Shell and Eni’s acquisition of Nigeria’s infamous OPL 245 oil block in Nigeria is now mired in an international corruption investigation that has spread to the United States, sources say, with a huge leak of documents of the companies revealing the deal was a financial disaster for the people of Nigeria from the beginning.
They also indicate that some of the money ended up in the hands of top politicians that include former President Goodluck Jonathan.
The companies, and several of their senior managers in Nigeria and Italy are already facing charges.
According to the leak, the block which Shell and Eni valued at up to $3 billion was given away for just $1.3 billion, leaving Nigeria to receive only $210 million.
That is less than 5% of the value.
And where did the rest of the money go?
It allegedly went to Dan Etete’s Malabu and various middlemen, with beneficiaries of the bulk of the money being such Nigerian politicians as Mr. Jonathan.
Internally, both companies were very pleased with themselves, the documents demonstrating their extreme interest in acquiring OPL 245. An internal Shell Group Investment Proposal dated September 10, 2008, setting out the case for acquiring the field, described the block as “a key building block in Shell's aspiration in Offshore Nigeria,” with “significant strategic 'hub' value.”
It was signed by Shell’s then second in command, Malcolm Brinded, who said the project had been identified as a “must win.”
Note the words: key, significant, strategic, and must-win.
There was a good reason for Shell’s determination, with initial exploration having led it to the conclusion that OPL 245 contained “about 500 million barrels of crude oil”.
But just one year later, and with only four wells drilled, Shell had reason to revise its estimates, saying that the figure was about 531 million barrels, of which 419 million were considered exploitable.
There were even more exciting expectations for the company, as it came to consider the volume of exploitable oil to be even higher. In the early 2000s, Malabu had undertaken seismic and other assessments of the field which estimated that the field could contain up to nine billion barrels of crude oil.
Of even greater significance, Malabu concluded that the gas reserves of the field, estimated at 600 million barrels of oil equivalent, were likely to be even more valuable than the oil.
It held that were that total of 600m barrels to become proven and thus bookable as reserves of oil, Shell’s 50% share in the field would inflate its bookable reserves by nearly 41%, which would be of “material significance” to the share value of the company.
As Shell’s engineers continued to explore the field, its senior management were calculating that likely value.
In March 2010, Iain Craig, Shell’s then Head of Exploration for Sub-Saharan Africa, circulated a proposal to commence negotiations with the Federal Government of Nigeria, calculating that the field would be worth between $1.6b at $50 a barrel and $3.6 billion at $80 a barrel.
In September of that year, just six months before the deal was finally closed, Shell’s number crunchers were explicit. In a briefing for senior management, they put the value of the block at an eye-watering $3.2 billion (assuming an oil price of $80 a barrel.
And that estimate was without taking account of the value of the gas.
In April 2011, Shell and Eni got the block cheaply, for $1.3 billion, just under a third of the value Shell estimated the block would be worth given an oil price of US$80 per barrel. At the time, the average price of the US benchmark crude, West Texas Intermediate (WTI,) was US$79.93.
The sale was a hugely controversial deal that was brokered by the then Attorney General Mohamed Adoke, who played the role of midwife, with the Federal Government acting as a middleman between the oil companies and Malabu Oil and Gas, the company part-owned by convicted money launderer Dan Etete, who, as oil minister under the military dictator Sani Abacha, had awarded Malabu the licence for OPL 245.
But the deal was not without its critics within official circles.
The Director of the Department of Petroleum Resources, W. Obaje, was scathing. In a letter to the Attorney General, sent in early April 2011, he described the proposed terms for the deal as “highly prejudicial to the interests of the Federal Government.”
Mr. Obaje did not address the valuation of the block directly but focused instead on a number of clauses that were, in his view, either illegal or undermining of Nigeria’s interests.
Under the proposed terms, the Federal Government undertook to waive any rights for all its relevant agencies to take a participating interest in the block or to assert title to any production from it.
According to Obaje, that “would leave for the FGN very little of the enormous potential economic value from the Block”.
The Director also took issue with other clauses in the agreements, notably the proposed “stabilisation clauses” that would give the oil companies the right to claim compensation if future changes in the law adversely affected their operations.
“It is not sound policy,” he advised in the letter, “for the FGN to be agreeing with private entities to undermine the intent and purpose of any future legislation or regulation it might make in respect of fiscal terms applicable to petroleum production operations”.
Obaje further warned that aspects of the agreements were illegal and that the FGN “would be opening itself up to scandal” if it awarded the license without competitive tendering, as proposed.
But, despite Obaje’s well-reasoned and trenchant criticisms, the deal went ahead with its terms almost unaltered.
Obaje is not the only one to have questioned the legality of the deal.
In pleadings to the UK High Court, the federal government of Nigeria under President Muhammadu Buhari described the deal as “corrupt” and “a conspiracy to injure” Nigeria.
Nigeria has every right to withdraw the license, but will it act?
It would have every legal right to withdraw the license, but it is unclear what it will do.