Under fire from shareholders, and facing investigations in the United States, the United Kingdom, and the Netherlands for misrepresenting its oil reserves, Royal Dutch/Shell is trying to shift the blame to Nigeria.
Confidential company documents made available in late March suggest that Shell withheld vital information on the extent of the downward revaluation of its Nigerian reserves - by 1.5 billion barrels (60% of the country's total reserves) - because it wanted to strengthen Nigeria's hand in negotiating with OPEC to increase the country's production quota. Nigeria presently produces two million barrels per day. OPEC calculates member countries' quotas based on proven reserves.
Nigeria, grappling with a worsening economic crisis, wants to double daily production to four million barrels, to reflect new discoveries that the Nigerian National Petroleum Corporation (NNPC) claimed in December 2003 had increased reserves to 34 billion barrels. Officials also argue that Nigeria's large population relative to other OPEC members, and the urgent need to earn foreign exchange to invest in infrastructure and social services, necessitates preferential treatment. Shell claimed it did not want to jeopardize these negotiations by making public the true state of its Nigerian reserves.
This image of Shell as a sensitive, caring company mocks the evidence. At the heart of Shell's oil reserves scandal is the desire for profit and the elaborate mechanisms that it nurtured in collaboration with corrupt military dictators over the years to ensure that its operations yield enormous dividends at the expense of ordinary Nigerians.
Shortly after General Ibrahim Babangida seized power in a coup in 1985, the military government signed a "Memorandum of Understanding" with Shell and other oil companies. The Memorandum, revised in 1991, entitled Shell to a guaranteed profit of between $2 and $2.50 per barrel produced as long as oil prices remain in the range of $12.50 to $23.50, and provided that it invests a minimum of $1.50 on every barrel it produces. As a further sweetener, Shell was entitled to a bonus of ten to fifty cents per barrel for every operating year in which it discovers new oil fields with reserves greater than the volume of the oil it extracts.
Shell has been laughing all the way to the bank ever since. On average, world oil prices have not fallen below the stipulated $12.50 baseline since 1986. Moreover, Shell also operates a joint venture partnership between the NNPC, the French oil company Elf, and Agip of Italy. The Joint Operating Agreement guiding the venture, in which the Nigerian government has 55% equity, stipulates that while all parties share in the cost of operations, Shell prepares the annual work programs and budget.
Control over operating costs is the key to understanding of Shell's big profits in Nigeria. The NNPC's executives admit that proper monitoring of the company's operating costs consistently eludes them and that what keeps Shell and the other western oil companies in business is not the theoretical margin, but the returns they build into their costs.
Because the operational budget is set by Shell, and because the NNPC is plagued by corruption and lacks the expertise to verify production claims, the operating company has a powerful incentive to inflate costs. Similarly, new reserves "discovered" by Shell to enable it to press a claim for the Reserves Addition Bonus was a key source of company profits until 1999, when a new government reviewed the Memorandum of Understanding.
Production costs have been a subject of bitter dispute between Shell and Nigeria's government since the early 1990's. Alarmed that the production costs put forward by Shell were always increasing, in 1996 Nigeria's petroleum minister promised to establish a monitoring unit to scrutinize all of Shell's invoices and claims. Nothing came of this.
Last February, the newly elected Senate attempted to block $1.6 billion from going to Shell and two other companies for production expenses until they provided adequate documents to support their claims. This effort was brushed aside by President Olusegun Obasanjo and NNPC officials.
The latest scandal is unlikely to elicit vigorous responses from Nigeria's government, even though it has been paying millions of dollars for new oil finds that exist only in Shell's imagination. Nigerian officials are anxious to swat away charges that Shell padded its figures for reserves in Nigeria to take advantage of lax oversight and regulatory mechanisms and reap millions of dollars in bonus payments. Indeed, Shell insists that Nigeria owes it $385 million more.
Shell has powerful friends in Nigeria's government. In the mid 1990's, the company worked closely with the late dictator, General Sani Abacha, to suppress the Movement for the Survival of Ogoni People, a grassroots environmental and minority rights organization led by Ken Saro-Wiwa, who was later executed by the regime. Human Rights Watch investigators linked Shell officials to gross human rights violations committed by government troops at the time.
This slick alliance of corrupt state officials and self-serving company executives, anxious to keep the petrodollars flowing, is still in place. Facing the sharp end of the stick are the seven million Niger delta peasants, who bear the brunt of the violence, environmental devastation, and social anarchy that Big Oil produces wherever it sets up its drilling rigs.