the construction of an HEP project at Mambilla; CNPC 1 bloc as core investor in the Kaduna refinery; ONGC/Mittal (OMEL) 1 bloc in return for the feasibility study of a new railway ,Lagos-Aba; and KNOC was pre-assigned 4 blocs for a $US2bn loan for the Port Harcourt-Maiduguri railway. Between them the ANOCs had been offered preferential access to 11 blocs.

In the event, in spite of the generous number of blocs assigned to them, the ANOCs

stayed away. They did not bid at all. Given the round’s timing, a mere 2 weeks before a change of government, there were justifiable fears that the paperwork would not be completed in time. There were also concerns that the new government might not uphold any deals then made. The political risk was too high. The round was largely a flop as a result. Although a total of 45 blocs had been on offer (including those with RFR rights), only 17 were taken up. The successful bidders were a motley bunch of small independents , some indigenous players and a few unknown private investors ( eg from India, Essar and Sterling).

So, at the end of 3 bidding rounds, in 2005, 2006 and 2007, the Asian footprint in Nigeria is still very small – KNOC with 2 blocs from 2005, ONGC/Mittal with 2 blocs from 2006 and a third (awarded by Obasanjo on a discretionary basis) which is sub-judice,(see below) ,CNPC with 4 blocs also from 2006 of which 2 have been abandoned due to low prospectivity and Taiwan’s CPC none following their withdrawal from Nigeria after being unwittingly caught up in a classic Nigerian intrigue.

But the ANOCs had been offered the Right of First Refusal (RFR) on a greater number of blocs. Had the ANOCs taken up all the blocs offered on RFR terms in the three bidding rounds in 2005, 2006 sand 2007, they would have ended up with over three times the number of blocs they actually bid for and acquired. In total, the ANOCs had been offered RFR on no less than 26 blocs but settled for a mere 8. Their caution was to later prove to be wise. See Table 2.

———————————————————————————————–

Table 2 Blocs offered to the ANOCs on RFR Terms 2005-2007

ANOC Blocs with RFR Round Taken Up

—————————————————————————————-

KNOC 2 2005 2

1 2006 –

4 2007 –

ONGC-VL 2 2006 –

OMEL 3 2006 2

1 2007 –

CNPC 4 2006 4

1 2007 –

CNOOC 4 2007 –

CPC 2 2005 –

1 2006 –

Petronas 1 2007 –

—————————————————————————————— Total 26 8

——————————————————————————————-

Source: compiled from data from the Department of Petroleum Resources, April 2008

Other assets of the ANOCs

The JDZ attracts

Outside the bidding rounds, Indian and Chinese NOCs have acquired a few additional assets. None were tied to downstream projects. Firstly, following the 2004 licensing round on the Nigeria-Sao Tome Joint Development Zone – JDZ (36) ONGC was finally awarded in May 2005 a 9% share in a consortium for Bloc 2. In March 2006, China’s Sinopec was approved as the operator of Bloc 2 as the biggest shareholder with its 28.67% stake. ONGC with its controversial partner, Equator Exploration (with a 6% stake) had hoped to secure the operatorship but lost out to Sinopec. Drilling by Chevron on Bloc 1 of the JDZ has proved disappointing. So it remains to be seen where the Asian investment in the JDZ will pay off.

– and CNOOC spends a fortune

Secondly, in early 2006, CNOOC (China National Offshore Oil Corporation) bought contractor rights through a private sale in a lucrative bloc, OML 130 (formerly OPL 246), in the Akpo field. It is estimated to have recoverable reserves of 600 – 1000 m barrels. In a complex transaction, CNOOC paid a massive US$2.3 bn to acquire these rights. ONGC of India had also tried to buy into this bloc. But, in December 2005, the Indian Cabinet Committee on Economic Affairs, responsible for sanctioning the deal, refused to sign off the finance, citing concerns about valuation and political risk (37) . This was in fact China’s first acquisition in Nigeria, preceding the CNPC gains from the 2006 mini-round. Significantly, financial support from China’s Exim bank was extended to CNOOC to help it develop the field. It received a 10-year loan of US$ 1.6 bn at a cheap interest rate for the purpose (38).

