Discretionary Awards of Oil Blocks in Nigeria: A State Capture Culture Passed Down from the Military Government

Analysis

Nigeria’s history as an independent country is very closely intertwined with the history of its oil industry. The “black gold” was discovered in a small village called Oloibiri four years before the country took the reins of its affairs and stopped being a British colony in 1960. No other economic activity has shaped the country as oil has. Even before it became the country’s primary source of revenue and foreign exchange, oil played a role in the 1967–70 Nigerian Civil War, which was fought between the government of Nigeria and the oil-rich secessionist state of Biafra.

Discretionary Awards of Oil Blocks in Nigeria: A State Capture Culture Passed Down from the Military Government

As with most developing nations that are rich in resources, postcolonial Nigeria did not have the capacity to prospect and explore its rich oil deposits by itself. It inherited oil blocks that had been concessioned to the company then known as Shell–BP, the sole concessionaire that struck oil in 1956. From a modest 5 100 barrels per day in 1958 when the field became operational, Nigeria’s oil production rose to 2.4 million barrels per day in 1974, increasing government oil revenue from N200 000 to N3.7 billion in the same period. By then, many other oil companies were active in prospecting and exploring oil in Nigeria.

However, these companies had one thing in common: they were all foreign-owned. Although the federal government had established the Nigerian National Petroleum Corporation (NNPC) in 1977, its participation in the upstream oil sector was through joint ventures and production-sharing contracts. It was not until 1987 that the first indigenous oil-producing company in Nigeria came into existence.

However, these companies had one thing in common: they were all foreign-owned. Although the federal government had established the Nigerian National Petroleum Corporation (NNPC) in 1977, its participation in the upstream oil sector was through joint ventures and production-sharing contracts. It was not until 1987 that the first indigenous oil-producing company in Nigeria came into existence.

The military government of General Ibrahim Babangida (1985–93) considered it an aberration that there were no Nigerian companies in the country’s largest and highest-earning economic sector. It felt that some form of local participation in the upstream oil industry was imperative and that Nigerian-owned companies should operate side by side with foreign companies and the supermajors, such as Shell, Chevron, Mobil and Eni.

There had been numerous Nigerian-owned companies in the downstream oil industry (sales, marketing and distribution) right from the 1960s, with numerous local players operating as importers, transporters, distributors and retailers of refined petroleum products. The Nigerian government itself had also become a player in that subsector when it bought controlling shares in the 1970s in Esso Africa (renamed Unipetrol), British Petroleum (renamed African Petroleum) and Shell (renamed National Oil and Chemicals). These were privatised in 2001.

However, the prized jewels remained the oil blocks from which the crude oil is pumped, and which have the biggest profit margins.

Indigenisation for the Connected Few

Against the backdrop of these realities, any attempt to transform the sector for the benefit of Nigerian society appears as a noble undertaking. The subsequent actions of the military government, however, point in the opposite direction.

Transformation of the sector seemed easy enough to achieve, considering the fact that the 1969 Petroleum Act gave the minister of petroleum unfettered power to use whatever method desired to award oil blocks. But maybe a bit too easy, as would become apparent soon. The 1990 indigenisation policy did not choose to award oil blocks through an open bidding process, which could have ensured transparency. Instead, the government invited those Nigerian entrepreneurs it felt had the financial muscle and/or could mobilise both financial and technical resources to carry out exploration and production activities to apply for oil block licenses. Any Nigerian company that was offered a license could have it through the exchange of a “signature bonus” of at least USD 1.5 million.

This is where the problems started. The objectives of the federal government to increase local participation in the oil industry were not clearly set out in any policy document, guideline or regulation. There were no specifications for what percentage of licences and leases were reserved for Nigerian companies, or for the restrictions on awarding licences and leases to multinational oil companies.

It is standard practice that official government communications be gazetted, to create prima facie proof of any fact of a public nature of which the gazette is meant to notify. However, the 1990 indigenisation policy was not published in an official gazette, and its vagueness created the possibility of the policy being abused by those charged with its implementation.

The first set of discretionary awards was made in 1991 and then a second one in 1993, with many of the recipients influential Nigerians who had never been in the oil industry before, but were well-connected to the government and especially the president, General Babangida.

For example, the family of Okunade Sijuade, the late influential Ooni (King) of Ife, who is regarded as the spiritual leader of the Yoruba ethnic group, was granted an oil block, Oil Prospecting License (OPL) 302 through its company, Alfred James Petroleum. MKO Abiola, an influential businessman and a close friend of General Babangida (and future acclaimed winner of the 1993 presidential election, which was annulled by Babangida), received two oil blocks. Mike Adenuga, another close friend and one of Africa’s richest men today, also received his first oil block in 1993.

