How The Elite Hide Their Wealth

How Nigeria’s lucrative oil profits disappear

The Panama Papers have revealed more information about how offshore oil profits from Nigeria’s ‘black gold’ Agbami oil fields have vanished, writes Khadija Sharife.

With the country’s immense oil reserves, discovered in 1956, the oil and gas sector in Nigeria makes up about 35% of the nation’s GDP. Oil has become a source of unimaginable wealth for many African tycoons, allowing the country to leapfrog South Africa to become the biggest economy on the continent.

Within Nigeria’s oil sector, there is one particular under sea area, roughly 100km from the Niger Delta, called the Agbami oil fields, which are the source of what has become known as Nigeria’s “black gold”. The Brazilian oil company Petrobras gushes that Agbami “holds more than one billion barrels of reserves and ranks among the single largest deepwater discoveries in the world.” When it hit full production in 2009, Agbami was producing close to 250,000 barrels per day from a depth of around 1,500m. Now, details from the leaked Panama Papers and the DoubleOffshore.org database shed new light on how oil profits have vanished at one of the world’s richest deepsea oil deposits. Star Deep (a Chevron company) operates the Agbami oil field alongside a company called Famfa Oil. Famfa is part-owned by Lagos’s powerful Alakija family, as well as Petrobras, Statoil and the Nigerian National Petroleum Corporation (NNPC).

But tracing the profits from Agbami isn’t an easy task. There is scant information available, for example, from the Nigeria Extractive Industries Transparency Initiative (Neiti), an organisation which is meant to provide a public record of the money paid to the government by resources companies.

Read the full response from Mossack Fonseca here

Neiti’s database of companies that, like Agbami, are subject to a production sharing contract (PSC) only includes information up to 2012. In the 2015 Neiti report, auditors revealed that Star Deep did not pay any royalties in 2012, even though it owed $66.5 million at the time. Chevron’s representative declined to respond to queries, saying detailed information was confidential. Though even Neiti’s $66.5 million figure could be an undervaluation of Star Deep’s debt, which is indicative of a wider problem with Neiti’s information. One specialist who scrutinised the 2015 Neiti report says: “The royalty computation for all PSC entities is a mere 51% of the computation of Neiti. Put differently, the under-assessment in 2012 totalled $366.2 million.” By contrast, operators say they pay 98% of what Neiti recommends. But Nigeria’s government may have lost $4 billion in revenue over the past seven years, and that’s just where production sharing agreements exist at all. Much has been written about Nigeria’s chaotic and lucrative oil sector on land, but less is known about its offshore oil industry, where multinationals such as Shell are quietly shifting the bulk of their investment. The appeal for oil companies is that an offshore presence makes it harder to ascertain the true cost, simultaneously masking evidence of pollution, deteriorating infrastructure or deliberate sabotage.

For companies that can artificially inflate their costs, it reduces any pre-tax profits from the oil ventures, which, in turn, reduces the royalties. Nigeria’s onshore oil sector is governed by joint venture agreements which require the state-owned NNPC to contribute a sum of capital. In reality, the NNPC has consistently failed to pay its share. One forensic expert says this has “led to a kind of ‘debt trap’ which in turn appears to have led to a range of undesirable tax concessions and the like”. This means that in practice, the companies tend to lend the NNPC money to cover their cash investment, and are then given fiscal breaks by the government as a way of repaying the loans. This has created a bizarre system, sparking the creation of a flood of offshore holding companies.

This differs from the deepwater fiscal regime governed by PSCs where oil companies tend to carry the financial risk in exchange for fully recovering costs from oil output before the oil profit is shared in “agreed proportions” between the government and the oil company. Nigeria’s government gets revenue from oil in various ways: royalties, a share of oil profits, another tax of the company’s own profit, and the proceeds from what the NNPC sells. However, some companies report false production volumes, others artificially hike costs to reduce their oil profits, and some use incorrect prices for oil sales in their tax returns.

Other factors also come into play: there is little verification of the cost that companies deduct and there are many instances of less complex forms of corruption. “Governments and companies hide behind confidentiality clauses,” says Johnny West, head of the Berlin-based Open Oil Institute. “But most clauses have lists of exceptions such as when disclosure is required by applicable law including the host country.” West says governments cannot be held in breach of contract if parliaments pass laws requiring publication of otherwise confidential information. Contained within these contracts are terms relating to costs, valuation formulas and the like ‒ issues that governments themselves may not have a handle on. Nigeria has little grasp of how much oil is actually produced offshore, relying wholly on the self-regulated data of the oil companies. It appears to have produced at least 650,000 barrels/day, or 240 million barrels/year, from large fields such as Agbami, Akpo, Bonga and Erha. Where companies drill for oil offshore, the royalty rates fall dramatically.

