By Oscarline Onwuemenyi
ABUJA – The Nigerian Extractive Industries Transparency Initiative, NEITI, has recommended a drastic restructuring of the Nigerian National Petroleum Corporation, NNPC, in order to ensure greater transparency and credibility of certain oil sector payments and receipts in the national oil and gas behemoth.
NEITI’s recommendation was made in its latest reconciliation report, which covered the period of 2006 to 2008 and published on the website of the extractive industries watch-dog, also disclosed several discrepancies in the operations of the conglomerate, especially with regards to its crude liftings and payments made into the Federation account by the NNPC.
According to the report, there is a “conflict of interest” in the buying and selling of crude by the corporation on behalf of the Federal Government, and the concomitant financial corruption in the process, and called for a review of the system.
It stated, “NNPC should not both buy Federation crude oil and sell the same crude on behalf of the Federarion. NNPC obtains a financial benefit by delaying sales documentation until it can chose an advantageous pricing option and make additional profit with the benefit of hindsight.
“This is contrary to the spirit of the decision taken in 2002 that NNPC should pay the market price for crude. Restructuring of NNPC should ensure arm’s length dealing between the Federation and the NNPC in relation to the sale of crude.”
It added that the Corporation should pay for domestic crude in accordance with the correct credit period.
Export crude is marketed on behalf of the Federation by the NNPC Crude Oil Marketing Division (COMD) and Domestic crude is sold by the Federation to the NNPC. According to the report, the accounting system used by the NNPC for equity crude is still largely not automated “with consequent reconciliation and fund sweeping interface difficulties.”
It added that, “As recommended in previous years, the COMD should maintain a timely sale ledger account for the sale of Federation crude. This is especially important in regard to domestic crude where NNPC fails to make timely payment and the Federation lacks the record to understand how is payable by NNPC at any time.”
The report further stressed that “the COMD lacks a system to manage and follow up on debts for crude sold, particularly to NNPC itself. The transaction system manages the single most significant source of income to the Federation. The system should be urgently upgraded to best practice.”
The report also raised some issues with the Production Sharing Contract, which is managed by the NNPC. It noted that there were unresolved accounting issues in the area of PSC tax and royalty oil.
“There is a long-running dispute between the NNPC and PSC operators as to the interpretation of the calculation of cost oil under the PSC; this has the effect that the parties cannot agree on the amounts being lifted by the NNPC.
“Amounts reported for this reconciliation revealed different interpretations of the same lifting transactions; the issue should be resolved speedily.
“During the 2007, a new system of bank accounts was introduced to reflect the PSC provisions. That system did not work well in the period under review. The method for accounting for tax and royalty PSC oil should be systematized,” it noted.
It also noted that the volumes reported by NNPC for crude oil liftings differed from those reported by companies operating the terminals.
“Companies report higher liftings than government has accounted for. The difference between NNPC liftings according to the records of NNPC and according to the information reported by companies have not been explained,” the report noted.
On signature bonuses, the report noted that “the Department of Petroleum Resources, DPR, provided incorrect information to the Reconciler, resulting in the issue of templates to companies being significantly delayed because the entities liable to pay signature bonuses and contract details for these entities were not known.
“As a result, not all these additional companies have returned their templates on signature bonus paid.”
Signature bonus is a negotiated amount agreed paid by a prospective investor or group of investors in a block. The bonus for a block is determined by a competitive process but must not be less than the minimum signature bonus benchmark assigned by the DPR to the block.
The Upstream and Revenue Units of the Department of Petroleum Resources, DPR, coordinates the tendering process and the signature bonuses arising from the bidding round. The Upstream Unit sets the procedures to be followed while the Revenue Unit is responsible for ensuring that companies pay the signature bonus to which they are committed.
It further noted that, “The legislation requires that signature bonuses should be paid to the Petroleum Training Development Fund PTDF, but in practice DPR has instructed companies to make payments to different accounts.
“For the 2006 round, the account details were notified to the companies after they had been successful, whereas for the 2007 round, the account details were set out in the guidance notes for prospective bidder as CBN/Accountant General FGN account’.”
The report further noted that in the 2007 licensing round, preference was given to bidders who offered to construct downstream processing projects and infrastructure.
“Significant commitments were offered, albeit mainly unquantified financially, and some bidders were accepted and signed a PSC. The timescale on which the infrastructure developments were to be provided was not clear.”
The report urged NEITI to aim to publish an annual reconciliation report within 8 months of the end of the year to which it relates.
“The report is of reduced relevance to stakeholders if it is unduly delayed. Reconciliation should be planned well in advance with a view to commencing around four months after the end of the year under reconciliation,” it said.
It added that NEITI should establish a database and collect all relevant data from the companies on a quarterly basis at least to facilitate the annual audit process.
The report further recommended that “NEITI should enhance its relationship with covered companies. This would yield benefits in terms of stakeholder understanding of company operations, constraints, and opportunities, and would benefit the reconciliation process in terms of improved preparedness.”