Leadership (Abuja)
Lillian Wong
7 January 2009
analysis
Many believe that the Asians were only interested in the oil blocs, and having acquired them, that the linked promises were hollow. They were seen as both difficult customers and insincere partners.
For their part, the Asians have struggled with Nigeria's slow, labyrinthine and corrupt-laden bureaucracy together with its byzantine politics. From the start, there was concern in government that there was no formal mechanism to enforce the deals. The downstream promises were little more than promises in principle. The MOUs signed were little more than expressions of intent.
But, few critics of the scheme noted the important small print. For example, when ONGC/Mittal (OMEL) of India signed the MOU with the Nigerian government in November 2005 for infrastructure investments in exchange for drilling rights (later acquired in the 2006 mini-round), the MOU was valid for 25 years. At the time of signing, the Chairman of ONGC made it clear that the investment would be proportional to the scale of oil discoveries. He said, "The investment in infrastructure would depend on the joint venture's returns from the blocs." (45) That would suggest that no action would be taken on the downstream promises for many years. In any case, Mittal had made it clear that he wanted 2 billion barrels of reserves before signing up to the implementation of any downstream investment. (46) This largely explains why, in India's case at least, no progress has been made on the ground on any of the commitments. In any case, given the scale of the promised projects they would have had very long lead times. Progress would have depended on inputs from the Nigerian side, such as arranging land access rights with local communities, always a tricky matter. The slow pace of Nigerian bureaucracy and the absence of monitoring mechanisms would have added to the timescale of any project.
Looking at the oil-for-infrastructure deals as a whole, the projects were vague lacking in technical or financial detail. Subsequent negotiations were slow. Endless visits by Nigerian officials to Asian capitals produced little clarity or progress and no timetables for delivery were ever announced. The projects chosen by Nigeria for Asian investment were high cost, high value, with high commission opportunity but not properly considered in the context of wider national economic planning needs. The political context also exposed the weakness of the arrangements. In retrospect, this was an ill-thought out, half-baked ad hoc exercise dressed up in fine words.
•KNOC wins and loses
There was one exception. KNOC had made some progress. It had put together a consortium (47) to build a 600km gas pipeline from Ajaokuta to Kano, together with 2 gas-fired power plants sited at Abuja and Kaduna. Spurs to Katsina and other northern cities were to be considered. The total cost was estimated at US$ 5 bn. KNOC had laid out a timetable of 8 years, from the feasibility stage in 2006 to completion in 2014. South Korea had even proposed to dismantle a steel mill in that country, to re-build it in Nigeria to manufacture the pipeline in Nigeria. A Joint Working Committee, KNOC/NNPC, had been established to follow through on the engineering and design and, inter alia ,to carry out the required environmental impact assessment (48). The financial arrangements had not however been agreed, and negotiations with relevant IOCs to secure the gas supply were far from finalised.
However, this project seemed solid and robust. By early May 2008, when the bulk of the fieldwork for this paper was undertaken, the KNOC project seemed likely to proceed. It had been included in the new government's Master Plan for Gas issued in February 2008. Indeed, the KNOC consortium had revised the alignment of the proposed gas pipeline to fit in with the Master Plan. KNOC was confident that the project would go ahead and the Yar' Adua government had reportedly asked KNOC to fast track it.
However, by late May 2008, a serious problem arose putting the project in jeopardy. It was discovered that KNOC had not paid the full signature bonus on its blocs acquired in 2005. While KNOC has since argued that it had been given a discount by President Obasanjo, there was no record of this in NNPC, DPR or Presidency files. It is common knowledge that President Obasanjo was fond of making ad hoc decisions with no supporting documentation. The discount given to KNOC , probably verbally during the South Korean President's visit, is a good example of Obasanjo's quirky style of government.
