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Cleansing the Rot in the Oil Industry

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Despite the controversy that surrounds its report, the Petroleum Revenue Special Task Force has made far-reaching recommendations to ensure transparency and accountability in the oil and gas sector

By Olu Ojewale  |  Nov. 26, 2012 @ 01:00 GMT

THE issue of corruption has always been a thorny one in Nigeria. So when President Goodluck Jonathan appointed Nuhu Ribadu, former chairman of Economic Financial Crimes Commission, EFCC, to head the Petroleum Revenue Task Force on Petroleum, February 28, Nigerians were understandably confident that his committee report would be credible, honest and factual about its findings.

That perception was almost marred when Ribadu and two members of the Task Force openly disagreed on the report presented to President Jonathan November 2. There was an allegation that a fake report of the Committee’s findings was already in circulation, thereby calling into question the credibility of the report being presented to government. The open disagreement appeared to have overshadowed the real work the Task Force has been able to do in an effort to bring sanity to the petroleum sector of the economy.

While some persons have advocated that the report should be thrashed on the excuse that the disagreement between Ribadu and two members had affected its credibility, others argued that the members of the Task Force had failed in their assignment.

Their standpoint was buttressed by reports that no member of the Task Force signed the final report submitted to President Jonathan coupled with its open admission that it could not verify most of the data in the document. The task force was mandated to ‘verify all petroleum upstream and downstream revenues, including taxes and royalties due and payable to the Federal Government of Nigeria; take all necessary steps to collect all debts due and owing and to obtain agreements and enforce payment terms by all industry operators.’ It had six months to do the work and submit a report of its findings every month. But that was not the case; the Task Force spent nine months on its assignment and did not submit any report at intervals. The Task Force appears to have done its assignment and Realnews can authoritatively report that it would be foolhardy to consign its report to the dustbin of history without considering its findings and illustrious recommendations on how to plug the leakages and ills that have characterised the Nigerian oil sector and heal the ills in the oil sector.

One of the ills discovered by the Task Force is how to collect the huge amounts of money being owed to the nation. For instance, major oil marketers, the Task Force report said, had more than N27 billion outstanding to be paid to the government. Among the debtor companies are Conoil with N4,251.18 billion; MRS – N6,478.43 billion; Oando – N4,608.25 billion; Forte – N4032.89 billion; Total – N3,020.80; Mobil – N1,277.88 billion and others – N3,746.13 billion. The Task Force reported that the outstanding included current debt, total overdue, disputed and total debt outstanding.

[caption id="attachment_680" align="alignright" width="346"]Jonathan Jonathan[/caption]

Some oil companies were also reported to owe the country fees on royalties, signature bonuses, concession rentals and gas flaring among others. Of the 60 concession awarded by the Department of Petroleum Resources, DPR, expected revenue was $2.26 billion, but only $1.7 billion was collected leaving $566 million outstanding. The signature bonuses on concession relating to legal disputes, oil and gas blocs, and long overdue outstanding all amounting to about $749 million, was also unpaid.

Based on information provided by the DPR, the Task Force reported that 57 concession holders were still indebted to Federal Government by $2.9 million.

On royalties, the Task Force sent letters to about 47 oil companies whose debts were still unpaid and within a short time $5,830,261 was paid to the government coffers. Several other companies made undertakings to pay at later dates. By the time the committee wound up its investigation there was still $3,027,946,927 outstanding. Prominent among the debtor companies are Shell Petroleum Development Company, SPDC, Agip, Texaco, Mobil, Con Oil, Conoco-Phillips and others. SPDC was said to owe $96,986,336; Mobil - $139,806,237; Texaco – $165,840,667 and Seplat - $303,621,395. However, the Task Force acknowledged the dispute between Addax and DPR on one hand and NNPC on the other over a debt in excess of $1.5 billion.

