Premium Times (Abuja)

Nigeria: Transparency in the Management of Nigeria's Oil Revenue

opinion

On September 25, 2013, the Governor of Central Bank of Nigeria (CBN) wrote a letter to the President of the Federal Republic of Nigeria. The central subject of that memorandum was "Non-Repatriation to the Federation Account by Nigerian National Petroleum Corporation (NNPC) of N49.8 Billion representing 76% of the value of Crude Oil liftings in 2012 and 2013".

But the letter also contains complaints about "Failure of NNPC to pay N22 billion Nigerian Export Supervision Scheme (NESS) Levy", and "Other Related Matters". On the whole, the CBN Governor raised, in the memorandum, several issues of urgent national importance which he wanted the President to intervene on and address. A close reading of the letter reveals about ten such issues.

Let me briefly list them. The first is the exact quantity of crude oil lifted by the NNPC from January 2012 to July 2013. The second is its true monetary value. The third is the monetary value of the crude oil exports by the NNPC within the same period. The fourth is the quantum of revenue swept into the Federation Account by the NNPC in the same period. The fifth is the shortfalls in remittances by the NNPC to the Federation Account between January 2012 and July 2013. These five issues are hard core economic questions which the President, to whom the memo was directly sent, should demand answers to, from the Minister of Petroleum Resources, the Accountant -General of the Federation and the Minister of Finance/Coordinating Minister for the Economy. They require a factual response, not a resort to diatribe, recriminations, or ad hominem verbal-stone throwing.

The second set of issues is more loaded and not all of them are directed at the NNPC. There is, first, a call by the CBN Governor for an investigation into the activities of Bureaux De Change (BDC) with a view to prosecuting them for violating Nigeria's anti-money-laundering laws. Then, second, the CBN Governor suggested an investigation of companies that sell private jets to Nigeria, accusing them of also violating Nigeria's anti-money laundering laws.

Third, the CBN Governor alleges, in a direct and pointed manner, that the NNPC has refused to keep up with payment of its levies under the Nigerian Export Supervision Scheme (NESS); and that the NNPC currently owes the Federal Government of Nigeria a sum of N22 billion. Fourth, the letter raises an issue which bothers on reconciliation of physical volumetric data and revenue flow data pertaining to crude oil lifting and tax payments.

As the CBN Governor puts it, between January 2012 and July 2013, NNPC crude oil lifting amounted to 46% of total lifting from Nigeria; yet remittances represented one third of taxes paid by the oil companies that exported the balance of 54%. That implies that the tax remitted by the NNPC should be commensurate with its oil lifting, and should therefore approach a proportion higher than 33.3% of the taxes paid by oil companies. The fifth issue raised in this category is also a reconciliation problem.

The CBN believes that the quantum of revenue received and swept into the Federation Account, as Crude Oil sale proceeds, should normally be higher than the amount paid into the Federation Account as Petroleum Profit Tax and other related taxes and charges. It was therefore surprised that in 2012 and 2013, this normal trend was reversed. The Federation Account received, instead, a higher figure of US$28.51 billion as Petroleum Profit Tax and related taxes and charges and only US$10.13 billion as revenue from crude Oil sales. And in 2013 (January to July) taxes brought in US$16.65 billion, while crude oil sales yielded only US$5.39billion to the Federation Account.

The CBN levied two other serious allegations against the NNPC way beyond the accusations of non-repatriation of funds to the Federation Account and non-payment of NESS levy. The CBN charged the NNPC of acting in a manner that is tantamount to violation of certain constitutional provisions; and also of violating both the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act No.17 of 1995; and the Pre-Shipment Inspection of Exports Act No. 10 of 1996.

It then proceeded to demand for some action to be taken by the President of the Federal Republic of Nigeria to address the problems raised in the memorandum. The first prayer by the CBN is that the President should require the NNPC to provide evidence for its disposal of all proceeds of crude oil sales "diverted from the CBN and the Federation Account". The second is for the President to order an investigation into crude oil lifting and swap contract as well as the financial transactions of counter-parties for equity, fairness and transparency. The third is that the President should authorize the prosecution of suspects in money laundering transactions, including but not limited to BDCs who are unable to account for hundreds of millions of dollars.

