The multi-billion dollar NNPC fraud, by auditors

 

             How much is missing from the Nigerian National Petroleum Corporation’s (NNPC’s) books – $20billion? $1.48billion? $4.29billion?
            The question remained unresolved yesterday – despite the release of the auditors’ report. But one fact is clear: the system is rotten.
Former Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi threw down the gauntlet in 2013 when he alleged that $20billion oil money was unremitted to the treasury.
A committee set up by Finance Minister Ngozi Okonjo-Iweala said about $10billion was the figure.
When auditing giant PriceWaterHouseCooper was brought in, it said, according to the government, that only $1.48 billion should have been remitted to the treasury.

The report, which the Presidency released yesterday – apparently to clear itself of shielding corrupt officials – said the oil giant should have refunded $4.29billion.
Besides, the report opened a can of worms, returning a damning verdict on NNPC’s operations.
The Nigeria Petroleum Development Corporation (NPDC), according to the auditors, was hostile. It made its job difficult.
Petroleum Minister Mrs Diezani Alison-Madueke said last week that $1.48billion was unremitted, adding that the NPDC was already returning cash.
The NNPC, said the report, was making deductions in its revenue before remitting funds to the treasury.
PwC stated: “Clarity is required on whether such deductions should be made by NNPC as a first line charge, before remitting the net proceeds of domestic crude to the federation accounts. If these are deemed not to be valid deductions, then the amount due from NNPC would be estimated at $2.07 billion (without considering expected known remittances from NPDC) or $4.29 billion (if expected known remittances from NPDC are considered).”
PwC came to this conclusion because between 12 January and 29 January 2015, the audit firm confirmed that “NNPC provided transaction documents representing additional costs of $2.81 billion related to the review period, citing the NNPC Act LFN No 33 of 1977 that allows such deductions”.
PwC said it did not have access to NPDC’s full accounts and records “and we have not ascertained the amount of costs and expenses which should be applied to the $5.11billion crude oil revenue (net of royalties and PPT paid) per the NPDC submission to the Senate Committee which should be considered as dividend payment by NPDC to NNPC for ultimate remittance to the Federation Account.”
There were suggestions that the NNPC cooked the books. The oil giant, the audit firm said, “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 $2.81billion, which were not part of the submission to the Senate Committee hearing have been defrayed to arrive at this position.”
In its comments section, PwC noted that it did not obtain any information directly from NPDC, “but in accordance with NPDC former Managing Director’s (Mr Briggs Victor’s) submission to the Senate Committee hearing on the subject matter, for the period, NPDC generated $5.11billion (net of royalties and petroleum profits tax paid).”
As a result, PwC said it relied on the legal opinion provided to the Senate Committee by the Attorney General (AG), Mr Bello Adoke “on the subject of the transfers of various NNPC (55%) portion of Oil leases (OMLs) involved in the Shell (SPDC) Divestments which impact crude oil flows in the period. The AG’s opinion indicated that these transfers were within the authority of the minister to make.”
If this is true, PwC believes “these assets were validly transferred to NPDC. The same AG’s Legal Opinion also indicated that NPDC was to make payments for Net Revenue (dividend) to NNPC, which should ultimately be remitted to the Federation Account.”
Some of the limitations encountered by the auditing firm, which affected its findings, were:
•inavailability of NPDC personnel to provide information on its processes;
•non-response of NPDC to request for detailed breakdown of the crude oil assets transferred to NPDC;
•volume of allocations to Strategic Alliance Partners per partner and list of receiving banks;
•account numbers and bank statements for NPDC crude proceeds.
“We encountered some limitations in the course of executing some aspects of our scope of work. The key limitations were: Unavailability of relevant NPDC personnel to provide information on the NPDC’s processes particularly around its operations, business objectives and internal accounting/financial reporting, etc; change of management at NPDC during the course of the engagement, which further contributed to our inability to successfully obtain responses to our request for information; non-response of NPDC to our request letter, which meant that we weren’t provided with the following requests:
•Detailed breakdown of the crude oil assets transferred to NPDC.

•Terms of divestment and contract documents involving the assets taken over.

