PETROLEUM ECONOMIST: Eni and Shell face new Nigeria action

The Nigerian government’s decision to formally launch a $1.1bn claim against Shell and Eni in UK courts, relating to funds allegedly misappropriated for bribes and kickbacks during the acquisition of an oil block in 2011, could lead to the largest-ever payment in an oil sector corruption case.

If successful, the case, launched in November 2018, could also open the door for more scrutiny by governments of deals made by their predecessors in the hope of winning similar awards. Eni and Shell deny any wrongdoing related to the deal.

The legal case centres on the acquisition in 2011 of offshore block OPL 245-which could hold up to 9bn barrels of oil. Most of the $1.3bn believed to have been paid by the companies to the government is alleged to have bypassed, or merely passed through, government accounts on the way to a private company, Malabu Oil and Gas. Malabu, controlled by former minister of petroleum Dan Etete, had previously been awarded and then relieved of the block by the government in murky circumstances (see box).

How much the oil companies knew about the final destination of the funds lies at the heart of the judicial proceedings. Eni—in which the Italian state is the largest shareholder—and Shell maintain they did nothing unethical and were not involved in any subsequent transaction between the government and Malabu, once their money had been handed over to the government. But Nigeria questions this.

“It is alleged that purchase monies purportedly paid to the Federal Republic of Nigeria were in fact immediately paid through to a company controlled by Dan Etete… and used for, amongst other things, bribes and kickbacks,” the Nigerian government said in a statement on the launch of legal proceedings in the UK, according to Reuters.

“It is alleged that Shell and Eni engaged in bribery and unlawful conspiracy to harm the Federal Republic of Nigeria and that they dishonestly assisted corrupt Nigerian government officials,” the statement added.

Judge criticises IOCs

Proceedings relating to the case have taken place in several countries. The highest profile proceedings are in Milan, where top executives from Eni and Shell have been cited as alleged participants in corruption relating to the OPL 245 deal. If they are found guilty, both firms could receive hefty fines.

In September 2018, the Milan court jailed two middlemen in the OPL 245 deal—Italian Gianluca Di Nardo and Nigerian Emeka Obi—to four years in prison each for corruption. They were put on trial separately from the two companies, as part of the same legal proceedings.

In her written reasoning for these convictions, published in December, the judge, Giusy Barbara, was scathing of the role of the international oil companies (IOCs).

“The management of oil companies Eni and Shell… were fully aware of the fact that part of the $1.092bn paid would have been used to compensate Nigerian public officials who had a role in this matter and who were circling their prey like hungry sharks,” she said, according to Reuters. “It was not mere connivance, but a conscious adhesion to a predatory project damaging the Nigerian state.” The judge also said money was given to managers at Eni.

The Italian convictions will have encouraged the Nigerian government to take its own independent action in the UK. It will also have been buoyed by developments in a related case taking place in Switzerland. There, it was ruled in December that items seized nearly three years ago from Obi—the Nigerian found guilty in the Italian case—could be shared with Italian courts at the discretion of a Swiss judge. These include documents, an external hard drive and phone SIM cards, which could contain information pertaining to the OPL 245 deal.

Lacking full transparency

For Nigeria, the greatest benefit of a win in court, besides recovery of the funds, would be an improvement in oil sector transparency, as companies look to protect themselves in future from similar retrospective legal claims—and reputational damage. That, in turn, ought to mean more money ends up in government coffers, rather than in the hands of corrupt third parties.

However, the government has been criticised for failing to increase oil industry transparency to the fullest extent. Sector observers say the most recent version of Nigeria’s petroleum industry governance bill stops short of introducing full transparency in drawing up oil agreements, potentially leaving room for further opaque dealings.

The corruption trial could also make the IOCs more cautious. The risk of costly, time-consuming litigation could persuade Eni, Shell and other companies to abandon plans for further field developments in some jurisdictions, unless the legal framework and financial processes are crystal clear.

Shell could yet decide to speed up divestment of its Nigerian assets, whose production is on the wane. Meanwhile, the ZabaZaba and Etan development on OPL 245 (see box) does not feature in Eni’s 2018-21 strategic plan.

NNPC lead role unlikely

This could leave the state-owned Nigerian National Petroleum Corporation (NNPC) best placed to develop the asset, if the government wants to fast-track it to production. But, the government’s strategy seems focused on recovering the lost funds it believes have been siphoned away as bribes and kickbacks, rather than taking over the block.

In any case, the NNPC’s record for field development has not been encouraging in terms of either timelines or funding, and it seems unlikely that the NNPC could take on such a field itself.

So, while the government might win the legal battle to recover its $1.1bn, it may still lose the bigger battle for investment in one of its most lucrative blocks—and cost it billions in delayed or lost taxes and royalty oil.

OPL 245: what it is and what’s at stake

The colourful story of oil block OPL 245 dates back to 1998, when the then-petroleum minister Dan Etete awarded it to a company he controlled, Malabu Oil and Gas.

This then entered a partnership with a Shell subsidiary to conduct exploration on the block between 1998 and 2001. The Nigerian government subsequently decided to revoke the license of Malabu Oil and Gas, awarding it to Shell in 2003.

Malabu fought the move in court, eventually winning the case in 2006 and getting the block back. But this prompted another legal case by Shell over the field, which claimed it still had rights to the block under its 2003 agreement.

Eventually a settlement was reached in 2011 that recognised multi-party ownership of the block, with Eni joining as a partner. It is believed that Shell and Eni then paid a sum of some $1.3bn to the Nigerian government for the right to develop the block.

A French court convicted Dan Etete of money laundering in an unrelated case in 2007.

Massive reserves

OPL 245 is believed to hold what could be the largest untapped oil reserves in offshore Nigeria, possibly as much as 9bn barrels—more than a quarter of Nigeria’s proven oil reserves. There are also substantial natural gas reserves, believed to run into trillions of cubic feet.

Prior to the re-emergence of the case in 2018 and Nigeria’s legal claim, Eni had been poised to take a final investment decision on the $13.5bn ZabaZaba and Etan field development on OPL 245, but has put that on hold. The field is estimated to hold 560mn bl and the plan was to produce some 150,000bl/d from 2020.

Eni and Shell concluded the evaluation process to appoint an operations and maintenance contractor, but requested clarity on the renewal of the block license, which was due to expire in 2020. They wanted assurances that it would be renewed before investing further in the project.

That sparked more debate over the ownership of the block, adding to the confusion caused by the current web of court cases.