A Review of the Nigerian Energy Industry

NNPC, CBN war may have national security implications

House-of-Reps-session*Industry jittery as allegations and counter-allegations swirl
*NNPC say Sanusi is “misguided,” not acting in good faith

Oscarline Onwuemenyi

15 February 2014, Abuja – The Central Bank building at the centre of the Federal capital territory is one of the most imposing architectural wonders in the city of Abuja. Its beauty, magnificence and commanding presence in the heart of the city, perhaps, can only be rivaled by the palatial splendor of the corporate headquarters of the Nigerian National petroleum Corporation, NNPC. It is therefore no little fireworks when the occupants of these sky-crappers take a go at each other in what is increasingly becoming the biggest controversy of the year.

The war of words and rhetorical brick-a-bat flying across the two mega-rich and highly visible entities in the nation’s economy has raised concerns all the way to the Presidency, which has come out to openly vilify one of the protagonists in the ensuing controversy. But the ripples have spread even further than the gladiators may have intended, whatever may be their motivations. Already, there is talk about what may become of the nation’s economic security and the international ramifications of the issues being exposed by the mud-fight.

To the last point, many experts have called attention to the political backlash, economic development and national security implications of the current crisis, which has stretched for the better part of half a year. This is especially in light of the fact that over 95 percent of the nation’s foreign earnings comes from the sale of crude, which is presently produced and sold through several Joint Venture arrangements with multi-national oil companies, the basis of which has been called into question by these allegations.

For an industry which has been besotted with numerous challenges, coupled with the frantic divestments by international oil and gas companies in the face of a Petroleum Industry Bill they consider anti-investment, the recent imbroglio brewed by Sanusi’s claims does nothing to calm frayed nerves. Add the fact that funding of the various Joint Ventures has continued to pose a challenge to the Federation, some of the issues thrown up by CBN Governor’s allegations may end up creating wider industry skepticism, which has been growing since the advent of militancy and illegal bunkering.

The points of the allegations were recently brought into sharper focus at a February 4, 2014 hearing of the Senate Committee on Finance on the Non-Remittance of Oil Revenue to the Federation Account, when the Governor of the Central Bank submitted a memorandum in which he made several serious allegations against the NNPC. Specifically, the CBN Governor in his report and presentation noted that from their calculation, of the $67 billion crude oil lifted, only $47 billion has been remitted leaving a balance of $20 billion.

He further alleged that the amount of money illegally and unconstitutionally withheld, diverted or spent by NNPC is in excess of the $10.8 billion, and he provided documents showing exactly how this money was taken from the Federation. On the claim by the NNPC that a major component of the $10.8bn was spent on kerosene and PMS subsidy, the CBN Governor indicated that he has evidence of a presidential directive stopping subsidy in respect of kerosene and therefore declared subsidy illegal and should be refunded to the Federation Account.

Sanusi also raised serious concerns around the swap transactions and attached a guidance note from an expert. He noted that oil revenue which should accrue to the Federation Account from NPDC’s is being diverted to private companies, namely Atlantic Energy and Seven Energy. That as a result of this there is a non- remittance of $6bn of gross crude revenue that ought to be remitted to the Federation account by NPDC as part of the divested assets.

The CBN also alleges that one of the points off revenue loss to the Federation was from the unfavorable fiscal terms of Production Sharing Contracts (PSC) executed between NNPC and various IOCs. It further posits that it had been misled into believing that the passage of the PIB is a prerequisite for the amendment of the fiscal terms in the PSC.
In its own presentation before the same Senate Committee a week later, NNPC sought to clarify the position and put forward the actual and verifiable position on these issues in the light of the seriousness of these allegations and “the fact that they have emanated from a source that is regarded as credible but is apparently misguided or acting contrary to good faith.”


The CBN governor in his presentation had claimed that the implementation of kerosene subsidy regime is a violation of the HHK deregulation order by the late President Yar’adua. He added that the directives was communicated to and received by NNPC.

