President, Goodluck Jonathan’s order that the forensic audit report of the NNPC be made public is generating furor in some quarters and curiosity in others. Here is the executive summary of the findings of the report unedited as submitted to the federal government by PWC
Actual revenue generated $69bn
Corporation operates an unsustainable model.
Forty six per cent of proceeds of domestic crude oil revenues spent on operations and subsidies.
International crude oil prices averaging $122.5 per barrel
$3.38 billion was spent on kerosene subsidy for the review period.
Presidential directive needed to stop kerosene subsidy
Over claim for subsidy $98million
Unpaid signature bonus for divested assets $1.75bn
No access to NPDC’s full accounts and records
Clarity required if deductions should be made by NNPC as a first line charge
BASED on the work conducted by our team from the commencement of this mandate up until January 29, 2015, our conclusions are as follows:
Total gross revenues generated from FGN crude oil liftings was $69.34bn and not $67 billion as earlier stated by the Reconciliation Committee for the period from January 2012 to July 2013. Total cash remitted into the Federation accounts in relation to crude oil liftings was $50.81bn and not $47bn as earlier stated by the Reconciliation Committee for the period from January 2012 to July 2013. 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 resulting potential excess remittance indicates that the Corporation operates an unsustainable model. Forty six percent (46%) of proceeds of domestic crude oil revenues for the review period was spent on operations and subsidies. 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 2, 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.
The corporation is unable to sustain monthly remittances to the Federation: 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.
We, therefore, recommend 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. The report reflects the fact that $3.38 billion was spent on DPK subsidy for the review period. We also confirmed using third party vessel tracking platforms that all vessels carrying NNPC cargoes arrived in Nigeria within the periods disclosed by PPPRA.
A major consideration centers 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. 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. 2 US Energy Information Administration data on indexmundi.com. Investigative Forensic audit of crude oil revenues and remittances by NNPC (January 2012 – July 2013)
Expected refund by NNPC to the FGN: Description Summary of expected remittance to the Federation accounts by NNPC/ NPDC $billion.
Comments: Duplicated PMS subsidy claim 0.02; Duplicated DPK subsidy claim 0.04; Subsidy computation errors 0.04; Subsidy claim on un-incurred DPK cost 0.21; Over-claim of subsidy for the review period 0.98bn; Unsubstantiated costs and errors in cost schedules 0.78. Additional cost provided between 12 January 2015 and 29 January 2015 (2.81). (Incurred deficit)/Expected refund by NNPC/NPDC to the FGN (0.74); Unpaid signature bonus for divested assets $1.75bn; unpaid NPDC self assessed taxes and royalties 0.47 I
Updated Expected refund by NNPC/NPDC to the FGN $1.48; Amounts to be refunded by NPDC to the Federation accounts out of NPDC net revenues (dividends)3.I; DPK Subsidy claims for the review period II. 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.
Between January 12 and January 29, 2015, 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. 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). The Corporation provided details of expenses to the tune of $12.97 billion related to the review period, funded from the proceeds of domestic crude oil revenues.
This is summarized: Revenue generated from domestic crude liftings (January 2012 to July 2013) $28.22bn; Revenue remitted from domestic crude liftings January 2012 to July 2013 $15.99; Unremitted domestic crude revenue $12.23bn; Costs incurred by NNPC-$12.97billion; Verified PMS and DPK subsidy $8.70bn; Demurrage claims by counterparties on product-exchange arrangements ($0.14bn); Verified Crude oil and product losses ($0.83); Verified pipeline maintenance and management costs (0.49).
Other costs incurred by NNPC not directly attributable to domestic crude (subsequently provided in 2015) ($2.81bn); NNPC potential excess remittance ($0.74bn); A consideration of the total costs incurred and the amount remitted potentially led to an excess remittance of $0.74bn by the Corporation during the review period as detailed in above:
Summary of crude oil revenue and remittance by NNPC (January 2012 – July 2013)
Revenue generated per reconciliation committee $67.00bn; additional revenue generated upon our investigation $2.34bn; Actual revenue generated $69.34bn; Costs directly attributable to domestic crude ($1.46bn); Total other third party financing arrangement ($1.06bn); Equity crude oil processing cost ($0.13bn); unremitted revenues – NPDC ($5.11)bn; PMS and DPK subsidy ($8.70bn); Amount due $52.88bn; Other costs not directly related to domestic crude oil operations- ($2.81billion); Salaries and benefits ($1.52bn); monthly operations ($0.48bn); Other third party payments (including training course fees, estacode, and consultancy fees, and other vendor payments) ($0.81bn), Expected remittance $50.07bn; actual remittance $50.81bn; Potential excess remittance to the federation for the review period ($0.74bn).
The Corporation represented that the potential excess remittance of $0.74 billion was funded from proceeds of PMS sales for which the suppliers of the PMS are yet to be paid in cash or crude oil. As at the time of concluding this report, details of the affected suppliers that funded this potential excess remittance are yet to be provided by the Corporation.
The analysis above and resulting potential excess remittance suggest the existence of liabilities to third parties incurred by the Corporation.We recommend the Corporation be required to disclose details of all existing liabilities and impact on proceeds of future crude oil sales. The Corporation is expected to operate in accordance with the NNPC Act LFN No 33 of 1977 which states in Chapter 320 Part I subsection 7(4) as follows:
“The Corporation shall maintain a fund which shall consist of: (a) such moneys as may from time to time be provided by the Federal Government for the purposes of this Act by way of grants or loans or otherwise howsoever; and (b) such moneys as may be received by the Corporation in the course of its operations or in relation to the exercise by the Corporation of any of its functions under this Act, and from such fund there shall be defrayed all expenses incurred by the Corporation.”
