19 November 2017, Sweetcrude, Abuja – It is no gainsaying that the largest company in Africa’s most populous nation is the Nigerian National Petroleum Corporation, NNPC. This is not surprising as the corporation oversees all of the oil and gas assets of the Federal government in an oil-rich country where over 80 percent of its export earnings is hinged on crude oil. The NNPC has also earned an unenviable reputation as a corporation that is most inured from efforts at reform over the many decades of its existence.
Thus, for many years, transparency and civic organisations in Nigeria have questioned the convoluted relationship between the NNPC and several of its subsidiaries; the makeup of the NNPC’s joint venture (JV) agreements with other oil and gas firms; and the internal operations of the NNPC, especially with regards to its financial management and statutory remittances to the Federation account.
Despite some progress in transparency of revenue collection over the past five years, tracking payments from oil and gas companies remains challenging.
In terms of the governance of subnational resource revenue sharing, Nigeria ranked 11th, according to the 2017 Resource Governance Index, compiled by the Natural Resource Governance Institute (NRGI). However, the public lacks access to audited information on revenue flows to lower levels of government, and this contributes to the gap between the legal framework and implementation.
Speaking on this matter, Nigeria Country Manager for NRGI, Sarah Muyonga, said: “NNPC has made some new disclosures under the Buhari administration, but the details and revenue implications of many of its high-value transactions remain secret. Furthermore, the Nigerian Government does not regularly publicly disclose government officials’ financial interests in the extractive sector or the identities of beneficial owners of extractive companies.”
The report scored NNPC 44 out of 100 for poor governance and falling below the sub-Saharan African average for state-owned enterprises (SOEs), despite being the largest on the continent.
According to NRGI, the Corporation does not disclose detailed annual reports on its finances, despite top officials having committed to doing so, and little information is publicly available, particularly concerning some of NNPC’s least efficient and most questionable activities.
At the onset of the President Muhammadu Buhari’s administration a couple of years ago, and under the wave of an anti-corruption fervor that swept up the polity, the corporation reluctantly introduced a few reforms, one of which was the publication of monthly financial and operations reports. Many observers came out to hail the effort, noting that it was only a first step in the long, arduous journey towards change for NNPC.
However, NNPC’s convoluted financial web came into focus again after the Nigerian Extractive Industries Transparency Initiative (NEITI) published its latest Policy Brief, the report of its investigations into the operations of the NNPC. The investigations showed that NNPC and one of its subsidiaries, Nigerian Petroleum Development Company, NPDC, owe the Federation Account more than $20 billion, which NEITI believes could help jumpstart the economy.
The rumoured involvement of another subsidiary, National Petroleum Investment Management Services, NAPIMS, which manages the investments of the national oil company, in the recent discovery of billions hidden in a Lagos apartment building, last week, has further called into question the financial management of the Corporation and its divisions. These revelations are coming in the light of the recovery of $43 million, £27,000 and N23 million in a flat in Ikoyi, Lagos state, by the Economic and Financial Crimes Commission (EFCC) following a tip-off from a whistleblower.
According to reports, the National Intelligence Agency (NIA) collected $289,202,382 in cash from the account of NAPIMS in February 2015 after the postponement of the general election. The funds were said to be approved for NIA’s “covert operations” by former President Goodluck Jonathan and subsequently withdrawn in cash from NAPIMS account at CBN.
Meanwhile, NEITI has criticised the shady financial structures that have persisted in the nation’s oil and gas industry, particularly in the operations of the NNPC, which overseas numerous joint venture agreements entered by the Federal government and oil and gas companies. It asserts in the latest report that, “Beyond the golden opportunity for economic recovery, there is also a compelling case for deepening transparency and accountability in the improving oil sector.”
To this extent, the transparency agency has urged the Federal government to recover over $21.8 billion (about N7.2 trillion) unremitted oil revenue from the Nigerian National Petroleum Corporation, NNPC. It said the recovery of the revenue would make it unnecessary for Nigeria to seek loans and other international funding assistance to jump-start its economic recovery.