In the analysis of the debt table on royalties, the Task Force gave a disclaimer saying: “The analysis above was arrived at based on data provided by the DPR. This information has not been corroborated by the operators of the various concessions. Also, the analysis does not consider payments relating to royalties due from prior periods nor does it consider subsequent payments (2012) in respect of royalties.”

The Task Force report alleged that the accountability of subsidiaries of NNPC was weak with opaque management structure and that the boards did not meet regularly.

The report said that the government, in the period under review, had received $115 million as penalty for gas flaring, while $58 million was still outstanding. Similarly, the nation was reported to be indebted to importers of refined petroleum to the tune of $3.6 billion.

The Task Force similarly discovered that the nation was losing money through the domestic crude oil allocation. The government allocates, on behalf of the nation, 445,000 barrels of crude oil daily, for domestic use. The Crude Oil Marketing Division, COMD, of the NNPC then sells domestic crude oil to the Pipeline Products Marketing Company, PPMC, which gives the crude oil to local refineries at Port Harcourt, Warri and Kaduna. But because the refineries have not been working at full capacity, it was found that COMD had been helping PPMC to sell the crude oil allocated to be refined for domestic use at the export market. As a result, it was discovered that “a greater proportion of the domestic crude oil was channelled to crude oil exportation, exchange transactions, offshore processing than for local refining.” It said between 50 and 88 percent of the crude oil was not refined in the country in last the 10 years under investigation. The PPMC was quoted as saying that refining crude oil in the country would be at a loss because the local refineries were in a state of disrepair caused by vandalism, coupled with theft of crude and refined products.

But contrary to speculations, the Task Force exonerated the Nigerian National Petroleum Corporation (NNPC) of allegations of non-remission of crude oil sales as and when due. The Committee report said that as at 31 December, 2011, N843 million was due to the federation allocation in respect of domestic crude oil allocations. “The amounts outstanding as at 31 December, 2011, represent amounts due for the months of September 2011 to December 2011. In view of the 90-day credit period, the outstanding amount as at 31 December, 2011, was not due for payment. The Taskforce, however, sighted evidence of subsequent payments in 2012,” the report said.

According to the committee, sample selections were made across the 10-year period in order to verify that the net amounts payable were remitted to the federation account in the CBN. From the selections made, it was observed that amounts remitted were most times different from the net payable amount. “From discussions with the NNPC, the variances were attributed to other miscellaneous receipts from the domestic gas sales and Nigeria Gas Liquids (NGL) supplies which were also included in the remittances to the Federation Account by the NNPC,” the Taskforce said. In order words, the committee acknowledged that payments made by the NNPC were higher than expected by the government.

However, the committee noted that where negative differences were observed, it could be attributed to differences in computation of subsidies. The report noted that subsidies deducted by the NNPC represents the difference between the PPPRA approved landing cost and the NNPC retail price (excluding margins) multiplied by the PPPRA observed volumes. The PPPRA subsidy approvals for the sale of the refined products by the NNPC were in excess of deductions made by about N132.7 billion as at 31 December, 2011. What this means is that NNPC as at December 31, 2011, the PPPRA owed the NNPC the sum of N132.7 billion and was yet to pay. At present, subsidy is paid based on the difference between the proceeds from the sale of refined products and the cost of importation of refined products.

“In the course of the Taskforce’s work, we did not receive sufficient justification and basis for the practice of deducting subsidies from the amount payable to the Federation account. Indeed, this practice does not accord with the law, with particular reference to the Constitution,” it said. On this issue, the NNPC maintains that the law allows it to deduct amount that have been approved by the PPPRA before remitting to the federal government.

According to the report, based on the daily allocation by the Federal Government of 445,000 barrels of crude oil, the NNPC was expected to be allocated approximately 162 million barrels annually. But investigation showed an inconsistent pattern in the implementation of this policy with variances found for 10 years’ review spanning 2002 to 2011.