But this bloc has a controversial history. The original bloc, known as OPL 246, was 60% owned by an indigenous company, Sapetro, headed by a former Defence Minister, General TY Danjuma.. The whole bloc had been originally awarded to Danjuma in 1998 by the then Head of State, General Abacha. President Obasanjo, who had fallen out with Danjuma over the latter’s public criticism of his style of government and Danjuma’s public condemnation of the third term agenda, tried to reduce Sapetro’s ownership of the bloc to 10% by invoking back-in rights. This failed.

A second issue then arose. When oil was discovered in the bloc, it was split into two under existing regulations. One part was sold to CNOOC as OML 130 while the remainder reverted to the NNPC.(Note: when oil is found in a bloc, the oil prospecting license, OPL, is converted to an oil mining license, OML). The NNPC confirmed the CNOOC deal in April 2006. But Sapetro took the NNPC to Court over the “relinquished” part of the concession, arguing that OPL 246’s expiry date had not yet been reached. The Court of Appeal in late 2007 upheld the NNPC’s case that it had acted under the rules. But Sapetro has since taken the matter to the Supreme Court where it rests. (39)

– while India gets a discretionary award

In the meanwhile, President Obasanjo had privately awarded, on a discretionary basis, the ” relinquished ” half of OPL 246 to ONGC-Mittal (OMEL) under its new bloc number, OPL 297.(Note: when blocs are subdivided, new numbers are given. In this case, the old OPL 246 became OML 130 and OPL 297). This would have given OMEL a third bloc (in addition to the 2 it won in 2006). But the case remains sub-judice and Sapetro won a Court injunction to restrain any activity on the bloc. Whatever the outcome of the Supreme Court case, it is unclear whether the Yar’Adua government – whose attachment to the rule of law is now legendary – would uphold any discretionary awards handed out by the previous government. When he came to power, President Obasanjo had denounced discretionary awards but later used the device when certain political circumstances arose. DPR records indicate that OMEL paid a signature bonus of US$25 million in September 2006 for OPL 297. Given the high prospectivity of the bloc, the very low price suggests that a discount might have been given.

– and CNOOC buys again

CNOOC made a second acquisition again through a private sale, again outside the bidding process and without any linkage to downstream commitments. In March 2006, it paid US$60 million for a 35% working interest in OPL 229. This bloc was wholly owned by two indigenous companies, Emerald Energy Resources and Amni International Petroleum Devt Co, who acquired the bloc in the late 1990s. Emerald is owned by Emmanuel Egbogah, an oil industry specialist, who was appointed in 2007 as Special Advisor on Oil Matters to President Yar Adua., and Amni by Tunde Afolabi, a petroleum geologist. CNOOC intends to pump an initial US$ 1.5 bn into the development of the field. Its funding was guaranteed by China’s Export Credit agency, Sinosure (40)

Non-State Owned Asian assets

To complete the picture, a small number of non-state owned Asian companies have also acquired oil blocs in Nigeria . In September 2006, President Obasanjo made a discretionary award (OPL277) to a little known Indian company called Sterling Global.Resources. It is linked to the Indorama PetroChemicals Group based in Indonesia. (41) Nigeria had earlier sold its Eleme Petrochemial Plant to Indorama under the privatisation programme. Given that Sterling had no history of oil exploration and development and was only set up in March 2006, it has been suggested that Sterling may have been a front company for a highly placed Nigerian or that it was a vehicle for funding raising for the ruling party ahead of the forthcoming elections in 2007. (42) Sterling subsequently won 2 onshore blocs (OPLs 2005 and 2006) in the 2007 round. All 3 blocs have since been revoked. Another independent Indian company, Essar E&P Ltd, also featured as a winner on one bloc (OPL 226) in the 2007 round. But, its credentials are similarly suspect, and its bloc has also been revoked.

 

The total Asian presence

Overall, the Asian footprint in Nigeria’s oil sector is still small. In the 4 bidding rounds 2000-2007, over 170 blocs were offered. Only 86 or so were awarded and some subsequently fell through because of payment default. Of the total number of awards made to the ANOCs over this period, the ANOCs have a presence in only 12 blocs, the 13th remains subjudice. – 8 through strategic deals in 2005/06 rounds, 2 from private sales in 2006, 2 shares in the JDZ, and the 13th through a discretionary award. Table 3. Small independent Asian companies awarded a further 4 in 2006/07 have since lost all of them. Indeed, the blocs gained by the ANOCs in the 2005 and 2006 licensing rounds are also under threat of revocation for non-performance on the strategic commitments.. Small though the Asian footprint is, it could be even smaller in the months ahead. The only safe blocs would appear to be those acquired by private sales. Those acquired through the oil-for-infrastructure deals are all at risk.

