First of all, some background. This is all linked to a huge LNG project, Nigerian LNG, which has been in the works for almost 20 years, and which finally came to fruition in the late 90s. LNG is liquefied natural gas, it essentially means that you freeze natural gas into liquid form so that it takes less volume and you can then transport it by boats (LNG tankers) to regasification facilities located in consuming countries. This is a good way to make money out of gas which is far away from markets and cannot be brought to a pipeline grid. In the case of Nigeria, LNG has a great environmental advantage, in that the gas is produced in parallel to oil (it's called associated gas), and until it could be converted into LNG, it was simply burnt ("flared") or wasted into the atmosphere (see here a picture that shows how visible this is from the sky). Methane, the main component of natural gas, is about 200 more "efficient" as a greenhouse gas than carbon dioxide.
So, the big oil producers in Nigeria (Shell, in the leading role, with Total of France and ENI of Italy) joined up with NNPC, the national oil company, to build a big liquefaction plant, NLNG. Now, such plants are very expensive (between 1 and 2 billion dollars a pop, depending on their size), and such large investments are especially risky to make in a country so difficult as Nigeria, so export credit agencies were eventually involved.
Export credit agencies (ECAs), such as US Exim, are public bodies that guarantee to exporters from their country that they will be paid (by their government) for contracts made in other countries, should the client in that country default for political or commercial reasons (you can guarantee only political risk - i.e. a government decision, or both, i.e. also a failure of the client not directly caused by the government). Rich countries have (wisely) decided not to go in a senseless competition between each other to subsidise exports as much as possible, and have set compulsory terms for such financings that apply to all exporting countries; on big projects, you also usually have several ECAs involved and they work together.
Banks love to work with ECAs, as they get to provide the funding, but they are fully guaranteed by the ECAs - so they get paid to essentially take no risk (although some ECAs, but not all, force banks to keep 5 or 10% of the risk). Clients like ECAs less, because they impose lots of conditions, both political and technical, but they use them because they provide a valuable service in difficult countries (by effectively giving Western governments a stake in the completion of the project in the host country, and thus bringing their influence to bear).
In the case of NLNG, a consortium of four companies, TSKJ (Technip of France, Snamprogetti of Italy, Kellogg of the UK (but owned by Halliburton of the US), and JGC of Japan) was chosen to build the first "trains" (that's the name of each individual liquefaction facility), thus allowing potentially for the involvement of French, Italian, UK, US and Japanese ECAs.They also won the bids for the subsequent construction of trains 4, 5 and 6.
Our corruption story begins in 1994, as summarised in this MSNBC story form last year:
Another Halliburton Probe
Feb. 4 [2004] - The Justice Department has opened up an inquiry into whether Halliburton Co. was involved in the payment of $180 million in possible kickbacks to obtain contracts to build a natural gas plant in Nigeria during a period in the late 1990's when Vice President Dick Cheney was chairman of the company, Newsweek has learned.
(...)
According to lengthy accounts of the probe in the French newspaper, Le Figaro, the TSKJ consortium in 1994 had created a subsidiary called LNG Services on Madeira, a Portuguese island in the Atlantic where companies are not required to pay any taxes. The French investigation was triggered, according to Le Figaro, when an official of one of the consortium's French partners, Technip, was charged two years ago with embezzlement growing out of a separate, long-running corruption case involving the French oil company Elf Aquitaine.
According to Le Figaro, George Krammer, the accused Technip official, was outraged when Technip refused to defend him and turned state's evidence. The paper reported that he told French authorities about an alleged $180 million "slush fund" that TSKJ maintained to bribe Nigerian officials relating to the natural gas plant in Nigeria. French authorities then tracked close to the same amount in "support contracts" from LNG Services--the subsidiary on the Portuguese island--to yet another obscure entity called Tri-Star, which was located on the British tax haven of Gibraltar. Tri Star, according to Le Figaro, was headed by a London lawyer named Jeffrey Tesler, who has long done work for Halliburton, and was known to have close relations with officials in Abacha's Nigerian government. Tesler did not respond to a request for comment from NEWSWEEK.
In the early years, Nigeria was such a difficult country that even ECAs were unable to participate to any financing, and the sponsors invested their own money for the construction of the LNG plant. Then, with 3 trains in production, the NLNG consortium managed in 2002 to raise a financing for the construction of trains 4 and 5, using the fact that cash-flow from the existing trains provided a pretty good guarantee to be repaid.
That financing involved the ECAs listed above, and a number of commercial banks that took only a small portion of the overall risk.
As described in the MSNBC story, the corruption probe originated in France and, in the early days, it was not clear if it was not a way for French authorities to put pressure on the US administration to tone down its anti-French rhetoric following the tensions around the Iraq war (there was also a delicate negotiation going on around the Executive Life / Crédit Lyonnais scandal); In any case, the investigation was taken seriously be the US Justice Dept. and has been continuing both in France and the US.