Reaction by the NNPC

The NNPC responded by stating that the allegation by the CBN was borne out of a misunderstanding, by the Governor of the Central Bank, of the workings of the oil and gas industry and the modality for remitting crude oil sales revenue to the Federation Account. It explained this modality pointing out that the Department of Petroleum Resources (DPR) and the Federal Inland Revenue Service were saddled with responsibility for royalty and petroleum profit tax, respectively. It then asserted that the major contributor into the federation from crude oil sales is royalty and PPT. This being the case, a significant proportion of the revenue generated from crude oil sales is expected to be paid into the federation account through the DPR and FIRS.

The NNPC went even further to claim that it "is an established fact globally that royalty and PPT contribute over 75 per cent of the total government revenue(especially of the JV arrangements in all jurisdictions) derived from the proceeds of crude oil sales while the balance represents cost of production and profit oil". The NNPC explained that the 24 per cent of the crude oil revenue receipts, which the published letter by the CBN Governor acknowledged as partial remittance represents the proceeds from the equity lifting which the NNPC was directly responsible for in line with global trends.

The NNPC then stated categorically, with a note of finality, that the "alleged unremitted 76 per cent [of total crude oil revenue] was paid through the agencies that are statutorily empowered to receive them for onward remittance into the federation account". Further, the NNPC claimed that "the entire federation equity in JV is about 58 per cent, hence only such equity and revenue derived from crude oil sales belongs to the federation". Curiously, in listing the upstream petroleum revenue flow streams, the NNPC was silent on domestic crude.

The NNPC also denied being indebted to the NESS.

A Comment

In commenting on this letter, its implications for the economy, the response of the NNPC, and the reaction of some Nigerians, I shall first broaden the issues involved and then address concrete and specific matters of oil revenue management. The broad issues pertain to the fundamental principles of petroleum revenue governance as reflected in the principles and criteria of the Extractive Industries Transparency Initiative (EITI) and the Precepts of the Natural Resource Charter (NRC). And the concrete and specific issues I shall address will be drawn from the work of the Nigeria Extractive Industries Transparency Initiative, especially its financial, physical and process audits of the Nigeria oil and gas industry, covering the period, 1999-2011.

The CBN Letter in the Context of the EITI and the NRC

The over-arching governance philosophy guiding good oil revenue management in countries implementing the EITI, or associated with the attempt to apply NRC precepts, is captured by the twin concepts of transparency and accountability. Let us start with the Natural Resource Charter and then go on to the EITI Principles.

Precept 2 of the Natural Resource Charter NRC) deals with the governance principles of transparency and accountability. It assesses the extent to which a government is accountable to an informed public in its management of the nation's natural resources. It states that a nation in which the quality of public information about natural resources is low and its timeliness is poor, it is difficult to hold government and companies to account. And in a nation where transparency is lacking and accountability weak, it is very hard to achieve sustainable development.

The relevant clauses of the EITI rules are Principles 4,5,8 and 9. These are reinforced by the very first of the six EITI Criteria. EITI Principle 4 speaks to recognition, by all EITI implementing countries, that a public understanding of government revenue and expenditure over time could help public debate and inform choice of appropriate options for sustainable development. EITI Principle 5 is an emphasis on the importance attached by all EITI implementing countries to transparency by governments and companies in the extractive industries and the need to enhance public financial management and accountability.

Principle 8 is an affirmation, by EITI implementing countries, of their belief in the principle and practice of accountability by government to all citizens for the stewardship of the revenue streams and public expenditure. And Principle 9 is a declaration that all EITI implementing countries are committed to encouraging high standards of transparency and accountability in public life, government operations and business. We should note that to be transparent is to be open, clear, unambiguous, precise, and simple. And to be accountable is to be answerable, responsible and liable.

