25 February 2014, Sweetcrude, Abuja – Last week’s sack of the Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, marked the climax in what has become a riveting episode in the nation’s oil and gas industry. His shock dismissal was undoubtedly linked to his allegations of a multibillion-dollar subsidy racket inside the Nigerian National Petroleum Corporation, NNPC, which may partly explain the huge shortfalls in what the nation is earning from its crude.
President Goodluck Jonathan suspended the governor of the Central Bank, who had accused the national oil company of not accounting for $20 billion of oil revenue.
“All that we have said as Central Bank, and I think that there is no disagreement – is that NNPC shipped $67 billion worth of crude. They have repatriated or we have established that $47 billion has come back to the federation,” explained Sanusi. There is $20 billion that has not come back,” Sanusi had noted in his memo to the Senate Committee on Finance investigating the matter.
President Goodluck Jonathan announced Sanusi’s suspension in a statement that accused the bank governor of “various acts of financial recklessness and misconduct.” In reaction to the news, financial markets closed and the value of the Nigerian currency, the naira, took a steep plunge.
And, although he may have been ousted from his position – and facing investigations and possible legal action – the allegations by Lamido Sanusi about the mismanagement of Nigeria’s oil funds are ensuring a stormy time in the oil and gas industry, with calls for more scrutiny of the subsidy management process.
Huge shortfalls in oil revenues, which typically account for more than 70 per cent of government revenue, have periodically come to light in Nigeria. However, the sums involved in the governor’s allegations dwarf previous controversies and come as the broader economy is drawing unprecedented attention from global investors.
Despite consistently high international prices, Nigeria’s income from oil has been declining sharply, putting pressure on state finances, foreign reserves and the naira, the local currency. The scale of resulting shortfalls is only partially explained by fluctuations in oil production and direct theft from pipelines.
The investigation was prompted by Mr.Sanusi’s earlier warnings, contained in a letter to President Goodluck Jonathan, about a gulf emerging between the value of Nigeria’s oil production and the revenues it provides to the state. President Jonathan’s opponents have taken advantage of the furore amid rising political tension before 2015 elections and public demands for an audit of the NNPC under his stewardship. The last external audit was initiated before Mr. Jonathan came to power.
In making his claims to the Senate committee on finance investigating the matter, Sanusi provided hundreds of pages of data, expert and legal opinion, and evidence in the form of contracts to support his allegations in a memo, which was obtained by SweetcrudeReports.
The memo points to more than $1bn a month from crude oil sales allegedly owed to the Federation that Mr. Sanusi believes the Nigerian National Petroleum Corporation has failed to remit.
However, some financial experts in the industry have picked holes in the Governor’s claims, faulting his logic and knowledge of the issues.
Speaking in an interview to Sweetcrude in Abuja, one of the experts who wished to remain anonymous to protect his job noted that the issues raised by Sanusi could be broadly categorized into Fiscal Terms of the Production Sharing contracts; Crude oil theft and bunkering in the Niger-Delta; and Illegal and unconstitutional acts on the part of NNPC leading to non-remittance of revenue to the Federation Account.
He noted that the submissions made by the CBN Governor appear to be quite weighty but they can be faulted in some areas. “For instance, his assertion that the fiscal terms of the Production Sharing Contracts can be renegotiated without recourse to PIB may not be true.
“This is because any renegotiation of the fiscal terms of the PSCs would require amendment to the Deep Offshore and Inland Basin Production Sharing Contracts Act of 1993 as amended. This Act specifies the tax and royalty rates to be paid by the PSC Contractor. Since it is an Act, it can only be amended by another Act of the National Assembly,” he noted.
On his allegation that NNPC took away blocks from the Federation and gave them to itself (using NPDC as a SPV) and then transferred the operation of the blocks to agents with limited experience in operating oil blocks, the expert debunked it noting that the blocks were properly assigned with the consent of the Government, pointing to the recitals of the Agreements for the date of consent.
He added, “NPDC is an upstream subsidiary company of NNPC. Also, the NNPC is empowered by its Act to review its affairs for the purpose of determining how the management of its activities or any of its subsidiary can most efficiently be organised; the net revenue of NPDC still forms part of NNPC’s revenue because NPDC is wholly owned by NNPC.
He challenged Sanusi’s claim that NPDC gave its business partners tax relief and waivers in the Strategic Alliance Agreements (SAAs), noting that this is not true. “The SAAs are financing agreements and more or less service agreements. The Clause referred to in the SAA which is on Taxes, Royalties, Rates and Dues, is a standard provision in all the Service Agreements that Nigeria has entered into with Service Contractors ( See Article 17 of NNPC and AGIP Energy & Natural Resources Ltd Service Agreement also Article 18 of NPDC and AGIP Energy & Natural Resources Ltd Service Agreement).
“The tax relief and waivers are as provided in our Fiscal laws See section 10 of the PPT Act. Besides, the SAA contractors are subject to Company Income tax regime. It is only NPDC that is required to pay PPT.”