Executive Secretary of NEITI, Mr. Waziri Adio, noted that findings from a series of its oil and gas sector audits revealed that the NNPC and its upstream subsidiary, the Nigerian Petroleum Development Company, NPDC, failed to remit over $21.78 billion and N316.1 billion to the Federation Account. He said details of these unremitted funds, which NNPC has never disputed, were from federation assets divested to NPDC and its legacy liabilities; payments for domestic crude oil allocation to the NNPC, and dividends paid from investment in the Nigerian Liquefied Natural Gas, NLNG, but withheld by the NNPC.
He said details of these unremitted funds were part of the briefing he gave in a presentation earlier in the month to the National Economic Management team presided over by Vice President Yemi Osinbajo. “Considering the difficulties the government has been facing securing as little as $1billion foreign loan, recovering these funds will significantly enhance government’s fiscal position in the short term.”
Details of the unremitted funds, the NEITI Brief showed, included outstanding $1.7 billion from a total of $1.8 billion as a result of the transfer of eight oil mining leases, OMLs from Shell Petroleum Development Corporation, SPDC, and $2.2 million from four other OMLs from the Nigerian Agip Oil Company, NAOC, to the NPDC respectively.
Besides, NEITI said about $148.3 million paid as cash calls on the transferred OMLs, in addition to about $1.5 billion legacy liabilities as well as about $15.8 billion that accrued as NLNG dividends between 2000 and 2014 were yet to be remitted to the Federation Account.
In keeping with conventional macroeconomic logic, Nigeria plans to spend its way out of the current economic slump. The fiscal stimulus began with the N6.06 trillion budget for 2016, and is continuing in 2017. The proposed budget for 2017 is N7.298 trillion, about 20% higher than the 2016 budget, which itself was a record number. This year’s budget estimate includes a proposed deficit of N2.32 trillion, to be financed through borrowing. This level of borrowing will further compound the Federal Government’s total debt liability by about 16%.
Implementing the fiscal stimulus has other challenges. The budget is based on an oil benchmark of $42.5 and projected production volume of 2.2 million barrels/day. Last year’s projections were less ambitious but still unrealized, as conditions were not favourable. While the country hopes that both international and domestic factors will be more clement in 2017, Nigeria’s experience with crude oil-based budget benchmarking has shown that hope alone is not enough.
Realizing that revenue projection for this year faces some real challenges, the Federal Government set up a cabinet committee last December to “increase the revenue accruals to the government in order to implement the budget”. This committee was charged with not only identifying new revenue sources, but also with harnessing existing sources by improving collection and blocking leakages.
Findings from a series of audits of the oil and gas sector carried out by the NEITI show that NNPC and its upstream arm, NPDC, have failed to remit $21.778 billion and N316.074 billion to the Federation Account. These are amounts due from three main sources: federation assets divested to NPDC and NPDC’s legacy liabilities; payments for domestic crude allocation to NNPC; and dividends from investment in Nigerian Liquefied Natural Gas company (NLNG) paid to but withheld by NNPC.
NEITI believes that recovery of these funds will significantly enhance government’s fiscal position in the short term. “Addressing the underlying causes of withheld revenues will boost government’s collection in the medium to long term, thereby enhancing government’s capacity to implement its infrastructure development programme, to successfully carry out its social intervention policies, and to put the economy on a sound and sustainable footing. It will also expand revenue options for the country at this critical period. In addition, the system and structure that allow funds to be withheld at discretion and with impunity point to an important area of reform in the oil and gas sector,” the report stated.