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Table 3. Total Assets of the ANOCs in chronological order

NOC Date Blocs Comment

————————————————————————————————————

ONGC May 05 JDZ Bloc 2 9% share/Equator 6% = 15%

Sinopec May 05 JDZ Bloc2 28% ; operator wef Mar 06

KNOC 2005 Round OPL 321&323 Strategic Deal

CNOOC Jan 06 OML 130 Bought contractor rights

For US$ 2.3 bn

CNOOC Mar 06 OPL 229 Bought 35%

CNPC 2006 Round OPL 471, 298, Strategic Deal

732,721

OMEL 2006 Round OPL 279& 285 Strategic Deal

(ONGC/Mittal)

OMEL Sept 06 OPL 297 Discretionary award

(ONGC/Mittal) Still Subjudice

————————————————————————————————————

Source: compiled from data from the Department of Petroleum Resources, April 2008

————————————————————————————————————

The fate of the strategic deals

This is the crux of the matter. Three years on, there is still nothing to show on the ground for the oil-for-infrastructure deals with the ANOCs. President Yar’Adua, inaugurated on 29 May 2007, almost immediately instigated an investigation into the 2007 bidding round following a number of complaints about its conduct. The Committee’s Report (43) concluded that were a number of serious irregularities, and that some of the declared winners should not have even pre-qualified. Two small Indian companies , Essar E &P Ltd and Sterling Global Resources, were singled out for lacking little or no exploration and production experience. Essar had only been registered in January 2007 and Sterling in March 2006. The Committee recommended that the award of OPL 226 to Essar be revoked and that the award of OPLs 2005 and 2006 to Sterling be withheld. Similarly, the Committee found fault with blocs awarded to indigenous companies.

Although it only addressed the 2007 licensing round, the Committee expressed a strong view on the oil-for-infrastructure scheme, noting that while the RFR option might have seemed a good one, in its view “.. many companies took advantage of it to have access to concessions with high potentials without fulfilling their commitments to Government by the commencement of downstream or infrastructure projects of strategic national importance which formed the basis of the philosophy”. As a result, the Committee recommended that the 2005 and 2006 rounds should also be re-visited. That was to place the ANOCs in the front line of fire for the non-delivery of projects 2 to 3 years after oil blocs were awarded to them.

Key industry officials have since confirmed that the oil-for-infrastructure concept will be abandoned. (44) The lack of transparency of the scheme, the non-performance on the downstream commitments, together with strong suspicions that the real reason for the deals was political and not developmental, that the scheme was driven by personal rather than national interest, are likely to ensure that such a scheme will never be repeated

In addition, there has long been a perception in Nigerian circles – in the media, civil society, the political class, the civil service and among oil sector professionals – that the ANOCs lacked seriousness about the early delivery on the commitments made in exchange for preferential access to oil blocs. Many believe that the Asians were only interested in the oil blocs, and having acquired them, that the linked promises were hollow. They were seen as both difficult customers and insincere partners. For their part, the Asians have struggled with Nigeria’s slow, labyrinthine and corrupt-laden bureaucracy together with its byzantine politics. From the start, there was concern in government that there was no formal mechanism to enforce the deals. The downstream promises were little more than promises in principle. The MOUs signed were little more than expressions of intent.

But, few critics of the scheme noted the important small print. For example, when ONGC/Mittal (OMEL) of India signed the MOU with the Nigerian government in November 2005 for infrastructure investments in exchange for drilling rights (later acquired in the 2006 mini-round), the MOU was valid for 25 years. At the time of signing, the Chairman of ONGC made it clear that the investment would be proportional to the scale of oil discoveries. He said, “The investment in infrastructure would depend on the joint venture’s returns from the blocs.” (45) That would suggest that no action would be taken on the downstream promises for many years. In any case, Mittal had made it clear that he wanted 2 billion barrels of reserves before signing up to the implementation of any downstream investment. (46) This largely explains why, in India’s case at least, no progress has been made on the ground on any of the commitments. In any case, given the scale of the promised projects they would have had very long lead times. Progress would have depended on inputs from the Nigerian side, such as arranging land access rights with local communities, always a tricky matter. The slow pace of Nigerian bureaucracy and the absence of monitoring mechanisms would have added to the timescale of any project.

