Economic Confidential, September 2007

COVER

Oil Sector: The Story of the Missing Billions

Tony Ochela

The media, in recent times has been awash with stories of billions being declared missing, especially in the oil sector where Nigeria is the sixth largest exporter of crude oil in the world.

The chairman of the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), Engineer Haman Tukur, at a recent meeting with President Umar Yar’Adua, had shocked the president (and the nation) when he alleged that the Nigerian National Petroleum Corporation (NNPC) had fleeced the nation of a whooping N555 billion between December 2004 and April 2007.

Engineer Tukur, who made the revelation at the Presidential Villa in Abuja, said the nation may have lost the huge sum from its Federation Account, due to lack of transparency and accountability which has continued to bedevil the computation, procedure of payment and stakeholders involved with the fuel subsidy.

This is not the first time the nation would be jolted with allegations of massive fraud in the oil sector. The Commission which is constitutionally charged with the responsibility of monitoring revenue accruals from oil and non-oil sectors and their disbursements among the three tiers of government, had also in 2002, during the presidency of Olusegun Obasanjo accused the corporation, which was then under Mr. Jackson Gaius-Obaseki, of not properly accounting for N302 billion .

The argument then on the alleged N302bn, the Economic Confidential gathered, was that: NNPC received 445,000 barrels of crude oil, an average of 50% of the Federation Crude, for domestic purposes when the refineries can hardly refine more than 50% of this quantity at best of times; that it procured the crude oil then at $18 dollars per barrel and exported the unprocessed domestic crude at the then prevailing market far above the fixed price while the differences of the sales are not remitted into the Federation Account; that the NNPC exchange rates at all times seem to be fixed then at N110 to the $(dollar) against those determined by IFEM operating at the time of sale, which was also high.

It was in that regard that the Commission in 2003 recommended that: that Joint Venture Cash Calls (JVCC) should be jointly funded by the three tiers of Government and that the budget of JVCC should be prepared annually and pass through normal budgetary processes; that only crude oil required and based on the current capacity utilization of the refineries should be allocated to the NNPC; that the provisions for the subsidy be made explicitly in the Annual Budget and appropriated accordingly instead of leaving it to its current discretional processes; that all revenue agencies of government should abide by the law and constitutional provision in their operations.

The fallout from those accusations, as viewed in some quarters, led to the eventual retirement of the Group Managing Director of the NNPC, but the government of the day never undertook the all-important task of verifying the receipts of payments in all the transactions the corporation had made with a view to blocking such loopholes. As a matter of fact, the issue got buried in the works of a national assembly committee that was at the time mandated to investigate the claims.

In his statement at the visit to Yar’Adua, the RMAFC boss said “Mr. President may be aware that the NNPC lifts 445, 000 barrels of crude everyday for domestic refining, but it sells most of these to refineries outside the country, especially because our refineries are not operating at full capacity.

“NNPC pays for refining and collects all the refined products but Nigerians only see kerosene, PMS and diesel, where then are the other products? Revenue from the sales of the other products like black oil, LPFO should be enough to recover costs and save Nigerians from price increases. Mr. President, not only does the NNPC not account for the other products, but it also withholds about N20 billion every month from the Federation Account as subsidy.

In his submissions, Engineer Tukur, further said that the commission had raised query on how the Petroleum Products Pricing Regulatory Agency (PPPRA) arrived at subsidy, especially as some items on its template are unnecessarily given high rates.

He listed those rates to include; exchange rates, dues paid to the Nigerian Ports Authority (NPA), pipelines/marine services charge, storage charge, and operational costs charge of the PPPRA.

According to him, all these has so far led the PPPRA to illegally deduct more than N23 billion from domestic excess crude between January and may 2007, adding that the controversy surrounding the management of external debts was compounded by the lukewarm attitude for keeping records of such debts.

Just like the report of underhand deals against the NNPC under Gaius-Obaseki led to his exit, Engineer Funsho Kupolokun also lost his job in a seemingly similar circumstance after nearly a week of guesses and denials by officials of the NNPC and the Presidency. Kupolokun has since been succeeded by Abubakar Yar’Adua, the most senior official in the corporation, and who, it has been pointed out, is no blood relation of the incumbent president. The new Ag. GMD of NNPC is said to have zero tolerance for corruption.

The recent report made to President Yar’Adua , however, comes in the wake of another revelation in which top officials of the NNPC allegedly defrauded the country of another N502 billion through various frauds including producing crude oil far in excess of assigned Organization of Petroleum Exporting Countries (OPEC) quota and converting the proceeds (mainly) to political electioneering.

Worsening the picture of the rot in the oil sector, the United States Justice Department also recently claimed that the US oil services company, Wilbros, bribed officers of the NNPC, the Peoples Democratic Party (PDP) and officials of the Nigerian government millions of dollars in a bid to secure the $387 million Eastern Gas Gathering System project.

But in his first reaction to the new development over the alleged missing revenue, the Acting Group Managing Director of the NNPC, Engr. Abubakar Lawal Yar’Adua, told journalists in Abuja that what the Chairman of RMAFC is raising as missing revenue arose from lack of understanding of the workings of the corporation. He insisted that no revenue due to the federation account is missing or unaccounted for. He pointed out that the misunderstanding between his corporation and RMAFC is surprising to him, but blamed it on a disagreement on the issue of subsidies.

