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Concerns mount over contract cost inflation by oil majors

By BusinessNews Staff on May 10, 2014

The allegation of contract inflation in the oil and gas industry by oil firms, particularly, international oil companies (IOCs) operating in Nigeria is generating ripples in the sector, THISDAY investigations have revealed.

Presidency sources hinted that top officials of multinational oil companies use their connections in the presidency to secure oil and gas contracts at very exorbitant rates, when compared to costs of executing similar projects in other parts of the world.

It was gathered that the oil majors often bypass the Nigerian National Petroleum Corporation (NNPC) to get direct approval from the presidency on multi-billion dollar projects that were hitherto disapproved by the corporation because final costs of their execution were ridiculously high.
A Canadian oil company operating in Nigeria was said to have recently submitted a tender for a multi-billion dollar project, for which the cost was far higher than what it takes to execute similar project elsewhere in the world, give or take a few variables.

The company was said to have been instructed by the NNPC’s exploration and production department to slash the cost in the tender because it was not justifiable.

Rather than comply with the directive, top management of the oil firm reportedly bypassed the NNPC and made straight to Aso Rock where it got twice what it originally presented as final cost of execution of the project.
“The NNPC is helpless in this regard. Oftentimes we are arm-twisted to approve such tenders, even when it is obvious that costs of execution of such projects were inflated by the oil industry operators. Our concern really is that the ripple effect would be on all us as Nigerians,” the source said.

“When we insist that the cost should be justified or reduced, the operators will accuse us of deliberately delaying projects that would boost Nigeria’s economy. The tender process as you may know is handled solely by these IOCs. They only bring it to us for approval. We only insist that costs of execution in Nigeria should be at par with what obtains elsewhere in the world,” said NNPC source, who asked not to be named.

Some oil industry operators recently alleged that the inability of the NNPC and IOCs to reach agreement on the costs of most multi-billion dollar oil and gas projects stalled their scheduled take-off.
NNPC had been accused by oil majors for delaying the execution of some multi-billion dollar oil and gas projects expected to increase Nigeria’s oil output and create thousands of jobs.

But contrary to perception that unduly delays projects execution, sources at the corporation said the NNPC’s management insistence that IOCs revise project costs that actually stalls the projects.

“The IOCs are our contractors and handle the tenders themselves, and then revert to us on the cost, which we have to approve. So our concerns have been the cost of these multi-billion dollar projects, because when we benchmark them against similar projects worldwide, they must conform to the costs that such projects will attract in other jurisdictions,” a source at the NNPC told THISDAY recently.

[This Day]

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