NNPC Again !!!

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In recent times, the Federation Account Allocation Committee (FAAC) has recorded repeated wrangling with the Nigerian National Petroleum Commission (NNPC) over remittance of oil money for states to share. Bamidele Famoofo examines the possible implications of this recurring issue on the economy

The Genesis

Hitherto, Nigeria, most populous nation in Africa, runs a mono-economy with about 90 per cent of its revenue derived from sales of oil and oil–related products. 

It would appear that successive governments of the largest economy in Africa have only paid  lip service to creating other avenues for the country to generate revenue in a bid to diversify the economy from the business of crude oil.

Recently, the country paid dearly for this negligence, which eventually plunged it into a recession, considered the worst of its kind in two decades. The reason for the negative downturn in the economy, which lasted one year was due mainly to the lacklustre performance of crude oil in the global market which affected price negatively. The case of Nigeria, however, became worse as production dropped as a result of criminal activities in the Niger-Delta region, dealing huge blow on revenue. And as a result, the executive arms of government from the federal to the local government level were unable to meet basic responsibilities like payment of wages and provision of basic infrastructures for the people. The only feasible way out especially for states was to go neck deep into debt as most of them sought assistance from all sources possible to keep the structures of governance running while the gloomy days of recession last.

 Allegation

The state governments represented by their finance commissioners have been at  loggerheads with the Nigerian National Petroleum Corporation (NNPC) over remittance of proceeds from oil sales meant to be shared on a monthly basis through FAAC. Just in the month of June, 2018, the states accused the NNPC of shortchanging them by N20 billion. According to the Chairman of the Finance Commissioners Forum, Mr. Mamood Yunusa,  the NNPC only remitted N127billion as its contribution to what the FAAC was meant to share instead of the expected N147 billion.

But the commissioners for finance from the 36 states of the federation, who met in Abuja, insisted that the states would not accept anything short of the NNPC fully remitting N20 billion outstanding to the Federation Account.

Yunusa gave a breakdown of the components the remittance from NNPC for the month of May, which was shared in June. “Based on all provable assumption parameters, the Nigerian National Petroleum Corporation (NNPC) is to remit N60 billion as Royalty based on the verbal admission of the Department of Petroleum Resources (DPR) and based on the MTEF (Medium Term Expenditure Framework) submitted by NNPC. The Petroleum Profit Tax (PPT) expected was to be 1.46 multiplied by 60 billion amounting to N87.6 billion, which means a total of  N147 billion was expected in the federation account as against N127 billion paid by NNPC”, he said.

He also disclosed that, at the inconclusive FAAC meeting recently, “NNPC claimed it spent N3.5 billion on product leakages, pipeline vandalism, but the Department of Petroleum Resources (DPR), an agency that is supposed to keep such record, claimed ignorance of the amount.”

Yunusa also observed that the states got more revenue from NNPC when crude oil was $50 per/barrel, adding that they now receive far less when the commodity is almost $80/barrel, wondering why such should be the case.

He argued that as equal stakeholders in the business, NNPC owes the states a duty to Nigerians in the spirit of openness and transparency and by the Act that established it to be open and transparent to all stakeholders. “States as stakeholders in federation account are not expected to take NNPC’s account hook, line and sinker but are allowed by law to ask questions for clarity.”

Meanwhile, according to the NNPC, average international Brent crude price has been on the increase since the beginning of 2018. Brent price rose to $69.08/b in January 2018 as against $64.37/b in December 2017.  Over last 12 months the price has risen to about 26.57 percent. The continuing  efforts by  OPEC  and non-OPEC  producers  to  stabilise  the  market  and crude  inventory  pulls  in  the  middle  of  healthy  economic growth  and  improving  oil demand supported  the  oil  price.  The OPEC  Reference  Basket  increased  for  the 5 consecutive months in  January  2018  to average  $66.85/b (an increase  of  7.7 per cent),  the highest monthly average since November 2014.  NYMEX WTI also increased by $5.71 to $63.66/b.

