Sustaining the Debate for Improved Transparency in Nigeria’s Oil and Gas Sector

March 10, 2014 | Nextier Research

The letter by the Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, to President Goodluck Jonathan alleges potential fraud at the Nigerian National Petroleum Corporation (NNPC). This Policy Brief presents the facts of the case, which is the opacity of operational and financial transactions in NNPC that can possibly lead to high levels of fraud and significant risk to Nigeria. This document is a background to a Roundtable Discussion hosted by Nigeria Natural Resource Charter for industry stakeholders to sustain the debate for improved transparency in Nigeria’s oil and gas sector.

ISSUE STATEMENT

What are the facts of the alleged non-remittance of crude oil sale proceeds and their implications for transparency in the petroleum sector?

BACKGROUND

On September 25, 2013, Sanusi Lamido Sanusi, CBN Governor sent a letter[1] to President Goodluck Jonathan accusing NNPC of non-repatriation to the Federal Account of US$49.8 billion constituting 76 percent of the crude oil sales proceeds from January 2012 to July 2013. This figure has subsequently been reconciled with the relevant government agencies and reduced to US$12 billion[2]. However, CBN still requests proof of payment for this amount.

The letter, which was leaked to the press, brought to public debate issues of transparency in the petroleum sector. Subsequent submissions by the CBN Governor to the Senate Committee on Finance[3] raised further concerns with the legality and integrity of certain transactions executed by NNPC.

 

In response to the accusations, Dr. Ngozi Okonjo-Iweala, Coordinating Minister of the Economy, requested a forensic audit of the sector[4]. However, many industry watchers doubt the current audit will lead to any meaningful action judging from Nigeria’s recent history[5] with audits and investigations of the Nigerian petroleum sector. In what it insists to be an unrelated action, Federal Government of Nigeria suspended the CBN Governor to facilitate investigations into grave allegations of fraud against the institution by the Financial Reporting Council of Nigeria[6]. Many industry watchers, including the international community[7], believe Sanusi is being persecuted for blowing the whistle on the alleged fraud in the petroleum industry.

 

FACTS OF THE DEBATE

1.    Lack of Transparency | Even the Central Bank of Nigeria is in the Dark

The CBN cannot validate the exact quantity of crude oil lifted from Nigeria. The CBN Letter to President Jonathan estimated that NNPC lifted 594.02 million barrels of crude oil from January 2012 to July 2013. According to NNPC, CBN was wrong on this number. It is quite troubling that despite the Freedom of Information Act, and its political clout, CBN could not obtain such a vital economic data from NNPC.

The CBN cannot validate the proceeds from the sale of Nigeria’s crude oil. It estimated that US$65.33 billion was realised from crude oil sales for the period. Again, the CBN was wrong. In its rebuttal, NNPC provided that US$67.12 billion was realised from the sale and the positive difference of US$1.79 billion could have resulted from timing differences and crude oil exports by Nigeria Petroleum Development Company (NPDC) that were not included in the CBN report.

The CBN cannot validate how much has been remitted to the Federation Account. It alleged that US$49.8 billion was not remitted to the Federation Account. NNPC counterclaimed that of the US$67.12 billion realised from crude oil sales, only US$10.8 billion was not paid into the Federation Account. These allegations and counterclaims raise questions about the accountability processes in Nigeria’s financial management system.

The table below presents a breakdown of crude oil sales proceeds for the period under review.

 

Amount

Description

Comments

US$14 billion

This is the amount that accrued to NNPC for the Federation Account (Equity Crude).

The CBN has confirmed this amount.

US$15 billion

Payments by the International Oil Companies (IOCs) to the Federal Inland Revenue Service (FIRS). The IOCs paid with crude oil and NNPC lifted the product on behalf of FIRS.

The CBN has confirmed this amount.

US$2 billion

Royalty payment by the IOCs to the Department for Petroleum Resources under similar arrangements as FIRS.

The CBN has confirmed this amount.

US$6 billion

NNPC claims to have paid this amount into the Nigerian Petroleum Development Corporation (NPDC) account.

The CBN cannot validate this amount.

US$2 billion

NNPC claims this amount (for other third party financing) has been paid into the Federation Account.

The CBN cannot validate this amount.

