By Alexandra Gillies, Natural Resource Governance Institute
This post originally appeared on resourcegovernance.org on June 10, 2019.
According to a BBC investigation broadcast last week, a recent oil deal in Senegal was festooned with red flags that signaled the potential for controversy and possible corruption. The Senegalese government went ahead with the deal despite the warning signs, and prominent U.S. and U.K. oil companies later joined in as well. As a result, a businessman dogged by ethics questions will walk away with hundreds of millions—and possibly even billions—of dollars in return for having done very little, and the country’s oil sector is left steeped in controversy. What can we learn from this unfortunate turn of events?
In 2011, the Senegalese government awarded the rights to explore two offshore oil blocks to a company called PetroTim. When a new Senegalese government came into power in 2012, it allowed PetroTim to retain rights to the blocks. In 2014, PetroTim transferred the rights to Timis Corporation which is owned by the controversial businessman Frank Timis. That same year, the American oil company Kosmos acquired 60 percent of the blocks from Timis and began exploring for oil and gas. Kosmos found major natural gas reserves, and BP then joined the partnership. Finally, as reported by the BBC, BP bought out Timis Corporation in 2017 for $250 million and a share of the gas field’s future royalties.
The deals should not have proceeded in this way. In 2017, my colleagues and I examined dozens of corruption cases connected to the award of oil, gas and mining licenses around the world. Looking at these scandals and mishaps, we asked what warning signs might have alerted authorities or outside observers that something suspicious was afoot? We found 12 common red flags that, when observed, should prompt additional scrutiny and concern.
According to the BBC investigation, the award of the licenses to PetroTim, the transfer to Timis Corporation and subsequent events exhibited at least a whopping seven of our red flags, and possibly two more:
Given the glaring warning signs, it is important to ask: Why did the Senegalese government choose PetroTim to begin with? Why did it then let Timis Corporation acquire the rights? And, why did Kosmos and BP choose to partner with the Timis Corporation? It’s because of these two decisions that Frank Timis will walk away from his Senegal oil sector adventure with his pockets full.
Considering these questions may hold a couple lessons.
First, the challenge here appears to be one of low standards rather than inadequate due diligence. Most of the red flags were observable well before the BBC’s investigation. Savvy and experienced companies such as Kosmos and BP surely saw them, and the government of Senegal likely did too. The government award process failed to weed out PetroTim as a suboptimal candidate. The later decisions by Kosmos and BP to move ahead with the deals suggest that they found their legal risks to be acceptably low, such as with respect to the U.S. Foreign Corrupt Practices Act or the U.K. Anti-Bribery Act. Indeed, Kosmos has been open about the identity of its new partner as part of the company’s strong commitment to transparency. So, it’s not that the parties’ due diligence systems failed to uncover the red flags; it’s more likely that they noted and assessed the risks and decided they were worth taking.
Outcomes like this one generate controversy and create conducive conditions for corruption. To avoid them, companies should apply higher standards for the kinds of partners and deals that they take on. This is a different takeaway than the one often drawn from controversies such as this one. For example, many FCPA settlement agreements involve companies promising to adopt ever more elaborate due diligence protocols. Even if these new and improved systems do expose more dirt, they won’t prevent future problems if executives approve the deal anyway.
Second, once an asset becomes “tainted” by controversy or suspected corruption, the options for getting it back on track are limited and unsatisfying. If the unqualified Timis Corporation retained full control over the license, the gas fields would have sat dormant and produced no returns for the country. If the government sought to revoke his license, years of disputes and arbitration would have followed. So instead, the two international companies partnered with Timis and eventually paid off his company in order fully claim the gas fields. The Timis Corporation had a legal claim to the licenses, so it negotiated a healthy payday for itself before agreeing to exit. But that payday has generated a scandal and inflicted reputational harm on all parties—and the harms could continue since BP will pay Timis a share of the field’s royalties for many years to come. While it’s good that capable companies now manage the assets, it should not have taken such a problematic set of transactions to reach that outcome.
The problem of tainted assets can be avoided altogether if governments award licenses to qualified and appropriate parties to begin with. The spread of beneficial ownership reporting, contract disclosure and other forms of transparency may help encourage this behavior. However, in cases where it is too late, we need a method for handling tainted assets that doesn’t stoke scandal and that protects the public interest of the country in question.