The implication of this finding is that for half of the period under review, the NNPC received less than the 162 million barrels per annum. Indeed, there were periods when the NNPC received as much as nine million barrels less than what it was supposed to get. On the discrepancy in the pricing of domestic crude oil, the Task Force found that the average price per barrel payable by the NNPC was compared with the average weekly prices for Nigeria Bonny Light, Forcados, obtained from the Energy Information Administration (EIA). It was understood from discussions with officials of the NNPC that the pricing of domestic crude oil during the period under review was based on international prices.

[caption id="attachment_885" align="alignright" width="352"]Diezani Alison-Madueke Diezani Alison-Madueke, Petroleum Minister [/caption]

Hence, the review revealed that over a 10-year period (2002 – 2011), there was a difference of an estimated sum of $5 billion. Subsequent enquiries made from the NNPC revealed that up until October 2003, the NNPC was granted fixed price regimes by the Federal Government of Nigeria as follows: 1999 – 2001, $9.50bbl, 2002 to July 2003, $18/bbl, August/September 2003, $22bbl. “This explains the wide disparity in prices in the earlier years,” according to the findings of the Petroleum Revenue Special Task Force final report. The Task Force, however, warned that if the CBN rates should be dropped, the country faces the prospect of losing up to N86.6 billion in 10 years.

It was not only oil companies that were cited as debtors. The Task Force discovered that the NNPC had been used to pay several bills on behalf of the Federal Government, and on its instruction, gave loans to government agencies and a foreign government. For instance, it gave loans of N798.6 million to the Bureau of Public Enterprises, BPE, and a loan of N700.5 million to Sao Tome and Principe, a foreign country. The report said the NNPC bought a presidential chopper at a cost of N2.2230 billion for government and paid bills on behalf of the Federal Government, which included N2.42 billion to Royal Swaziland Sugar Company; Federal Ministry of Science – N11.466 billion; Federal Ministry of Science Technology - N4.185 billion; Federal Ministry of Technology Wind Energy – N128.9 million; Storage Cost on illegal bunkering - N563.9 million; Nigerian Content Development Monitoring Board – N673 million and on behalf of Presidential Implementation Committee on Maritime Safety and Security – N19.87 billion.

It also paid for sponsorship of the World Cup to the tune of N866.2 million, and also more than N250 million in legal expenses for the Ministry of Petroleum while other expenses amounted N521 million. ?

But the management of the NNPC did not agree with the report, insisting that some of the Task Force’s findings and recommendations were inaccurate and that its decisions were based on conjectures. In a rejoinder, the corporation said the disclaimer made by the committee clearly showed that the report could not be relied upon because it impinges significantly on the accuracy and reliability of its conclusions and recommendation.

On the alleged $5 billion discrepancy in the sale of crude oil, the NNPC argued that: “The value of any crude oil cargo is determined by the pricing publications, pricing window, loading date, type or grade and quantity loaded.” And because Nigeria exports 26 grades of crude oil at different times, there is a likelihood of varying quantities, different quality and different published prices. Therefore, the corporation argued that it was erroneous and misleading for the Task Force to base its conclusions on average price figures.

In addition, it argued that it was wrong for the Task Force to conclude that the nation had the potential of losing about $86.6 billion in the next 10 years. It said: “NNPC always uses the applicable exchange rate advised by the CBN in computing funds to be remitted to the Federation Account.?These figures are always reconciled with and confirmed by the CBN and thus there can be no variance or under payment by the NNPC into the Federation Account.”?The corporation, therefore, said that the adoption of a simple averaging technique by the Task Force to determine the difference in revenue accruable to the Federation Account from crude oil sales was fatally flawed and that a more “appropriate method should have been a weighted-average of volume, price and exchange rate.”