Loss making subsidiaries
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 accounts. Commisions for the Corporation services can then be paid based on agreed terms.
Comments: We did not obtain any information directly from NPDC, but in accordance with NPDC former Managing Director’s (Mr Briggs Victor) 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).
We have relied on the Legal Opinion provided to the Senate Committee by the Attorney General (AG) 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. Thus, 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. A sale will mean the following should be due to be remitted to the Federation accounts Petroleum Profit Taxes (PPT); Royalties; Signature bonus payment; Dividend from profit for the period (according to dividend declared in line with NPDC’s dividend policy).
We have not obtained any information that suggests that NPDC has been assessed for PPT and Royalty for the review period. However, as disclosed by the former MD of NPDC at the senate hearing, NPDC had done a self assessment of PPT and Royalty and had unpaid self assessed PPT and Royalty to the tune of $0.47 billion related to the review period.
In January 2015 (subsequent to our initial reported conclusions), we were availed with copies of Deeds of Assignment for OML’s 26,30,40,42. We were not provided with copies of Deeds of Assignment for OML’s 4,38,41,34. We were also provided. Investigative Forensic audit of crude oil revenues and remittances by NNPC (January 2012 – July 2013) with information which indicated that the various NNPC (55%) portion of Oil leases (OMLs) involved in the Shell Divestments related to the eight (8) OML’s aforestated, were transferred to NPDC for an aggregate Sum of US$1.85billion. So far, only the amount of US$100m had been remitted in relation to these assets. This means that the amount of US$1.75billion is yet to be remitted in relation to this transfer.
In addition, by a comparison of the aggregate amount of US$1.85billion determined by DPR as the transfer value , and the (arm’s length) commercial value paid for by 3rd parties for between 30% to 45% divested by Shell, we arrive at an estimated Alternative Commercial Valuation of US$3.4billion for the NNPC 55%. The point here is that while we appreciate that this is a government entity to government entity transaction, we had expected a transfer basis higher than the US$1.85billion commercial value determined by DPR. We have not performed a professional valuation and therefore recommend that the valuation done by DPR be re- assessed.
NNPC explained that these OML transfers were in the bid to encourage local participation in the Nigerian upstream Oil and Gas Industry. We also expect that NPDC should remit dividends to NNPC and ultimately the Federation accounts, 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 US$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. II. We determined from information obtained from PPPRA that $3.38 billion relating to DPK subsidy cost was incurred by the NNPC for the review period.We obtained a letter, dated October 19, 2009 written by the Principal Secretary to the President, to the National Security Adviser (The following were in copy: Honourable Minister for Petroleum Resources, Honourable Minister of State for Petroleum Resources, Group Managing Director NNPC, and the Executive Secretary PPPRA), confirming a Presidential directive of 15 June 2009 instructing that subsidy on DPK be stopped (Exhibit D7).We also obtained a letter dated 16 December 2010 from the Executive Secretary PPPRA to the CBN Governor clarifying that PPPRA had ceased granting subsidy on Kerosene since the Presidential directive of 15 June 2009 (Exhibit D8).
Furthermore, Kerosene subsidy was not appropriated for in the 2012 and 2013 FGN budget. However, the Presidential Directive was not gazetted and there has been no other legal instrument cancelling the subsidy on DPK. In a Presidential media chat on 24 February 2014, The President and Commander in Chief of the Armed Forces of the Federal Republic of Nigeria, President Ebele Jonathan, asserted that kerosene subsidies have not been disallowed.
We, therefore, recommend that an official directive be written to support the legality of the kerosene subsidy costs. This should also be followed by adequate budgeting and appropriation for the costs.
Other Findings: For the period reviewed, we identified 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. 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 aMargin 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.
NNPC explained that the contract the Corporation executes with the kerosene marketers confirms NNPC (PPMC) is responsible for the delivery of DPK to marketers at their assigned depots on shore. The Corporation further explains that the kerosene marketers, however, opt to receive the product off shore Lagos. The Corporation further explains that the DPK sales price per litre off shore Lagos includes the following: Approved sales priceN 34.5; Bridging allowance N5.85 Marine Transportation Allowance 0.15; PPPRA Admin Charge 0.15 Total 40.66 Unexplained charge 0.24; Sales price off shore Lagos 40.90
The accounting and reconciliation system for crude oil revenues used by Government agencies appear to be 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.
Our approach to this mandate: It is important to note that although PwC has reviewed documents submitted by the key stakeholders involved, our work was conducted independently, and our findings are based on the review of documentation, analytical reviews of data, and interviews conducted. Due to this approach, our findings and the way we presented them in this report may not necessarily reflect the formats of the various submissions made by the different stakeholders.
In certain instances where we were not provided with information or access to key stakeholders (Section 6.3.2 ) we leveraged on external and available sources of information to reach our conclusions. These external and available sources of information are clearly highlighted in the relevant sections of this report. Any information and/or documentation which may come to our attention subsequent to the date of this report may alter our findings. We have also listed some of the limitations to our scope in Section 3.2. The procedures performed and specific limitations to scope are also discussed under the various work stream sections. Based on specific instructions from the Auditor General for the Federation, we returned to do additional work, after NNPC had represented that our initial process did not provide an opportunity for formal discussions of our findings with top management, in the form of an exit interview.
With the exception of the Deputy Group Managing Director/ Group Executive Director Finance and Accounts of NNPC, the Auditor-General for the Federation, and the Honourable Minister of Petroleum Resources, we have not discussed the findings of this report with any stakeholder.