According to him, the SAAs are to relieve NPDC of the funding obligations it has in the Joint Venture oil blocks. “There is no doubt that presently NNPC has challenges in meeting fully its funding obligations in the JV due to low government appropriation for the venture. NPDC being wholly owned by NNPC does not have a balance sheet that can enable it easily raise funds at the financial market.”
He further noted that all the allegations on Swap Contracts are assumptions based on an advice from an expert in the area. “The issues here border on facts which ought to be substantiated with credible evidence; unfortunately this was not provided by the CBN Governor.
“On the upfront deduction for subsidy, the points raised by the CBN Governor are also assumptions based on the information credited to the officials of NNPC. He said in line one page 6 that ‘the reconciliation team has not met since last appearance before this committee.’ The question therefore is that, is it not possible for these officials of NNPC to be quoted out of context?
“Sanusi also made so much weather of the Presidential Directive during the administration of President Yar’Adua. The point is that, is it not possible that the Directive has been reversed,” he added.
On his own part, however, the head of the Democracy and Legal Advocacy Center in Abuja, Clement Nwankwo, says the NNPC wields tremendous power as crude oil sales fund most of the national budget, adding that Sanusi was fired for only one reason.
“Definitely because he has raised concerns about the accountability of the NNPC on oil revenues and that is really what it is,” Nwankwo stated.
Sanusi and non-government organizations have repeatedly accused the Nigerian oil industry of not accounting for huge amounts of public funds.
Abuja-based political consultant Fabian Ihekweme said Sanusi was not suspended because the accusations are untrue, but because the accusations are dangerous coming from the Central Bank governor, rather than a politician or an NGO.
He said it is irresponsible for any Central Bank governor to make allegations like these publicly, because it frightens investors and consumers, which is bad for all Nigerians.
“Any allegations he makes, any statement he makes is capable of creating panic in the stock market of that country. It is the same thing in Nigeria or any other nation. I believe what Sanusi has been doing over time, if it was not properly checked, probably could have had an adverse effect on the Nigerian economy,” said Ihekweme.
But Ihekweme said he supports new laws to make Nigeria’s oil industry more transparent.
Mr Sanusi pointed to possible losses of $20bn in a 19-month period between January 2012 and July 2013 by questioning three main areas in which he alleges that the state has been short-changed.
The most glaring anomaly the memo detail is in the allocation of fuel subsidies. At meetings aimed at reconciling the numbers last December the NNPC claimed it had spent $8.49bn on subsidies that were deducted at source by the corporation. These included a subsidy on kerosene.
However, annexes to Mr Sanusi’s memo show that the kerosene subsidy was eliminated in 2009 by a directive of the late president Umaru Yar’Adua. Further evidence, in the form of official data from across Nigeria, shows that nowhere in the country is kerosene sold at a subsidised rate. It is bought by the NNPC at N150, sold to marketers at N40-N50, but retails at N170-N250. Mr Sanusi estimates that $100m goes astray this way each month.
“The margin of 300-500 per cent over purchase price is economic rent, which never got to the man on the street. In dollar terms every vessel of kerosene imported by NNPC with federation money cost about $30m and it was sold at $10 or $11m generating rent of $20m per vessel to the syndicate,” he writes.
Mr Sanusi also questions the legality of billions of dollars of deductions for petrol subsidies allegedly funded outside the legal budgetary framework. He says the figures the corporation has provided imply that it is importing up to twice as much fuel as the country consumes. In reality, he says, private marketers, who in prior investigations have taken the brunt of blame for alleged fraud, supply half the market. In his memo, Mr Sanusi calls on the NNPC to provide evidence that the fuel it claims to have imported actually arrived.
He also raises questions over the value Nigeria is getting from crude oil swaps with international and local traders, in which oil is exchanged for refined fuel imports without cash changing hands.
The expert analysis he attaches lists several ways in which these opaque arrangements, covering an estimated 200,000 to 220,000b/d of Nigeria’s total production, which fluctuates between 2m and 2.2m b/d, could be costing the state. One such contract, dating from 2011, contains a clause permitting the destruction of related documents a year after contract termination, highlighting potential difficulties in ascertaining the true value of swaps.
Finally, Mr Sanusi delves into an equally complex arrangement whereby the Nigerian Petroleum Development Corporation, a subsidiary of the NNPC, entered into “strategic alliance agreements” to finance and manage oilfields in which Royal Dutch Shell had sold off its stake.
Three law firms consulted by the central bank said these agreements contravened the constitution by effectively transferring control of revenues and profits on state-owned assets to private companies.
As expected, Sanusi’s revelations have already prompted a furious rebuttal from Andrew Yakubu, the NNPC’s group managing director, who accused him of failing to understand “the technicalities of the oil industry.”
“CBN is not an auditing outfit. But what it is doing is now auditing. We have no problem with auditing, but let the professionals, the certified bodies and agencies do it,” he said.
In response to questions from our correspondent, the main companies involved – Atlantic Energy and Seven Energy – defended both the legality and commercial rationale of what they said were standard service contracts. They said contractually it was up to the NPDC to pay the state its dues after deductions according to a revenue-sharing formula.
Mr. Sanusi noted that on a total of $7bn in crude shipped under these arrangements, the Federation received only $400m in taxes from the NPDC during the period he examined.