In reality, almost no royalties are remitted. If a low royalty of 4% was charged, at least $4 billion would be generated in annual revenue, around $20 billion between 2010 and 2015. Oil mined offshore in Nigeria’s oceans has spiked in recent years. In 2004, just 2.7% of total oil production came from offshore rigs. This rose to 40% in 2014 and 55% in 2015. To compensate for low oil revenue, Nigeria’s government has tried to reduce the perks of the PSC regime, which was put in place in 1993. But this doesn’t apply to the country’s older oilfields like Agbami. The 1993 model, for example, set no limit on how much of the costs can be recovered, whereas the new rules in 2005 say costs must be limited to 80% of oil production. And, as before, there was still wriggle room: reopener clauses allowed for the renegotiation of PSC terms if the price of oil rose above $20/barrel and if large discoveries of reserves were found. An allegedly corrupt NNPC earned passive rent from oil companies. The companies were clever enough to recognise this, so they set out to offset their royalties in sophisticated ways.

Leaked Wikileaks cables, for example, reveal that Shell supposedly bragged about “seconding” the company’s sources to every segment of the Nigerian government. Shell’s biggest fear, documented in the Wikileaks cable, was losing deepwater acreage. In 2014, Nigerian Central Bank Governor Lamido Sanusi alleged that the NNPC was missing $20 billion in oil sale revenues. The NNPC denied this claim.

Briefcase Companies

Nigeria’s oil industry uses a unique system where “briefcase” or shell companies purchase oil from the NNPC before selling it on to companies such as Trafigura and Gunvor. It is the only major producer to sell oil to speculators and traders rather than end users. These traders are usually shell entities that make a profit from middleman fees. The Panama Papers contain information about what seems to be an oil purchase from the NNPC by a briefcase company. The deal is worth an estimated $290 million from a shell company administered in Gibraltar, a tax haven. The company, Lucius Trading, claims it has offered oil to foreign European buyers that it is yet to purchase from an NNPC subsidiary. Lucius requests that Mossack Fonseca, the law firm whose data was leaked in the Panama Papers, assist it with finding a corresponding bank. The company could not be reached and the NNPC did not respond to interview requests. By 2014, Nigeria’s briefcase system was responsible for 340 million barrels or $40 billion worth of oil contracts, using the Brent crude prices at the time. “Briefcase entities mushroomed under the [Goodluck] Jonathan era as a patronage system,” says Jeremy Weate, a resource governance expert. “It has nothing to do with increasing local players. Instead, it suits the purposes of the Nigerian government and Swiss commodity traders while providing a layer of opacity which facilitates their traders.”

Briefcase entities serve no substantive market function, but are an open secret. The NNPC did not respond to e-mailed questions about the process and criteria for the selection of these traders. There are other concerns: more than 70% of Nigerian oil rigs are incorporated in maritime tax havens ‒ jurisdictions such as Liberia, the Marshall Islands, Belize and Panama. If a company incorporates its oil rig in a tax haven, it can claim to be bound by the rules of that new jurisdiction, rather than the site of actual production. And in most cases, the tax haven don’t pay too much attention to financial, environmental and labour issues.

The Deepwater Horizon rig that caused the Gulf of Mexico ecological disaster is one such example. Though BP was fingered as the culprit, the US could not regulate what was not fully within its territories. The rig was leased to BP by a company called Transocean, and it was registered in the Marshall Islands, not the US. The Marshall Islands ‒ which at the time hosted 221 oil rigs, 2,000 foreign vessels and a population of 62,000 people ‒ made it possible to register a company in a day, and offered an alluring regime of voluntary disclosure, zero tax and client confidentiality. The Marshall Islands registry has previously said: “If the authorities … come to our registry and jurisdiction and ask to disclose more information, regarding shareholders, directors of the company, etc, we are not privy to that information anyway. Unless the name[s] of directors and shareholders are filed in the Marshall Islands and become a public record (which is not mandatory), we are not in a position to disclose that information.” One of the downsides for the public is that when disaster strikes, the owner has limited liability. Soon after the Deepwater Horizon spill, over $1 billion in dividends was distributed to shareholders. Transocean’s liability was pegged at just $27 million. The Marshall Islands and Liberia, another haven, don’t even manage their own registries. They are outsourced to private entities such as International Registries Incorporated (IRI), based in Virginia, in the US. IRI says a registry serves to “maximise profitability, while minimising the risk of exposing beneficial owners to personal liability.” This has raised alarm bells. The Organisation for Economic Co-operation and Development claims anonymity is the “rule rather than the exception” when it comes to the registration of ships and rigs. Estimates suggest about 60% of the world’s vessels are “false-flagged”.

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