A Review of the Nigerian Energy Industry

Governance challenges in oil sector: Task before Buhari

06 April 2015, Lagos – Just as the discovery of shale became a game changer in the global petroleum economy, the election of Gen. Muhammadu Buhari, as the president-elect also became a game changer in Nigeria’s political clime. –


Over the years, the major drive for politicians has been to acquire both political and economic power predicated on oil wealth, thereby neglecting to put in place structures for the proper management of the nation’s natural resources.

The Buhari campaign slogan is “change” intended to right all wrongs; but the change should go beyond seeking a unified account for the Nigerian National Petroleum Corporation, NNPC, and the Nigerian Customs Service, NCS.

He had said, “First and foremost, we will plug the holes in the budgetary process. Revenue producing entities such as NNPC and Customs and Excise will have one set of books only. Their revenues will be publicly disclosed and regularly audited.”

Coming at a time when the oil industry is in crises on account of falling prices and compounded by domestic dwindling production and Naira devaluation, the task before the President-elect is to tackle the governance issues that have plagued the petroleum sector for decades.

If Buhari must succeed with meeting budgetary proposals, he must immediately on assumption of office, institute good structures for the management of not only the petroleum resources, but every other God-given resource for the benefit of all Nigerians.

Prevailing issues

For years, the federal government has not been able to boost crude oil production even as it targets four million barrels per day by 2020, due to the non-passage of the Petroleum Industry Bill, PIB, increasing rate of oil theft and pipelines vandalism.

Nigeria earns billions of dollars from oil annually, with the sector accounting for about 90 percent of the country’s foreign exchange earnings. But the recent drop in world oil prices means that Nigeria desperately needs more oil revenues to support government budgets, protect foreign reserves and stem the ongoing devaluation of the naira.

The NNPC Group Managing Director, Dr Joseph Dawha, already alluded to challenges in meeting budgetary projections due to the price falls and called for prioritisation of expenditures.

But the real challenge to increasing government’s revenues right now according to experts is “to reduce leakages from the NNPC oil sales system … as poor management of the sales process and the revenues from it are costing Nigeria billions each year.”

The former Central Bank Governor, Sanusi Lamido Sanusi’s recent allegations of $20 billion refers to this poor management, even as a Pricewaterhousecoopers, PwC audit has attempted to explain that the sum was not missing after all.

However, many government instituted reports from KPMG audit; the Nuhu Ribadu-led Petroleum Revenue Special Task Force, PRSTF; Nigerian Extractive Industries Transparency Initiative, NEITI, and a host of others have identified major governance problems with how NNPC sells Nigeria’s oil.

Part of the poor governance also resonates in all the agencies under the petroleum industry, which many believe is also linked with the hire and fire of top management of these establishments, resulting in lack of continuity of programmes.


Oil traders

In the spirit of Nigerianisation and local content development, there has emerged a crop of politically-connected, low-capacity “briefcase companies,” with very minimal experience trading in Nigeria’s oil. According to industry observers, the group merely wants to re-sell any oil they get from NNPC to other middlemen, especially an international trading firm rather than to an overseas refinery for a share of profit with their sponsors.

But these profits could have been earned directly by the NNPC, thereby boosting government revenues if the oil had been sold directly into the world market.

Furthermore, there is no structure put in place for vetting and choosing buyers of oil, and for apportioning cargoes of oil among buyers, as in the KPMG, NEITI, and PRSTF reports. The reports highlighted the lack of written rules and procedures in this regard and as such are open to political interference and corruption.


Annual accounts

Apart from not producing an audited account for many years, which Buhari says he will tackle headlong during his campaigns, the monthly Federal Accounts Allocation Committee, FAAC reports and NEITI data also suggest that NNPC does not remit all of its earnings from sales of crude to the Federation Account.

For instance, as part of the $20billion allegations, Sanusi had also queried the management of the strategic alliance agreements, SAAs, running into billions of dollars that the Corporation’s subsidiary, Nigerian Petroleum Development Company Limited, NPDC, has with some local firms on crude from Oil Mining Lease, OML 119.

While NNPC has not been able to defend allegations publicly, the terms of reference, TOR, for the recent PwC audit did not empower the auditors to probe these agreements in detail.