Sanusi also pointed out that the average supply of DPK vessel by NNPC was between four to six vessels per month and where conversion factor of 1,136 equals to 1 Metric Ton; that NNPC rendered nil returns on kerosene subsidy within April 2012 to December 2013, and there were delays in filing subsidy claims to PPPRA. In shoert, according to him, the entire subsidy implementation is a farce/myth.

The NNPC has vigorously debunked those claims, noting that Mr. Sanusi misrepresented facts in alleging that NNPC violated presidential directive on kerosene subsidy. “The factual position is that the late President issued a directive on the deregulation of Kerosene but the administrative procedure for implementation was not concluded before the demise of President Yar’adua.
As a matter of fact, the presidential directive contained conflicting provisions that required further clarification to warrant implementation,” Yakubu stated.

He said NNPC attempted through several correspondences to seek clarifications on the conflicting clause in the directive without any positive response. “It would appear that Mr. Sanusi ran into same difficulty encountered by NNPC in interpreting the controversial presidential directive when he suppressed facts in his submission.

He noted that for the avoidance of doubt, the express letters of the controversial presidential directive is to the effect that commencing from July 2009 “Eliminate existing subsidy on the consumption of kerosene, taking into account that subsidy payments by Government, on Kerosene do not reach the intended beneficiaries. Public announcement of this measure should be avoided”.

According to him, Sanusi chose to suppress the latter part of item of the directive because of the perceived inconsistency. Section 6 of the Petroleum Act empowers the Minister of Petroleum Resources to approve petroleum product prices – HHK inclusive and the statutory provision remains un-amended. Such approval must be through the means of a Gazette, the Minister of Petroleum Resources cannot change prices of Petroleum Products without a Gazette. Meanwhile, the directive was that “public announcement of this measure should be avoided” in direct contravention of the provision of Section 6 of the Petroleum Act.

He stressed that the directive on kerosene subsidy was never received in NNPC as posited by Mr. Sanusi. Rather the directive was communicated to the former Honourable Minister of Petroleum Resources – Dr Rilwan Lukman who could not communicate the directive to NNPC arising from the challenge indicated in the earlier paragraph of this submission.

Consequently, an Inter-Ministerial Committee (Presidential Implementation Committee on Downstream Deregulation) consisting of the Minister of Finance, Minister of Petroleum Resources, Minister of State Petroleum Resources, Chief Economic Adviser to the President and GMD NNPC was set up by Mr. President to develop strategies on implementing deregulation of the downstream sector. The outcome and subsequent directive to NNPC by the Inter-Ministerial Committee was that NNPC should delay implementation of deregulation of HHK and ensure sufficient supply to the market due to withdrawal by other marketers and also a strategic action to win the public over in implementing the ultimate objective of deregulating the downstream as a whole (copies of correspondences between NNPC and the Minister of Finance.

Meanwhile, as the NNPC boss pointed out, there was also an intervening factor – the House of Representative Resolution in July 2011 – which barred the Minister of Petroleum Resources from deregulating the price of HHK even with the best of intentions and which directed an increase in volume of HHK for the market and the sale of HHK at N50 per liter.

“Furthermore, there is a subsisting court judgment by the Federal High Court Abuja delivered on the March 19, 2013 by Justice Bello in Bamidele Aturu vs. Minister of Petroleum Resources and Ors, the court granted ‘an order restraining the defendants, their agents, privies and collaborators and whosoever and howsoever from deregulating the downstream sector of the petroleum industry or from failing to fix the prices of petroleum products as mandatorily required by the Petroleum Act and the Price Control Act’. The implication of the court judgment is that the Minister of Petroleum Resources is retrained from deregulating the prices of regulated petroleum products including HHK. It is instructive to note that the injunction remains in force till date,” the NNPC boss stressed.

On the volume of HHK supply to the system by NNPC, the Corporation believes Mr. Sanusi wrongly projected with faulty data that NNPC supplied an average of 4 – 6 vessels per month to the nation. It noted that the factual position is that NNPC supplied an average of 5 vessels per month within the period and the conversion factor at standard temperature and pressure is 1232 Liters per Metric Ton. Furthermore, the conversion factor for PMS at standard temperature and pressure is 1341 Liters per Metric Ton and not 1,136 Liters per Metric Ton as alleged by Mr. Sanusi in his submission.

