RESTRUCTURE NNPC (I) : Scrap 450 b/d Direct Crude Allocation To NNPC – NRGI

Experts in natural resource governance have recommended scrapping the current Direct Crude Allocation (DCA) system under which NNPC allocates 445,000 barrels per day (b/d) for refining and sale to the Pipelines and Product Marketing Company Ltd (PPMC), the corporation’s main downstream subsidiary.
Instead, the government must replace the opaque, corruption-ridden and unaccountable DCA with a streamlined, purpose-fit, transparent and easily audited system of selling Nigeria’s crude oil and remitting its proceeds to the Federation Account without the illicit transactions which breed confusion and controversy over unremitted funds.
Worse still, the corporate giant’s virtually unregulated power to sell the crude and retain whatever it needs to cover the cost of its operations makes NNPC the sole determinant of how much and when it remits to the Federation Account the revenue from sale of the nation’s crude oil, a system riddled with theft and corruption.
For instance, a report by Natural Resource Governance Institute (NRGI) analysed over the ten-year period between 2004 and 2013, total revenue of DCA crude oil allocation to NNPC, the amount it retained and how much did not get into the Federation Account:
According to its findings, much as the total barrel of crude oil allocated by NNPC was approximately the same in 2004 of 151,893 barrels/day compared to 156,192 b/d in 2013, the revenue from the high-priced crude oil rose from N759.7 billion to N2.66 trillion respectively. Yet the percentage of unremitted money to the Federation Account jumped dramatically from 27% to 42%.
In fact, only in the three intervening years of 2006 to 2008 did the percentage of NNPC’s retained earnings fall below the 2004 base year with 22%, 26% and 22% respectively. In all the seven other years, NNPC’s unremitted earnings to the Federation Account was more than 30%.
It was no coincidence that former Central Bank Governor and now Emir of Kano, Alhaji Sanusi Muhammadu II, raised alarm on December 10, 2013 about the eventually calculated $20.5 billion unremitted sum to the Federation Account by NNPC.
Under the current DCA, according to the NRGI report, PPMC sends some of the crude oil to domestic refineries, sells the rest abroad or trades it in complicated swap deals for refined petroleum products. PPMC uses the revenue to pay NNPC for the crude, either from the proceeds it gets from selling the crude for export or from selling the refined fuel products derived from the crude.
NNPC has 90 days to forward payments to a joint NNPC-Central Bank of Nigeria (CBN) naira-denominated Crude Oil Revenue Account domiciled with the CBN.
Finally, once a month, CBN transfers an amount from this account to the Federation Account, which serves as the main treasury account for the country’s three levels of government.
“The government should eliminate this system and replace it with purpose-fit and soundly constructed mechanisms for financing NNPC, providing crude to the refineries and financing NNPC’s subsidy costs,” NRGI said.
“Nigerian authorities could also use the information provided here to guide future audit efforts, as there exists no full and credible accounting of how NNPC has spent DCA revenues from recent years.”
It explained that oil from the DCA currently goes in three directions: (1) Refinery sales: These are the actual barrels the refineries can realistically process. In 2014, for instance, the four refineries together received an average of 70,792 b/d for processing—or, 14 percent of their total installed capacity.
(2) Oil-for-product swap deals. These complex barter transactions between PPMC or NNPC and a number of private foreign traders have consumed around 210,000 b/d since 2011.
(3) Export sales: NNPC sells the remaining domestic crude—usually between 100,000 and 150,000 b/d—for export to some of its term customers, under terms that are similar to regular NNPC export sales.
In other words, the DCA is used as a makeshift and poorly suited mechanism for funding NNPC’s expenses. NNPC deducts funds from the amounts due to the Federation Account, or delays in repaying the funds into it. It uses these funds to cover various expenses.
For instance, PriceWaterhouseCoopers (PwC) found that NNPC discretionarily retained 46 percent of domestic crude revenues received during a 19-month period in 2012-2013 for spending on operations and subsidies.
“The revenue retention is not governed by any rules, nor is it subject to oversight. NNPC keeps these funds in part because there is no other established method for financing its operations. Most countries establish an explicit rule for national oil company financing.
For instance, Malaysia’s Petronas retains profits on earnings, but transfers royalties, dividends and export duties to the treasury, as well as pay a set tax rate on its own profits.
Moreover, Ghana’s GNPC can retain “equity financing costs” and additional amounts approved by parliament, but this cannot exceed 55 percent of net cash flow from government assets.
However, NNPC’s retention of domestic crude revenues is part of a larger ad hoc system for revenue collection within the corporation. “This system consists of a mish-mash of methods including deductions from the joint venture cash call account, the retention of subsidiary earnings and borrowing from third parties.
“Paradoxically, this ad hoc way of operating at once impoverishes NNPC, leaving it chronically indebted and short of operating funds, and gives it far too much discretion to retain ever-growing sums from oil sale proceeds.
“NNPC uses revenues from the DCA to pay part of Nigeria’s fuel subsidy bills. It receives subsidy payments for its refined product sales in a unique manner. Usually, the government pays companies the difference between the market price and the subsidized price for gasoline and kerosene.
“Most companies receive payments from the Petroleum Support Fund (PSF), the country’s official fuel subsidy mechanism. NNPC, on the other hand, calculates its own claims and then pays itself out of domestic crude earnings.
“This effectively exempts NNPC from the PSF’s inter-agency oversight process, in which around a dozen government bodies and agents play roles. NNPC does send its subsidy claims to the Petroleum Products Pricing and Regulatory Authority (PPPRA).
Then it deducts funds from the amounts due to the Federation Account, or delays in repaying the funds it owes. It uses these funds to cover its various expenses.
Meanwhile, its revenue retention is not governed by any rules, nor is it subject to oversight (PPPRA) for verification and approval and the integrity of the process is questionable.
“The corporation’s legal basis for side-stepping the PSF is not clear either. Multiple past investigations have found significant evidence that NNPC subsidy claims, and NNPC fuel imports more broadly, are systematically mismanaged.
“For some years, there were anecdotes which indicated that NNPC’s withholdings from domestic crude returns were growing, leaving the Federation Account with less value per barrel. This was clear cause for concern: Every naira retained by NNPC is money that cannot be spent on other national priorities, like power, roads, education and health. “Particularly during high-price periods (e.g., 2010-2014, when the oil price regularly topped $100 per barrel), one would expect the opposite trend—that the flow of each oil sector revenue stream would increase revenue.
“One cause of confusion is the debate around whether NNPC has a legal basis for retaining domestic crude revenue. Some argue that its withholdings violate Section 162 of the 1999 Constitution, which requires that all centrally collected oil revenues go to the Federation Account.
NNPC has not explained the general legal basis for its withholding of DCA revenues, apart from pointing to Section 7 of the NNPC Act, which allows it to keep “a fund” of monies “received by the Corporation in the course of its operations or in relation to the exercise by the Corporation of any of its functions.”
In other words, even if NNPC Act does offer some legal cover – a point subject to perennial debate – it contains no adequate rules to govern the retention and use of such large revenues. Indeed, the act does not give a clear picture of NNPC’s anticipated commercial activities, or how the revenues it generates are supposed to support them.”
More broadly, NNPC officials told NEITI that “the Attorney General of the Federation has advised that cost of operation and other related expenses are chargeable to the cost of crude before remittance of the residual to the Federation Account.”