The four EITI Principles highlighted above as part and parcel of global EITI Rules are reinforced, and clothed with both concreteness and mandatory force, by the first of the EITI Criteria. The first EITI Criterion, or Requirement, in EITI implementation is: Regular publication of all material oil, gas, and mining payments by companies to governments ("payments") and all material revenues received by governments from oil, gas and mining companies ("revenues") to a wide audience in a publicly accessible, comprehensive and comprehensible manner.

Nigeria subscribes to the NRC precepts and is an EITI implementing country; indeed, it is designated an EITI-Compliant country (2011-2016). It follows that the Nigerian people, government, ministries, departments and agencies subscribe to the EITI Principles (20 in all) and are bound by the EITI Criteria. Therefore, the throwing into the public domain of the data and information on revenues received by the Nigerian government from the oil and gas sector is in consonance with the spirit and philosophy of the EITI. No one should be embarrassed about the act, especially when one of the issues being canvassed is that the precise amount received should be determined and what is not paid into the Federation Account be "repatriated" and paid into that account in accordance with the provisions of the 1999 Constitution of the Federal Republic of Nigeria (section 80) and other extant laws of Nigeria.

Determining the Accuracy or Authenticity of the Revenues Received by the Government

Once more, let us begin with a general point. In the context of the implementation of the EITI in Nigeria, no data, on revenues received from the oil and gas companies as royalty, taxes, or other charges released by either one agency (be it the CBN or the NNPC) or by all of them acting together, even after reconciliation, can be regarded as accurate, authentic and final. Such figures need to be subjected to audits conducted in accordance with international standards and then made available to the NEITI independent auditors for reconciliation with figures from oil companies and for a thorough validation of the data and information. This is the whole point about the utility of Nigeria signing on to the EITI ten years ago. We shall return to this point later.

Let us also say for the benefit of the public that the CBN, from the experience of the NEITI audits, appears to be the institution of government from which comprehensive data bout upstream petroleum revenue streams can be easily got. Unfortunately, its records are not always accurate. Indeed, the CBN is 'famous' for its misclassification of data. Any in doubt of this should look at the NEITI financial audit report for the year 2005, especially the section dealing with royalty and PPT data, much of which emanated from the CBN. But the problem is not that of the CBN alone. In age if great advance in information and communication technology, much of recording of information and data in the upstream oil and gas industry is still paper-based, done manually, and reconciliation requires face-to-face meeting of officials. It is incredible.

Meanwhile, let us nevertheless, examine critically some of the information and data provided by the CBN. We shall begin with the items listed above as the first set of issues, all of which need to be addressed by the NNPC. According to the CBN, from January to December 2012 and from January to July 2013,, total lifting of crude oil by the NNPC amounted to 594,024,107 (i.e. roughly 594.024 million) barrels. This, it claims, represents 46% of total lifting by all stakeholders, which it put at 1,287,742,641 (i.e. about 1.288 billion) barrels, during the period under review. If the data on lifting are correct, then NNPC's proportion represents 46.129% of total lifting by all stakeholders, as stated. The trend of lifting by NNPC in the years immediately preceding the period under review would tend to give credence to the figures quoted by the CBN. According to NEITI physical and process audits, NNPC's crude oil lifting, peer annum, (i.e. 12 months) in the years 2006-2011 was as follows:

Year Total Lifting NNPC Entitlements % Entitlements of O/Coys %

2006 860.89mbbls 417.89mbbls 48.54 443.0mbbls 51.46

2007 809.27mbbls 381.82mbbls 47.2 427.45mbbls 52.8

2008 764.34mbbls 406.19mbbls 53.14 358.15mbbls 46.86

2009 789.71mbbls 336.16mbbls 42.57 453.55mbbls 57.43

2010 898.25mbbls 387.63mbbls 43.15 510.62mbbls 56.85

2011 867.29mbbls 385.94mbbls 44.50 481.35mbbls 55.50

Total Nigerian federation crude oil lifting or entitlement is received through the NNPC. For six years immediately preceding 2012, average proportion of the total lifting of crude oil that was taken by the NNPC, on behalf of the federation, was 46.52 per cent. That total consists of equity crude (arising from joint venture agreements); profit oil (arising from production sharing contracts); and domestic crude (meant for the refineries and domestic consumption but much of which NNPC actually exports and earns foreign exchange from).