But consequences have followed. The discount issue has given the new government the grounds to cancel the contract for the gas pipeline project with the added threat to revoke the oil blocs into the bargain. Negotiations are ongoing with the South Koreans. The problem with the oil-for-infrastructure deals was that the new government found itself locked into contracts which had not gone out to international open tender. This meant that on pricing there was no benchmark against which to judge a proposal such as that from the KNOC consortium. This meant that in effect Nigeria did not know whether it was getting value for money. For all these reasons, the KNOC gas pipeline project was cancelled in May 2008. (49)
•Railways on track and off track
The Railway projects tied to oil bloc allocation have also been put on hold or cancelled by the Yar'Adua administration. The Obasanjo government had an ambitious plan to upgrade its rail system. The then Chairman of Nigerian Railways, the late Mohammed Waziri (who incidentally spearheaded the campaign to fund the third term project) had lobbied for funds to renew and expand the railway system.The overall cost was high at an estimated US$35 bn. Seeking funding from Asia to kick start the plan seemed a smart option given Western donor resistance to funding large infrastructure projects. So, in return for guaranteed access to oil blocs, the ANOCs committed to building 3 separate railway lines: China promised to construct a new double track, standard gauge line between Lagos and Kano; South Korea pledged to rebuild the decrepit Port Harcourt-Maiduguri line; while India committed to undertake a feasibility study for a new east-west railway linking Lagos with the Niger Delta.
Preliminary MOUs on these undertakings were duly signed - with India's OMEL in November 2005, with China in April 2006 during the visit to Nigeria of the Chinese President, and with South Korea in November 2006. The latter signed by Nigeria's Minister of State for Petroleum, Edmund Daukoru and Korea's Minister of Energy, provided for Korean long-term low interest loans to help Nigeria cover part of the estimated US$10bn necessary to rebuild the 930 mile-long railway. Following negotiations with South Korea, a proposal for an initial loan package of US$ 2bn at 3% interest with the mark-up to prevailing commercial lending rate bridge was provisionally proposed. But significantly, acting on instructions from the Presidency, this loan was predicated on the allocation of 4 oil blocs to Korea, with a Signature Bonus waiver - at the next bidding round in 2007. (50) But the Koreans did not take part in the 2007 bidding round and the whole proposal fell away.
There had been some progress , however, on the Chinese pledge over the Lagos-Kano line. The Obasanjo government had opted to replace the existing single track, narrow gauge line with double track standard gauge. A Chinese contractor , China Civil Engineering Construction Corporation (CCECC) was appointed, bypassing the normal open tendering process. The initial price quoted for the job was astronomical at US$ 15.4 bn. After intense negotiations and some amendments to the design, the final price agreed was US$8.3 bn and the work was to take 4 years from the start date. But, according to the World Bank, this was still double the cost it should have been. (51) Although the Due Process Unit in the Presidency reviewing the CCECC proposal had reservations, it was passed because of political pressure. The contractor was allocated a mobilisation fee of US$250million, a sum taken from the Excess Crude Account in January 2007. Some argue that this was illegal because the project had not taken off, the government had not agreed the financing package for the railway, and there was no provision for it in the 2007 Budget. The mobilisation fee itself had not been appropriated (52) . In any case, no work was started.
Earlier, in November 2006, Nigeria had signed a Loan Facility agreement with China for US$2.5bn - of which US$1.3 bn was to be dedicated to the first phase of the new Lagos-Kano railway. The loan comprised 2 facilities - the first valued at US$ 500 m provided by China through the Chinese Exim Bank, on concessionary terms, with an interest rate of 3%, a repayment period of 20 years including a grace period of 5 years; and the second, for a US$2bn provided directly by the Chinese Exim bank on the same terms. However, the most significant condition of the loan facility was that it was linked directly to the lifting of crude oil by Chinese companies and the allocation of 4 oil blocks (one of which had to be producing) - in the upcoming 2007 licensing round. And as with the Korean loan, China was to benefit from a Signature Bonus waiver under this arrangement But, crucially the MOU required to confirm the terms of the Loan Facility agreement had not been signed by the time President Obasanjo had left office, nor since (53). The signature of such an MOU had been an imperative for drawing on this facility. In any case, the IMF did not support this facility on the grounds that the terms of the Chinese loan did not meet the required concessionality defined by the PSI (Policy Support Instrument). (54)
Subsequently, an investigation by the Yar 'dua administration showed that the contract price was hugely inflated, that there had not been either a feasibility study or a front end design before the contract was awarded, and in any case there was no provision in the 2008 budget for Nigeria's co-financing element.
As a result, the President cancelled the contract in June 2008.
The Yar'Adua government was not keen on the grandiose and costly railway projects it had inherited. According to government officials, Yar'Adua's economic team prefers to opt for the simple refurbishment of the 2 existing north-south lines, retaining the original single track narrow gauge structure. The east-west line, which would have been new, is no longer regarded as a priority. The government is hoping to attract foreign investment for the refurbishment. Another option being considered is to throw all the lines out for concessionaries . The new government has been encouraged in this thinking with the discovery that ,before the oil-for infrastructure deals closed all options, the Bureau of Public Enterprises (BPE) had received Expression of Interest on the railway concessions from some 21 companies. (55) The government hopes to be able to revive that interest.