It has been argued that the awardees still assumed the risk in prospecting for oil within the acreages and some did not strike “gold” until much later, or even never. OPL 226, which was awarded to Soglas Nigeria Limited, a company controlled by the family of the late Jerome Udoji, a senior civil servant, had its first oil discovery only in 2001, halfway into the 20-year lease that all awardees were given.

Nevertheless, some oil finds showed the inadequacy of the USD 1.5-million “signature bonus”. Perhaps the best-known example is OPL 216, which was given to Famfa Oil Limited. This is also one of the most-cited examples of how such discretionary licensing is prone to abuse.

Famfa Oil is owned by Folorunso Alakija, a popular fashion designer who was also close to the fashion-loving wife of General Babangida. After being awarded the oil block in 1993, she sold 40 percent to Star Deepwater (a Texaco company), which sold 8 percent of its stake to Brazil’s Petrobras. Today, the oil block produces 200 000 barrels of crude oil-and-gas liquids daily, making Alakija’s net worth about USD 1.1 billion.

Even in this most blatant instance of abuse of power, it would have been unheard of for the minister of petroleum not to award the oil block to Alakija, given the overwhelming power of the office of the president. Even though ministers’ appointments are subject to parliamentary screening, the president can fire them at will.

Famfa Oil’s sale to Star Deepwater also defeated the purpose of the indigenisation policy, which is to allow for more local participation. But in the absence of any explicit prohibition of such sale by law or policy, licensees are within their legal rights to bring in foreign technical partners. This loophole particularly assisted smaller foreign oil companies that lacked the financial muscle to compete against the majors to gain entry into the Nigerian oil-exploration industry.

Perspectives

Perspectives Africa

Perspectives is a publication series of the Africa offices of the Heinrich Böll Stiftung. The series provides a platform for experts from Africa to express their views about issues pertinent to the democratic and sustainable development agenda in the region.

The latest edition of Perspectives was compiled with the Heinrich Böll Foundation’s North Africa offices and the Transform Africa project. It is dedicated to the emerging conversation of alternative approaches that challenge the historical bias towards the industrialisation of agriculture and the food system as the main strategy to address food insecurity while preparing for a +2°C world.

Military Rule to Democracy

Under the administration of military ruler Sani Abacha (1993–98), the Petroleum (Amendment) Decree was passed in 1996 to provide the legal framework for the awarding of “marginal oil fields”, which were fields that had been discovered by major international oil companies in the course of exploring their larger acreages, but had been left undeveloped for more than ten years. It did not remove the power of the minister of petroleum to award licenses and leases discretionarily.

In the same year, draft guidelines were prepared by the department for petroleum resources, which is the government agency responsible for the exploration of petroleum products. According to the guidelines, only technically qualified Nigerian citizens who own locally incorporated companies may apply; current holders of oil prospecting or mining leases, except indigenous oil companies, are excluded from expanding into marginal fields; and indigenous companies must relinquish existing oil prospecting and mining licences to be eligible.

While the development of the guidelines was an improvement on the earlier indigenisation policy, where implementation was left to the determination of the minister of petroleum, the guidelines have yet to be approved, twenty-two years on. This effectively means that the government is not bound to follow them when approving marginal oil field operators.

The practice of discretionary awards of major oil licenses also did not end with the Babangida administration. General Sani Abacha gave away as many as eight licenses, the most famous of which was given in 1998, “as a reward” to the former chief of army staff and future defence minister, General TY Danjuma. That oil block, OPL 264, later received USD 2.3 billion from CNOOC, China’s offshore oil company, for a 45-percent stake, which contributed heavily to Danjuma’s current worth of USD 750 million.

Another prominent example is the award of OPL 245 in 1996 to Malabu Oil, a company controlled by Dan Etete, the minister of petroleum at the time, in a clear conflict of interest. The oil block is now the subject of at least four court cases across Nigeria, Italy and the United Kingdom after the license was revoked by Olusegun Obesanjo’s administration in 2001 and re-awarded to Shell, which was challenged in court by Malabu Oil until 2006.

