Nigeria’s 2017 Oil Sale Contract List Shows New Names, Old Tendencies

Nigeria’s state-owned oil company, the Nigerian National Petroleum Corporation (NNPC), has kicked off 2017 by announcing the names of 39 companies it has chosen to purchase the government’s share of oil production. Even with prices down, the competition was intense: officials picked winners from among 224 bids submitted in November. Most are supposed to receive 32,000 barrels per day (b/d). The contracts are for one year.
 
These deals are among the most significant that Nigeria signs: sales of crude oil by NNPC regularly are the government’s largest revenue stream. In NRGI’s 2015 report Inside NNPC Oil Sales—the first in-depth, independent analysis of how Nigeria’s oil is sold—colleagues and I showed how the corporation’s approach has suffered from high corruption risks and failed to maximize returns for the country’s citizens.
 
In a subsequent blog, we noted that NNPC’s first round of oil sale contract awards under President Muhammadu Buhari—finalized in December 2015—showed some improvements over what had happened under his predecessor, Goodluck Jonathan. These changes seemed consistent with NNPC management’s promises to weed out unqualified, well-connected middlemen companies and improve transparency and due process. They also matched with the new president’s strong anti-corruption campaign platform.
 

Good commitments, mixed implementation
 
But the list of newly announced names suggests both promises have suffered setbacks. First, this year’s list is much longer than 2016’s—39 companies instead of 27. Most notably, eight more privately owned Nigerian companies have been slotted in. After reviewing market data and talking to several experts in the oil trading business, I could find no evidence that even a majority of the local firms on the list have ever sold Nigeria crude directly to a refiner; quite a few seem not to have previously dealt in oil at all. Several of the winners’ own websites describe their main experience in fields like construction and procurement or domestic fuel marketing. Two company sites do not list any personnel; one company has no web page at all.
 
Responding to written questions from NRGI, a high-level official at NNPC with responsibility for oil sales described signing deals with these companies as an attempt to boost indigenous oil trading capacity, comply with Nigeria’s local content law, and keep more of the profits that buyers of NNPC oil earn in the country. (The official noted that the published requirements for local companies are different than those for the bigger foreign buyers.)
 
Under the right circumstances, NNPC selling more of the nation’s crude to local companies could be good socio-economic policy. The local content law does put some pressure on NNPC to do business with Nigerian firms. And officials in past governments have predicted that selling more oil to local players would boost indigenous companies’ skills. That has happened in a few cases. Nonetheless, each new administration tends to sweep away most of its predecessor’s favored firms, as NNPC under Buhari did with last year’s list.
 
The main risk in this scenario is that many of the inexperienced companies buying oil from NNPC in 2017 will simply re-sell or “flip” their oil to experienced traders for quick margins. Such so-called “briefcase” traders have operated in Nigeria’s oil market for decades—often sharing earnings with politically exposed persons. (Inside NNPC Oil Sales documented the practice.) The higher number of inexperienced local firms this year raises concerns that this kind of patronage will grow. Our 2015 report noted that the governments of Olusegun Obasanjo (1999-2007) and Umaru Yar’adua (2007-2010) also tightened up NNPC’s roster of oil buyers during their first years in office, but then questionable deals mushroomed as political pressures intensified. Disclosing the “beneficial owners” of winning companies might help reduce corruption risks.
 
By making 2017’s list longer, NNPC has also created obligations that it likely will not be able to meet. In total, the 39 contracts commit the corporation to providing buyers with a whopping 1.31 million b/d. NNPC’s published data for January-October 2016 shows total government oil sales averaged only around 600,000 b/d – less than half of the amount of oil needed to fulfil the new 2017 contracts. Close to half of this amount went into deals other than the kind awarded to the 39 companies, notably the oil-for-fuel swaps NNPC calls “direct sales-direct purchase.” These sales figures—which are significantly lower than the ones for 2015—have been due mainly to the ongoing unrest in the Niger Delta. A high-level official at the corporation told NRGI that that NNPC management expects production to rise as high as 2.4 million b/d in this year’s first quarter, meaning it could “very possibly meet [its] commitments.”
 