- Power on and off
President Obasanjo also persuaded the Chinese to build a HydroElectric power project at Mambilla in Taraba State under the strategic deal scheme. He was impressed with the "Three Gorges" project in China, and decided to replicate it in Nigeria. This commitment was linked to CNOOC acquiring oil blocs in the 2007 round. The deal was agreed on the margins of the China-Africa Summit in November 2006. But a disagreement arose over the interest payments Nigeria would make on a Loan Facility of some US$2.5bn offered by China for the purpose. Two Chinese companies put in cost estimates for the civil works and hydraulic steel structures, with prices up to US$ 2bn. . However, before the Loan Facility could be sorted out, President Obasanjo went ahead and awarded the contract, valued at US$ 1.46 bn , for the first phase to a Chinese company, China Gezhouba Group Corporation (CGGC) , just a few weeks before the handover to his successor. This impetuous decision was typical of Obasanjo's style, leaving his successor to pick up the pieces. A subsequent House of Representatives investigation in March 2008 into the power sector discovered that the German Firm acting as Consultants on the project had not even done a feasibility study although they had been given a mobilisation fee of US$ 3 million allocated from the Excess Crude Account. (56) No work has been done on the site to date. With the boycott of the 2007 round by the ANOCS, including CNOOC, the status of the Chinese contract is now in doubt. In fact, the new government suspended the project in October 2007 while it seeks alternative sources of funding..
- Refineries pending
On the rest of the Asian commitments, there have been regular announcements that both China and India would build new refineries in Nigeria. One of OMEL's commitments in return for oil blocs was to build a Greenfield 180,000 bpd capacity refinery . While negotiations are reported to have started in January 2008, the site for the proposed refinery is not yet firm. Both Lagos and the Niger Delta are possible options. (57) So, these have remained rhetorical announcements. In any case, the Obasanjo administration changed its mind several times about the fate of the existing refineries. China had originally pledged to invest US$ 2bn in the ailing Kaduna refinery, while Taiwan. had offered to buy into the equally ailing Port Harcourt refinery. Neither happened. To confuse matters further, on the eve of his departure from office, President Obasanjo sold bothrefineries to a local business consortium. The Yar'Adua administration has since reversed these sales. It remains to be seen whether the Indian and Chinese promises to build new refineries are translated into reality.
The denouement
When the strategic deals with the ANOCs were first announced, the press - both domestic and international - hailed this development as a massive shift to the East for Nigeria's oil industry. But the hype was not justified. In reality, they secured little more than a handful of blocs out of several hundred awarded over the last 50 years to the IOCs and western independents. The magnitude of their gains was over-stated as was the magnitude of the shift. And the grand promises of infrastructure projects have not been honoured.
By the Summer of 2008, the irregular nature of the strategic deals had become apparent following a number of official government investigations. Further details emerged during hearings of the House of Representatives Ad Hoc Committee set up to enquire into the NNPC and its subsidiaries for the period 1999-2007 (the Obasanjo years). Firstly, it was confirmed that KNOC had not paid its full signature bonus for the 2 blocs it was awarded in 2005. KNOC claimed that it had been given an unannounced discount. Secondly, the true nature of the OMEL deal was exposed when Mittal's representative admitted in a closed session to the Ad Hoc Committee that Obasanjo had agreed that Mittal would not have to fulfil any of the promised downstream obligations until the two blocs awarded in 2006 yielded 650,000 bpd. That is not only an implausible target but practically impossible to achieve short of a major oil field discovery on OMEL's concessions. Obasanjo later made a discretionary award of a third bloc to help OMEL reach its production target. Mittal also revealed that the original agreement to invest in 3 projects (see Table 1) had been later changed by mutual agreement to the effect that Mittal would invest in only 1 of the 3 projects. China's CNPC also found itself in a controversial position over one of the four blocs it acquired in 2006. In a bizarre move, a producing bloc known as OML 65 belonging to the NNPC's exploratory wing, NPDC (Nigeria Petroleum Development Corporation) was taken from it, the bloc was allocated a prospecting licence ( OPL 298) which was duly awarded to CNPC. It appears that Obasanjo had promised China at least one operational bloc. The Legal Department of the NNPC described this arrangement as highly anomalous. It is rare for a bloc with a mining licence to revert to a prospecting licence. But the problem for CNPC came when they tried to take control of the bloc. In spite of having signed the PSC a month before Obasanjo left office, the NNPC has since stalled on the follow-up paperwork. The new government was angered over the manner in which OML 65 had been given away outside normal procedures and for an insignificant signature bonus.
