Shell and Eni’s OPL 245 deal: a catalogue of scandal

Julian Turner 22 May 2019 (Last Updated January 31st, 2020 07:55)

The Dutch Public Prosecutor’s Office is preparing fresh criminal charges against Royal Dutch Shell relating to a $1.3bn deal in 2011 to purchase drilling rights at the OPL 245 deepwater offshore oil field in Nigeria. Julian Turner gets the inside track from Global Witness campaigner Barnaby Pace.

Shell and Eni’s OPL 245 deal: a catalogue of scandal
The OPL 245 deal is alleged to seen $1.1bn reach the coffers of Malibu Oil and Gas, rather than the Nigerian Government. Credit: Divulgação Petrobras

When Royal Dutch Shell, along with Italian oil giant Eni, inked a $1.3bn deal to purchase drilling rights at the OPL 245 deepwater offshore field in Nigeria in 2011 – home to 560 million barrels of oil  – the multinational could not have known that eight years later it would be fighting legal battles related to the contract in multiple jurisdictions.

What Shell and two of its former senior executives did or didn’t know is a central theme of a criminal trial in Milan, in which prosecutors allege that Shell and Eni were aware that $1.1bn of the fee they paid for the OPL 245 licence was destined, not for Nigeria’s national coffers, but for Malabu Oil and Gas, a company controlled by former Nigerian oil minister Dan Etete, a convicted money launderer.

It is alleged that hundreds of millions of dollars were then distributed to a number of middlemen and well-connected officials, among them the former Nigerian president Goodluck Jonathan.

In 2017, Shell (belatedly) admitted that it was aware that part of the money from the deal would go to Etete, but continues to deny that it had any knowledge of the alleged subsequent payments.

Defendants in the trial include Eni’s CEO Claudio Descalzi and his predecessor Paolo Scaroni, as well as former Shell board member Malcolm Brinded and Peter Robinson, the firm’s former VP for sub-Saharan Africa. Both companies and all of the individuals charged deny the allegations of corruption.

As part of the trial, the Nigerian Government is also making a civil claim against Shell and Eni, as well as filing a separate claim in London against the two companies. It is also suing JPMorgan for “gross negligence,” accusing the bank of mishandling state funds from the OPL 245 deal totalling $875m.

Case studies: legal proceedings in Nigeria and the Netherlands

In December 2018, news surfaced of a $1.092bn lawsuit filed against Shell and Eni by the Nigerian Government, which claims hundreds of millions of dollars from the OPL 245 deal were diverted from the public purse for “bribes and kickbacks”. British, Swiss and US authorities have also investigated.

The amount allegedly meted out as bribes amounts to more than the entire 2018 healthcare budget of Nigeria, where 87 million people in extreme poverty. Research by Global Witness found that, in total, the terms agreed for future oil revenues from OPL 245 will end up depriving Nigeria of $6bn compared to standard Nigerian terms.

Then, in March 2019, following a long-term investigation by Dutch authorities that included a raid in February 2016 on Shell’s headquarters in The Hague, the company revealed it faces prosecution in the Netherlands for criminal charges related to the purchase of the OPL 245 field.

“Based on the preliminary criminal investigation, public prosecutors concluded that there are prosecutable offences,” a spokesperson for Dutch prosecutors told Reuters.

“There is also a third set of criminal proceedings beyond those in Italy and the Netherlands, and that is in Nigeria itself,” adds Barnaby Pace, a campaigner at international NGO Global Witness, which has spent years investigating the case.

“Nigeria has brought criminal charges against a Shell subsidiary and Eni in Nigeria, and last month issued arrest warrants for Eni and Shell managers, former oil minister Dan Etete, and Mohammed Adoke, the former attorney general who managed the 2011 deal.

Risky business: the ‘sole risk’ contract controversy

Then, in late April, the story took a further twist when analysis carried out by oil consultancy firm Resources for Development, and commissioned by Global Witness, revealed that the OPL 245 license was not a standard production sharing agreement, as Shell and Eni claimed, but instead was listed in the Nigerian Department of Petroleum Resources’ annual report as a ‘sole risk’-type contract.

“A sole risk contract has not been given to an international oil company, and especially not one operating in deep water off the coast of Nigeria, since the mid-1990s during the era of military rule under General Sani Abacha,” says Pace. “The result of that is incredibly poor terms for Nigeria.”

Under a typical production sharing agreement, a government contracts an oil company to lift the hydrocarbons out of the ground, the company is paid back its costs, the taxes and royalties are deducted, and the proceeds from the subsequent production from the field are then shared.

By contrast, a sole risk contract transfers massive economic benefits to the companies at the expense of the Nigerian people by giving away Nigeria’s right to its share of the oil produced.

The International Monetary Fund (IMF) recommends that mature oil-producing countries receive 65–85% of oil revenues, with the remainder going to oil companies. Global Witness claims that the current OPL 245 deal is projected to result in Nigeria receiving just 41% of revenues, while Nigeria’s standard production sharing agreement terms – or the terms Shell agreed with Nigeria in 2003 when it originally owned the license – would earn Nigeria 65% or 60% of revenues respectively.

Furthermore, if Nigeria spent $870m taking up its back-in rights – the term given to a contract clause that entitles a government or NOC to a share of the asset once the contractor has recovered its production costs – it would only improve Nigeria’s share from the current deal from 41% to 45%.

Global Witness claims that these favourable terms boosted Shell and Eni’s internal valuations of the oil deal enough to justify the companies paying $1.1bn upfront for the OPL 245 licence, the money Italian Prosecutors allege was used to pay former Nigerian oil minister Dan Etete and “intended for payment to President Jonathan, members of the government, and other Nigerian public officials”.

Courting controversy: potential penalties for Shell and Eni

With the Italian court case related to the sale of drilling rights at the OPL 245 offshore field ongoing, I ask Pace for his opinion on the potential outcome of the trials, and possible fines for Shell and Eni.

“The jail terms [in the Italian case] are seven years’ imprisonment, but, technically, the fines are very limited in Italy, where the maximum penalty for a corporation is €1.5m,” he explains.

“However, the potential award in terms of compensation to Nigeria is unlimited and, in addition to any decision made in Italy, you potentially have further exposure to financial penalties elsewhere, including the US, which has investigated the case.

“Evidence has been given by an FBI agent on the stand in Milan and there is a reasonable possibility that the US will take the opportunity to prosecute or levy a fine against Shell and Eni, especially as they both have previous deferred prosecution agreements in the US for corruption in Nigeria.”

As for the trial in Italy, the stakes remain high.

Pace said: “Some of the most senior executives of two of the biggest companies in the world could face prison sentences for a deal struck under their watch.”