It further noted that the seeming delay in filing subsidy claims by NNPC compared to other marketers arises from the intricacies of PPMC operations. PPMC is a subsidiary of NNPC and a bulk supplier of petroleum products to other marketers. “It takes fairly longer amount of time to assemble documentation from ship-to-ship (STS) operations involving coastal marketers and submitting to PPPRA compared to other marketers. This is due to the singular fact that NNPC supplies 100% HHK and about 60% of PMS to the market.

“Finally, Mr. Sanusi alleged that the entire subsidy is a myth, Mr. Chairman, Mr. Sanusi’s allegation in this respect defiles logic especially that he had in the earlier paragraph of his presentation alluded to the fact that NNPC buys kerosene at N150/litre and sells and N40 per litre. The difference of N110/litre obviously is the subsidy or under-recovery that Mr. Sanusi illogically denied to acknowledge and described as “economic rent”. NNPC mega stations nationwide retail kerosene at N50/litre pump price.

“It should be added that while the battery limit of NNPC/PPMC is to supply kerosene at 40.90/litre ex depot, the duty of ensuring the retail price at 50/litre is that of regulatory agencies. If indeed in 2009 subsidy on Kerosene was removed, 2012 presented an opportunity for the policy directive to be reiterated, when subsidy on PMS was removed,” Yakubu noted.

On the call by Sanusi for renegotiation of the Production Sharing Contracts , the NNPC boss said the Ministry of Petroleum Resources and NNPC had also made a recommendation to the Federal Government in 2007 for a re-negotiation of terms of the PSC which was approved by the then President Yar’ Adua. “Therefore, the CBN Governor’s knowledge of the Federal Government effort to amend the fiscal terms in the PSCs through the instrumentality of the law is limited as per the report submitted. It is instructive to note however that changing fiscal laws in a democratic regime has always proved very challenging because it requires the necessary legislative process and executive accent.

He added that, “On the issue regarding the model for Revenue share of the proceeds based on the PSC, it does appear that the CBN has taken advice from non-subject matter experts who do not fully understand the dynamics and operation of standard oil and gas arrangements such as the allocation of proceeds in a typical Nigerian PSC. The CBN’s revenue sharing framework does not conform to the Nigeria’s PSC model.”

According to the NNPC GMD, the question of energy bothers on National Security and has tremendous impact on the economic development of the Nation. Therefore, energy supply must be continuous, smooth and static in the overall interest of the Nation. Granted that currently the Crude for product importation is on the basis of international market rate, it is pertinent to consider how unavoidable costs such as pipeline vandalism/security/repairs and the attendant product losses will be managed. As the NNPC posited: Will the funds realised from the sale of Crude Oil be adequate to cover these incidental and unavoidable costs?

Furthermore, what happens to strategic stock holding, especially those arising from the paucity of import reception facilities, pipeline vandalism and attendant marine stock holding costs? Can these be accommodated in the new dispensation being proffered by Mr. Sanusi?

It is clear, in fact, that Sanusi’s recommendations are significantly aligned with the direct import system, which he did not adequately address in his submission. It was the very challenges NNPC faced during the regime that prompted the Corporation to seek approval for an alternative Petroleum Products Import Funding System. One might then ask, in the event that other urgent national needs require the usage of funds meant for product importation what happens to products importation? It was such challenges during the Direct Import that orchestrated other financing alternative like OPA/SWAP.

Furthermore, what is the guarantee that the crude to borrow will be readily available as and when needed! In this respect, one should bear in mind the characteristics of international crude oil trading, which must be dealt with in every dispatch.

“It is quite surprising that Mr. Sanusi in his recommendations failed to part ways without a word on one of the crucial issues he raised in his discourse, which is subsidy on kerosene. The question still beg to be answered in view of the current challenges facing other domestic sources of energy, especially gas, should the subsidy on kerosene go or stay?,” Yakubu asked.

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