The data supplied by the CBN is also lent some credibility by the historical trend in the structure of the revenue streams in the petroleum upstream subsector. Data published by the NEITI on financial flows from the sector covering the period 1999-2011 present the picture very graphically. The underlying assumption of the CBN position is that proceeds from oil and gas sales are usually much higher in value than the financial proceeds from royalty, petroleum profit tax and other charges. Therefore, when you have a situation where the value of the royalty, taxes and other charges is higher than the value of oil and gas sales, then there is need to interrogate the figures. The table below clearly validates the argument of the CBN.

Year Total Flows to the FA(US$) Proceeds from O&G Sales(US$) % of Total Receipts Proceeds from Royalty &Tax etc (US$) % of Total Receipts

2006 43.433billion 27.177billion 62.57 16.256billion 37.43

2007 42.103billion 29.201billion 69.36 12.902billion 30.64

2008 58.296billion 41.217billion 70.70 17.079billion 29.30

2009 27.171billion 17.611billion 64.82 9.560billion 35.18

2010 41.452billion 27.635billion 66.67 13.817billion 33.33

2011 63.139billion 36.724billion 58.16 26.415billion 41.84

Average % 65.38 34.62

Source: NEITI "Financial Audit: An Independent Report Assessing and Reconciling Financial flows within Nigeria's Oil and Gas Industry--2009-2011"

The table above shows that between 2006 and 2011, the average contribution of proceeds from oil and gas sales to the total flows to the Federation Account was 65.38 per cent. The average contribution of royalty, petroleum profit tax, and other charges to the Federation Account was smaller, at 34.62 per cent. If we take a long view of the situation, the picture that emerges is similar.

A publication by the NEITI titled "10 Years of NEITI Reports-What Have We Learnt?" states: "the Government of Nigeria through the Federation [Account] has received a total of US$269 billion from the oil sector between 1999 and 2008. Over the ten year period US$92 billion has been received from oil-specific taxes. US$5 billion from non-oil specific taxes from oil companies and US$172 billion has been received from the sale of government equity oil". The term "equity oil" was used for simplicity to cover equity crude oil; profit oil; and domestic crude. The proportion of its contribution is 63.94 per cent; and that of the taxes is 36.06 per cent.

Yes, we know that in more recent years, the quantum of proceeds yielded through the Joint Venture Operations is diminishing while that from Production Sharing Contracts is increasing. The Federal Inland Revenue Service has also become more competent in the extraction of petroleum profit tax. Consequently, the value of PPT is rising relative to the value of Royalty. We know too that as a result of the more prominent position occupied by PSCs and Carry Agreements, the value of what goes to the operators as cost oil is rising while the value of equity crude may be decreasing vis a vis what accrues to the Federation as profit oil. Thanks to unequal and unfair agreements and contracts between oil companies and the Nigerian federation.

These developments are not, in my view, sufficient to completely reverse, in 2012 and 2013, the historical (1999-2011)trend in the structure of financial flows into the Federation Account delineated above. In 2011, a period of twelve months, the total amount swept into the Federation Account was US$63. 139 billion. Of this amount, proceeds from oil and gas sales accounted for US$36.724 billion (58 %), while royalty and taxes contributed US36.724 billion (42%). Then in 2012-2013, a period of 19 months, there was a dramatic and drastic reversal: a mere US$15.528 billion from oil and gas sales out of a total of US$65.332 billion (or even the post-bellum revised figure of US43 billion). Both the total amount and the proportions contributed by different revenue streams need to be interrogated, in the light of the historical trend observed.

