What you need to know:
- Cases of corruption are common place in the oil and gas sector. But what are some of the global cases that could provide lessons to Uganda?
It is not a secret that in the past some government officials have controversially contracted companies to execute highly profitable deals.
Depending on how you view it, government officials and oil companies may have underlying interests and pressures, some of which might include self-gain or fronting the interest of allies.
Companies, on their part, may be incentivised to manipulate award proceedings to gain favour.
Corrupt schemes in oil and gas can involve usage of complicated transactions, legal jargons and secret offshore jurisdictions.
Therefore, in this article, we shall examine ‘red flags’ that are schemes of corruption in the award of extractive sector licenses and contracts.
The red flags touch real-world cases documented by the National Resource Governance Institute, which could perhaps help Uganda to secure the oil sector against corruption.
Nigerian National Petroleum Corporation sales to oil trading “brief cases”
In some sectors, unqualified shell companies are regularly inserted into certain deals as a tool for distributing patronage.
For years, Nigeria’s National Oil Company sold large portions of crude oil production to unqualified companies, often referred to locally as “briefcase companies.”
These are small, little-known intermediary firms, typically connected to a political heavyweight, that lack the financial and operational wherewithal to sell oil.
Instead they re-sell, or ‘flip’ the oil they receive to larger, more experienced commodity traders, and collect a margin on the sale.
A 2012 Nigerian government task force noted that many buyers of the country’s oil “did not demonstrate known expertise in the business of crude oil trading” and had “little or no commercial and financial capacity”.
A 2015 National Resource Governance Institute research found that some of the briefcase companies were used to channel payments to Nigerians, and sometimes foreigners.
The funds - estimated in 2013 at the higher end of $0.25- $0.40 per barrel - could potentially have been captured by the Nigerian state.
The companies, therefore, were used as corrupt patronage schemes, rather than value drivers to commercial transaction.
Nigerian National Petroleum Corporation oil for product swaps
A second scenario of fraud and corruption involves a company or an individual with a history of controversy or criminal behavior who competes for, or wins, an award.
A company involved in the award process, or an individual with ownership interest, has a reputation for, or a record of participation in corruption or other misconduct.
This could suggest that the company or individual has a propensity to engage in problematic business practices, or that officials treat them with favoritism.
Of course, some companies may be wrongly accused. Therefore, the level of scrutiny on this particular red flag should depend on factors such asreliability of the evidence or how often the company or individual has been accused.
In this case, several companies won contracts after they were publicly implicated in earlier scandals.
Starting in 2010, Nigeria’s petroleum corporation sold 210,000 barrels per day of crude through oil-for-refined-product swap deals with private trading companies.
In 2012, three of the companies that held these contracts were implicated in a $6.8b fuel subsidy scandal.
A government committee ultimately cleared two of the accused, although alleged abuse of the subsidy scheme through using counterfeit or falsified documentation to acquire unjustified large subsidy, were not cleared.
One of the company and some of its principals were charged with nine criminal counts in 2012 but it continued to do oil trading for government under the same contract until late 2014.
After a change of government, a Nigerian court sentenced two of its principals to prison for subsidy fraud.
Earlier, in 2015, Nigeria’s anticorruption police opened investigations of some of the swap deals; most of the companies publicly denied wrongdoing.
No charges directly related to the swaps have been filed to date, though in 2016 Nigerian anticorruption police declared the managing director of another of the companies wanted on suspicion of “criminal conspiracy, diversion of funds and money laundering” in another oil -related bribery scheme.
The executive replied that he was “a law-abiding citizen” and had not failed to honour any summons from the police.
A 2015 research by National Resource Governance Institute found that some of Nigeria’s oil-for-refined-product swap contracts contained unbalanced or inadequately defined terms that allowed traders to profit at the government’s expense.
The National Resource Governance Institute estimated that losses from three technical provisions in a single “offshore processing” contract could have reached $ 381m in one year (or $16.09 per barrel of oil sold).
Some of the unbalanced provisions dealt with the measures used to convert volumes of crude into refined products.
Oranto Petroleum alleged payments for contract approval
Here a company pays to manipulate or direct the outcome of the selection process. The company will receive preferential treatment, especially in cases where they are paying an official who is the final decision-maker.
At times companies make payments to officials who must merely sign off on awards, rather than those charged with making the selection.
In 2005, Oranto Petroleum and Broadway Consolidated - later renamed Peppercoast Petroleum - entered into negotiations with the National Oil Company of Liberia to acquire a number of offshore blocks.
However, after a tentative deal was reached, final approval of the agreements stalled. According to a report by Liberia’s General Auditing Commission and an investigation by the country’s anti-corruption police, members of Parliament would not approve the production sharing agreements until they received bribes.
In 2006 to 2007, Liberia’s national oil company made four payments totaling $118,400 to representatives of the Liberian legislature, allegedly for the purpose of speeding the contract review process.
Liberia’s National Oil Company did not have the required funds itself, so it obtained a loan from the state-owned Liberia Petroleum Refining Corporation. The Liberian auditor and Global Witness found evidence that Oranto agreed to provide Liberia with cash for at least two of the payments. Liberia’s national oil company noted the payments on its books as “lobbying fees” - which raised the red flag causing the auditor to investigate.
It is not clear in all cases who the ultimate recipients of the payments were, nor how much influence they had over the contract approvals.
At least $40,000 was paid directly to a member of the Liberian House of Representatives, $1,500 went to the House’s chief clerk. Both men acknowledged receiving the payments.
The head of Liberia’s National Oil Company argued that the transfers were legitimate and meant to pay for computers, stationery, and other office supplies that the cash-strapped legislator’s needed.
Oranto ultimately signed contracts for three blocks while Broadway signed for a single block.