US$28 billion

This is for Domestic crude oil lifted by NNPC. NNPC claims that US$12 billion of this amount has not been remitted to Federation Account but utilised as follows

US$8.49 billion

Kerosene subsidy

Refer below

US$1.2 billion

Deductions for 2011 subsidy arrears

Refer below

US$0.37 billion

Strategic Alliance Agreements

Refer below

US$1.22 billion

Repairs of vandalised pipelines

CBN requested proof

US$0.72 billion

Product and crude oil losses

CBN requested proof

 

2.    Kerosene Subsidies | Kerosene is not a Subsidised Product in Nigeria

The CBN governor stated categorically that kerosene is not a subsidised product in Nigeria. He assured that his analysis shows that the product sells for N170 to N220 per litre across Nigeria. As a result, claims by NNPC that it imports kerosene at N150 per litre and sells the product at a subsidised rate of N40 per litre are false. He stated categorically that any alleged kerosene subsidy is rent created for dealers in the product[8].

CBN argues that there should be no deductions for kerosene subsidy as President Yar’adua issued a presidential directive in July 2009 eliminating all subsidy payments on the product. As a consequence, CBN insists that purported deductions for kerosene subsidy do not have government approval and all such should be returned to the Federation Account. The CBN calculates that the Federation Account loses about US$100 per month to the subsidy racket[9].

 

3.    Deduction for 2011 Subsidy Arrears | Lack of Government Approval

NNPC reports to have deducted N180 billion (or US$1.2 billion) as 2011 subsidy arrears on petroleum products. It states that the deductions were effected in Q4 2011. The CBN Governor stated that this cannot be true as there is nothing in the financial returns filed by NNPC in Q1 2012 (or afterwards) that indicate any deductions for subsidy payments[10]. Furthermore, there is a presidential directive to NNPC to cease all subsidy deductions with effect from 2011[11].

4.    Crude Oil Swaps | Opaque and Complex Transactions

Petroleum Product Marketing Company (PPMC), a subsidiary of NNPC, has Crude Oil Swap contracts with a number of companies that empowers them to lift crude oil from Nigeria for free, sell the products in the international market, and use the proceeds to import Premium Motor Spirit (PMS). According to allegations by the CBN Governor, these parties repatriate the crude oil sale proceeds, sell the foreign currency at the autonomous rate, trade with the proceeds and, at their own time, establish Letters of Credit to import PMS using funds purchased at the official window[12].

These swap transactions between PPMC and its counterparties are opaque and complex even to industry financial and legal analysts. CBN has raised concerns that the transactions were not properly structured, monitored, and audited. For instance, NNPC collects 440,000 barrels of crude per day for these swap transactions. There is limited information on the quantity of PMS and other petroleum derivates realised from refining the crude oil. 

5.    Strategic Alliance Agreements | Fuzzy Mathematics

The Strategic Alliance Agreements (SAAs) between Nigerian Petroleum Development Company (NPDC) and its counterparties have raised questions about transparency and equity. The need for SAAs arose when NPDC claimed it did not have the financial or technical capability to manage the eight oil blocks for which it had majority interest. As a result, NPDC engaged Seven Energy and Atlantic Energy to fund its share of the 55 percent cost of running the oil blocks. Both companies will recoup their investment as “cost oil” or “cost gas”, and obtain a share of any remaining profit from the blocks (“Profit Oil” or “Profit Gas”).

Industry experts have questioned why NPDC needs to partner with these companies given that the latter leveraged the same assets to raise capital from local and international banks. Critics posit that NNPC used NPDC, as an SPV, to acquire assets belonging to the Federal Government and to transfer a percentage of the income into private hands.

There is no clarity on how much is received or paid to the private sector companies. What is clear is that prior to this transaction, Nigeria was the effective owner of 55 percent of the proceeds of the eight oil blocks and all the proceeds were remitted to the Federation Account. With the SAAs, a percentage of the 55 percent is paid to the private sector companies resulting in a drop in the amount that is remitted to the Federation Account.

6.    Other Issues As Contained in the Sanusi Letter

Petroleum Profit Tax in relation to Proceeds from Sale of Crude Oil

The CBN Governor, in his letter to the President, argued that between January and July 2013, the Federation Account received a higher amount from Petroleum Profit Tax (PPT) than from proceeds from the sale of crude oil. In this period, PPT accounted for 76 percent of total inflow from the sector while NNPC crude oil sales accounted for only 24 percent. CBN highlights this as a sign of potential fraud in the financial submission. However, NNPC explained that the seeming imbalance is a result of the changing structure of the business arrangements in the petroleum sector from Joint Ventures to Production Sharing Contracts, alternative financing arrangements, and the impact of the fiscal regime on gas development. NNPC argues that these factors have led to a decline in the proceeds to the Nigerian government in recent years.