The corporation expressed regret that the Task Force, saddled with such an investigative responsibility could not take the pains to ascertain the correct process for determining NNPC subsidy payments. It argued that the disbursement of subsidy payments and Joint Venture cash calls from the Federation Account was provided for under the Appropriation Act.?According to the NNPC, the standard practice is that subsidy payments due to the corporation are not based on cash remittances, but by way of credit notes to the NNPC against domestic crude oil purchases by the NNPC. The corporation said the values of the subsidy payment certificates issued to the NNPC by the PPPRA were often deducted from the cost of domestic crude oil purchases by the NNPC.?Thus, it said it was within the NNPC’s rights to claim the credits due to it for the said subsidy payments which were still outstanding to the tune of N752.77 billion.

The NNPC management also kicked against the report on the basis that it contained some unverified facts and data. “We, therefore, question the basis of the decision of the Task Force to ignore these information and data which would have ably assisted it in arriving at verifiable conclusions and recommendations without misleading the public as the report clearly did.”

But Olisa Agbakoba, SAN, and a member of the committee told the Realnews in a telephone interview that there was nothing wrong with the report. He said it was unfortunate that many Nigerians who did not know why the committee was set up, were trying to distract the government from implementing the recommendations of the Task Force. “One of the main reasons why government set up the task force was to block all loopholes where the oil revenues are being siphoned. The committee was to look at ways of doing things differently in terms of revenue generation. Nigeria was losing a lot of revenue because the NNPC was not directly in charge of selling crude oil.

“Most of the revenue from crude oil sale was not coming to the government and the committee was able to look at the problem and proffer solutions. Nigeria would gain a lot from the report if the government could implement the recommendations. Whatever were the individual differences between Nuhu Ribadu and Orosanye, had nothing to do with the job of the committee,” Agbakoba said.

Indeed, despite the loopholes, the Task Force made some recommendations which will help the Nigerian oil industry. It asked the government to set up an independent process to review the use of traders and NNPC’s system for selling crude oil in order to achieve probity.

The Task Force recommended the passage of an oil sector transparency law to compel all oil companies active in Nigeria to report all payments, costs and earnings for each licence or transaction and to publish all contracts and licences. It will authorise the FG to create a special properly-trained oil and gas sector financial crimes unit, which should be fashioned in the mode of the Economic and Financial Crimes Commission, to deal with the widespread corruption in the nation’s oil sector. Ribadu said the technical knowledge of the EFCC could be effectively exploited to establish the proposed anti-corruption agency in the oil sector.

To increase government revenues through debt collection and control, the Task Force said the government should embark on aggressive debt collection for the outstanding bonuses, revoke oil blocs of non-paying companies, and sanction institutions that failed to collect revenue. In addition, it recommended an independent audit of upstream cost control rules and mechanism including the use of cross-country price benchmarking.

The Task Force also advocated an amendment of the 1984 Special Tribunal (Miscellaneous Offenses) Act to strengthen the legal framework for oil and other sector crimes; arrest and prosecute the barons as well as financiers of illegal bunkering rings.

The committee urged the Presidency, in consultation with the BPE, to hire consultants to perform a financial due diligence review of the NNPC, and work on a road map for full commercialisation of the NNPC before passage of the Petroleum Industry Bill.

On withholding of payment of oil revenue, the Task Force said the Federal Government should introduce an amendment to the Fiscal Responsibility Act 2007, by making it a criminal offence. It further noted that the practice of remitting domestic oil payments to the Federation Account using exchange rates other than that of the CBN should be stopped forthwith, and the CBN rates be enshrined in the law as the only acceptable ones.

To reduce revenue losses, the Task Force recommended the establishment of a website for Petroleum Revenue Vigilance, as "a standing independent accessible and transparent repository of information on revenue losses, sabotage, and illegal activity affecting the petroleum industry."

Moreover, it recommended that the FG should appoint a new Nigeria Extractive Industries Transparency Initiative Board, now long overdue. Members of the board should be sector experts with commitment to transparency. The civil society should also appoint independent representatives to the board. Besides, the government should establish an embedded and independent office of transformation for the sector.

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