Looking at the oil-for-infrastructure deals as a whole, the projects were vague lacking in technical or financial detail. Subsequent negotiations were slow. Endless visits by Nigerian officials to Asian capitals produced little clarity or progress and no timetables for delivery were ever announced. The projects chosen by Nigeria for Asian investment were high cost, high value, with high commission opportunity but not properly considered in the context of wider national economic planning needs. The political context also exposed the weakness of the arrangements. In retrospect, this was an ill-thought out, half-baked ad hoc exercise dressed up in fine words.

– KNOC wins and loses

There was one exception. KNOC had made some progress. It had put together a consortium (47) to build a 600km gas pipeline from Ajaokuta to Kano, together with 2 gas-fired power plants sited at Abuja and Kaduna. Spurs to Katsina and other northern cities were to be considered. The total cost was estimated at US$ 5 bn. KNOC had laid out a timetable of 8 years, from the feasibility stage in 2006 to completion in 2014. South Korea had even proposed to dismantle a steel mill in that country, to re-build it in Nigeria to manufacture the pipeline in Nigeria. A Joint Working Committee, KNOC/NNPC, had been established to follow through on the engineering and design and, inter alia ,to carry out the required environmental impact assessment (48). The financial arrangements had not however been agreed, and negotiations with relevant IOCs to secure the gas supply were far from finalised.

However, this project seemed solid and robust. By early May 2008, when the bulk of the fieldwork for this paper was undertaken, the KNOC project seemed likely to proceed. It had been included in the new government’s Master Plan for Gas issued in February 2008. Indeed, the KNOC consortium had revised the alignment of the proposed gas pipeline to fit in with the Master Plan. KNOC was confident that the project would go ahead and the Yar’ Adua government had reportedly asked KNOC to fast track it.

However, by late May 2008, a serious problem arose putting the project in jeopardy. It was discovered that KNOC had not paid the full signature bonus on its blocs acquired in 2005. While KNOC has since argued that it had been given a discount by President Obasanjo, there was no record of this in NNPC, DPR or Presidency files. It is common knowledge that President Obasanjo was fond of making ad hoc decisions with no supporting documentation. The discount given to KNOC , probably verbally during the South Korean President’s visit, is a good example of Obasanjo’s quirky style of government.

But consequences have followed. The discount issue has given the new government the grounds to cancel the contract for the gas pipeline project with the added threat to revoke the oil blocs into the bargain. Negotiations are ongoing with the South Koreans. The problem with the oil-for-infrastructure deals was that the new government found itself locked into contracts which had not gone out to international open tender. This meant that on pricing there was no benchmark against which to judge a proposal such as that from the KNOC consortium. This meant that in effect Nigeria did not know whether it was getting value for money. For all these reasons, the KNOC gas pipeline project was cancelled in May 2008. (49)

– Railways on track and off track

The Railway projects tied to oil bloc allocation have also been put on hold or cancelled by the Yar’Adua administration. The Obasanjo government had an ambitious plan to upgrade its rail system. The then Chairman of Nigerian Railways, the late Mohammed Waziri (who incidentally spearheaded the campaign to fund the third term project) had lobbied for funds to renew and expand the railway system.The overall cost was high at an estimated US$35 bn. Seeking funding from Asia to kick start the plan seemed a smart option given Western donor resistance to funding large infrastructure projects. So, in return for guaranteed access to oil blocs, the ANOCs committed to building 3 separate railway lines: China promised to construct a new double track, standard gauge line between Lagos and Kano; South Korea pledged to rebuild the decrepit Port Harcourt-Maiduguri line; while India committed to undertake a feasibility study for a new east-west railway linking Lagos with the Niger Delta.