If these optimistic projections do not come true, the 39 companies will vie with each other to receive their allocations of crude. NNPC has not publicly explained how it manages this kind of competition. In Inside NNPC Oil Sales, we noted how past governments regularly promised more oil than NNPC had to sell, creating a monthly bottleneck in which traders jockeyed to receive cargoes from key officials—a scenario that comes with high corruption risks. On this point, NNPC told us it will roll out “a predictable allocation framework so that […] associated corruption risks are eliminated.”
 

Transparency, to a point

The transparency of the announcement also had its strengths and weaknesses.  It is commendable that the corporation has put out the list of winners itself, and in a timely fashion. In prior years, officials and industry players leaked or circulated rosters of winners in secret, creating serious confusion.
 
But the version posted on NNPC’s website and Twitter feed raises questions—most basically: who exactly are the companies named? Of the 39 names given, I could only match 14 with the full registered names of companies with prior operations in Nigeria. The rest are a mix of trade names that do not seem to correspond to particular legal entities, names that I could not match to Nigerian or foreign corporate registration databases, or seeming conflations of multiple companies. At least four appear to be misspelled. Twenty-one do not precisely match any entries on NNPC’s internal list of 224 bidders that I obtained and reviewed.  In an oil market commonly marred by fraud and illegal sales, precision around company identities is important. NNPC told NRGI in its responses that it made the “difficult choice” not to publish the winners’ full names in an effort to protect them and “gullible buyers” from fraudsters.
 
Some accounts also suggest the published list may not be complete. Since its release, colleagues and I have heard from several well-placed industry sources that NNPC has, or was about to, sign additional contracts with companies not on the list. We reached out to the senior official and one of the alleged winners about this, but neither replied. NNPC’s final published roster of 2016 oil buyers—released months after the first version was released—likewise showed six more firms that were added later, for reasons unknown.


How to step up commitments to transparency and anti-corruption
 
Overall, NNPC’s new transparency and due process commitments for its oil sales contract awards, while welcome, are not strong responses to the governance problems they presumably are meant to address.
 
For the second year, top officials opened bids live on television. This is a nice nod to openness, but what happens after the bids are in matters far more from a governance perspective, and that stage of the process remains behind closed doors. This year’s invitation to tender also called on companies to attach more supporting documentation to their bids than in prior rounds. Some of this material—annual reports, tax certificates, corporate filings and the like—could help NNPC judge companies’ industry bona fides, assuming officials had the time to sift through it. But it would not tell them much about the integrity of bidders’ business practices, or the risks of doing business with them from an anti-corruption perspective. Asked about this, the senior NNPC official told us NNPC is “working with [the anti-corruption police and intelligence services] to secure a no-objection statement” from investigators on all winners, and that executives at all bid-winning companies must sign an anti-corruption pledge NNPC can use to terminate their contracts in the event of misconduct.
 
These steps acknowledged, the 2017 list suggests room for improvement. Several of the winning companies were accused of (and in a few cases, largely cleared) of malfeasance in Nigeria’s fuel subsidy program. NNPC canceled a controversial contract with another 2017 winner in 2015, on grounds that the terms were “skewed in favor of” the company. British prosecutors claimed in 2013 that still another hid assets and moved money for a powerful former governor, later convicted of money laundering.
 
It would be unfair to expect NNPC under President Buhari to undo decades of questionable, politicized oil sales practices in two years. His government’s second list of oil buyers certainly does not reflect the bonanza of runaway patronage and self-dealing seen during the latter years of the Jonathan era. And, NNPC’s disclosures and responsiveness to our inquiries represent a welcome break with past unwillingness to engage with outsiders. But to address some of the concerns and negative perceptions raised by the new awards, my NRGI colleagues and I suggest that NNPC officials consider:
 

• Confirming that NNPC has not, and has no plans to sign additional 2017 oil sale contracts with companies not on its published winners list.
• Publicly explaining how and why they chose the 39 buyers for 2017 and why the volumes allocated totaled the very ambitious 1.3 million b/d.
• Publicly explaining the process for allocating oil among contract holders, in the event that the 1.3 million b/d promised for 2017 is not available.
• Developing stronger anti-corruption due diligence systems for vetting bidders as part of the selection process.
• Committing to collect and disclose beneficial ownership data in future oil sale contract awards.
• Publishing per-cargo oil sales data on a regular basis in 2017, to show which contract holders are receiving oil.