There is pervasive fraud and corruption in Nigeria’s oil industry enabling theft that is causing Nigeria’s economy substantial damage. The English courts could help to trace the money and track the thieves.
No one knows how much crude oil theft is really costing the country; those involved are able to hide much of their actions and proceeds. But the theft is so serious, pervasive and sophisticated that it is causing grave damage to Nigeria’s economy.
Nigeria’s finance minister, Ngozi Okonjo-Iweala, said in November 2013 that the country could fall USD 12 billion short of its 2013 budget estimate as a result of the theft. It is estimated that between 100,000 to 350,000 barrels per day, out of Nigeria’s daily production of approximately two million barrels, are being stolen.
Tricks of the trade
Oil theft in Nigeria occurs at every stage of the transportation process from the drilling site to export terminals. At its lowest and most unsophisticated level, local groups tap into pipelines and wellheads by inserting siphons. The stolen crude oil is then refined in local “artisan” refineries and sold at local black-markets as fuel or blended with refined products such as gasoline and diesel.
The next level, in terms of sophistication and scale, is known as “bunkering”, whereby a team use large hoses and taps to extract oil from the pipelines on land, underground and even under water.
The oil is then pumped onto barges or boats in the Niger Delta that sail down towards the coast where the oil is transferred to small tankers. While some have managed to transport oil on these tankers to other storage facilities in the Gulf of Guinea, they rarely sail due to their poor condition. Typically, stolen oil builds up in the small tankers and is then transferred onto larger tankers that transport the oil internationally.
The largest scale theft takes place at the oil export terminals and is known as “topping up”. Some international tankers that connect to Nigeria’s oil terminals to take legal deliveries of oil also take illegal volumes of oil at the same time.
This theft can only be carried out with the collusion of people working at the terminals. Given the vast volumes of oil involved, this form of theft is the most economically damaging. This theft is enabled by oil terminals devoid of formal metering systems, which makes it difficult to track how much oil the terminals receive, where it is being sent and whether each transfer was a legal or illegal volume.
Complex and opaque methods are used to move the oil internationally. Tracking the stolen oil is likely to prove difficult and it is obviously possible that the final recipient of this oil may have no idea that it is stolen.
Stolen Nigerian oil can be loaded with legitimately purchased oil from other countries and then transported as a split cargo to the next stage in its transportation. The split cargo can then be offloaded all at once to one refinery or offloaded at different refineries. All or part of the split cargo could be offloaded into storage, to another tanker, or to multiple tankers.
There is much speculation as to which countries eventually receive the oil. Swiss trading companies have attracted suspicion for the role they may play as intermediaries in securing stolen oil in Nigeria and arranging for its transportation to clients in Russia or Eastern Europe.
Plugging the leak
Stopping the theft in Nigeria requires a determined and sustained approach at a national and local level.
Nigeria has launched initiatives to combat the problem in the past. Following a request from the Nigerian Oil Ministry in 2012, a committee led by the former head of the Nigerian Economic and Financial Crimes Commission, Nuhu Ribadu, produced a 146-page report on corruption in the export of Nigerian oil between 2002 and 2011.
Nigeria’s president Goodluck Jonathan has stated that government is exploring the possibility of using electronic pipeline surveillance to track oil theft and the Nigerian National Petroleum Corporation (NNPC) commissioned oilfield services company Schlumberger to carry out a study on the protection and surveillance of pipelines in Nigeria in 2010. It hoped the Texan company could help it adopt metering at oil well heads, flow stations and export terminals.
Schlumberger proposed a demonstration of its surveillance system with an initial trial in Southampton, a major UK port, followed by a live test with the Shell Petroleum Development Company at the Afam oil field near the southern coast of Nigeria. The surveillance system would include the use of long-range infrared CCTV cameras and Schlumberger would report incidents.
Schlumberger also proposed installing a pipeline monitoring system at Shell’s Okolola gas plant in the Afam field to detect leaks and activity around the pipeline, with a command and response post set up at Schlumberger’s facility in Port Harcourt to identify threats, detect leaks and intrusions and plan responses.
The US company submitted a further proposal in 2012 for a consortium of firms to provide pipeline security services to the NNPC, including surveillance and metering with a fully functioning control centre.
Without direct and technologically sophisticated action at each stage of the oil transportation process, which is managed by national and local resources capable of being held accountable for their actions or inaction, it’s unlikely that any progress will be made in reducing the oil theft.
Plan of action
Realistically, it may be unattractive to pursue funds generated by the small scale and local oil theft. A better approach would be to install prevention measures through a combination of sophisticated pipeline monitoring and efficient local policing. Given the large sums of money made from the theft, the government and oil companies should consider action to trace and recover funds generated by bunkering and topping up oil theft. Much more intelligence work would have to be done on the ground in Nigeria before any progress could be made. Investigations by corporate intelligence firms and forensic accountants working in partnership with government authorities would have to find:
- Precisely how much oil is transferred between export terminals and tankers and how this process is monitored;
- Corruption and bribery among the employees working at the terminals;
- Patterns of tanker movement for those tankers regularly receiving oil from the terminals. Evidence would have to be found where have the tankers come from and where are they going? Where are they registered and by what or whom are they owned? What are the nationalities shown on the crew manifest?