The FT story is interesting because it documents the reactions of ECGD (the UK ECA) to the ongoing probe, a lot of which was splashed in European newspapers:
from the FT article
As recorded by ECGD memos, some of Halliburton's responses were misleading or omitted crucial details. The documents also raise questions about whether MW Kellogg Ltd, Halliburton's UK subsidiary, was entirely candid in an application for more than $200m in insurance cover funded by British taxpayers.
Halliburton is adamant that it did not withhold information from the ECGD and maintains all its statements have been "true and correct". The ECGD says it is not an investigatory body able to look into the matter more deeply.
Still, the passive response by the British government to allegations that a project it supported was won with the aid of bribes undercuts its effort to head the international fight against corruption. Tony Blair, the UK prime minister, plans to use next month's G8 summit in Scotland to press African and western leaders to do more to tackle corruption, seen as one of the primary causes of poverty in the region.
"ECGD appears to have been more concerned with damage limitation in the face of bad publicity than conducting a proper assessment of what the allegations consisted of and who was involved," said Sue Hawley of Corner House, the anti-corruption campaign group.
The records reveal an unusual degree of co-ordination between ECGD and Halliburton over their response to the bribery allegations. In confidential discussions, Halliburton said it would supply the ECGD with the "bare minimum" of information on the case to avoid the risk of disclosures being "misconstrued by a third party". The company also refused to provide the ECGD with details of its long-standing relationship with Jeffrey Tesler, the London-based agent suspected of having distributed the bribes, the minutes say.
Surprisingly, the ECGD accepted Halliburton's position, with the proviso that it had an obligation to answer questions from parliament and the press, the minutes say. The two sides agreed to remain in close contact to "prevent the press implying there was a conflict" between them, according to minutes of a December 10 meeting.
Now let me explain a bit how banks work on big projects with their clients (and this applies to ECGD and other ECAs as well). Prior to signing a deal, and prior to actually giving the money, the borrower has to fulfill tough conditions, which must be confirmed by independent experts: prove that its industrial plans are sound, that its cost estimates are reasonable, that it complies will all laws and regulations and has all relevant permits and authorisations. Recently, banks have also been pretty tough on insisting that projects follow strong environmental and social guidelines (notably through the Equator Principles - if you don't want just the banks' version, go see the watchdog site: BankTrack). So prior to what is called "Financial Close", when all condtions have been deemed to be fulfilled, the relationship between the two sides is pretty much adversarial (one asking for more and the other trying to do less).
But once the financing is in place, the interests of the two parties converge: both want the project to work with the least possible effort. Banks want to be paid back without having to kick a fuss, and clients want the banks to be paid back, because they are only allowed to get money out of the project once the banks are paid and happy (usually on a yearly basis). Anything that goes wrong with the project requires work from the bankers which is not pleasant (solving a problem) and not good internally (it's not a new deal, so you're not making money, and if there are problems, it looks like you did not negotiate the deal right in the first place). So when any negative news surface, especially if it is not directly linked to the ability of the project to pay its debts, the borrower and the banks try to negotiate together to find a simple, amicable solution together. If it's a complaint by a third party, the banks' main concern is to not look bad, i.e. to show that they have done the appropriate due diligence, that they have all the relevant information (ideally provided by independent third parties), and that they have acted on it. The borrower's concerns are to limit its costs and to protect its reputation. So both have in effect an incentive to minimise stories when they come out.
The thing is, banks WILL react very harshly if there is any substance to a claim, and make the client pay for a real resolution of the problem, but they initially would rather avoid such confrontations, because reacting harshly means basically threatening to take the project over from the clients, and that's always a mess. Banks don't want to piss off big clients, they are ultimately not qualified to run big oil and gas projects anyway, and a big public spat on what are usually highly visible projects (pretty inevitable when you are talking about multi-billion dollar investments) is definitely not what they want to be involved in. The companies that invested in the project want to see a return, so they do have to keep the banks happy, so both sides will first negotiate, either amicably, or more confrontationally, before formal remedies are triggered. This is a normal process in any negotiation. It's just that the stakes get rapidly very high in mutli billion projects where several governments are involved...
Currently, there are ongoing discussions between the banks and the NGOs about what exactly "reasonable satisfaction" that the various criteria have been met means. Some NGOs have very high standards that banks are not prepared to enforce today, (they consider that the standards they enforce are good enough) and the discussions on how effective the enforcement is are not easy to decide - and a matter of opinion. I won't comment further on this as I am directly involved in such discussions.
I won't comment directly either on the ECGD actions, but I hope that I have provided sufficient background to give you an idea of what's going on and what's proper behavior by the banks and/or ECAs. Do note that there is nothing to suggest that ECGD has acted incorrectly in any way; the question is again one of what kind of standards you want to enforce, especially if you have specific, public objectives on that topic. The question is also different for a government body than for a bank, as it has less to worry about the commercial and financial repercussions on its bottom line of such decisions.
I suppose in any case that the mention of "corruption" and "Halliburton" will titillate you more than the details of the UK government reaction to these allegations, thus the title of this diary...