The Senegal situation is not the most dramatic or disturbing example of these challenges. In Nigeria, in the late 1990s, the petroleum minister allocated the oil block OPL 245 to a company called Malabu which he himself partly owned. Shell and Eni later sought to acquire the rights to the block. But what to do about Malabu? In 2011, Shell and Eni paid $1.3 billion into a Nigerian government account for the block. Multiple accounts conclude that more than $1 billion of the payment ended up paying off Malabu’s owners, government officials and other private parties. Leaked emails indicate that Shell and Eni personnel negotiated directly with Malabu’s owners to arrive at the deal. Again, weak company due diligence was not the problem as OPL 245’s history was well known to all parties. Rather, the companies knew the risks and chose to engage with Malabu anyway. In this case, the gamble may not have paid off. Italian prosecutors indicted the two companies and several top executives on corruption charges, and their trial is ongoing. They deny wrongdoing. Other cases, including from Liberia and the DRC, further illustrate the problems that arise when international companies engage with high-risk, problematic actors in order to access extractive sector opportunities.
The BBC’s investigation of the Senegal case sounds the alarm once again. Unless governments and companies adopt stronger standards for the kind of deal they’ll undertake and we tackle the challenge of tainted assets, the natural resource wealth of developing countries will continue ending up in the wrong pockets.
Alexandra Gillies is an advisor at the Natural Resource Governance Institute. She is the author of the upcoming book Crude Intentions: How Oil Corruption Contaminates the World. Follow her on Twitter @acgillies.
By Mukasiri Sibanda, Zimbabwe Environmental Law Association (ZELA)
This post originally appeared on mukasirisibanda.wordpress.com on June 10, 2018
On 6 June 2018, Zimbabwe Platinum Mines (Zimplats) publicly announced that it has amicably resolved a six-year long dispute with government which was seeking to compulsorily acquire part of its mining claims measuring 27,948 hectares. This dispute was pending in the courts of Zimbabwe.
Consequently, Zimplats agreed to release 23,093 hectares to government “to ensure participation by other investors in the platinum mining industry.” Zimplats now owns 24,632 hectares with a new special lease valid for the lifetime of the mine. A significant development that warrants public scrutiny into how well the country’s mineral wealth is governed for the benefit of all Zimbabweans.
It is a positive development that this dispute was amicably resolved. But it must be noted that the dispute had been going on for six-long years, and such lengthy period riddled with uncertainty on government’s commitment to property rights and Zimbabwe as an unattractive investment destination. Such disregard for investment agreements also provides scant comfort to existing and prospective investors.
Notably, Zimbabwe is one of the least attractive investment destination according to Fraser Institute’s Policy Perception Index. Interestingly, Zimbabwe’s mineral potential is ranked among the top under the same organisation’s Mineral Potential Index. This partly explains why, despite Zimbabwe’s abundant mineral wealth, the country is struggling to attract much needed investments to realise the sustainable development dividend from its huge mineral wealth endowment.
One could also spin the agreement between Zimplats and government as positive in that the released land creates space for the entrance of new players in the platinum industry. In all mineral sectors, the entrance of new players is largely problematic as most of the land has been taken.
It is noteworthy that the new Minister of Mines, Honourable Winston Chitando publicly stated during the Chamber of Mines AGM held last month that from next year, government will enforce the law on renewal of mining titles. Paying ground rental and mining inspection fees will no longer suffice, but evidence to back capital expenditure will be required. He stressed that this is not a new requirement at all. Perhaps Zimplats was cornered by this development and it had no option but to release the ground. In this regard Chitando’s leadership is coming to bear, a man with strong private mining sector background.
Worryingly, Zimplats got a new mining lease valid for the life span of the mine. Its special mining lease was due to expire in August 2019. Terms and conditions of the new special mining lease have not been disclosed. What we know is that in the previous mining lease, Zimplats had a 2.5% royalty stabilisation agreement with government which undermined the country tax code in which platinum royalties were pegged at 10%.
In 2015, Zimbabwe Revenue Authority (ZIMRA)’s annual revenue performance report revealed that mineral royalty income was in the red at $19,421,653.62. A factor attributed to a royalty refund of $101.55 million. Although the report did not state Zimplats, the refund came after Zimplats had won a court dispute with the tax agency on legality of the 2.5 percent royalty stabilisation agreement with Ministry of Mines.