Furthermore, it has been discovered that all of the NNPC trading companies including Calson, Hyson, Napoil, Nigermed, except Duke Oil are in joint ventures, JVs, with major international trading firms.

NEITI, PRSTF and KPMG reports all questioned how the companies split earnings with their partners, and how much revenues they keep back for themselves, which raises questions as to the possible violation of Section 162 of the 1999 Federal Constitution. Besides, most these companies are incorporated in offshore banking secrecy jurisdictions and none publishes annual accounts.

Crude allocation to refineries

In its March edition, Sweetcrude exclusively reported that Nigeria’s four refineries with a combined template of445,000 barrels per day, bpd, were all comatose as  their fluid cracking catalytic FCC units were not functioning and have not been for years, contrary to claims otherwise; yet NNPC retains the same quantity of crude allocations to them.

As a result, the domestic allocation is described as “the least transparent part of NNPC’s oil sales system,” as the Corporation gives the Federation Account billions of dollars less than market value for the oil set aside for the four refineries. The $10.8 billion that Sanusi and other agencies agreed had not been remitted was from the domestic allocation.

It has also been found to make large unilateral deductions from domestic oil sale proceeds, for fuel subsidy for petrol and kerosene, and no government agency audits the withholdings in detail.

The Petroleum Products Pricing and Regulatory Agency, PPPRA does calculate and “approve” some of NNPC’s subsidy payments to itself, but NEITI and KPMG have faulted the practice as the process is riddled with serious defects, especially as they also discovered that NNPC regularly ignored PPPRA’s approvals and withdrew higher amounts.

Crude delivery

Perhaps the most controversial issue in NNPC’s domestic allocations is the new methods of crude delivery to the refineries. Starting from 2011, the Corporation decided to begin delivering crude oil to the Warri Refinery by ship otherwise called, Very Large Crude Carrier, VLCC. Hitherto, such crude was delivered through the Pipelines and Product Marketing Company, PPMC pipeline running from the Escravos crude oil terminal to the refinery.

A similar process was introduced for the Port Harcourt Refinery in 2013, and in August 2014, the Petroleum Minister, Alison Madueke, told an audience at an oil conference that NNPC was spending an average of $7.52/bbl to transport oil to the refineries via this scheme.

Industry analysts describe such an amount as outrageous, considering that NNPC, through its subsidiary, PPMC, used to charge the government only a N0.30/litre tariff to move oil through the refinery pipelines.

The more worrisome is the fact that there are no open tenders or competitive bids for the particular set of VLCCs contracted for this purpose. It is not also clear what costs make up the $7.52/bbl, or whether the companies are paid for their services in oil or cash, and how PPMC keeps watch over the flows of oil and/or cash involved in the scheme.

Under the terms, a VLCC picks up crude from the Escravos terminal, usually about a million barrels at a time, then travels to a point close to the mouth of the Forcados River, where it anchors. Thereafter, smaller shuttle vessels then receive the crude from the VLCC by ship-to-ship transfer, STS, and transport it up the Forcados to the Warri refinery jetty, where they are supposed to discharge it for refining.

Future outlook

The NNPC holds the federal government’s equity in the petroleum industry in trust on behalf of Nigerians, but weak corporate governance has militated against all Nigerians benefiting from this equity.

For Buhari to make headway in his acclaimed fight against corruption, experts have suggested a number of ways to make the Corporation more accountable to the people and more profitable for government.

These include that:

The government should urgently find a new vehicle for selling oil to the refineries. Past committees and task forces—most recently, the Kalu Idika Kalu-led, National Refineries Special Task Force in 2012, explored available options, but the executive has not acted on them.

The executive should order an independent review of PPMC’s arrangements for delivering crude oil to the refineries.

If NNPC subsidiaries are withholding money from oil sales, NNPC should explain any and all withholdings, and put an end to those that are constitutionally prohibited. NNPC should publicly account for earnings from sales of crude from NPDC and its oil trading subsidiaries, and cease unconstitutional withholdings.

NNPC should correct this as a way to stave off further losses from oil going to unqualified companies that reduce national earnings per barrel of crude sold.

NNPC should either scrap the 445,000 bpd “domestic crude allocation” or else limit the allocation to its actual refining


– Vanguard

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