Awaiting the magic of forensic audit

NNPC17 February 2014, Abuja – It was a shocking revelation when the Governor of the Central Bank of Nigeria (CBN), Mr. Sanusi Lamido Sanusi alleged that the NNPC failed to remit the sum of $49.8 billion for the period January 2012 to July 2013.

Sanusi in a letter to President Goodluck Jonathan, which later leaked to the media, complained about the alleged missing funds.

But the highly-respected apex bank governor’s figure was highly bloated as inter-agency reconciliations brought down the figure to about $10.87 billion.

Although $10.87 billion is a huge amount of money that must be accounted for, the exaggerated figures by Sanusi may have drawn public sympathy in favour of the NNPC, which had complained of the convoluted and rigorous nature of oil accounting in the country.

The NNPC further received the backing of the public when the CBN governor went ahead to review the disputed figure upwards to $20 billion, after accepting $10.87 billion at the end of the inter-agency reconciliations.

However, as the controversy over the $10.87 rages, the NNPC has made spirited attempts to provide credible clarifications on how the purportedly missing fund was spent.

In a recent submission before the Senate Committee on Finance, the Group Managing Director of NNPC, Mr. Andrew Yakubu, said before the allegation of $49.8 billion was made, NNPC, Federation Account Allocation Committee (FAAC), CBN and the Federal Ministry of Finance were clearly aware of the outstanding $10.87 billion and the issues relating to its non-realisation.

“For the avoidance of doubt let me restate that the items included in the $10.87 billion are: unpaid petroleum products subsidy totaling the sum of $8.76 billion; crude oil and products losses amounting to $0.76 billion; national strategic reserve holding cost amounting to $0.46 billion; pipeline maintenance and management cost amounting to $0.91 billion,” he said.

He said the subsidy claims had been fully reconciled and signed off, adding that all other items have been fully reconciled with all relevant stakeholders and supporting documents submitted to senate committee.

Yakubu restated that since January 2012, the NNPC has not received any subsidy payments for petroleum products supplied to the domestic market.

He recalled that N888.101 billion and N971.138 billion were appropriated for subsidy for years 2012 and 2013 respectively, which according to him, were grossly inadequate to meet the required subsidy payments to both NNPC and other marketers.

In spite of the nonpayment of subsidy, Yakubu said the NNPC continued to sustain petroleum products supply, even when other marketers refused to participate.

“This development led to the accumulation of $8.76 billion as unpaid subsidy due to NNPC for petroleum product supplied during the period under review.  This amount comprised $5.25 billion for PMS and $3.51billion for Dual Purpose Kerosene (DPK) and has been reconciled and signed-off by statutory agencies – PPPRA, DPR and NNPC,” he added.

Even when the marketers resumed supply of petroleum products, they still refused to participate in the importation/supply of Kerosene following the lack of clarity over the removal of subsidy on Kerosene.

On the issues of crude oil and petroleum products losses, Yakubu noted that the NNPC is operating in an increasingly hostile business environment both in the upstream and downstream sectors of the industry.

Giving detailed statistics, he said on the downstream sector, NNPC was suffering from crude oil losses along Escravos-Warri, Bonny-Port-Harcourt and Warri-Kaduna crude oil pipeline systems in its effort to supply crude oil to its refineries.

“In the period under review, the corporation lost a total of 4,658,096 barrels amounting to $465,809,647.05. Pipeline vandalism along our petroleum products distribution networks is even more extensive, affecting nearly all regions of the country.  In the period under review, NNPC lost 463,185,000 litres of PMS, 2,392,000 litres of DPK and 47,643,000 litres of AGO amounting to $296,047,770.15. The total Crude Oil and Petroleum Products losses during the period under review amounted to $0.76billion as outlined in the following appendices,” he said.

On the expenses associated with the cost of strategic reserves, Yakubu said for the purpose of national energy security and to guarantee seamless supply of petroleum products, the NNPC is mandated to maintain strategic petroleum products stocks on behalf of Federal Government.

According to him, the NNPC currently maintains a 30 day stock level as against the international practice of 90 days.

He said for the period under review, the sum of $0.46billion was incurred in discharging this responsibility.

Speaking on the network of NNPC’s pipelines, Yakubu said the NNPC operates over 5000kilometres of pipeline and 22 Depots across the country, adding that during the period under review, the sum of $0.91billion was incurred on pipeline and depot management and repairs.

To support his submissions, the NNPC boss presented to the committee, all relevant documents regarding petroleum products cargoes deliveries and discharges by NNPC into the Nigerian market covering the Bill of Lading; Survey Report; Cargo manifest; Certificate of quality; Certificate of quantity; Certificate of origin; Tanker timesheet; Navy clearances; Custom clearances and Discharge certificate.

To recover the $10.8billion, Yakubu recommended the payment of outstanding subsidy due to NNPC; formal approval for reimbursement of cost of holding strategic petroleum product stock; re-imbursement of crude oil and petroleum products losses; and sustenance of the recent momentum to end pipeline vandalism, crude oil and products theft.