As a result of its findings, the Ad Hoc Committee has recommended the cancellation of the oil blocs awarded to KNOC, OMEL and CNPC in 2005 and 2006. (58) This followed the government's earlier cancellation of two major project proposals linked to the deals (a gas pipeline promised by South Korea and the Lagos-Kano railway promised by China). At the same time, all other infrastructure proposals linked to the acquisition of oil blocs were put on ice. In any case, most had not been elaborated. The government was provoked to so decide after discovering that the deals were opaque, that the financial arrangements were unsatisfactory and that due process had not been followed. However, some Presidential advisors have urged caution arguing for re-negotiation of the deals to avoid the inevitable political fallout with the Asian countries concerned. This group sees revocation as a clumsy response to a clumsy problem. So encouraged, the ANOCs under threat have since opened negotiations with the government to try to rescue their oil assets.
In the meantime, the government has revised the guidelines for oil bloc allocation. One of the most important changes is its decision to abolish the controversial Right of First Refusal (RFR) which had so compromised the bidding rounds of 2005, 2006 and 2007, and which had been designed to favour the ANOCs. The issue of the Local Content Vehicle is also to be discouraged given that it was used to reward cronies rather than to encourage genuine local participation in the industry. The timetable for the payment of signature bonuses has also been tightened up, citing the penalty for non-payment of 50% within 90 days of the award as automatic revocation. Licensing rounds, which had become an annual affair during Obasanjo's second term, will in the future be less frequent and based on economic need rather than political considerations. (59)
The ANOCs experience in Nigeria has been difficult and frustrating so far. Oil-for-infrastructure deals have been successful elsewhere in Africa, notably in Angola and Sudan. This suggests that the concept per se is not at fault. But in Nigeria the scheme went wrong because it was not properly conceived and there were no inbuilt guarantees. . While historically it has been common practice in Nigeria for an incoming government to investigate the contracts of its predecessor, the oil-for-infrastructure deals were of a different order. The absence on the ground of promised infrastructure projects some three years after the oil blocs were awarded was sufficient to provoke an investigation. It was then discovered that arrangements for compliance were shoddy or non-existent, due process and transparency were lacking, that the existence of secret clauses and unannounced discounts on signature bonuses had combined to make a mockery of the bidding process and the concept itself.. These serious shortcomings together with the hidden political agenda ensured that the scheme was doomed to failure. The denouement was predictable.
Conclusion - Things Fall Apart
President Obasanjo's stated grand design to achieve a "development dividend" through the oil-for-infrastructure scheme with ANOCS has fallen apart - and with it the impact that it might have made on the Nigerian landscape. Following the cancellation of the Korean gas pipeline project and the Lagos-Kano railway contract with China, it now appears that in total some US$ 20 bn of investment promised by the ANOCs in 2005/2006 is at risk. The direction of travel is clear.
For all the grandstanding announcements, the devil is in the detail. The financial arrangements were not favourable to Nigeria. Both China and South Korea had offered to only partly fund the projects with government to government loans. But the terms were not satisfactory. With all the projects, Nigeria would have to find the balance of the funding itself. That would have imposed a burden over time. The Indian proposals were different. Their commitments were to be funded by direct investment and the projects done on a build, operate, manage and ownership basis. (60) The downside of the Indian approach was that the projects would not start until the oil blocs they had been awarded were in production. It can take 3-5 years of prospecting before an oil bloc starts producing. The absence of detailed assessment by the Obasanjo government of the ultimate value - and cost - to Nigeria of the oil-for-infrastructure scheme was partly responsible for its demise.
From its actions over the past 12 months, the Yar 'asdua government has made its position very clear. Its policies will be guided by the rule of law, due process and transparency. The oil-for-infrastructure scheme, which compromised the transparency of the oil licensing rounds , will not be repeated. The introduction of both the RFR and the LCV were abused for political purposes.
