Oil Swap Fraud: Aiteo, Alleged Front For GEJ & Diezani, In Buhari’s Cross-hairs

As President-elect Buhari’s inauguration is just four weeks away, outstanding questions remain on how he will handle the endemic corruption in the oil sector. According to a leaked Energy Compass report, the energy company Aiteo could be headed for a major investigation.

Aiteo is an alleged to be a front for some corrupt activities of President Jonathan and the Petroleum Resources Minister Diezani-Alison Madueke, according to another high-level source.

The Energy Compass report said that, “companies deemed close to the minister that could face further scrutiny include Nigerian trader, which has been criticized for unfairly exploiting its OPAs, and Atlantic Energy, which has allegedly lifted crude beyond its entitlements from the upstream SAAs.”

The report noted that Buhari could dig deeper and hold more alleged perpetrators to account than his predecessors, partly because he has staked his credentials on fighting corruption, and because of the major power shift, which is under way.

The entire report, leaked to SaharaReporters, can be found below:

 

Nigeria: Buhari Mulls Corruption Fight

As Nigeria's new President­-elect Muhammadu Buhari and his All Progressives Congress (APC) party ready for power, state Nigerian National Petroleum Corp. (NNPC) officials, oil traders and upstream players alike are bracing for a raft of investigations into deals approved by outgoing President Goodluck Jonathan's regime. As corruption is endemic across much of Nigeria's oil sector, such probes have featured with every incoming government for decades with new presidents and lawmakers using the findings to threaten and control opponents, shake down oil companies for more cash, terminate contracts and award new ones to allies.

Buhari could dig deeper and hold more alleged perpetrators to account than his predecessors, partly because he has staked his credentials on fighting corruption, and because a major power shift is under way. Corruption became a huge issue under Jonathan, with sizeable volumes of crude allegedly squandered through offshore processing agreements (OPAs), under which traders lift crude and deliver oil products and cash back to NNPC, as well as through strategic alliance agreements (SAAs) that paid companies in crude for helping NNPC to operate upstream assets divested by Royal Dutch Shell. The government eventually commissioned PricewaterhouseCoopers (PwC) to audit NNPC's finances in 2014 but declined to release the full report (EC Mar.28'14).

 Buhari is treading carefully, starting on his own doorstep by disputing his own supporters' demands for contracts to satisfy their sponsors, sources tell Energy Compass. To manage such intense pressures, some expect Buhari to keep the oil portfolio himself and appoint a minister of state for petroleum as did former President Olusegun Obasanjo (2000­07) ­­ a move that streamlined rather than eradicated such activity. Significantly, though, APC policy director Kayode Fayemi yesterday promised to publish PwC's audit in full.

 The president-­elect will need a light touch in Jonathan's home, the Niger Delta, where his People's Democratic Party retains control of all states after flawed governor elections on Apr. 11 (EC Apr.17'15). Powerful former militants are conciliatory but could stir up trouble if Buhari cancels their lucrative pipeline and maritime security contracts secured through the 2010­15 amnesty agreement and ties to Jonathan. Former gang leader Ateke Tom took out a full-­page advertisement congratulating Buhari. Less predictable are militants excluded from the amnesty, who are now flexing muscles to secure contracts.

 A compromise to tackle corruption without ruffling Niger Delta feathers could be in the making, under which most of the corruption gets blamed on unpopular outgoing Oil Minister Diezani Alison­Madueke, allowing Jonathan to retain the statesmanlike image he acquired on ceding power to Buhari (EC Apr.3'15). A narrative is emerging that the minister helped herself to funds raised for his election campaigns and recycled it with help from business allies. "Goodluck was kept in the dark ... without real influence over oil sector decisions," one trader said. The minister will struggle to counter this version of history, as numerous fallouts have left her with few allies, sources say.

Trader Trouble

Companies deemed close to the minister that could face further scrutiny include Nigerian trader Aiteo, which has been criticized for unfairly exploiting its OPAs, and Atlantic Energy, which has allegedly lifted crude beyond its entitlements from the upstream SAAs.

Aiteo and Geneva-­based, Nigerian-­owned trader Sahara each signed a two-­year OPA in November that took effect in January to deliver products against roughly three 950,000 barrel cargoes a month. A general rule of thumb equates approximately 120,000 tons of gasoline or kerosene to each standard cargo of crude. Contracts seen by Energy Compass outline a process requiring the counterparty to specify products and parcel sizes, delivery date range and discharge port within a week of loading the crude. Aiteo's contract requires products to be supplied within two months of crude loading.

 Traders and NNPC insiders allege that by late March, Aiteo was more than 20 cargoes in arrears on the new deal. Analyzing these complex arrangements is not easy, but data obtained by Energy Compass for products shipped against January and February loadings indicates some shortfall and suggests Aiteo was casual in following contract process. For example, after loading two cargoes in January, Aiteo nominated 110,000 metric tons of dual purpose kerosene against one cargo but showed few plans to offset the other, listing only product delivery dates, with gasoline and vessels to be arranged later.

 

Nomination data was again incomplete in February, and tracking of delivery vessels shows a shortfall in February and March. An Aiteo spokesman contacted by Energy Compass denied any wrongdoing, arguing that contracts allow for delays of a few weeks. Analysts meanwhile say that the OPAs provide too much flexibility and are too complex ­­with more formulas, conversions and other moving parts than crude­-for­-product swaps or open­-account trading; Aiteo lacks a full crude­ trading team and has been selling through Shell.

 

So Buhari will have his work cut out to get to the bottom of allegations. In the long term, NNPC needs to restructure $1.5 billion in arrears on products to traders so they can return to supplying products on short­term credit (EC Sep.5'14). The more basic questions of why OPAs were chosen over NNPC's relatively expensive but more straightforward swaps, whose interests they serve, and why Aiteo and Sahara were selected also remain to be explored.

 

Given the political risks of investigating such deals, Buhari could quietly tell beneficiaries to repay funds dubiously obtained in exchange for waiving prosecutions. But he'll need experts to work out how much is owed, and what could replace the OPAs while NNPC remains in arrears. Traders seeking advantageous contracts for themselves are already lobbying his inner circle to proffer advice and alternatives. But Buhari would do well to tap a broader range of advisers.