Kerosene Subsidy Controversy
The issue of kerosene has been one of the most contentious issue as the CBN in its presentation before the Senate Committee on Feb 4, 2014 had insinuated that the implementation of kerosene subsidy regime is a violation of the DPK deregulation order by the late President Yar’adua and that the directive was communicated to and received by NNPC.

The apex bank also maintained that the average supply of DPK vessels by NNPC was between four to six vessels per month with a conversion factor of 1,136litres equals one Metric Tonne.

It also alleged that the NNPC rendered no returns on kerosene subsidy from April 2012 to December 2013 and that the NNPC delayed in filing subsidy claims to PPPRA.

In his submissions, Yakubu said the CBN misrepresented facts in alleging that NNPC violated a presidential directive on kerosene subsidy.

“The factual position is that late President Yar’Adua issued a directive on the deregulation of the price of kerosene but the legal and administrative procedures for its implementation were never concluded. As a matter of fact, the presidential directive contained conflicting provisions that required further clarification to support the implementation,” he said.

He restated that the directive on kerosene subsidy was never formally communicated to NNPC for implementation as posited by the CBN.

According to him,  the directive was communicated to the former Minister of Petroleum Resources – Dr Rilwan Lukman, who did not direct NNPC to implement.
He also argued that the House of Representatives on July 5, 2011 passed a resolution in plenary, supporting the retention of the subsidy, ensuring the availability of DPK across the country and the sale of DPK at N50 per litre.

Yakubu also cited a subsisting court judgement by the Federal High Court Abuja Division delivered on the March 19, 2013 by Justice Bello in BamideleAturu vs. Minister of Petroleum Resources and Ors (FHC/ABJ/CS/591/09), where 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.”

He said the implication of the court judgment was that the Minister of Petroleum Resources was restrained from deregulating the prices of regulated petroleum products including DPK.

Offshore Processing/Swap Arrangement
The issue of Offshore Processing Arrangement (OPA) or swap arrangement is another contentious issue raised by the CBN, against the NNPC.Yakubu acknowledged that over the years, the operations of the refineries have been very epileptic due to equipment failures and incessant acts of vandalism on the crude oil supply pipelines.

He said even when the refineries were fully operational, they could not satisfy the petroleum products requirements of the domestic market, especially PMS, with domestic daily requirement currently estimated at 40 million litres.
According to him, the domestic refineries at full capacity can only produce about 19 million litres of PMS while the outstanding balance of 21 million litreshas to be imported.

He said in order to guard against product shortages and guarantee steady availability of petroleum products for domestic consumption all year round, the NNPC resorted to importation of petroleum products to augment production from the local refineries.

The importation of petroleum products by NNPC, which according to him, started in the 1990’s, was carried out under the open account system, through open tender process from reputable oil trading companies with proven track record of good performance and strong capital base.

“However, NNPC started experiencing default in deliveries and failure to perform by some of the supply companies especially around the winter period. The trading companies’ perennially blamed high cost of products and high cost of freight, for their non-performance hence the demand for increased premium,” he said.
Rather than deliver cargoes based on their allocations from NNPC, Yakubu said the oil traders would insist on spot cargo offers, which resulted in severe scarcity of petroleum products witnessed especially in 2009/2010.

He said the open account import system exposed NNPC to certain variable market conditions, especially the demand for high premium by the suppliers.
This demand in most cases, he said was predicated on NNPC’s inability to fulfill its payment obligations as and when due.

Yakubu told the committee that the delay in making payments for the cargoes delivered deteriorated to over 1,000 days in default and as a result the debt owed by NNPC at some point in time accumulated to about $3.2billion.

The consequence of the NNPC’s long delay in making payments, and the huge outstanding debt, was that most International financial institutions became reluctant to cover NNPC imports, he said.

In order to mitigate the challenges of price vulnerability and supply disruptions associated with the open account import system and also guarantee steady supply of petroleum products to the market, Yakubu said the NNPC explored the option of offshore processing of some portion of the refineries’ unutilised crude oil, as well as the exchange of same for petroleum products.

He told the law makers that it was on these grounds that NNPC in April 2009 sought and obtained the approval of the late President Yar’Adua to enter into the Swap and Offshore Processing arrangements pending when the refineries would be turned around for optimal performance.

“Under the OPA, NNPC delivers Crude Oil to a Refinery for processing at a contractually agreed yield pattern and processing fee. In return, NNPC evacuates the refined products that are needed most. The OPA provides NNPC the opportunity and flexibility to exchange products grades based on domestic need and immediate requirements. As a result, NNPC can request the refinery to make available for evacuation more PMS and Kerosene that are in higher demand in exchange for Automotive Gas Oil (AGO) out of the products yield,” he explained.

He said all other products such as Propane, Butane, Vacuum Gas Oil (VGO) and Fuel Oil that are not necessarily needed for consumption in Nigeria are sold by the refinery on behalf of NNPC at the prevailing market prices and proceeds remitted to NNPC.