Financials

Group operating revenues for the months of December 2017 and January 2018 were N406.83 billion and N323.19 billion respectively.  These represented 110.63 per cent and 87.89 per cent respectively of monthly budget.  Similarly, operating expenditure for the same periods were N413.64 billion and N324.76 billion respectively, which  also  represented 130.22 per cent  and 102.24 per cent of budget for the months respectively. This 30th edition of the report, which is the latest one published, indicated a trading deficit of N1.56 billion, which is comparatively lower than the previous month’s deficit of N6.81billion.  This  represented  N5.25billion  decrease  in  tradingdeficit  compared  to  the  December  2017 performance. This improvement is attributable to the decreased cost in upstream activities especially NPDC and relative decrease in PPMC operation’s cost.

Antecedents

In December 2011, the Nigerian government permitted a forensic report conducted by KPMG to be published. The audit, commissioned by the Ministry of Finance following concerns over the NNPC’s transparency, detailed the NNPC’s sharp business practices, violation of regulations, illegal deductions of funds belonging to the state, and failure to account for several billions of naira that should go to the federation account.

Auditors found that between 2007 and 2009 alone, the NNPC over-deducted funds in subsidy claims to the tune of N28.5 billion. It has not been able to account for the sum ever since.

In May 2008, Willbros Group Inc, a US company, admitted to making corrupt payments totalling over $6.3 million to officials at the NNPC and its subsidiary NAPIMS, in return for assistance in obtaining and retaining contracts for work on the Eastern Gas Gathering System (EGGS).

In July 2004, ABB Vetco Gray, a US company, and its UK subsidiary ABB Vetco Gray UK Ltd, admitted to paying over $1 million in bribes to officials at NNPC subsidiary NAPIMS in exchange for obtaining confidential bid information and favourable recommendations from Nigerian government agencies.

In November 2013 after a report was published by Swiss Non-governmental advocacy organisation – Erklärung von Bern – allegations of heavy fraud surfaced, placing the NNPC under suspicion of siphoning off $6.8 billion in crude oil revenues.

 Unremitted funds

On 9 December 2013, a letter from the then Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi, to the then President Goodluck Jonathan, dated 25 September 2013 revealed  that the NNPC had not remitted over $49.8 billion proceeds of crude oil sales to the government surfaced. On 13 December 2013, NNPC responded that no money was missing. Reconciliation Committee (comprising representatives of (i) CBN (ii) NNPC (iii) DPR (iv) FIRS (v) OAGF (vi) The Budget Office of the Federation (vii) Federal Ministry of Finance (viii) Federal Ministry of Petroleum Resources) was set up.

The reconciliation committee estimated unremitted funds at $10.8 billion on 18 December 2013, while CBN changed its claim to $12 billion. CBN then informed senate committee on finance on 4 February 2014 that NNPC needed to account for $20 billion as the CBN could only confirm receipt of $47billion out of $67billion revenue for the period under review. The then finance minister recommended the conduct of an independent Forensic Audit and PwC was officially appointed by the office of the Auditor General of the Federation (AuGF) to conduct a forensic audit into the allegations.

Among the conclusions reached by PwC at the end of their work, as stated in their report, which was made public are:

1. Total cash remitted into the Federation accounts in relation to crude oil liftings was $50.81billion and not $47billionn as earlier stated by the reconciliation committee for the period from January 2012 to July 2013.

2. NNPC has provided information on the difference leading to a potential excess remittance of $0.74 billion (without considering expected remittances from NPDC). Other indirect costs of $2.83 billion which were not part of the submission to the Senate Committee hearing have been defrayed to arrive at this position.

3. A major consideration centres on the ownership of oil and gas assets controlled by NPDC. Subject to additional information being provided, we estimate that the NNPC and NPDC should refund to the federation account a minimum of $1.48billion as summarised in the next page.

No staff of the NNPC or Ministry of Petroleum has so far been punished, though on Thursday, 20 February 2014, the whistle-blowing CBN Governor was suspended from office by the President.

 Reactions

Expectedly, there have been arguments and counter arguments after the FAAC meeting in June, which ended in a deadlock.  Nigeria’s Finance Minister and Chairman of FAAC, Mrs. Kemi Adeosun,  while briefing journalists in Abuja after the meeting agreed with the position of Yunusa that governments comprising federal and states as major stakeholders in the business are entitled to their full benefits.  “For the purpose of this briefing, we operate the NNPC as a business. We have invested public capital in that business; and we have expectations of return. And when that return falls lower than our expectations, then the owners of this business, which in this case are the federal government and states, need to act,” she said.