Epilogue

Just as we were rounding off the writing of this article, another scene in the alleged US$49.8 billion non-repatriated oil revenue drama unfolded. During a joint press conference involving, among others, the Minister of Finance/Coordinating Minister for the Economy, the Minister of Petroleum Resources and the Governor of Central Bank, Nigerians were informed that half the amount allegedly un-repatriated, previously, had been identified: it was not missing; it was not unremitted; it was not non-repatriated; it was in fact in the national Federation Account.

The CBN Governor was reported to have admitted that he made a mistake in his letter to the President; that, in the course of a reconciliation meeting, only about US$12 billion was found to be a short-fall in the remittances of the NNPC to the Federation Account. He explained that, actually, the NNPC shipped out crude oil worth a little above US$67 billion during the period under review. However, out of this amount, US$24 billion worth of crude oil shipment was made on behalf of third parties, to defray obligations like oil companies' tax on crude and also third party financing. He declared that, the discovery had, already, addressed half of the amount under question. (Well, US$67billion--US$24billion=US$43billion--US$15billion=US$28 billion).

According to the CBN Governor, the second part of the issue pertained to the lifting of "Domestic Crude" by the NNPC, to the tune of US$28 billion. It is here that the CBN felt that there was a short-fall in remittances to the Federation Account by the NNPC, amounting to US$12 billion. The Finance Minister, at this point, countered the position of the CNB Governor, stating that the un-reconciled figure was US$10.8 billion. So the reconciliation exercise would continue among the relevant agencies.

From the analysis made above, the issues raised in the letter by the CBN governor are larger and weightier than the narrow focus of the inter-agency reconciliation meeting. The public should insist that answers should be found for them, even if, or when the CBN that raised decides to make a tactical retreat--at least in public.

The Way Forward

The first set of issues identified above is within the jurisdictional competence of the Office of the Accountant-General of the Federation. He is the constitutional boss of the Federation Account and should be raising the issues interrogated by the CBN (which is the OAGF's banker) in this category. To get to the root of the matter, the OAGF should work closely with the Revenue Mobilization Allocation and Fiscal Commission, the Office of the Auditor-General for the Federation and the NEITI.

The matter is too important to be left to the CBN and the NNPC, under the auspices of the Ministry of Finance. In the medium term, the recommendations contained in NEITI financial, physical and process audit reports, especially those pertaining to revenue-flow interface, capacity building for regulatory agencies in the oil and gas sector, and overall governance of the sector, will help to address the problem and prevent a future occurrence.

The second set of issues about money-laundering should involve the Economic and Financial Crimes Commission. Some of those that need to be interrogated are the so-called "Politically Exposed Persons (PEPs)", who should more appropriately be described as Politically Protected Persons, because they are protected not only by the immunity clause of the 1999 Constitution, but also by their high political offices, positions or influence, their politically-derived wealth, and their politically sourced social status. Because of this, the ICPC and the Code of Conduct Bureau need to assist the EFCC; their enabling laws empower them better to deal with such persons.

The ultimate solution is to make the institutions established by law to deal with the problems identified by the CBN to work effectively. It is also to take more seriously our commitment to relevant international associations, like the EITI, and employ fully the transparency and accountability tools which they have fashioned, such as the audit process of the NEITI and the benchmarking exercise of the Nigeria Natural Resource Charter. The institutions need to adequately and regularly funded; allowed to operate independent of political interference; and taken seriously by having the recommendations in their reports faithfully implemented. Where the government of the day fails to discharge any of these obligations, then the people should organize and mount pressure on government to fulfil its responsibility towards these institutions and the citizens at large. Professor Asobie was the Chairman of the Governing Board of NEITI, former head of the Academic Staff Union of Nigerian Universities, and a renowned campaigner for oil sector transparency in Nigeria (formerly for Transparency International Nigeria). He is also the Co-chairman of the Nigerian Natural Resource Charter.

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