- The corporate entities used to pay for legal oil cross-referenced against any suspicious ship movement, ownership or registration;
- The corporate background and trading history of any intermediaries and traders linked to suspicious ship movement, ownership, registration or payments; and
- Intelligence held by Nigerian government agencies and departments.
If a pattern can be established that provides a reliable indication that certain individuals, companies or banks have been involved in oil theft by receiving and transmitting either stolen oil or the proceeds of that oil’s sale, then steps can be taken.
For any entity or individual located in Nigeria, the domestic courts should be engaged. For those based outside of Nigeria, government to government engagement, criminal prosecution or civil action can be taken.
Government to government engagement and international criminal prosecutions are protracted processes that would give the recipients of the oil or its proceeds plenty of time to move assets and make themselves judgment proof.
If, however, there is a link between the stolen oil or its proceeds and the UK, then a civil claim can be made in Nigeria (where the theft occurred) with an application in the English courts to support of those proceedings.
There is a well-established practice in the English court providing such assistance in the form of interim relief, such as orders freezing assets and obtaining documents and information. Practical justice can be achieved through the international co-operation of judiciaries.
The English court may refuse to grant the relief sought if it is inexpedient to do so. It will be presumed practical to grant the relief if the respondent individual or company is a resident or based in England and as long as an order doesn’t interfere with the management of the case in the primary court.
English courts are more likely to step in if a matter involves fraud, with worldwide freezing injunctions recently granted against defendants in US and United Arab Emirates courts.
If the stringent procedural tests can be passed in the application for a freezing order, such orders can be powerful. The English court was prepared to assist proceedings in the UAE courts by going as far as granting worldwide freezing and disclosure orders even though the defendant was in the UAE and there were no obvious assets in the UK.
If there are grounds on which the English civil court can exercise substantive jurisdiction over the proceeds of Nigerian oil theft, then the possibility of commencing substantive proceedings in England is a trump card. The English court may be persuaded to exercise its jurisdiction if a suspected thief of Nigerian oil can be served with court proceedings in England and Wales or if the proceeds of the theft can be shown to have passed through bank accounts or used to buy assets in England and Wales. English courts can grant world-wide interim relief in such circumstances.
Crude oil theft is also becoming a major issue in Mexico, where state-owned oil corporation Pemex estimated in June 2013 that between 5,000 and 10,000 barrels of oil were being stolen per day.
Pemex recorded 730 illegal siphons in its pipelines in the first four months of 2013, compared to 377 in the same period for 2012. The theft also appears to be becoming more organised and sophisticated and it is now suspected that major organised crime groups are involved.
Pemex, unlike its Nigerian counterparts, has been proactive in seeking redress through foreign civil courts against suspects based outside of Mexico that it believes, one way or another, are involved in the theft.
In a lawsuit filed at a US district court in Texas, Pemex alleged that nine US companies and two US oil executives were involved in receiving natural gas condensate stripped from its Burgos oilfield in northeast Mexico.
The Mexican company claimed that some of these companies knew, or should have known, that they were trading in or transporting stolen gas. Some companies may have been ignorant that they were purchasing stolen goods, but in either case the companies had improperly taken possession of Mexico’s sovereign property.
A federal judge dismissed most of Pemex’s claims in September 2013 as time-barred because they fell foul of the two year statute of limitations under Texas state law. The judge did give leave for Pemex to pursue its conversion claims at trial, but commented: “In order to hold any individual defendant liable for conversion, [Pemex] must trace condensate that was actually stolen in Mexico to the individual defendant. [Pemex] must also present evidence from which a fact-finder could form a reasonably certain estimate of the amount of stolen condensate, if any, that each defendant converted.”
The judge’s comments show one of the central evidential difficulties for an entity to pursue claims relating to stolen oil. Can it track, with sufficient certainty, the passage of a specific amount of stolen oil from the source of the theft through the transport phase to its ultimate recipient? If it cannot, it may struggle to succeed in any court action to recover the oil or the proceeds of its sale.
It is unclear whether or not Pemex has this quality of evidence but the Nigerian government and oil companies should monitor the outcome to pursue oil theft in the country.
Curbing oil theft must be of the highest priority to the Nigerian government if it wishes to help safeguard the country’s economic future. If it is able to develop the necessary will, there are a number of steps that the government can take now to prevent the fraud and to trace the stolen oil and its proceeds.
If sufficient links to the UK can be established, then the English court stands ready to assist civil proceedings brought in Nigeria to recover the oil or its proceeds.
The following article by BLP was first published in Commercial Dispute Resolution News on 24 January 2014.