Preliminary MOUs on these undertakings were duly signed – with India’s OMEL in November 2005, with China in April 2006 during the visit to Nigeria of the Chinese President, and with South Korea in November 2006. The latter signed by Nigeria’s Minister of State for Petroleum, Edmund Daukoru and Korea’s Minister of Energy, provided for Korean long-term low interest loans to help Nigeria cover part of the estimated US$10bn necessary to rebuild the 930 mile-long railway. Following negotiations with South Korea, a proposal for an initial loan package of US$ 2bn at 3% interest with the mark-up to prevailing commercial lending rate bridge was provisionally proposed. But significantly, acting on instructions from the Presidency, this loan was predicated on the allocation of 4 oil blocs to Korea, with a Signature Bonus waiver – at the next bidding round in 2007. (50) But the Koreans did not take part in the 2007 bidding round and the whole proposal fell away.

There had been some progress , however, on the Chinese pledge over the Lagos-Kano line. The Obasanjo government had opted to replace the existing single track, narrow gauge line with double track standard gauge. A Chinese contractor , China Civil Engineering Construction Corporation (CCECC) was appointed, bypassing the normal open tendering process. The initial price quoted for the job was astronomical at US$ 15.4 bn. After intense negotiations and some amendments to the design, the final price agreed was US$8.3 bn and the work was to take 4 years from the start date. But, according to the World Bank, this was still double the cost it should have been. (51) Although the Due Process Unit in the Presidency reviewing the CCECC proposal had reservations, it was passed because of political pressure. The contractor was allocated a mobilisation fee of US$250million, a sum taken from the Excess Crude Account in January 2007. Some argue that this was illegal because the project had not taken off, the government had not agreed the financing package for the railway, and there was no provision for it in the 2007 Budget. The mobilisation fee itself had not been appropriated (52) . In any case, no work was started.

Earlier, in November 2006, Nigeria had signed a Loan Facility agreement with China for US$2.5bn – of which US$1.3 bn was to be dedicated to the first phase of the new Lagos-Kano railway. The loan comprised 2 facilities – the first valued at US$ 500 m provided by China through the Chinese Exim Bank, on concessionary terms, with an interest rate of 3%, a repayment period of 20 years including a grace period of 5 years; and the second, for a US$2bn provided directly by the Chinese Exim bank on the same terms. However, the most significant condition of the loan facility was that it was linked directly to the lifting of crude oil by Chinese companies and the allocation of 4 oil blocks (one of which had to be producing) – in the upcoming 2007 licensing round. And as with the Korean loan, China was to benefit from a Signature Bonus waiver under this arrangement But, crucially the MOU required to confirm the terms of the Loan Facility agreement had not been signed by the time President Obasanjo had left office, nor since (53). The signature of such an MOU had been an imperative for drawing on this facility. In any case, the IMF did not support this facility on the grounds that the terms of the Chinese loan did not meet the required concessionality defined by the PSI (Policy Support Instrument). (54)

Subsequently, an investigation by the Yar ‘dua administration showed that the contract price was hugely inflated, that there had not been either a feasibility study or a front end design before the contract was awarded, and in any case there was no provision in the 2008 budget for Nigeria’s co-financing element. As a result, the President cancelled the contract in June 2008.

The Yar’Adua government was not keen on the grandiose and costly railway projects it had inherited. According to government officials, Yar’Adua’s economic team prefers to opt for the simple refurbishment of the 2 existing north-south lines, retaining the original single track narrow gauge structure. The east-west line, which would have been new, is no longer regarded as a priority. The government is hoping to attract foreign investment for the refurbishment. Another option being considered is to throw all the lines out for concessionaries . The new government has been encouraged in this thinking with the discovery that ,before the oil-for infrastructure deals closed all options, the Bureau of Public Enterprises (BPE) had received Expression of Interest on the railway concessions from some 21 companies. (55) The government hopes to be able to revive that interest.