Adeosun, like the state commissioners of finance, said the amount of money NNPC proposed as return on investment for the month of May was unacceptable. 

“So, that was what caused the deadlock yesterday (Wednesday) and we really felt the figures the NNPC was proposing for FAAC were unacceptable. We felt that some of the costs couldn’t be justified, and so we have decided that rather than approve the accounts, we will go back and do further work,” she added.

A major bone of contention was the cost which the NNPC claimed it incurred in the business in the month of May, which reduced the amount it could remit to the federation account, which both the federal and state governments said was not realistic.

“NNPC claimed it spent N3.5 billion on product leakages, pipeline vandalism, but the Department of Petroleum Resources (DPR), an agency that is supposed to keep such record claimed ignorance of the amount,” Yunusa lamented.

The allegations notwithstanding, the helmsman at NNPC, Dr. Maikanti Baru, said the corporation had done nothing wrong to be castigated.

He noted: “The Nigerian National Petroleum Corporation (NNPC) has been faithfully remitting all revenues accruing to it to the Federation Account.”

Baru told members of the Senate Committee on Petroleum (Upstream), who visited his office recently to carry out their oversight function that, allegations of non-remittance of funds had become a recurring decimal over the years.  He attributed the problem to the nature of the corporation’s operations, which involved credit lines requiring constant audit and reconciliation.

“While the process of audit and reconciliation of accounts is on, a lot of accusations of short payments and non-remittances are usually traded, we endeavour to keep our cool on these allegations because we know that we remit whatever is due to the Federation Account,” he explained.

Baru acknowledged the disagreement between FAAC and NNPC over expenses incurred on generating revenue, stating that such allegations usually arose from disagreements over expenses borne by the corporation on behalf of the federal government.

But while the stalemate persists, one major concern is that civil servants in the 36 states will be the ones to bear the brunt as salaries might be delayed.

Adeosun was quick to express this concern, saying, “The consequence of this is that salaries might well be delayed in many states as a result of this.”

But the NNPC did not agree with the position of the Minister as a statement signed by its Head of Corporate Affairs, Mr. Ndu Ughamadu, said it was  mere excuse on the part of state governments to claim they will not be able to pay salaries due to  issues of remittance.

The statement read: “The governors’ (under the umbrella of the Governors’ Forum) antics of rushing to the press at the earliest opportunity of FAAC meeting are most unfortunate, using this as an unfortunate excuse not to pay salaries. “It is a ploy to set the public against the NNPC. Yet, it is the same Governors’ Forum that approved the cash call exit to restore investor confidence and boost crude oil production, thereby generating more revenue for them to share. Again, all crude oil proceeds go straight into the CBN and not to the NNPC accounts”.

Intervention

Adeosun, however, hinted that steps were being taken to address the matter. According to the Finance Ministry and the NNPC, the Vice President, Prof. Yemi Osinbajo will mediate in the issue.  “Further negotiations and interactions are going on with the NNPC as we speak. However, we did brief both Mr. President and Mr. Vice President on the deadlock and asked for their support and their forbearance in this, because the consequence of this is that salaries might well be delayed in many states as a result of this,” Adeosun said.

Besides, the NNPC said it was taking proactive steps to settle the problem of undue expenses.  On efforts by the NNPC to ensure that Joint Venture (JV) and Production Sharing Contract (PSC) partners do not run excessive bills at the expense of the nation, the GMD explained that apart from the establishment of an Efficiency Unit in the corporation to ensure value for money across all operations, NNPC had also done a lot in renegotiating contracts as well as benchmarking costs in keeping with international best practices, adding that the effort had yielded significant results in terms of reduction in the cost of crude oil production per barrel in the industry.

Solution

Meanwhile, economic experts believed that governors should not be too dependent on revenue sharing to pay salaries and execute projects in their respective states. Figures made available by the National Bureau of Statistics have shown that most of the states depend on FAAC to survive while little or nothing is done to generate revenue internally.

Internally Generated Revenue (IGR) growth by the 36 states dropped to 16.12 per cent from N801.95billion to N931.23billion in fiscal year 2017.  On the average, each state generated an IGR of N25.17billion monthly in 2017, compared to average debt profile of N90.5billion, which leaves each with N65.3billion deficit in fiscal 2017.