The Nigerian Petroleum Development Company (NPDC) was created in 1988 as a wholly-owned subsidiary of NNPC. NPDC functions as NNPC’s upstream arm and has the mandate for exploration and production (E&P). Currently, the company operates three categories of Oil Mining Leases (OMLs), totaling 21 in all. In the first category are five OMLs that are reputedly owned 100% and operated by NPDC. These OMLs were acquired by NPDC before 2001. These are: OMLs 64, 65, 66 acquired in 1989; OML 111 acquired in 1996; and OML 119 acquired in 2000
Writing in his twitter feed recently, Adio explained that the NNPC divests federation equity to its subsidiary, meaning assets now belong to NPDC, and not the federation. According to him, “NPDC is owned 100% by NNPC. If NPDC makes profits, it goes to NNPC, which has many loss-making arms. Since NPDC is not owned directly by the federation, the federation does not directly benefit or benefit at all from its profits.
“This is why NEITI asks that the relationship between NPDC and the federation should be clarified and that NPDC should fully pay for assets divested to it. The issue is the consideration due on the divestment.”
Adio further noted that, “NPDC doesn’t belong to FGN (Federal Government of Nigeria). It is owned 100% by NNPC. So if it makes profit it goes to NNPC, and that dissolves in NNPC’s pool of losses. Since the assets were divested to NPDC, they now belong to NPDC and not the federation. NPDC has been enjoying benefits of ownership without paying.”
Adio, however, insisted on his twitter feed that the agency’s reports are not attacks on the NNPC or NPDC. “We commend them for ongoing reforms. We believe Nigerians deserve better.”
At a social media forum to discuss the NEITI Policy Brief, BudgIT, a civic organization that applies technology to intersect citizen engagement with institutional improvement, charged that the status and operations of NPDC should be reviewed in line with global best practices to ensure greater efficiency and optimal value to the country.
The discussion which trended under the hashtag #FixOurOil, explored NEITI’s reports on the oil and gas industry, including the recommendations and action points that should be taken by the government. It further said the federal government should fast-track comprehensive reforms of the improving petroleum sector.
BudgIT lamented that, as disclosed by the NEITI brief, 12 Oil Mining Licenses, OMLs, were transferred to NPDC from NNPC for which NPDC paid only $100, 000.
“In addition to this, N2.42bn was also erroneously paid to NPDC by NAPIMS. The 2014 NEITI audit report showed that NNPC did not account for about N243.639 billion. Also, the investigations revealed some questionable transactions between the NNPC and NPDC, which need to be looked into by the federal government,” it stated.
The organization also charged that NNPC has also failed to account for NLNG dividends from 2000 – 2014. “Further findings show that between Jan 2012 and July 2013, NNPC remitted only a part of revenue made from domestic crude sales. NNPC sometimes justifies withholding the funds for subsidy but this doesn’t add-up, amount withheld exceeds subsidy payments.”
According to the NEITI Policy Brief, the unremitted funds from NPDC fall under three categories. First, is the full payment for the 12 OMLs divested from the Shell and Agip joint ventures. NNPCs divestment of 55% of its stake in the Shell JV was valued at $1.8 billion by the Department of Petroleum Resources (DPR).
It added, however, that considering the figures from Shell’s divestment of between 30% and 45% of its own share in the same joint venture, PricewaterhouseCoopers (PwC) arrived at an alternative commercial valuation of these assets of $3.4 billion. “This means the eights OMLs were undervalued by, or valued at a discount of, 47%. Despite this, NPDC has paid only $100 million on these OMLs divested between 2010 and 2011, leaving an outstanding of $1.7b of the discounted valuation. The four assets divested in 2012 by NNPC to NPDC under the NAOC JV were not valued until four years later. In the third quarter of 2016, DPR valued these four OMLs at $2.225 billion. NPDC has asked for clarification of the basis of the valuation. Therefore, NPDC owes the Federation $3.925 billion for these 12 divested assets,” it stated.
It explained that while waiting for the determination of the consideration, NNPC reported it had remitted US$1.3 billion to the Federation Account from the gas revenue derived from the assigned assets from January 2013 to date. Thus, the NPDC effectively intends to pay for these assets using revenues accruing from them. This is, to say the least, a very crude way of doing business and at the expense of the Federation. It is inconceivable that this would have been possible somewhere else, that is: buy an asset from someone, take possession without paying any amount, and use the proceeds from those assets, at your own convenience, as part-payments.