NNPC vs. Taxes Paid by Oil Companies

The CBN Letter drew attention to the fact that NNPC lifted 46 percent of the total crude oil exports from Nigeria during the reference period, yet its remittances represented only one-third of the taxes paid by the oil companies that exported the balance of the 54 percent. 

Non-Payment of Nigeria Export Supervision Scheme

CBN claims that NNPC owes N22 billion to the Federal Government being non-payment of levies under the Nigeria Export Supervision Scheme.

Investigation for Potential Money Laundering Activities

The CBN letter to President Jonathan identifies potential money laundering activities in Nigeria.

¤ Bureaux de Change (BDCs): The letter claims that some of the BDCs purchased hundreds of millions of dollars from the interbank market but cannot account for these monies. CBN has compiled a list of the BDCs and calls on the government to investigate their operations.

¤ Dealers in Private Jets: The CBN urges the government to investigate the companies that sell private jets to Nigerians, as they may be conduits for money laundering activities.

 

CONCLUSION

The main challenge with Nigeria’s petroleum sector is a lack of transparency with the technical and financial processes. Most of the transactions highlighted about may have some merit; however, when cloaked in secrecy, they provide room for fraud and other forms of abuse.

There is need for a detailed audit of the activities of NNPC. However, judging from Nigeria’s history with audits of the petroleum industry, there is little or no confidence that an audit conducted by the government will result in any meaningful changes to the sector. Therefore, there is need for an organisation of industry stakeholders to conduct such an audit.

The audit can be achieved under the provisions of the Freedom of Information Act. The organisation should engage the services of a Forensic-auditing firm with expertise in the oil and gas sector. Working closely with the media and Civil Society Organisations, the result of the audit should be used to drive meaningful changes in Nigeria’s petroleum industry.

 




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[1] Sanusi, S.L (2013). Non-Repatriation to the Federation Account by Nigerian National Petroleum Corporation (NNPC) of $49.8 Billion representing 76% of the value of Crude Oil Liftings in 2012 and 2013, Failure of NNPC to pay N22 Billion Nigerian Export Supervision Scheme (NESS), and Other Related Matters. Premium Times. Available at: http://premiumtimesng.com/resources/151244-download-sanusis-letter-to-president-jonathan-on-nigerias-stolen-n8-trillion.html (Updated December 10, 2013, accessed March 11, 2014)

[2] Nigerian National Petroleum Corporation (2013). Revenue Reconciliation Meeting among the Concerned Federal Government Agencies, Parastatals and Ministries. NNPC website. Available at: http://www.nnpcgroup.com/PublicRelations/NNPCinthenews.aspx (Updated December 17, 2013, accessed March 11, 2014)

[3] Sanusi, S.L. ((2014). Memorandum Submitted to the Senate Committee on Finance on the Non-Remittance of Oil Revenue to the Federation Account.

[4] Okonjo-Iweala insists on forensic audit of NNPC books. BusinessDay (2014). Available at: http://businessdayonline.com/2014/02/okonjo-iweala-insists-on-forensic-audit-of-nnpc-books-over-missing-20-billion/ (Updated on February 26, 2014, accessed on March 11, 2014)

[5] Nigeria’s petroleum sector has undergone various investigations in recent months yet no remarkable action has been taken as a result of these reports. Some of these audits include the sector audit by the Nigeria Extractive Industry Transparency Initiative, Nuhu Ribadu Commission, Aig-Imokhuede Commission, Farouk Lawan Commission, KPMG Audit, etc

[6] Financial Reporting Council of Nigeria (June 07, 2013). Briefing Note: CBN Audited Financial Statement for Year Ended 31st December 2012.

[7] Nigeria's image in Africa: Big country, thin skin. The Economist (2014). Available at: http://www.economist.com/news/middle-east-and-africa/21596524-nigerias-president-bemoans-negative-image-his-country-how-odd-big-country (Updated on February 15 2014, accessed on March 11, 2014)

[8] Sahara Reporters (2013). How NNPC Illegally Diverted $20 Billion From The Federation Account -CBN Governor Sanusi. February 05, 2013. Available at: http://saharareporters.com/report/how-nnpc-illegally-diverted-20-billion...

[9] ibid

[10] ibid

[11] ibid

[12] Sanusi, S.L. ((2014). Memorandum Submitted to the Senate Committee on Finance on the Non-Remittance of Oil Revenue to the Federation Account.

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