In 2011, under the administration of Goodluck Jonathan, Shell and Italian oil industry giant ENI transferred USD 1.1 billion through the Nigerian government to accounts controlled by Etete. Although the two companies initially claimed they did not know the money would end up with Etete and his cronies, evidence has shown otherwise. Shell, Eni, Etete and several others are now being prosecuted for their roles in the scandal, highlighting the role of international oil companies in the corruption.

This practice has continued into the Fourth Republic. With every administration since Nigeria transitioned into democracy in 1999, the list of oil awardees still consists of the well-connected who have taken advantage of the Petroleum Act to take control of these resources. As before, there have been awardees who struck it big and those who did not until their licenses expired.

Due to the latitude of powers given to the minister of petroleum under the Petroleum Act, particularly with regard to the awarding of oil prospecting and mining leases, the occupant of the office has always been seen as one of the most powerful cabinet members. On two occasions, the president has also doubled as the minister of petroleum (Olusegun Obasanjo, 1999–2007, and Muhammadu Buhari, since 2015). Although they appoint special advisers or ministers of state in the portfolio, they retain the overall legal power to award or cancel a lease with the stroke of a pen.

Appointments into the crucial positions that have oversight of the oil industry are hotly contested by the political elites, creating opportunities for entrenched crony capitalism and patronage. These political elites continue to use the rhetoric of indigenisation to justify the opaque processes of leasing. For example, news broke in 2017 of the federal government’s plans to award 46 oil blocks while setting aside some discretionary awards for firms owned by Niger Delta indigenes, “in order to sustain the prevalent peace in the oil-rich region and give its citizens a sense of ownership in Nigeria’s oil wealth"1. While this seems like a noble objective, given that the oil-rich Niger Delta has for decades experienced civil unrest and violence related to longstanding political and environmental issues, the opaque nature of the process makes it prone to abuse. When the awarding of the oil blocks eventually happens, cronies and fronts will benefit at the expense of the country and region.

Attempts at Legislative Reform

By 2000, there was a general admission across the political class, oil companies, civil society and the public that the structure of the petroleum industry did not allow for transparency nor did it serve to attract the best investments into the sector. In response, the Petroleum Industry Bill (PIB) attempted to create an omnibus for the sector by bringing together 19 separate pieces of legislation. The Bill, which enjoyed widespread public support, was drafted to cover all aspects of the industry, including a properly defined regulatory structure, a fiscal regime for the sector, and breaking up the NNPC. However, it was criticized for not removing the discretionary powers afforded to the minister with respect to the awarding of oil blocks. Despite the PIB stalling in the National Assembly and undergoing several revisions, that provision was retained. A special parliamentary committee for the Bill recommended that the discretionary power of the president to grant licences and leases be removed and replaced by an open competitive bidding process.

In order to more easily pass the PIB, the National Assembly broke it into four bills. The first, the Petroleum Industry Governance Bill (PIGB), focused on the regulatory framework. The Bill creates the National Petroleum Regulatory Commission (NPRC), which will, among other functions, “conduct bid rounds or other processes for the award of any licence or lease required for petroleum exploration or production”. This eliminates the power of the minister of petroleum to award licenses and leases using whatever process s/he deems fit.

However, in August 2018, despite its passage by both the Senate and the House of Representatives, the president declined to assent to the Bill, raising concerns with certain aspects. Since then, it has not been re-presented to him. With new members of parliament coming into both chambers, the Bill will have to be introduced again in both houses as its slow crawl begins again. In the meantime, the minister of petroleum continues to enjoy unfettered powers to allocate whatever oil block s/he deems fit to anyone, and without checks or reparations to anyone – other than those that benefit the vested interests who strategically placed them there.

Conclusion

Nigeria is a country that is sadly synonymous with numerous forms of corruption, from kickbacks to the awarding of public contracts to front companies that inflate contracts and divert public funds. There have also been instances where public policy and laws have been made for the sole benefit of a group of people.

However, the indigenisation policy may be one of the most crucial examples of state capture in Nigeria. In many ways, it has shaped the oil exploration industry, which sits at the heart of revenue generation for the country. Major losses of revenue have occurred due to the payment of signature bonuses that were lower than they should have been, and to lower oil production due to the inability of the licensee to develop the oil block. It has incentivised successive political elites to retain the law that allows the minister of petroleum discretionary powers to award oil field licenses, leading two presidents to double as the minister for petroleum in order to exercise that power.

Note

1 CKN Nigeria, FG sets guidelines for auctioning 46 oil wells, 18 September 2017. Available at https://www.cknnigeria.com/2017/09/fg-sets-guidelines-for-auctioning-46…