The reported stated: “NPDC has continuously enjoyed full rights and benefits accruing from the assets transferred as dictated by the terms of the deed of assignment, i.e. oil and gas revenues from the assigned fields have been paid to the account of NPDC. (This should not be an issue if NPDC had fully paid for these assets. As owners, NPDC should be entitled to the proceeds and will pay only taxes and royalties). But despite enjoying full.”
NEITI has criticized the decision to transfer the country’s oil asset to NPDC as not founded on sound economic judgment. The agency noted that although the company was established to foster indigenous participation in the upstream sector of the industry, it has so far not been able to produce substantial levels on its own.
A review of the company’s operations, NEITI said, showed that in mid-2006, total output from its wholly owned production stood at just 10,000 barrels per day, while production from its service contract agreement with NAOC fetched a paltry 65,000 bpd.
Reasons NPDC gave for the poor performance, NEITI said, included undue interference by NNPC, inadequate financial structure and inability to source project financing. This development, the agency said, led the company into partnerships with international and indigenous oil firms engaged in the actual exploration and production of NPDC asset.
On the NLNG dividends, the NEITI expressed concern that despite evidence of payment from the NLNG to NNPC, there was no corresponding evidence of NNPC remittance to the Federation Account in accordance with the provisions of Sections 80(1) and 162(1) of the Nigerian constitution.
Despite owning majority shares in the NLNG operated as a private company run by its private partners, NEITI lamented the non-involvement of the Nigerian government in the management of the company. Rather, it said the government earned revenues from its investment in the enterprise in form of dividends, interests and loan repayments.
“Since the Federation’s shareholding in NLNG is held through NNPC, dividends are paid to NNPC, which should remit same to the Federation. However, NEITI audits have revealed that until 2015, NNPC has failed to remit the interests and dividends from NLNG to the Federation Account totaling $15.8 billion between 2000 and 2014,” NEITI said.
Consequently, NEITI recommended urgent measures by government to recover the funds to support its on-going economic recovery plans. “At current exchange rate, unremitted revenues to government’s treasury comes to about N7.2 trillion. Achieving a recovery rate of just 20 per cent would significantly offset the projected deficit for the 2017 budget, while a third of the computed unremitted revenues would completely eliminate the need to borrow to finance the budget, with short and long-term positive implications for the economy,” it said.
Other recommendations included re-evaluation of the asset divested to NPDC to determine the actual market prices, with a view to recovering the full value of these asset; a review of the relationship between NPDC, NNPC and the Federation, to determine and establish effective lines of accountability of NNPC subsidiaries in line with global best practices.
NEITI also asked government to review the process of acquiring OMLs by NNPC and NPDC, to ensure the long-term net positive value was realized; investigate the status and use of the NLNG dividends from 2000 to 2014 and undertake criminal proceedings against anyone found culpable of any fraud as well as fast- track a comprehensive reforms of the petroleum sector.
When contacted, NNPC’s spokesperson, Mr. Ndu Ughamadu, said a committee constituted by the corporation’s management was studying the NEITI audit report and recommendations and at the appropriate time would come up with a response.
But NEITI has urged the federal government to immediately revisit and re-valuate the transfer of some oil asset by the Nigerian National Petroleum Corporation, NNPC, to its upstream subsidiary, the Nigerian Petroleum Development Company, NPDC.
Mr. Adio underlined the importance of the review, considering NNPC’s under-valuation and refusal to pay for the assets. He said the review was also necessary in view of NPDC’s inability to either make returns on investments on the asset, or be accountable to the federation over its management of the oil assets in its custody.
The NEITI Policy Brief has put the total unremitted revenues to the federation by the NPDC at a total of N1.76 trillion, consisting $5.5 billion and N72.4 billion.
