July 21, 2014
A damning report lifts the veil on how state oil company, NNPC, is joining forces with foreigners to steal crude oil, robbing Nigeria of billions of dollars.
The process by which the Nigerian National Petroleum Corporation, NNPC, selects trading companies to which it sells Nigeria’s crude oil is characterised by monumental corruption and intense uncertainty. A report has likened the arrangement to a “beauty pageant.”
In some instances, according to the report, the NNPC collude with foreign companies to facilitate the stealing of Nigerian crude with firms without allocations lifting oil from the country’s shores.
The report, “Big Spenders: Swiss Trading Companies, African Oil and the Risks of Opacity, published by Bern Declaration, BD, a Switzerland-based non-profit transparency organisation, examined the processes involved in the sales of crude oil to Swiss commodity
trading companies by SubSaharan African countries between 2011 and 2013.
BD observed that Swiss companies purchased over 500 million barrels of crude valued at $55 billion from 10 sub-Saharan African countries within the period under review. According to BD, the figure “equal(s) 12 percent of the governments’ revenues, and are double what they received in foreign aid.”
Pointing out that Swiss trading companies are the largest buyers of crude from Cameroon, Chad, Equatorial Guinea, Gabon and Nigeria, BD states that these purchases are subject to governance risks because “they take place in environments of weak institutions and widespread corruption”.
In Nigerian, for instance, BD puts the value of crude sold to Swiss trading companies at $37 billion which makes up more than 18 per cent of total government revenue in the period under review.
It observed that unlike most major crude producers around the world, which prefer to sell crude directly to refineries and end users, the Nigerian National Petroleum Corporation, NNPC, sold over a third of Nigeria’s crude between 2011 and 2013 to Swiss companies alone.
“In 2011 and 2012, Swiss companies bought almost half of the identified export sales made by the Nigerian National Petroleum Corporation (NNPC), an estimated $27 billion worth of crude. While this figure dropped to a little less than one third in 2013, as Nigerian companies became bigger buyers, Swiss companies still bought government crude worth an estimated $10 billion,” the report stated.
“Beauty Pageant”-type process
According to BD the annual term contract through which the NNPC selects companies that are eligible to buy crude is so skewed by favouritism and corruption with its criteria for selection so opaque that it could only be likened to the process of selecting the winner of a beauty pageant.
The report states that many of the trading companies on the list are allowed to lift far more that the quantity they are officially allotted.
“In 2012, Vitol and Trafigura each received term contracts worth 30,000 barrels per day. Each of the companies also operates its own oil marketing joint venture with NNPC (both based in Bermuda: Calson for Vitol and Napoil forTrafigura), and these entities each received additional 30,000 barrel per day allocations that year.
“However, rather than 60,000, market data suggests that Vitol bought closer to 145,000 barrels per day in 2012, and Trafigura 97,000—far exceeding their allotted shares, and a discrepancy that illustrates the laxity of the system.”
In fact some companies, which do not appear on the award list, are allowed to lift crude. Particular mention was made of Swiss firm, Arcadia, which lifted 19 cargoes between 2011-2013 despite not being approved to lift crude.
“Nigeria’s award of the term contracts is a discretionary and politicized process, with companies gaining and losing allocations depending on their relationship with the officials in charge and the influence of their local contacts or ‘sponsors,” the BD report states.
The report also points out that the NNPC sells crude to politically exposed “briefcase traders” who in turn sell to Swiss trading companies at a margin “effectively privatizing a profit that could go to the states that sold the oil”.
The report also states that NNPC sells crude below the market value to Bermuda-based subsidiary, Calson. Vitol, a top Swiss trading company, owns 49 percent of Calson.
Last year, another report by BD says Nigeria lost billions of dollars through this deliberate undervaluing of its crude by the NNPC.
Taming the bleeding
In order to solve this glaring compromised process, BD calls for better transparency in the system. It advises producing government to select “buyers through a method that reduces opportunities for favoritism, bribery and manipulation.”
BD suggested “attracting the best possible return for the oil in question, as losses of just
pennies per barrel can add up to significant revenue shortfalls; and insist on “collecting and transferring the revenues to the treasury through a rule-based process that reflects clear national priorities.”
In order to achieve this, BD suggested methods that Nigeria could adopt in the sale of its crude oil.
It believes the country should be transparent about:
- The name, beneficial owner and country of incorporation of the buying company the volume, grade, and date of any sale, broken down by cargo where appropriate;
- The price, and how it was determined
- the revenue received for each cargo, and the destination of that revenue (e.g., used by NOC to
purchase fuel, transferred to national budget, transferred to a local
- A full explanation of the process for choosing the buyer (e.g., the
allocation of a term contract, an open tender)
- The full text of the related contract (e.g., term contract, agreement
to swap crude for refined products).
The report also called on Switzerland to do more in the area of transparency as the centre of commodity trading in the world.
BD said, “Switzerland should accept its responsibility as the world’s leading commodity trading hub and pass regulation that requires Swiss companies producing or trading in natural resources to disclose all payments made to governments and state-owned companies, including payments associated with trading activities.
“In a 25 June 2014 report, the Swiss federal government indicated a preference to exclude
trading-related payments from future regulation of this kind. If that position holds, the payments described in this report would remain secret.”
Download the full report here.