On the capacity of the refineries, the Ag. GMD pointed out that before the pipeline rupture, Port Harcourt was operating at 90%, Warri - 85% and Kaduna - 75%. Adding that once the issue of vandalised pipelines is rectified the refineries will all come on stream.

Giving more insight into RMAFC’s allegations, the Group Executive Director of Finance and Administration in NNPC, Mr. Stanley Lawson said that prior to November 2003, in order to take care of the subsidy on petroleum, domestic crude was sold to NNPC at a discount both in terms of price and the exchange rate and it helped NNPC build up strategic financial reserves. He added that following the commencement of payment for domestic crude oil at international market prices from 22nd October 2003, it affected the reserves built up over the previous years as it was exhausted on funding the subsidy element.

According to Mr. Lawson, as a result by mid 2005, NNPC was no longer able to fully meet crude cost payments due to the subsidy and by the end of 2005, the total amount unpaid by NNPC summed up to N249 billion and N355 billion due to NNPC by way of subsidies.

While stressing the transparency of NNPC’s accounts, Lawson explained that by mid-2006 the Ministry of Finance appointed auditors to check NNPC’s subsidy claims during the year and their report aligned with that of the corporation showing that the total amount outstanding to the FAAC as follows: 2005 - N249 billion by NNPC: 2006 - N232billion by FMF; and first quarter of 2007 - N64 billion by FMF, with the summation of it being the figure that RMAFC continues to quote as missing money.

He said the NNPC and RMAFC as government agencies have always met but surprisingly after the meetings the commission continues to raise issues.

There are, however, positive results coming from checks being conducted into the activities of the industry with the Nigerian Extractive Industries Transparency Initiative (NEITI) saying significant progress has been recorded in fixing some lapses in the petroleum sector identified in its first comprehensive audit of the industry. The NEITI is the Nigerian subset of a global initiative aimed at following due process and achieving transparency in payments by Extractive Industry (EI) companies to governments and government-linked entities. It largely concentrates on extractive industries that operate in Nigeria and not restricted to a single company.

Quoting the Chairman of NEITI, Dr. Siyan Malomo, the Director of Communication of the agency, Mr. Waziri Adio said that major issues raised by the first NEITI Audits are being tackled comprehensively and conclusively. “We are moving beyond just publishing the audit reports to fixing the problems. We can now point to tangible fruits of the post-audit phase.”

On the issue of revenue discrepancies, NEITI stated that the auditors have worked with the various companies and government agencies to trace payments previously unaccounted for. He said after a comprehensive reconciliation exercise, the auditors have reported that the bulk of the payments claimed to have been made by oil companies could be authenticated. Adio confirmed that “the differences between revenues paid by oil companies and those received by government agencies between 1999 and 2004 was about $300 million, which was later revised by the auditors to about $6 million.”

Two of the main highlights of the landmark audits were: gaps between revenues paid by companies and received by government, and capacity and coordination gaps in the overall management of revenues in the petroleum industry. NEITI had commissioned the first financial, process and physical audits of the petroleum industry, covering the period 1999 to 2004. The audits were conducted by an international consortium of auditors, led by the Hart Group of United Kingdom.

Adio said “the balance of $6 million represents about 0.01 % of the more than $90 billion oil and gas revenues for the audited period. Though the outstanding percentage is adjudged to be within acceptable margin of errors, the unresolved payments have been referred to law-enforcement agencies for further investigation and possible prosecution.”

NEITI said in response to the structural and operational gaps with the industry, the government constituted an Inter-Ministerial Task Team (IMTT) to devise and implement strategies for rectifying the gaps. The team consists of representatives of core government agencies such as Department of Petroleum Resources (DPR), the NNPC, the Federal Inland Revenue Service (FIRS) the Office of the Accountant General of the Federation (OAGF), and the Central BANK of Nigeria (CBN) with NEITI mandated to coordinate the remediation efforts.

The team thereafter developed a comprehensive programme, which was also approved for implementation. The remediation plan covers five key areas: developing a revenue-flow interface among government agencies; improving Nigeria’s oil and gas metering infrastructure; 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.

Reacting to the report of missing billions in the nation’s oil sector, a former minister of petroleum under General Ibrahim Babangida’s administration, Professor Tam David-West, was of the opinion that by acting as the political head of the ministry for all of eight years, only appointing Dr. Edmond Daukoru as minister of state in the last two years, the nation’s immediate former president, Olusegun Obasanjo, can not plead ignorance of such monumental mismanagement in that sector. He therefore suggested a comprehensive audit of the NNPC accounts, which should be all-embracing as to involve the questioning of both chief executive officers and political office holders in charge of the oil sector.

With the coming of the Umar Yar’Adua presidency and its public comments regarding instilling integrity in governance and people confidence in government, it is hoped that a new regime of accountability would be instituted in the oil industry. It is an issue of hope because past administrations in the country have been found to have merely paid lip service to the issue of corruption without realy getting down to the business of eradicating the menace.

The period of President Obasanjo’s leadership of the country witnessed unprecedented rise in the international price of crude, which nearly sold for $70 a barrel, but contributed little to the material well-being of the people. President Yar’Adua has promised to bring a change to the situation and has started with the recent reversal of the less than transparent sale of the nation’s two refineries in Kaduna and Port-Harcourt.

The onus is now on him to address the recurring allegations of mismanagement of the nation’s vital oil sector with particular emphasis on getting the industry to adequately meet the larger developmental needs of the nation. Posterity is watching and will in due time pass its verdict.