On the issue of SWAP/Crude Exchange arrangement,  Yakubu said under this arrangement, the NNPC allocates crude oil to reputable oil trading companies in exchange for the delivery of PMS, DPK or any other petroleum product as may be required by PPMC.

“The contract is based on the International market value of the petroleum products against the prevailing International market value of the Crude Oil. This is clearly a value for value arrangement; crude oil lifted versus products supplied. The value for value philosophy enshrined in the SWAP contracts is validated and tested on a regular basis, when reconciliation meetings are held between NNPC and the trading companies,” he added.

According to him, the years 2011 to 2013 witnessed zero queues in the filling stations, despite the challenges of product distribution and especially pipeline vandalism.

“This achievement is due largely to the OPA/SWAP arrangement and the strategic stock management,” he said.

NPDC’s Strategic Alliance Agreements (SAAs)
The CBN had alleged that NNPC took away blocks belonging to the Federal Government and gave them to itself using NPDC as an Special Purpose Vehicle (SPV) and thereafter transferred the operation to third parties/agents with limited experience in operating oil blocks.

The CBN further alleged that NPDC has been withholding income meant for the Federation Account.

Responding to these allegations, Yakubu stated that the NPDC received a presidential mandate in 2009 to grow its crude oil and condensate production to 250,000 barrels of oil per day by year 2015.

This ambitious growth plan will be achieved by a combination of asset acquisition and organic growth of NPDC’s existing assets, he said.
He said the growth opportunity presented itself following the divestment by the International Oil Companies, (IOC) of some of their assets in the western Niger Delta arising from portfolio restructuring.

Yakubu noted that the funding of the various Joint Ventures has continued to pose a challenge to the Federation.

Apart from the organic growth of NPDC’s assets, the assignment of NNPC’s interest in some of the divested blocks has reduced the Federal Government burden of cash call payment for those assets, which was about $550M for the 2013 fiscal year.
He said the NNPC was not in a position to take away blocks or allocate same to itself as it did not have such powers.

Yakubu said the increasing challenges of the Federal Government in meeting its funding obligations under the Joint Ventures with IOCs has been one of the major concerns of the oil industry resulting in curtailment of work programmes.
Following portfolio restructuring and subsequent divestment by the IOC partners in the Shell Joint Venture of some of their assets in the western Niger Delta, Yakubu said the NPDC took over the operatorship of five out of the eight  oil mining leases hitherto operated by Shell.

“As the new operator it became imperative for NPDC to address the associated funding requirements through various initiatives,” he said.

He explained that the SAA is a third party funding arrangement, which is similar to Modified Carry Arrangement (MCA) or other forms of Alternate Funding (AF) applicable in the Joint Venture operations today.

The only difference between the SAA and the MCA, AF or Service Contract (SC), according to him, is that while the operator provides the financing in the case of the JV, a third party does that in the SAA.

Need for Forensic Auditors
There is no doubt that the NNPC has exhaustively cleared the air over these allegations and the CBN Governor has also made his point, which no doubt, is part of his statutory responsibilities.

The next stage should be to invite forensic auditors to resolve any knotty issues and clean the books.

The continuous politicisation of the $10.87billion controversy is not a healthy development to the country’s image and her financial system.

The politicisation of the unremitted funds, which resulted from the leakage of Sanusi’s letter to the media and his inconsistency over the disputed figures, is an unhealthy development in the country’s financial system, an affront on the country’s image and clearly, a disincentive to local and foreign investors, as well as international partners and donor agencies.

The Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke had told the Senate Committee on Finance that when the leaked CBN Governor’s allegation of a missing $49.8 billion was made public in December 2013, the stakeholder agencies held reconciliation meetings.

The reconciliation led to a joint statement issued by the Ministers of Finance, Petroleum Resources and the CBN Governor and the relevant agencies continued with the reconciliation exercise in order to determine all the claims arising from the $10.8 billion.

The NNPC has no doubt provided a detailed analysis of the unrealised revenues and the work of reconciling the subsidy claims has largely been completed and signed off.

Any further dispute arising from these reconciliations should be referred to independent foreign auditors for final resolution instead of the continued politicisation of the matter.

In view of the current disposition of the various parties in the dispute, only reputable international audit firms will come up with reports that will put the matter to rest.
However, a situation whereby the NNPC continues to import kerosene at huge expense to the Federation Account, without any benefits to the masses should be discontinued.

NNPC should stop allocating kerosene at N40.90 per litre to individuals, companies and groups because these beneficiaries do not sell the kerosene to the masses at N50 per litre.

The NNPC should sell kerosene at deregulated price or private marketers should be allowed to import and enjoy subsidy like the NNPC to end the current NNPC’s monopoly, which has created artificial scarcity and led to the inability of the masses to access the product at subsidised rate.

Much as the the clarifications from the NNPC seem convincing, it is only the forensic audit of its accounts that will put this whole controversy to rest.

– Ejiofor Alike, This Day

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