– Power on and off

President Obasanjo also persuaded the Chinese to build a HydroElectric power project at Mambilla in Taraba State under the strategic deal scheme. He was impressed with the “Three Gorges” project in China, and decided to replicate it in Nigeria. This commitment was linked to CNOOC acquiring oil blocs in the 2007 round. The deal was agreed on the margins of the China-Africa Summit in November 2006. But a disagreement arose over the interest payments Nigeria would make on a Loan Facility of some US$2.5bn offered by China for the purpose. Two Chinese companies put in cost estimates for the civil works and hydraulic steel structures, with prices up to US$ 2bn. . However, before the Loan Facility could be sorted out, President Obasanjo went ahead and awarded the contract, valued at US$ 1.46 bn , for the first phase to a Chinese company, China Gezhouba Group Corporation (CGGC) , just a few weeks before the handover to his successor. This impetuous decision was typical of Obasanjo’s style, leaving his successor to pick up the pieces. A subsequent House of Representatives investigation in March 2008 into the power sector discovered that the German Firm acting as Consultants on the project had not even done a feasibility study although they had been given a mobilisation fee of US$ 3 million allocated from the Excess Crude Account. (56) No work has been done on the site to date. With the boycott of the 2007 round by the ANOCS, including CNOOC, the status of the Chinese contract is now in doubt. In fact, the new government suspended the project in October 2007 while it seeks alternative sources of funding..

– Refineries pending

On the rest of the Asian commitments, there have been regular announcements that both China and India would build new refineries in Nigeria. One of OMEL’s commitments in return for oil blocs was to build a Greenfield 180,000 bpd capacity refinery . While negotiations are reported to have started in January 2008, the site for the proposed refinery is not yet firm. Both Lagos and the Niger Delta are possible options. (57) So, these have remained rhetorical announcements. In any case, the Obasanjo administration changed its mind several times about the fate of the existing refineries. China had originally pledged to invest US$ 2bn in the ailing Kaduna refinery, while Taiwan. had offered to buy into the equally ailing Port Harcourt refinery. Neither happened. To confuse matters further, on the eve of his departure from office, President Obasanjo sold bothrefineries to a local business consortium. The Yar’Adua administration has since reversed these sales. It remains to be seen whether the Indian and Chinese promises to build new refineries are translated into reality.

The denouement

When the strategic deals with the ANOCs were first announced, the press – both domestic and international – hailed this development as a massive shift to the East for Nigeria’s oil industry. But the hype was not justified. In reality, they secured little more than a handful of blocs out of several hundred awarded over the last 50 years to the IOCs and western independents. The magnitude of their gains was over-stated as was the magnitude of the shift. And the grand promises of infrastructure projects have not been honoured.

By the Summer of 2008, the irregular nature of the strategic deals had become apparent following a number of official government investigations. Further details emerged during hearings of the House of Representatives Ad Hoc Committee set up to enquire into the NNPC and its subsidiaries for the period 1999-2007 (the Obasanjo years). Firstly, it was confirmed that KNOC had not paid its full signature bonus for the 2 blocs it was awarded in 2005. KNOC claimed that it had been given an unannounced discount. Secondly, the true nature of the OMEL deal was exposed when Mittal’s representative admitted in a closed session to the Ad Hoc Committee that Obasanjo had agreed that Mittal would not have to fulfil any of the promised downstream obligations until the two blocs awarded in 2006 yielded 650,000 bpd. That is not only an implausible target but practically impossible to achieve short of a major oil field discovery on OMEL’s concessions. Obasanjo later made a discretionary award of a third bloc to help OMEL reach its production target. Mittal also revealed that the original agreement to invest in 3 projects (see Table 1) had been later changed by mutual agreement to the effect that Mittal would invest in only 1 of the 3 projects. China’s CNPC also found itself in a controversial position over one of the four blocs it acquired in 2006. In a bizarre move, a producing bloc known as OML 65 belonging to the NNPC’s exploratory wing, NPDC (Nigeria Petroleum Development Corporation) was taken from it, the bloc was allocated a prospecting licence ( OPL 298) which was duly awarded to CNPC. It appears that Obasanjo had promised China at least one operational bloc. The Legal Department of the NNPC described this arrangement as highly anomalous. It is rare for a bloc with a mining licence to revert to a prospecting licence. But the problem for CNPC came when they tried to take control of the bloc. In spite of having signed the PSC a month before Obasanjo left office, the NNPC has since stalled on the follow-up paperwork. The new government was angered over the manner in which OML 65 had been given away outside normal procedures and for an insignificant signature bonus.

