Corporate Debt Review

Shell’s Nigerian Debacle

Stuck Inside of Florida with the Delta Blues Again

Over my decades of work in global oil, some of my most frustrating experiences took place in Nigeria. The country has reserves of light sweet crude, the grade that is most prized for refining worldwide. Unfortunately, to get to the oil, you must jump over hurdles, both natural and manmade.

The natural impediments are provided by the environment surrounding the Niger Delta, one of the most disagreeable places in which I have ever worked. There are insects there that need saddles, the rest of the fauna are hardly agreeable, all manner of disease abounds, the weather is either stickily oppressive or drenching, and the locals have been known to attack all manner of oil installations (and the people working there).

Meanwhile, aside from the always-lingering prospects of revolution in the Delta, other human barriers involve some of the most egregious degrees of corruption found anywhere on earth, within all levels of administration including the courts.

The central government in Abuja and authorities in the economic center (and former capital) of Lagos have pledged to make the country move transparent and friendly to outside business and investment. New legal codes have even been passed or updated.

But the improvements have been slow in coming, even in the case of assets no longer controlled. Just ask Dutch/UK oil major Shell. The recent unfolding legal battle testifies to the ongoing problems of doing business in Nigeria.

Lease 42 Has the Answers

The latest in a line of mishaps involves Oil Mining Lease (OML) 42, the main lease of eight Niger Delta consignments the oil major has divested to Nigerian domestic company Neconde Energy.

The OML 42 block encompasses 315 square miles and has been a major producer over the years with operations commencing in 1969 at the Egwa field. It now has seven producing and five undeveloped fields. By 1974 it was yielding 250,000 barrels per day (b/d) from Egwa alone and had a normalized production over twenty years of as much as 150,000 b/d.

However, not all of that was continuous extraction. The entire block was shut down in 2006 because of security problems in the West Delta. By early 2011, two smaller fields – Batan and Ajuju – were brought back on line by Shell before the divestment of a 45% interest in OML 42 to Neconde. That position was held by Shell as operator, along with French Total and Italian ENI.

At the time, the sale attracted protest by the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), an objection that may well have figured in legal actions taken last week.

Current production in four operating OML 42 fields is estimated at 70,000 b/d and expected to reach around 135,000 b/d before the end of this year.

The remaining 55% interest in the entire block belongs to the Nigerian National Petroleum Corporation (NNPC) and was assigned to NPDC, its E&P subsidiary. As of December 2011, Neconde had acquired the 45%. By February 2012, the Nigerian government named NPDC operator. In May 2015, the government moved block operating status to Neconde for a period of ten years.

There are also significant off shore blocks adjacent. These deep water zones have had onshore assets, consignments, or forward production contracts involved in collateral in the bidding and development cycles.

OML primarily contains crude oil. But it also has some 6 trillion cubic feet (about 170 million cubic meters) of natural gas resources. Plans are to develop over the next several years, with the target of 500 million cubic feet/day (MMcf/d) to service the domestic market. That development plan will also monetize a significant amount of condensate resources. A Neconde/NPDC joint venture has rehabilitated the Odidi gas central processing facility, resulting in an initial run of 40 MMcf/d coming on line about two years ago.

Shell of a Mess

Against that backdrop, the following hit last week. On March 28, Neconde announced it had launched arbitration against Shell concerning the alleged diversion of crude oil worth millions of dollars produced from OML 42.

In its press release (distributed first by government-controlled media outlets in Nigeria), Neconde contended that the arbitration move was central to a response against a “phantom” criminal lawsuit by Shell against its former employee over suspected fraud in the sale of block crude oil to Neconde.

On the same day, Shell had filed the suit in Dutch court against former staff after the company declared that it discovered alleged infractions during an ongoing internal investigation conducted by Shell in its legal battles over the controversial acquisition of Nigerian deep water oil block OPL 245.

In response, Neconde disagreed that there were any underhanded dealings before, during, or after the processes leading to the 2011 sale of Shell’s 45% position in OML 42. The Nigerian company’s statement read, in part: “Neconde, in an open and competitive bid in early 2011, acquired the 45% joint equity interest in OML 42.

… Neconde paid the full consideration provided by its financiers and in accordance with the competitive bid process adopted.”

Neconde added that it completely denied any allegation or suspicion of kickback, saying “This allegation by Shell may not be unconnected with an ongoing arbitration instituted by Neconde against Shell in London in connection with Shell’s diversion of crude oil worth millions of US Dollars from OML 42 after the acquisition of the 45% joint equity interest by Neconde and for other infractions.”

Neconde further asserted that the allegation of kickback was defamatory and that it was seriously considering legal options.

In 2016, the federal government sued Shell and its allied Shell Western Supply & Trading Ltd. for $407 million, the amount claimed as being revenue that should have accrued from undeclared/under-declared lifting of Nigerian crude.

Meanwhile, the Shell suit in The Netherlands was filed against one of its own executives heading up the local Nigerian subsidiary. Neconde has identified this individual as Peter Robinson, the former Shell VP in Nigeria. The oil major has not confirmed the identification as of this writing.

But a contact has said that “Based on what we know now from an internal investigation, we suspect a crime may have been committed by our former employee against Shell in relation to the sale process for Oil Mining Lease (OML) 42 in Nigeria in 2011.”

Neconde has some visible support in the legal fight, as well. Speaking on the criminal case, Barnaby Pace, spokesman for global anti-corruption crusader Global Witness, remarked that the new development shows Shell indeed was “always swimming in murky corruption waters in its dealings in Nigeria.”

Pace added, “Today marks a huge blow for Shell. After years of saying that there is no place for bribery or corruption in their company, they have finally admitted that one of their most senior executives may have taken kickbacks in return for an oil deal.”

Shell is also facing a separate suit lodged in Milan against the deep water OPL 245 deal.

All of this brings back painful memories of my attempt to broker an export of Nigerian crude for import of processed low sulfur diesel. But that will remain a tale for another occasion.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.