Section 315 (2) (c) of the Constitution requires transparency and accountability in the negotiation and performance monitoring of mining contracts. It remains to be answered whether Parliament was involved in this deal? A government that was established against the backdrop of restoring order should be at the forefront of respecting the Constitution.
Now that government is in possession of released ground, what happens next? The privately-owned Zimbabwe Independent on Friday reported that Lucas Pouroulis, whose company Karo Resources, last month signed a $4.2 billion platinum deal with government, has been given the land in the resource rich Great Dyke.
The African Mining Vision, to which government is a signatory, cautions that known mineral reserves should be disposed through bidding to allow room for government to pick an investor who offers greater development outcomes like infrastructure, skills development, technology transfer and the development of local supply chains in addition to taxes.
The secrecy around the deals being announced currently leaves too much room for corruption. Lessons can be learnt from the acquisition of claims from Anglo American owned Unki Mine by government in 2008 as empowerment credits, which ended up in the hands of speculators. Government got $100 million from CAMEC, which later resold the Bougai and Kironde claims for nearly $1 billion dollars.
Much as Parliament is preoccupied with the issue of allegedly missing $15 billion diamond revenue from Marange, a lot is going on in the mining sector with mega deals being announced frequently. Parliament should keep its eye on the ball.
In 2014, Niger announced it had successfully renegotiated uranium extraction contracts with French state-owned company Areva to secure a greater share of the wealth deriving from their uranium resources. Three years later, an analysis carried out by Oxfam based on data released by Areva calls into question the benefits for Niger in the contract renegotiation.
This analysis was carried out as part of the data extractor program developed by Publish What You Pay.
You can read more about Areva in Niger and more in the English version of “Beyond Transparency: Investigating the Investigating the New Extractive Industry Disclosures.” This report was published by Publish What You Pay France, Oxfam France, ONE, and Sherpa.
Understanding the context: why is Nigerien uranium so important for Areva?
Uranium is a strategic commodity for France. More than 75% of electricity produced in France comes from nuclear power. Most of the uranium used for nuclear combustion in France is supplied by Areva. Up to 1 in 5 lightbulbs in France would be lit up thanks to Nigerien uranium.
For years, civil society organizations have called out Areva for the uneven partnership with Niger. Despite vast resources in uranium, Niger has yet to convert this valuable resource into tangible wealth: the country still ranks second to last in the Human Development Index.
The renegotiation: a game-changer for Niger?
In 2013, Oxfam and ROTAB, a Nigerien NGO – both members of Publish What You Pay – launched a campaign denouncing the unbalanced partnership between Areva and Niger and calling for the renegotiation of the contracts. Oxfam and ROTAB specifically pointed that Areva’s contracts included a sweetheart clause enabling Areva to pay a lower rate of royalty than the applicable regime in Niger. Royalties make up the majority of uranium mining revenues to the Nigerien government.
In 2014, after months of pressure from civil society organizations around the world, Areva and Niger agreed to a new contract without the sweetheart clause. In June 2014, a Strategic Partnership Agreement signed between Areva and Niger stressed that Areva would be subject to the legal royalty regime, raising hopes of a fairer share of the revenues for Niger. This agreement was published on the Journal Officiel- the official gazette of the Republic of Niger where major legal official information are published.
In August 2016, Areva released for the first time the payments the company makes to governments where it mines uranium, as part of new EU regulations. In Niger, it was the first time the public had access to Areva’s payments since the renegotiation took place in Niger. And the results are surprising:
By Aaron Sayne, Alexandra Gillies, Andrew Watkins, Natural Resource Governance Institute
This post originally appeared on resourcegovernance.org on April 6, 2017
Oversight actors can detect and prevent corruption in the oil, gas and mining sectors if they ask the right questions. Corruption schemes can be complex and opaque, yet clear patterns and similar signs of problematic behavior do exist across resource-rich countries.
To find these, we examined over 100 real-world cases of license or contract awards in the oil, gas and mining sectors in which accusations of corruption arose. The cases come from 49 resource-producing countries.
Based on this work, we developed a list of 12 red flags of corruption in extractive sector license and contract awards, with real-world illustrations for each. This list can provide a concrete, practical tool for many types of actors, not least:
Download the full report on resourcegovernance.org
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