As a result of its findings, the Ad Hoc Committee has recommended the cancellation of the oil blocs awarded to KNOC, OMEL and CNPC in 2005 and 2006. (58) This followed the government’s earlier cancellation of two major project proposals linked to the deals (a gas pipeline promised by South Korea and the Lagos-Kano railway promised by China). At the same time, all other infrastructure proposals linked to the acquisition of oil blocs were put on ice. In any case, most had not been elaborated. The government was provoked to so decide after discovering that the deals were opaque, that the financial arrangements were unsatisfactory and that due process had not been followed. However, some Presidential advisors have urged caution arguing for re-negotiation of the deals to avoid the inevitable political fallout with the Asian countries concerned. This group sees revocation as a clumsy response to a clumsy problem. So encouraged, the ANOCs under threat have since opened negotiations with the government to try to rescue their oil assets.

In the meantime, the government has revised the guidelines for oil bloc allocation. One of the most important changes is its decision to abolish the controversial Right of First Refusal (RFR) which had so compromised the bidding rounds of 2005, 2006 and 2007, and which had been designed to favour the ANOCs. The issue of the Local Content Vehicle is also to be discouraged given that it was used to reward cronies rather than to encourage genuine local participation in the industry. The timetable for the payment of signature bonuses has also been tightened up, citing the penalty for non-payment of 50% within 90 days of the award as automatic revocation. Licensing rounds, which had become an annual affair during Obasanjo’s second term, will in the future be less frequent and based on economic need rather than political considerations. (59)

The ANOCs experience in Nigeria has been difficult and frustrating so far. Oil-for-infrastructure deals have been successful elsewhere in Africa, notably in Angola and Sudan. This suggests that the concept per se is not at fault. But in Nigeria the scheme went wrong because it was not properly conceived and there were no inbuilt guarantees. . While historically it has been common practice in Nigeria for an incoming government to investigate the contracts of its predecessor, the oil-for-infrastructure deals were of a different order. The absence on the ground of promised infrastructure projects some three years after the oil blocs were awarded was sufficient to provoke an investigation. It was then discovered that arrangements for compliance were shoddy or non-existent, due process and transparency were lacking, that the existence of secret clauses and unannounced discounts on signature bonuses had combined to make a mockery of the bidding process and the concept itself.. These serious shortcomings together with the hidden political agenda ensured that the scheme was doomed to failure. The denouement was predictable.

Conclusion – Things Fall Apart

President Obasanjo’s stated grand design to achieve a “development dividend” through the oil-for-infrastructure scheme with ANOCS has fallen apart – and with it the impact that it might have made on the Nigerian landscape. Following the cancellation of the Korean gas pipeline project and the Lagos-Kano railway contract with China, it now appears that in total some US$ 20 bn of investment promised by the ANOCs in 2005/2006 is at risk. The direction of travel is clear.

For all the grandstanding announcements, the devil is in the detail. The financial arrangements were not favourable to Nigeria. Both China and South Korea had offered to only partly fund the projects with government to government loans. But the terms were not satisfactory. With all the projects, Nigeria would have to find the balance of the funding itself. That would have imposed a burden over time. The Indian proposals were different. Their commitments were to be funded by direct investment and the projects done on a build, operate, manage and ownership basis. (60) The downside of the Indian approach was that the projects would not start until the oil blocs they had been awarded were in production. It can take 3-5 years of prospecting before an oil bloc starts producing. The absence of detailed assessment by the Obasanjo government of the ultimate value – and cost – to Nigeria of the oil-for-infrastructure scheme was partly responsible for its demise.

From its actions over the past 12 months, the Yar ‘asdua government has made its position very clear. Its policies will be guided by the rule of law, due process and transparency. The oil-for-infrastructure scheme, which compromised the transparency of the oil licensing rounds , will not be repeated. The introduction of both the RFR and the LCV were abused for political purposes.

The new government has acted decisively over a number of the dubious deals made by the previous government. It cancelled the last minute sale of the refineries arguing that it had been contrary to the national interest and that due process had not been followed. It cancelled the sale of the Ajaokuta Steel Complex sold to an Indian steelmaker for a token sum. It has approved investigations by Government Panels or the National Assembly into the power, transport, aviation , and other sectors. These investigations have all exposed evidence of massive fraud and corruption in the allocation of government contracts. The scale of the corruption, mismanagement and non-execution of projects in the Obasanjo years has sent shock waves though Nigeria. For example, The House of Representatives investigation into the power sector discovered that despite expenditure of some US$16 billion in the power sector between 1999 and 2007, power generation has dropped from 3500MW in 1999 down to 1200 MW in 2007.

