Published On: Fri, Mar 2nd, 2018

NIGERIA BRIBERY SCANDAL REFLECTS COST OF DOING BUSINESS IN PETROSTATES

 

This month, high-ranking officials of two major international oil companies (IOCs) will go on trial in Milan for bribing officials in Nigeria to secure lucrative contracts. The case marks the third major corruption scandal that has touched large oil companies in recent years.

In Brazil, Petrobras contractors overcharged the oil company for work and then kickbacked bribes to company executives and politicians. The probe into the operation was launched in 2014, and the scandal hit the country’s economy and political establishment, with officials at the top of both Petrobras and the government implicated. In 2016, investigative journalists found that Monaco-based Unaoil, a family-run company, formed an international bribing network to secure oil and gas contracts for clients.

Now, in what is even bigger than those two, Royal Dutch Shell’s former head of international oil development, Malcolm Brinded, and Eni’s CEO Claudio Descalzi are alleged to have paid more than $1 billion to a former Nigerian oil minister. The case involves Eni and Shell’s purchase of Nigeria’s OPL-245 offshore oilfield, one of the most valuable oil blocks in Africa. Prosecutors claim that company officials used bribes to win the license to explore the field.

 

“There has been greater scrutiny around corruption issues over the past 15 years,” Aubrey Hruby, a Senior Fellow at the Atlantic Council, told The Fuse. “This case is not a deviation by any means, but the money involved is mind-boggling.”

The case shows the risks Western corporations must take to navigate the complex politics of oil-producing nations in order to compete for limited resources. IOCs will continue to come under more scrutiny after this investigation, and the more they want to invest in petrostates, the greater the possibility of yielding to illegal activities.

The scandals have come about in large because of increased transparency, whether through leaks of corporate data and emails, revelations from the Panama and Paradise Papers, or campaigns launched by groups such as Global Witness. Moreover, the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act have exposed international corporate misconduct.

The international nonprofit Global Witness obtained emails showing that the money Shell and Eni paid for the rights to the Nigerian block went to Malabu Oil and Gas, a company run by Dan Etete, the former Nigerian oil minister who was convicted of money laundering. The trial will likely focus on when the executives knew where the money was ultimately going.

For Western companies, one question moving forward is whether they can withstand a new era of transparency and change their practices.

Wenar explains that Western majors have traditionally held a competitive advantage in gaining access to resources in oil-producing states, but that may be eroding. Their technical expertise and managerial skills have been an important selling point to get awarded contracts. But the Chinese companies are catching up to the West. The oil majors and other Western IOCs still have an advantage over their counterparts in their better understanding of how politics work in petrostates. However, that has taken a hit with the latest revelations about possible bribery. Shell has operated in Nigeria for decades: The Anglo-Dutch major has been able to operate within a complicated political scene, and the two sides know each other well. Yet, the oil major is still involved in a major scandal.

“Companies need people to understand the political environment,” said Wenar. “It’s important to remember that corruption is the system in some of these countries. That’s how they’re governed. Oil money goes to the top and then it’s distributed to lower levels in exchange for loyalty.”

Hruby argues companies will be more conservative in making investments moving forward. “The investigation drives fear into the hearts of senior executives,” she said. “General Counsels will become even more involved in the investment process, which slows things down. Companies will be more nervous to do business in frontier markets.”

Systematic problems in Nigeria

The Nigerian oil industry is of course no stranger to misconduct, and there is no guarantee it will change its ways even if the trial exposes more malfeasance. “Corruption in Nigeria’s oil industry has been remarkably systematic despite many campaigns by the government and parts of society to remedy it,” Michael Ross, a professor at UCLA and the author of The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, told The Fuse.

 

Ross also sees little change among IOCs, including Shell, despite recent scandals and calls for transparency. “Shell, the Nigerian government, and NNPC have been very innovative in adapting to new anti-corruption regulations and initiatives,” said Ross. “It’s worth remembering that oil companies are remarkably sophisticated and organized. They have stayed on top of the private sector globally for a long time despite countless scandals.”

Nigeria relies on oil and gas for roughly 95 percent of its exports, making its economy highly vulnerable to price fluctuations and exploitation. Transparency International, a non-profit that tracks corruption on a country-by-country basis, ranks Nigeria 148 out of 180 in its index. In the latest Resource Governance Index (RGI) from Natural Resource Governance Institute, Nigeria scores 42 of 100 points and is ranked number 55 among 89 assessments.

RGI

No matter what the outcome of the trial is, recent news is unfavorable for the oil industry and petrostates similar to Nigeria.

In a reflection of deep-seated wrongdoing, an audit in 2016 showed that state-run Nigerian National Petroleum Corporation (NNPC) did not pay $16 billion in revenue owed to the state’s treasury in 2014. Other findings were that the company repeatedly violated numerous rules, cheated taxpayers, and repeatedly committed fraud. The audit also highlighted questionable actions surrounding the awarding of production contracts—which is central to the upcoming trial.

No matter what the outcome of the trial is, recent news is unfavorable for the oil industry and petrostates similar to Nigeria, as it comes after other major scandals. The investigation is a reminder of the wide-ranging consequences of doing business in countries where mismanagement of resources is persistent.

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