The new government has acted decisively over a number of the dubious deals made by the previous government. It cancelled the last minute sale of the refineries arguing that it had been contrary to the national interest and that due process had not been followed. It cancelled the sale of the Ajaokuta Steel Complex sold to an Indian steelmaker for a token sum. It has approved investigations by Government Panels or the National Assembly into the power, transport, aviation , and other sectors. These investigations have all exposed evidence of massive fraud and corruption in the allocation of government contracts. The scale of the corruption, mismanagement and non-execution of projects in the Obasanjo years has sent shock waves though Nigeria. For example, The House of Representatives investigation into the power sector discovered that despite expenditure of some US$16 billion in the power sector between 1999 and 2007, power generation has dropped from 3500MW in 1999 down to 1200 MW in 2007.
In what has turned out to be a long season of probes into the activities of the Obasanjo administration, the oil sector has not been spared. The 2007 licensing round was investigated leading to a review of the 2005 and 2006 rounds. And, in May 2008, the National Assembly set up an Ad Hoc Committee to look into the activities and performance of the NNPC/DPR for the period 1999-2007. Its report, due by the end of 2008 or early 2009, is likely to be explosive. The oil-for-infrastructure deals with the ANOCs are unlikely to survive this scrutiny. But they may have collapsed before then.
The tragedy is that the deals were not what they seemed. Unspoken political agendas from the Nigerian side and opportunistic agendas from the Asian side undermined what might have been a mutually beneficial arrangement. Although the initiative came from Nigeria in the first place, once the blocs had been awarded to the ANOCS the initiative moved into their hands. Nigeria was thereafter trapped by a set of expensive promises with no mechanism to force the ANOCs to deliver on them. There were no legally binding agreements which would have tied the development of oil blocs to the simultaneous delivery of the infrastructure. This was the key weakness of the whole concept.
What is certain is that Nigeria is in dire need of a functioning infrastructure, whether railways or gas pipelines to serve the domestic market. The Yar'Adua government expects that it will get a better deal by putting at least some of these projects out to international tender, or by setting up public-private partnerships. It believes that the few Asian projects that got as far as the drawing board were not competitively priced, nor properly designed. The inflated contract prices would have left much room for corruption and left Nigeria with unacceptable levels of new debt.
This case study does not reflect general concerns about Asian behaviour in Africa. The ANOCs entry into the murky waters of Nigerian oil has proved both difficult and controversial. This has not been a case of the aggressive Asian pursuit of oil. After years of reluctance, they accepted the invitation to play. Neither has this been a case of ANOCs paying over the odds to get into the market. On the contrary, they were offered either discounts or signature bonus waivers to entice them in. This was a wholly Nigerian initiative. The novel concept of swapping oil blocs for investment in infrastructure was inspired by President Obasanjo. His intentions were good but officials failed to spell out the full implications of the scheme. And many used the scheme for private profit. It might have seemed a good idea on paper but the spirit was breached in the implementation. In spite of the acreage awarded to the ANOCs, they have not yet added to the reserves, and there has been no measurable benefit from the strategic deals. (61)
Even if the oil blocs awarded to the Asians stand, and this is not yet certain, the ANOCs footprint in Nigeria is very small. They pose no threat to the IOCs, a conclusion confirmed by them (62). The IOCs are more concerned about the impact of the Yar'Adua government's proposed reforms to the NNPC as well as the perennial problem of insecurity in the Niger Delta. According to diplomatic sources, the IOCs see the proposed reform to the JVs as "nationalisation through the back door." (63) While this is a highly exaggerated view, there is no doubt that the reforms will affect their profitability.
The impact of the ANOCs in Nigeria has turned out to be unexpected. The manner in which they came has generated controversy. Not a single barrel of oil has yet been produced by them. Not a single barrel has been added to Nigeria's reserves. Not a single downstream commitment has been started. The impact of the ANOCs on the Nigerian economy has been zero. There has been no tangible benefit. They have had a baptism of fire in Nigeria. Their experience has exposed the quirky style of government in the Obasanjo years more than anything else. It is time for the ANOCs to get their relationship with Nigeria sorted out and put on a more sound footing for the future. Otherwise, they might lose the small toehold they already have. Revocation is in the air. If some or all the blocs are revoked, there are bound to be diplomatic, political and possibly legal consequences. When the ANOCs begin to compete on a level playing field in a transparent process, following market forces rather than under the table deals, their presence and impact in Nigeria is likely to be beneficial and long-lasting.
The oil-for infrastructure concept has succeeded elsewhere in Africa. But in Nigeria, it was poorly conceived and poorly implemented - and above all, it was distorted by political considerations. What should have been a "win-win" situation turned into a "lose-lose" situation. Historians are likely to judge the Nigerian case as an aberration, as a product of its time, in a very particular political context.
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