In what has turned out to be a long season of probes into the activities of the Obasanjo administration, the oil sector has not been spared. The 2007 licensing round was investigated leading to a review of the 2005 and 2006 rounds. And, in May 2008, the National Assembly set up an Ad Hoc Committee to look into the activities and performance of the NNPC/DPR for the period 1999-2007. Its report, due by the end of 2008 or early 2009, is likely to be explosive. The oil-for-infrastructure deals with the ANOCs are unlikely to survive this scrutiny. But they may have collapsed before then.

The tragedy is that the deals were not what they seemed. Unspoken political agendas from the Nigerian side and opportunistic agendas from the Asian side undermined what might have been a mutually beneficial arrangement. Although the initiative came from Nigeria in the first place, once the blocs had been awarded to the ANOCS the initiative moved into their hands. Nigeria was thereafter trapped by a set of expensive promises with no mechanism to force the ANOCs to deliver on them. There were no legally binding agreements which would have tied the development of oil blocs to the simultaneous delivery of the infrastructure. This was the key weakness of the whole concept.

What is certain is that Nigeria is in dire need of a functioning infrastructure, whether railways or gas pipelines to serve the domestic market. The Yar’Adua government expects that it will get a better deal by putting at least some of these projects out to international tender, or by setting up public-private partnerships. It believes that the few Asian projects that got as far as the drawing board were not competitively priced, nor properly designed. The inflated contract prices would have left much room for corruption and left Nigeria with unacceptable levels of new debt.

This case study does not reflect general concerns about Asian behaviour in Africa. The ANOCs entry into the murky waters of Nigerian oil has proved both difficult and controversial. This has not been a case of the aggressive Asian pursuit of oil. After years of reluctance, they accepted the invitation to play. Neither has this been a case of ANOCs paying over the odds to get into the market. On the contrary, they were offered either discounts or signature bonus waivers to entice them in. This was a wholly Nigerian initiative. The novel concept of swapping oil blocs for investment in infrastructure was inspired by President Obasanjo. His intentions were good but officials failed to spell out the full implications of the scheme. And many used the scheme for private profit. It might have seemed a good idea on paper but the spirit was breached in the implementation. In spite of the acreage awarded to the ANOCs, they have not yet added to the reserves, and there has been no measurable benefit from the strategic deals. (61)

Even if the oil blocs awarded to the Asians stand, and this is not yet certain, the ANOCs footprint in Nigeria is very small. They pose no threat to the IOCs, a conclusion confirmed by them (62). The IOCs are more concerned about the impact of the Yar’Adua government’s proposed reforms to the NNPC as well as the perennial problem of insecurity in the Niger Delta. According to diplomatic sources, the IOCs see the proposed reform to the JVs as “nationalisation through the back door.” (63) While this is a highly exaggerated view, there is no doubt that the reforms will affect their profitability.

The impact of the ANOCs in Nigeria has turned out to be unexpected. The manner in which they came has generated controversy. Not a single barrel of oil has yet been produced by them. Not a single barrel has been added to Nigeria’s reserves. Not a single downstream commitment has been started. The impact of the ANOCs on the Nigerian economy has been zero. There has been no tangible benefit. They have had a baptism of fire in Nigeria. Their experience has exposed the quirky style of government in the Obasanjo years more than anything else. It is time for the ANOCs to get their relationship with Nigeria sorted out and put on a more sound footing for the future. Otherwise, they might lose the small toehold they already have. Revocation is in the air. If some or all the blocs are revoked, there are bound to be diplomatic, political and possibly legal consequences. When the ANOCs begin to compete on a level playing field in a transparent process, following market forces rather than under the table deals, their presence and impact in Nigeria is likely to be beneficial and long-lasting.

The oil-for infrastructure concept has succeeded elsewhere in Africa. But in Nigeria, it was poorly conceived and poorly implemented – and above all, it was distorted by political considerations. What should have been a “win-win” situation turned into a “lose-lose” situation. Historians are likely to judge the Nigerian case as an aberration, as a product of its time, in a very particular political context.

 

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