According to NEITI, details of the outstanding unremitted revenues by the NPDC to the Federation Account in respect of the transferred oil asset by the NNPC include $1.7 billion in respect of the transfer of oil mining leases, OMLs from the Shell Petroleum Development Company, SPDC joint venture. Another $2.23 billion was also outstanding in respect of the transfer of four OMLs from the Nigerian Agip Oil Company, NAOC joint venture.
NEITI report said the NPDC was yet to refund about $148.3 million and about N2.42 billion, being cash-calls paid to it by the federal government for the transferred OMLs. Other outstanding revenues unaccounted for also include legacy liabilities of $1.46 billion and N70.02 billion.
“Beyond the issue of unremitted monies, there are issues of transparency and efficiency with the operations of NPDC,” NEITI noted in its report. “Since 2005, NNPC has transferred 16 OMLs to NPDC. However, the process of transfer of these assets raises serious questions, as there appears to be no clear-cut criteria for transfer of oil mining assets to NPDC. The process for the transfer of Federation’s assets to NPDC does not seem to pass the transparency test. One of the upshots of this is the undervaluation of these assets, thereby depriving the Federation of optimal value for the assets,” the transparency agency stated.
The undervaluation, NEITI report said, resulted from NNPCs divestment of its 55 per cent shares in the SPDC JV valued at about $1.8billion. NEITI pointed out that the valuation of the same asset by globally acknowledged audit firm, PriceWaterhouseCoopers, PwC, was put at about $3.4 billion.
Besides, NEITI compared the valuation of the asset with that of four other asset divested in 2012 by NNPC to NPDC under the NAOC JV, which the Department of Petroleum Resources, DPR, valued at about $2.225billion.
The agency said the NPDC, which has so far paid only $100 million, was still contesting these valuations despite that it was currently operating the 12 OMLs without paying neither the full value, nor the new figures arrived at by PwC and the DPR. “In total, the non-payment for the 12 oil blocks by NPDC sums up to $3.925billion,” NEITI said.
“NPDC continues to be unaccountable to state institutions and the laws of the country. NPDC has consistently refused to give account of its operations and its management of national oil assets in its possession. NPDC failed to cooperate with the forensic audit ordered by the Auditor-General of the Federation in 2015. The company failed to cooperate with NEITI for five audit cycles, and only partially cooperated during the 2013 and 2014 audits,” the agency added.
NEITI and its partner agencies argues that the failure of government agencies to remit revenue to the treasury has significant implications for Nigeria’s economy in two ways. The questionable practice of withholding revenues due to the treasury is partly implicated in government’s current fiscal struggles. Yet, the withheld funds offer huge and interest-free opportunity to stimulate the economy, much easier and much better to access than internal and external borrowings, depending on government’s capacity and willingness to use its machinery to recover unremitted funds.
From the computation above, total unremitted revenues to government’s treasury amount to $21.778 billion and N316.074 billion. At current exchange rate, this comes to about N7.2 trillion. Achieving a recovery rate of just 20% would significantly off set the projected deficit for the 2017 budget. A third of the computed unremitted revenues would completely eliminate the need to borrow to finance the budget. This has both short and long-term positive implications for the economy. Short-term macroeconomic benefit has been discussed in relation to the implementation of the 2017 budget. In the long run, it would improve Nigeria’s stock of productive infrastructure as envisaged by the current administration, with attendant multiplier effects on the economy.
NEITI believes that at an institutional level, enforcing collection of arrears of revenues accruing to the Federation but withheld by NNPC and NPDC would significantly advance the accountability objective of government, which is the main pillar of President Buhari’s administration. However, recovering the outstanding revenues without reforming the system that allowed the anomalies in the first place will be a missed opportunity. The country has thus been presented with a loud and compelling case for a root-and-branch reform to deepen efficiency, transparency and accountability in Nigeria’s improving but not yet squeaky-clean petroleum sector.