•Strategic Alliance agreements between NPDC and counterparties.
•Monthly volume allocations to Strategic Alliance Partners per partner.
•Monthly balance of NPDC crude over-lifts by Strategic Alliance partners.
•List of receiving banks, account numbers and bank statements for NPDC crude proceeds.”
The report added: “We did not have access to NPDC’s full accounts and records and we have not ascertained the amount of costs and expenses which should be applied to the $5.11billion Crude Oil revenue (net of royalties and PPT paid) per the NPDC submission to the Senate Committee which should be considered as dividend payment by NPDC to NNPC for ultimate remittance to the Federation Account.”
The firm said working with the documents made available to it, it established that the gross revenues generated from Federal Government’s crude oil liftings was $69.34bn and not $67 billion as stated by the Reconciliation Committee for the period from January 2012 to July 2013.
It also found out that the cash remitted into the Federation Accounts in relation to crude oil liftings was $50.81bn and not $47b as stated by the Reconciliation Committee. It said this amount was arrived at because “ (Nigerian National Petroleum Corporation) 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 $2.81billion, which were not part of the submission to the Senate Committee hearing, have been defrayed to arrive at this position.”
The report observed that the “resulting potential excess remittance indicates that the Corporation operates an unsustainable model”.
The report states that “the Corporation is unable to sustain monthly remittances to the Federation Account Allocation Committee (FAAC), and also meet its operational costs entirely from the proceeds of domestic crude oil revenues, and have had to incur third party liabilities to bridge the funding gap. Furthermore, the review period recorded international crude oil prices averaging $122.5 per barrel (Average Platts prices for 2012). As at the time of concluding this report, international crude oil prices average about $46.07 per barrel, which is about sixty two percent (62%) reduction when compared to the crude oil prices for the review period. If the NNPC overhead costs and subsidies are maintained (assuming crude oil production volumes are maintained), the corporation may have to exhaust all the proceeds of domestic crude oil sales, and may still require third party liabilities to meet costs of operations and subsidies, and may not be able to make any remittances to FAAC.”
It, therefore, recommended that the “NNPC model of operation must be urgently reviewed and restructured, as the current model, which has been in operation since the creation of the Corporation, cannot be sustained”.
PwC also established that a “determination is required as to whether all or a portion of other costs not directly attributable to crude oil operations can be defrayed by NNPC”.
It recommended that the NNPC be required to disclose details of all existing liabilities and impact on proceeds of future crude oil sales.
PwC said: “Accordingly, all the Corporations costs, and those of its loss making subsidiaries have been defrayed in the analysis provided by the Corporation for the review period. However, the profit making subsidiaries and dividends received have been excluded from the analysis provided. This suggests that there are other sources of net revenues available to the Corporation not currently disclosed. A proper estimate of the actual potential excess remittance/under-remittance can only be arrived at if all revenues and all costs of the Corporation and all its subsidiaries are accounted for in a consolidated position. A detailed review of this was beyond the scope of our mandate.
“We, therefore, recommend that NNPC be required to disclose the consolidated position of the Group and its subsidiaries, and expected remittances to the Federation accounts be determined from the available consolidated net revenues. Furthermore, the nature of costs that are allowable should be pre-determined by all relevant parties.
“We also recommend that the NNPC Act be reviewed as the content contradicts the requirement for NNPC to be run as a commercially viable entity. It appears the act has given the Corporation a ‘blank’ cheque to spend money without limit or control. This is untenable and unsustainable and must be addressed immediately. The Corporation should be required to create value, and meet its expenses entirely from the value created.
“Proceeds from the FGN’s crude oil sales should be remitted entirely to the Federation Account. Commisions for the Corporation services can then be paid based on agreed terms.”
It added: “We also expect that NPDC should remit dividends to NNPC and ultimately the Federation Account, based on NPDC’s dividend policy and declaration of dividend for the review period.We did not have access to NPDC’s full accounts and records and we have not ascertained the amount of costs and expenses which should be applied to the $5.11billion Crude Oil revenue (net of royalties and PPT paid) per the NPDC submission to the Senate Committee hearing in order to arrive at the Net Revenue (in line with the AG’s Opinion), which should be subjected to dividend remittance.We are also not aware that NPDC declared dividend for the review period.
These matters need to be followed up for final resolution in terms of the NPDC Net Revenue (dividend) for Crude Oil relating to the transfers, PPT and royalty unremitted, and the transfer price valuation and remittance.”
The auditors’ other findings include “possible errors in the computation of crude oil prices at the NNPC that resulted in a $3.6 million shortfall in incomes to the Federation Account.
“The major beneficiaries were Fujairah Refinery – $805,545, NNPC (KRPC/WRPC) – $697,995 and NNPC (COMD) – $2,107,275. Subsequent to our identification of this issue, NNPC has amended the errors, and have reflected the amendments in the remittances to FAAC in October 2014.”
The report uncovered iregularities in Kerosine subsidy. It said: “Our review of the DPK sales process revealed that NNPC sells DPK to bulk DPK marketers in Nigeria at N40.90 per litre at a location on the coastal waterways (off shore Lagos). The expected/official regulated retail price of DPK in Nigeria is N50 per litre. This retail price of N50 comprises the ex-depot price of N34.51 and a margin of N15.49. NNPC should be required to explain the reason for selling DPK at N40.90, rather than the regulated Ex-depot price of N34.51. The Corporation should also be required to explain the reason for selling DPK to bulk DPK marketers at a location on the coastal waterways (off shore Lagos) rather than at the in-country depots.”
The auditors criticised the accounting and reconciliation system for crude oil revenues used by government agencies as “inaccurate and weak”. “We noted significant discrepancies in data from different sources. The lack of independent audit and reconciliation led to over reliance on data produced from NNPC. This matter is further compounded by the lack of independence within NNPC as the business has conflicting interests of being a stand-alone self-funding entity and also the main source of revenue to the Federation Account,” they said.