A Review of the Nigerian Energy Industry

Royalty: NEITI, govt, companies continue feud over missing billions

NEITIOscarline Onwuemenyi 13 August 2014, Sweetcrude, Abuja – The effort by the Nigerian Extractive Industries Transparency Initiative, NEITI, to reach a final remediation and resolution on unaccounted billions of naira owed the Federal Government from the sale of crude has continued to drag, as documents from the Inter-Ministerial Task Team, IMTT, remediation process reveal.

Years after the publication of the audit reports, many of the companies and agencies of government affected by the disclosures have continued to proffer lukewarm responses to the remediation process, even as some of them continue to engage in outright denial about their roles in the missing billions.

The oil and gas audits carried out by NEITI covering 1999-2011 had also unearthed some structural and operational deficiencies in government agencies responsible for management of oil revenues and the sector governance identified.

In order to address the deficiencies, the Federal Government constituted an Inter-Ministerial Task Team, IMTT, to develop and implement a remediation action plan that covers key areas including developing a revenue-flow interface among government agencies, and improving Nigeria’s oil and gas metering infrastructure.

Other areas include developing a uniform approach to cost determination, building human and physical capacities of critical government agencies and improving overall governance of the oil and gas sector.

The Chairman of the IMTT, Mr. Ledum Mitee noted that President Goodluck Jonathan was taking a serious interest in the NEITI audit reports and stressed that the IMTT has a responsibility to report periodically to the Federal Government on what it has achieved in terms of the Remediation exercise. He therefore urged the members to make quality inputs into the process.

However, following the latest audit report covering the period of 2009-2011, some of the oil companies and government agencies whom were affected in the have continued to drag their feet on the issue of remediation.

For instance, the document revealed that on the issue of Royalty Validation, the audit observed after a review of royalty calculations an estimated $233million under assessment of royalty payments during the period under review, which was attributed to inappropriate application of the price variable in the determination of fiscal value for royalty calculation.

The report observed that none of the companies applied the monthly OSP as advised by the COMD in the computation of fiscal value for royalty payment. While the Joint Venture companies applied Realisable Price (RP), the Production Sharing Contract (PSC) companies actually used actual selling price, FOB.

The use of RP by the companies despite the notice of expiration of a year 2000 Memorandum of Understanding from the Department of Petroleum Resources, DPR, has resulted into royalty underpayment of over $683.8 million during the period under review, the documents show.

Meanwhile, the NNPC has noted that it was concerned that the total potential contingent liability against the Corporation currently stands at $9 billion with annual increase of $3 billion if the adverse ruling is sustained.

On the matter of the Renegotiation of the 1993 PSC Agreements, the Corporation pointed out that Clause 16 of the Deep Offshore and Inland Basin Production Sharing Contract Act, DOA, 1999 (as amended) provides in summary that if the price of crude oil at any time exceeds $20 per barrel, the share of Government shall be readjusted to such extent that Production Sharing Contracts shall be economically beneficial to the Government of the Federation.

“In addition, the Decree is subject to review after a period of 15 years from the date of commencement and every five years thereafter. The Act does not therefore provide for negotiation with the Contractors; hence, the Federal Government could make pronouncement on the attainment of the provisions of the Act. It should be noted that the price of oil has consistently been above $20/barrel since 2003 and the Act since enactment attained 15 years in 2008 and should therefore be reviewed,” the Corporation observed.

NNPC recommend that the IMTT should advise the Government to invoke the provision of the DOA to take advantage of the economic value.

NNPC further reported that the Petroleum Industry Bill, PIB, is before the National Assembly, adding that its enactment remains purely the prerogative of the legislators.

On the issue of Production Sharing Contract, PSC, for Gas, the Corporation reported that presently, there is cash-in-flow to the Federation Account through the Gas Sales Agreement between NNPC/SPDC/Total/NAOC JV and NLNG; the Federation gets 55 percent of the revenue while 45 percent is retained by SPDC pending the determination of service fees payable for the usage of NNPC/SPDC JV facilities.

It further explained that NAPIMS currently books the 45% as liability to SNEPCO pending the finalisation of the relevant Agreement.

The NEITI Chairman remarked, however, that it was unfortunate that the meeting among agencies to decide on what the Exchange rate to be adopted was yet to hold, stressing that these agencies (CBN, NNPC and RMAFC) have up till one month to meet and resolve the issue.

It was hence resolved that the affected agencies should meet (after due consultation with their respective managements) to come to a decision. The Chairman promised that the IMTT shall facilitate the meeting after mandates are obtained management of the various affected agencies.
Mr. Mitee also stressed that it was not proper that 45 percent of the revenue is retained by SPDC pending the determination of service fees payable for the usage of NNPC/SPDC JV facilities.

He wondered why the total figure is not paid into an Escrow Account until outstanding issues are resolved, noting that that may actually cause the parties to resolve their differences quicker. He also suggested more social and community re-engineering in efforts being made to effectively check pipeline vandalism and oil theft.
On her own part, the NEITI Executive Secretary, Mrs. Zainab S. Ahmed recommended that 100 percent of the revenue be put in an Escrow Account to serve as an incentive for both parties to come to the table to resolve outstanding matters

Meanwhile, the Revenue Mobilisation, Allocation and Fiscal Commission, RMAFC, has suggested that for the sake of transparency and accountability in the revenue sharing in the PSCs, the agency should be play a more pro-active role in the fiscal reviews, in line with its mandate of revenue tracking and mobilisation.

The report further showed that Federal Inland Revenue Service, FIRS, reporting showed a lot of progress in their ability to collect the tax owed to government by the oil and companies, due to the exposure done by the audit reports over the years.

The Service regretted, however, that the issue of covered entities enjoying Pioneer Status had frustrated its efforts at collecting more. It therefore questioned the continued exemption of some oil companies from paying taxes since they had taken up operations both in the downstream and midstream sectors of the industry.

FIRS also announced that it had appealed against the pioneer status enjoyed by some oil and gas companies as well as the issue of incentives through side letters, and had escalated the issue at the level of the Ministry of Finance. It added that the FIRS was committed to working with the NNPC to apply the full weight of the law on such companies using the transferable.

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